1. Individual Debt Collection a. Overview of Bankruptcy System i. Bankruptcy Chapters 1.

Chapter 7: Liquidation (For everyone, except railroads and banks) a. 2 step analysis: i. Whats in the estate (is it yours, accessible for these purposes) ii. Exempt property (homestead exemption), election b/w state & federal. b. Means testing requirements for individuals if you have too much money, this isnt an option. 2. Chapter 11: Reorganization (for business - chp 7 + bank, RR, but not brokers) 3. Chapter 13: Reorganization (for individuals with regular income, no brokers) a. Must be an individual with regular income and fit within debt limits if you are too far in debt, this isnt an option. 4. Chapters 1, 3, 5: General Provisions (for everyone) 5. Others: Chapter 9 Municipal; Chapter 12 Farmers; Chapter 15 International. ii. Counseling requirement help individuals avoid the problems that caused the bankruptcy (within 180 days before filing). iii. Involuntary filing generally insolvent, not paying debts as come due; but exceptions for farmers, non-profits. iv. What happens when you file? 1. Automatic stay kicks in no more collection efforts 2. But secured creditors can try to avoid this, by showing a. Debtor has no equity in property and not necessary to reorganize, OR b. Theres not adequate protection, so you should get cash payments along the way to cover loss in value. v. Review of claims 1. Strip off improperly perfected security interests 2. Void preferential transfers (90 days, or 1 year for insider) 3. Void fraudulent transfers 4. Void postpetition transfers 5. But we do allow setoffs for banks. vi. Debtor get to decide what to do with its stuff in liquidation, decide whether to redeem, reaffirm or ridethrough property you still owe on but want to keep. vii. Operation in bankruptcy 1. Can continue to operate in the ordinary course of business 2. Special non-ordniary course events need court approval. 3. Decide what contracts to keep and which to reject = executory contract. 4. Cash collateral: cash that is subject to a lien cant be used.

5. So may need to get more money; special rules for how to get new loans. viii. Wrapping up the liquidation bankruptcy 1. Secured creditors get their stuff a. Undersecured - $250K property value, $500K owed b. Oversecured - $1M property value, $500K owed. 2. Unsecured Creditors then get paid in priority order a. Administrative costs first. b. Special protected groups next child support, employees, etc. c. Then general unsecureds d. Equity holders in company last. 3. Discharge ix. Wrapping up the corporate restructuring bankruptcy 1. Create a plan; debtor gets first opportunity to propose 2. Create classes of similarly situated creditors. 3. Then vote on the plan 4. Court must confirm the plan at least one impaired class has to vote in favor of the plan, it must have a reasonable prospect of success, and must get at least as much as they would in liquidation. b. State Law Debt Collection & Fraudulent Conveyances 2. Consumer Bankruptcy a. Property of the Estate = all property owned by the debtor at the instant of filing i. Exceptions at s541, including: 1. Post-filing services of debtor at 541(a)(6) = debtor (recall problem 5.3) 2. Contingent expectancies & non-transferable property = arguable. a. Tax refunds, look to the nature of the refund b. Bonuses and other contingent monies (recall problem 5.5) c. Non-transferable entitlements, such as permits, license (prob 5.6) d. Contractually non-transferable property generall disfavored under 541(c) 3. Spendthrift trusts = debtor under 541(c)(2), if meet criteria (cf. 522(d) as exempt property for retirement funds) (Recall problem 5.4) b. The Automatic Stay i. Protects debtor from all collection actions until stay is lifted, cooling off period to process the bankruptcy 362(a) 1. Creditor must return estate property under 542(a) 2. Exceptions at s.362(b) for certain types of actions that can continue; e.g.: a. If the landlord has already obtained the eviction (362(b)(22)) b. Doesnt stop criminal prosecutions for hot checks (362(b)(1)), but some courts will look further to the nature of the

prosecution to determine whether its collection-oriented; see also 362(b)(2) c. Family support (362(b)(2)(C) see also (D)) 3. Lasts until case is closed, dismissed, or discharge granted/ denied. ii. Dont forget post discharge injunction s.524(see p.259) c. Means Testing Eligibility for Liquidation i. All persons, but restrictions on railroad, insurance cos and banks ii. Concern with too many people in 7 instead of 13 iii. 2005 Amendments crack down s.707(b) 1. Abuse under (b)(1): Any party (not just US trustee) can seek dismissal for abuse a. Used to say substantial abuse now just abuse b. Unless debtors current monthly income x 12 < median income by state, household size, in which case no one can challenge for abuse c. The distinction between general abuse and the presumption of abuse based on means testing also has an impact on whose income is considered: i. General abuse just the filer ii. Means test non-filing spuses income is included for purposes of determining whether the debtor is above or below the median income, but only the debtors income is used for working through the budgets of the means test [query how this should work when it comes to paying household expenses, etc. for purposes of the form] d. Section 707 is focused on consumer debt so if you are dealing with the ramifications of a failed business, if youve structured things right, you can get a pass as well. 2. Means test under (b)(2) a. Presumption based on formula 707(b)(2)(A)(i) i. Exempt if current monthly income of debtor and spouse, x12< median family income for state, household size; no party (including judge or trustee) can assert the presumption against a below median debtor 707(b)(7) 1. Current monthly income 101(10A), see also (10B) for payments by others 2. Formula based upon household, even if unrelated ii. Continue with test if above-median debtor; presume abuse if: 1. Available income over 5 years> the greater of a. 25% of nonpriority, unsecured claims or $7025, OR b. $11,725 2. This means you deduct: monthly IRS expense amounts, taxes, optional expenses (health insurance,

etc.), secured debt (car, mortgage), priority claims (alimony, child support) a. Secured debts deducted in ful, no cap 707(b)(2)(A)(iii) 3. Look to surplus income to unsecured debt (see p. 161) iii. Can rebut presumption only with showing of special circumstances to adjust the formula under 707(b)(2)(B), showing would meet formula with the adjustment. iv. US trustee must either move for dismissal/ convert to 13, or file explaining why not appropriate (704(b)(2)) 3. Bad faith under (b)(3) a. Totality of the circumstances 707(b)(1),(3) i. Even if you pass (b)(1) and (b)(2) tests can still be deemed an abuser ii. Can use any of the old cases under substantial abuse standard, plus also find more things to be abuse as well. iii. Some courts want specific bad behavior suggesting a scam iv. Others are broader, look subjectively at what they consider recklessly wasteful see p. 151 b. Remember, in addition to bars on eligibility, there are also bars on discharge that might be triggered by similar bad faith behaviors this is worse, in that youve gone through bankruptcy, but then dont get relief i. 727(a) Transfers with intent to hinder, delay defraud ii. See pp. 198-209 for further discussion of pre-filing planning as well as the asset trusts discussion at pp.210-15 d. Exempt Property - s.522 i. Can keep some property thru bankruptcy- dont sell off every thing 1. State exemption law, creates state exemptions and decides whether to allow a choice of state or federal (see Twen for GA) 2. Creates possibility of substantive (not procedural) forum shopping => Special rules for debtors that move pre-filing (522(b)(3), next class) 3. Does this count? a. Raises classification questions is a bus a vehicle? Is this an eligible annuity payment? b. Raises valuation questions if the property is valued below the exemption, debtor keeps; if it is worth more, its sold, the secured creditor takes first, then debtor gets his exemption, balance to estate distribution. c. Raises tracing questions child support, wages. ii. Non-PMSI and judicial liens can be voided, if the collateral is exempt and it falls within 522(f)PMSI Calculation issues: 1. Partially exempt property: get cash value

2. Security interests in exempt property: comes off the top, before the exemption iii. Example: 1. Car is valued at $40,000; the loan is for $20,000, of which $5000 has been paid and 15,000 remains; the state exemption for the car is $7,000 what resul? a. Sell vehicle (neither bank nor debtor can claim it entirely) b. 15K to bank; 25K in value remains c. 7K to debtor; 18K remaining d. 18K to estate. e. Exempt Property Homesteads and Trusts f. Claims and Priority i. Secureds payout to secured creditors up to secured value ii. Priority unsecureds 1. Domestic support and related administrative expenses 2. Other administrative expenses 3. Involuntary bankruptcys ordinary course expenses 4. Wages, etc. 180 days, $11,725 5. Employee benefit plans 180 day/$11,725 aggregate limits 6. Farmers, fishermen 7. Real property deposits to $2,600 8. Government claims e.g. taxes, but limits a. Tax Confusion i. Whos obligation is it? 1. Employees past obligation 507(a)(8)(c) 2. If its the employers contribution 507(a)(8)(d) ii. Collecting penalties: 1. Penalties have the same priorities as the original claim 2. But only can be collected if yhey are for actual pecuniary loss a vague term that courts split on iii. Duration: Taxes under 8(c) dont have a reachback limit, but all others do 1. Where theres one of these after/ before tests, mark down the date of filing on a timeline, subtract back the lookback period to create the payable range, and then mark down when the taxes could last be paid without penalty. a. File 3/1/12; tax penalty imposed on 2/1 each year, so could claim a priority with a one-year look back to the 2011 taxes but not for 2010, since theyd have been due on 1/31/11. Which is more than a year before (3/1/11) b. 26 USC 1398(d) allows for a truncated class year to get the estate to pay the taxes owed so far in 2012.

9. FDIC 10. DUI claims iii. General Unsecureds, no priority g. Claims and Priority Unsecured Creditors i. Unsecured claims 1. Original principal 2. Pre-petition interest, collection fees 3. No post-petition interest 4. Receive pro-rata distribution with other unsecureds of same priority level. ii. Secured Claims 1. Depends on whether they are over or undersecured. 2. Allowed principal, pre-petition interest, and collection fees like unsecureds, 3. But can also obtain post-petition interest to the extent it can be paid by the secured property; attys fees if pre-petition or secured, question if unsecured. iii. So 1. If the balance due is MORE than the property value, it is secured only to that amount and the balance is unsecured; 2. If the balance is LESS, then the property is sold, the secured creditor is paid, the debtor obtains the value of any exemption claimed in the property, and if money still remains, it goes into the pool for pro rata unsecured distribution. iv. Disputes & Priorities 1. Secured creditors secured property off the top a. Question about payment of sales costs preference for paying off the top before secured creditor (506c), but can also be paid as an administrative expense (see below) 2. Pro rata distribution at each priority level. a. Decide which category each unsecured falls into; general unsecured unless they qualify under a priority look to s. 507 and problem set 11 b. Administrative expenses are bifurcated between two levels: if they are for the benefit of a domestic support claimant they are 507(a)(1)(C); if they are for the other claimants then it comes under 507(a)(2). c. List all of the claims at each priority level, pay out all at each level before moving onto any payment for the next set of creditors d. Understand why changing one creitors classification, payment of sale costs often changes what the others receive. v. Distribution 1. Governed by section 726 a. Sale of property

i. Indentify property; may still be sold, but debtor gets the value of exemption ii. Determine if anyone has an interest in property co-owner or secured party; may prevent sale or may receive its portion off the top typically deduct sale costs first. b. Collect remaining proceeds from sale; distribute by priority i. Priority creditors each level of prioriy takes 100% of their claims before $1 goes to the next level; when the money is not sufficient to payout to that level at 100% then pro rata between creditors at that level ii. General unsecureds take last, if anything remains. Review Questions. 1. A bank holds a note of $30,000 on a car valued at $40,000. In recovery, which of these is the best statement of what the bank can recover if the car is a nonexempt asset in bankruptcy? a. Thebankmaytakepossessionofthecarandkeepthefull$40,000value at sale. b. Thebankisentitledto$30,000becausethatisthefacevalueofthedebt c. The bank is entitled to take the $30,000 in principle, plus all interest, and any collection fees, up to the $40,000 value; any remainder to the estate. d. Thebankisentitledtotakethe$30,000inprincipleandanycollection fees, but it can only recover the interest that was accrued before the filing date; any remaining value is divided between the other secured creditors if the property securing their notes is underwater, and only once they are fully compensated are any remaining monies made available to the unsecureds.ew Questions 2. A bank holds a note of $30,000 on a car valued at $20,000. What do you advise the bank it can recover? a. Thebankcanrecoveronly$20,000becausethatisthevalueofthecar. b. Itcanrecoverthefull$30,000,asthatisthefacevalueofthesecured interest it holds on the car. c. It can elect to receive either $20,000 as a secured creditor or $30,000 as an unsecured creditor, but not both. d. It can recover $20,000 as a secured creditor, but the remaining $10,000 is unsecured as are any pre-petition interest and collection fees; cannot collect post-petition interest.Review Questions 3.You are determining whether your clients are eligible to file in Chapter 7. Which of the following is least likely to be able to file under chapter 7? a. A corporation with $1 million in assets, seeking to liquidate the corporation b. A woman whose small business just failed, leaving her swimming in business debt, and who is seeking to file for personal bankruptcy c. A man with above-median income, whose available income over the next 5 years will be $12,000 and whose unsecured debts are $20,000 d. A woman with an income of $30,000, unsecured debts of $10,000 and secured debts of $5,000 in a state where the median income is $42,500 h. Discharge

i. Discharge of personal liability (not liens, obligations of others) is the goal of bankrupty, but can lose in certain circumstances (pp.229-51; see also 524 for effect) 1. -523 specific debt a. non-dischargeable categories: tax 513(a)(1)(A), 19 types in 523(a)(3) b. also can convert by action 523(a)(2) fraud or false written statements in obtaining financing, money, property or services. 2. -727 all debts free ride for non-objection creditors a. Cannot take any of 12 enumerated actions, including: i. Defraud creditors by destroying property (a)(2) ii. Destroy, conceal or falsify information unless its justified (a)(3) b. See also 521(h) dismissal for failure to file documentation c. For very bad acts, can also face criminal consequences. i. Keeping favored Property i. Cant use exemptions to trump secured creditors claim; may also want to protect a co-debtor on unsecured loan ii. Redemption buy the property @ current value (722) 1. Pay the lesser of full loan value or collateral value in cash. iii. Reaffirmation negotiate for a new deal (524(c)) 1. Waive the discharge; so debt is legally enforceable post discharge, on the hook for the full amount negotiated again 2. Problem of how to approach without violating stay in 362(a)(6) 524(a)(2) 3. Attorney approval required (in contrast to 722, ride-through) iv. Ride through lets kep doing what were doing 1. Legality is uncertain, and resulting the consequences how do you notify of balances, etc without violating the stay? j. Creation of an Acceptable Plan Payment to Secured Creditors k. Creation of an Acceptable Plan Payment to Unsecured Creditors i. Chapter 13 (pp 275-76) 1. Ability to keep all property 2. Structure a. Court-approved plan detailing how much should be paid to each creditor b. Must make payments for 3-5 years from future earnings (instead of estate property); DIP retains control of property, trustee ensures payments are made. c. Discharge at end f payments. ii. Comparing creditor treatment (p307) 1. Secured creditors receive the full present value of their claim (506 collateral value or 1325 full contract value) 2. All priority claimants under 507 receive full payment (1322(a)(2))

3. Unsecureds are pooled for pro rata payment; no guarantee of full value. iii. Pool for unsecred payout s.1325 (pp307-08) 1. Best interest test each creditor must receive at least as much as if the debtor filed under Ch. 7 (1325(a)(4-5)) 2. Disposable income test debtor must contribute all disposable income to payments during life of the plan (1325(b)) iv. Plan must be proposed in good faith and not by any means forbidden in law (1325(a)(3)) (pp.321-23) v. Plan can of course be modified as circumstances improve for the debtor or deteriorate further. (1329(a)) vi. Disposable income test s1325(b) (pp308-18) 1. Below median 1325(b)(2) a. 3 year plan b. reasonably necessary standard for payments i. For income, expenses see cases at pp. 309-313 2. At or above median 1325(b)(3) a. 5 year plan b. Fixed payment of surplus form s.707(b)(2) calculations i. For calculation, see pp. 313-18 vii. Priority Payments (pp. 319-20 1. Paid as amount of claim, no interest 2. Examples: a. Administrative expenses; maybe attorneys fees b. Alimony, child support now risk not just background penalties/ jail for non-payment, but loss of discharge 3. No incentive to challenge each others claims now; contrast to Ch. 7 where pro rata distribution may occur in 507(a) priorities and leave nothing for lower priority. viii. Tax liability (pp.320-21) 1. If pre-filing lien, then secured must repay in full under s.506(a) 2. If no lien, then priority claim must pay ahead of other claims under 507(a)(8) l. Eligibility for Chapter 13 i. Section 109(e) limits Chapter 13 to; 1. Natural persons a. Not corporations 2. Limited debts (pp. 330-34) a. On the date of filing b. Must have noncontingent, liquidated, unsecured debts of less than $360,475 c. Noncontingent, liquidated, secured debts of les than $1,081,400 3. Regulrar income (pp 326-30) 4. (Note re: married couples) m. Consumer Bankruptcy

i. Contrast between 1. Concern that relaxing obligation to pay thru bankruptcy will encourage irresponsible behavior, risk-taking by debtors 2. Concern that debtors are going into bankruptcy because of severe dislocations not of their own creation (layoff, medical divorce) making bankruptcy necessary as part of the social net. ii. Study of ex ante causes of bankruptcy 1. Focus on debtors irresponsibility in taking on debt. 2. Focus on creditors irresponsibility in extending credit; but does it create a moral hazard, costs for others, or instead are the costs absorbed by the high late fees and charges? 3. Inability of debtors to select wisely between cards, terms iii. Pressures toward Chapter 13 1. Most debtors can file in either chapter because they are below median with regular income 2. So why chapter 13? a. Inability to save enough for the bankruptcy (atty, filin fee) b. Pressure on attorneys to certify i. Further increases fees ii. Potential sanctions for attorney if he files for Ch. 7 and it is eventually tossed out, even over good faith difference. c. Yet most folks do not emerge successfully from chp 13 d. As a practical matter, spectrum of partial payment with ch. 7 reaffirmation. iv. Summary of obligations 1. applicable in 7 and 13) a. 527 Disclosures to debtors b. Written contract with debtor (528(a)(1)) c. Credit counseling (109h, 521b) d. Financial education (ch 7 is 727(a)(11), ch 13 is 1328(g)) e. 521 Statement regarding collateral, income and expenses f. Annual financial statement 521(f)(4) g. Tax returns (521 e-g) i. Pre-petition tax 521(e) ii. Post-petition tax 521(f) h. Sanctions for material violations 526(c)(2-3) 2. Applicable only in 7 a. Creditor notice 342(select provisions) b. Statement of financial affairs 521(a) (select provisions) c. Certificate of lawyer as grounded n fact, not abusive, and no knowledge schedules are wrong 707(b)(4) d. Certificate of debtor 707(b)(2)(C) e. Sanctions for reporting omissions (707(b)) i. *** select provisions apply only to 7, other obligations apply to both. 3. Corporate Bankruptcy

a. Corporate Liquidation and involuntary Bankruptcy (Chapter 7) i. Key terminology 1. SME Small & Medium enterprises (as contrasted with large typically public companies) 2. Liquidation analysis Parties will run the numbers to figure out their hypothetical takeaway in h 7, to understand their BATNA; this allows parties to compare their result under 7,11, and a non-bankruptcy workout. ii. Why involuntary petition? 1. Available in 7 and 11, not 13 2. Reorganiztion to incetivize recognizing the problem early 3. But if the executives wont file, creditors can push into involuntary bankruptcy; a. Relativel rare (most often unecureds file), but b. Incredibly important as a negotiating tool e.g. i. Prevent later security interests ii. Favoritism in payment iii. Wasting assets iv. Get disclosure v. But sometimes bad faith as with credit derivatives keyed to bankruptcy filing. iii. Limitations on type of person (farmers, non-profits) in 303(a) iv. 3 creditors must join, if more than 12 creditors exist (some room or manipulation through claims assignment) 1. strategies for challenging the 3 creditor and 12 creditor requirements a. Faberge post-petition payments dont remedy b. Can challenge the debt allegedly owed c. Are the companies affiliated, truly independent? Gibralter, Iowa Coal d. May exclude insiders 303(b)(2) (incorporating s.101) 2. Attys fees, costs, maybe punitives if unsuccessful (silverman; 303(i)(2)(B)) v. 303(h)(1) test of debtors financial condition 1. Generally not paying such debtors debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount. b. Introduction to Asset Sales s.363 i. Canot enter into an agreement to hold down the sale price (violation of 363(n)) ii. Can challenge a sale under 363(b), (c) if it does not occur in the ordinary course of business AND notice and a hearing are not provided. 1. But we will want to find out from the docket whether a. There was a hearing and we alone simply werent notified, or

b. That the court didnt have a hearing, which is within its discretion in 102(1) which defines the term notice and hearing 2. No good post-sale remedy against good faith buyers 363(m) c. Introduction to Corporate Reorganization i. Chapter 7 distinctions 1. No discharge for corporations 727(a), just expires under state corporations laws 2. No exemptions all property is used to pay the creditors. ii. Benefits of bankruptcy v. state law 1. Avoids run on the bank, TIB can seek to reverse transactions 2. Facilitates collective sale, breathing room to get the best price, no set dates; 3. Forces disclosure by debtor (but see, turnover statute); accelerates future claims; 4. Orderly distribution (a benefit for some, loss to others) iii. As with other forms of bankruptcy, we rewrite contractual obligations changing the amount due, the amount of time the debto has to pay, and even terminate some disadvantageous contracts 1. Same automatic stay of 362 2. Debtor in possession (DIP operates company in the ordinary courts under 363(c) 3. But also has rights, duties of TIB under 107 (so can challenge its own fraudulent conveyance, executory contracts) d. Plan of Reorganization i. Creditors committee is appointed to review activities 1102 ii. Negotiations between the debtor and all the different creditor interest groups iii. Culminating in a plan of reorganization 1. Pay each class of creditors a negotiated percentage of claims over a determined period of time. 2. Payments may be cash, securities, or property. 3. The classes each vote upon the plan; must be approved by the specified majorities of creditors in each class under 1126(c) 4. Dissenters must get at least as much as they would in liquidation 1129(a)(7) 5. Then it is confirmed by the court if it meets the requirements of 1129 iv. Discharge of debts subject to the plan 1141(d) e. Automatic Stay & Adequate protection i. The difficult position of creditors 1. DIP can force the return of property repossessed on the eve of filing, as well as payments a. Avoiding power for preferential payments in the last 90 days 547 b. Assume of breach executory contracts 365 c. Void fraudulent conveyances 548, 544(b)

d. Set aside late perfected or unperfected security interests 544(a), 547 e. Turnover of property held by another (that belongs to debtor) 542, 543 2. Een innoent violations are void (or voidable, minority view) 3. Post-petition, the court often allows some breathing room before seriously considering motions to lift the stay a. Unless futility can be shown (conert to ch. 7) or bad faith (SGL Carbon) 4. Pre-petition waivers of 362 not enforceable (Farm Credit) ii. The difficult position of debtors: 1. Courts must rule on motions to lift the stay within 30 days or it is automatically lifted as to the particular collateral 362(e) 2. DIPP has the burden of showing adequate protection 362(g) 3. There are also exceptions to the stay, listed in 362(b) but one may argue that these should be narrowly constued and the stay broadly interpreted under 105 iii. Lifting the stay 3 alternative tests, any one sufficient; pg 415+ 1. Lack of adequate protection 362(d)(1), 361 a. Periodic payments (in addition to any interim interest payments under 506) b. Additional or replacement lien c. Catch all for other means of providing equivalent protection 2. Debtor lacks equity and the property is not necessary to effective reorganization 362(d)(2) 3. Stay against real property (362(d)(4)), if the petition was filed to delay, hinder or defraud creditors and involved either a. Transfer of all or partial interest in property without consent of the secured creditor or court b. Multiple bankruptcy filings affecting the same real property iv. Single asset realty case 362(d)(3); necessary govt function (d)(4,5), Seitles, pg 410+ discusses the tests. f. Operating in Chapter 11 i. Just as in Ch. 13, need to provide adequate protection for secured creditors or they can seek lifting of the stay (361, 362, 363) ii. Can seek additional financing, credit with court approval (364) 1. This financing gets special protection under the Code, that encourages firms to extend it 2. But necessarily at the cost of he pre-petition creditors because were dealing with a fixed pie. iii. Can avoid pre-petition payments 1. Avoiding power for preferential payments in the last 90 days 547 2. Assume or breach executory contracts 365 3. Void fraudulent conveyances 548, 544(b) 4. Set aside late-perfected or unperfected security interests 544(a), 547

5. Turnover of property held by another (that belongs to debtor) 542, 543 g. Getting the DIP out i. Challenge by creditors to continued DIP control, for apptof TIB 1. S.1104 test a. For cause fraud, dishonesty, incompetence, gross mismanagement (1104(a)(1)) Sharon Steel b. In the interest of creditors, equity holders, and other interested parties (1104(a)(2)) Eastern Airlines unions, deepening insolvency/ who to favor when theres an inevitable tradeoff 2. Tradeoff of honesty for information, ability to run business; exacerbated by companys existing crisis, need for quick turnaround but maybe a good trade for liquidation sales a. Result 1104(c) compromise appt of examiner 3. Often accompanied by private ordering, selection of new management (possibly turnaround management specialists) ii. Creditors Committees 1. Creditors committees s.1102 a. Appointed by US trustee; traditionally, presumption in practice that the seven largest creditors willing to serve will be appointed. b. Post 2005 mendments, courts have started to deviate from the rule, adding a small-business creditor with disproportionately large debt c. Often not appointed in small/ medium sied cases => larger role for the court & US trustee d. May also have special committees labor, tort victims, equity 2. Beauty contests & operation a. Owe fiduciary duty to group it represents; otherwise, powers are vague and limited, as described in s.1103 (access to information, hearing) b. Negotiates with the debtor about its operations, plan with committee support, the plan is much more likely to go through, court more likely to grant motions if supported by committee. iii. Cash: Cash Collateral, Setoff 1. The special problem of cash: creditors with liens on inventory and accounts, concerned because they can be turned into cash and dissipated a. Allow use of cash in the ordinary course of business 363(c)(1) b. Cash Collateral i. Cash subject to lien (sale of inventory, collections)

ii. Is effectively in a lock-box, accessible only with court approval 363 (typically part to the creitor, part to the debtor as it comes in) c. Setoff: extension of any creditors right to offset a debt owed to the debtor against a debt owed by the debtor 553 i. Why do creditors like this? Skip ahead in line ii. Bank claims right of setoff under 506(a), but must get court approval because of automatic stay 362(a)(7) although it can freeze the money in the interim; treated as cash collateral rules of 363(c) iii. Protection for special bank accounts escrow, tax. h. Post-Petition Financing i. First Day orders p468 ii. 552(a) example: pre-petition security interest (even with an afteracquired property clause) 1. have first claim on the pre-filing property, subject to the rules weve discussed re: cash collateral etc. 2. But no claim on property acquired post-petition 3. Exemption: If the property is acquired with proceeds (cash collateral, swap, etc.) then the creditor can use tracing to show that it has a secured interest not because of the contractual interest in after-acquired property, but because it was entitled to the proceeds of the earlier property iii. So what is available to offer a security interest in? 1. Pre-petition property that was not encumbered 2. New, post-petition property iv. Can challenge under? 1. 361 (adequate protection), on the theory that the evidence doesnt demonstrate a reasonable likelihood of rehabilitation, as this means that the unencumbered assets otherwise available for the unsecureds are being dissipated. a. Rejected by court in Garland; some courts permit with reluctance 2. 364 (obtaining credit) a. Unsecured credit, debt in the ordinary course (364a); nonordinary course with court approval (364b) receive administrative priority b. If unable to obtain unsecured, with notice and hearing can obtain debt: with priority over administrative expenses as 507(b) aka super priority administrative claim; secured by unencumbered property; with junior lien on secured property (364c) c. Priority lien (senior or equal lien) if trustee shows inability to obtain credit otherwise and adequate protection of existing security holder (364d; Hubbard Power) aka priming the pre-existing lien.

v. Cross-collateralization (upgrading unsecured debt in exchange for new $) 1. Secure a pre-bankruptcy loan with new or additional collateral during the bankruptcy 2. Generally disfavored, as not only granted within 364 but inconsistent with the codes goals more generally vi. Timing problems p461 1. If an appeals court stays a bankruptcy court decision permitting financing, then it may cause the company to go into liquidation 2. If an appeals court permits the financing to go forward, it may be hard to undo later a result aided by the code, eg 364e (incentivizing creditors to rely on the bankruptcy court decision in going ahead with the money, secure that their rights wont be upset) vii. Equitys new money exception to absolute priority rule if fair bargain, no other source p465 viii. Suppliers substantial pressure on DIP financing 1. Must finish out existing contracts 2. But no future obligation: receive administrative priority if they do; critical vendor rule to permit payment of pre-petition obligations; 546(c) reclamation (goods delivered in last 45 days); 503(b)(9) administrative priority (goods delivered in the 20 days before filing) ix. Inputs: H-100K unsecured; FSB-250K unsecured; lawyer-150K; assets of 350K x. Baseline: 1. FSB super-priority (503a w/ AP skip to front of 507b) 250 pd first 2. Then balance is post petition admin under 503a; so 100K assets left/ (100K+150K )= 40% payout; none to lower priority. xi. 364 scenario 1. Hanratty 364(c)(1) priority first 100K super super priority (100K) 2. Then FSB as super priority under 503a & 507b (250K) 3. None left for attorney or other creditors xii. Chapter 7: 1. TIB & ch 7 attorney paid first case law of 726(b) effectively super, super, super priority. UntanglingthePriorityWebfromProblem21.2: Chapter 7 administrative claims under 507 (s.726a) Section 503 claims (s.726c) Super super priority negotiated under 364(c)(1) Super priority if your 362(d) motion is denied, then you get superpriority under 507(b) because your adequate protection wasnt, and so you jump to the front of your priority group, which is 503(a) because the loss in value was a result of the automatic stay Administrative priority standard 503/ 507 administrative priority for post-petition creditors, DIP attorneys fees i. Reshaping the Estate Strong Arm Clause (544(a)) i. The strong arm clause grants the TIB he power to test the interests of the purportedly secured parties, to make sure that they have properly perfected their liens. ii. If hey havent, then the TIB can have the lien set aside even though, in the corporate world, we recall the TIB is the DIP.

iii. Mortgages: did they comply with states real property laws? 1. The case book suggests a split of authority, but actually think this can be largely reconciled based on variations in state law 2. TIB is equivalent to BFP under 544(a), takes without regard to knowledge of the trustee (DIP), creditors a. Most courts see this as meaning actual knowledge b. The splits then come from whether facts supporting constructive knowledge were present and whether state law invalidates a BFP based n constructive knowledge i. Constructive knowledge present and sufficient (Little key) ii. Constructive knowledge insufficient, likely not present (Wonderbowl) iv. Other Property: Perfection under federal law (Article 9) 1. For personal property disputes (not real estate) the TIB only gets lien creditor status under 544(a)(1-2) 2. This is much less powerful because of changes in Article 9 over the years, not allowing the lien creditor to avoid the unperfected seurity interests, in response to concerns that too many security interests were being challenged in bankruptcy v. Overarching Points 1. Timing: unperfected interests are invalidated as of the date the bankruptcy is filed, to prevent a post-filing rush to file / correct errors; but UCC/ state law may extend that filing period (see e.g. 9317c) 2. On the exam, I wont ask you to apply Article 9 (or state law, for the prior slide on mortgages) I would just note that the security interest had been perfected according to requirements, or had not. j. Reshaping the Estate Preferences i. VOIDABLE PREFERENCES 1. Power to invalidate certain the debtor took within 90 days of the bankruptcy 2. We call it a voidable preference because the TIB is reviewing the transactions to determine whether the debtor gave certain creditors preferential treatment 3. If so, the court unravels voids- the transaction. ii. The 547(b) Elements 1. To solve just walk through the checklist 2. A trustee may avoid any transfer of an interest in the property of the debtor a. To or for the benefit of a creditor b. For or on account of an antecedent debt owed by the debtor (before such transfer was made) c. Made i. While the debtor was insolvent and

ii. Either (a) on or within 90 days of the date of filing, or (b) between 90 days and one year before filing if the transfer was to an insider d. And enables the creditor to receive more than it would recive according to a normal distribution under chapter 7, if the transfer had not been made. k. Reshaping the Estate Exceptions to Preferences (547(c)) i. But the trustee cannot avoid a transfer if the transfer was 1. For new value given to the debtor a. Contemporaneous exchange for new value (c)(1) b. Collateral for new value given to debtor, to buy property that the security interest is now in (PMSI exception) (c)(3) c. New value given by the creditor after the transfer (c)(4) 2. In payment for a debt incurred in the ordinary course of business (c)(2) 3. Special provision for perfected security interests in inventory/ accounts recieveable (floating lien) (c)(5) 4. Other miscellaneous provisions a. Dmestic support (c)(7); statutory lien that is not avoidable anyway (c)(8) b. Small value i. Under $600 in primarily consuer debt case (c)(8) ii. Under $5850 in a non-primarily-consumer debt bankruptcy (c)(9) ii. Earmarking doctrine judicial exception (see p483) l. Reshaping the Estate The Floating Lien i. No relation-back (547(e)(3)); all property acquired within 90 days is therefore likely a voidable preference under 547(b), such that the security interest in the property would be voided ii. Unless you fall into 547(c)(5), which is the exception for inventory and receivables (the floating lien) 1. Other types of after-acquired property not savedonly inventory, receivables 2. The idea of this exception is that we will protect the amount of securitization you had, but we wont let you increase it to become more secured a. Forthemathinclined,see formula on p.515 b. Everyone else, p. 512: Undersecured 700K (90 day) vs. Oversecured 99K (filing) i. So during the 90 days, improved position by 700K = bad preference ii. Why not by 800K? The court didnt care how oversecured it was b/c it reverts to estate [if we ignore attorneys fees, interest, etc. which the court was happy to do] iii. Dont be fooled by market fluctuation it must be a transfer, not just value shift

iii. Setoff Rule of 553(b) 1. If you set-off at/ before filing (no ct permission), 90 day setoff of improvement 2. If you wait and setoff under 362 w/ ct permission, no setoff m. Reshaping the Estate Executory Contracts i. If both parties have at least one obligation outstanding, which would constitute a material breach of contract if not fulfilled, then the contract is executory 1. Example: I will pay you upon delivery for the baby colt, when it is delivered at 6 weeks of age. I must pay, you must give me the horse. ii. If the contract is executory, then the TIB/DIP has the ability under 365 to either assume or reject the contract 1. Assume = I will keep the contract, complete my part of the bargain 2. Reject = On second thought, I dont like this, I choose to breach. iii. The limits of Assumption 1. Must be executory 2. Cannot assume (or assign) if it is in the list at 365 a. If it would violate background law (e.g. a patent law that prohibits the assignment of a patent) 365(c)(1) b. If the contract term is to make a loan, extend other debt financing, or other financial accommodation - 365(2) c. If the lease is for nonresidential real property and has already been terminated 365(c)(3) iv. Rejecting the Contract 1. If the DIP/TIB rejects the contract a. Then it has to pay breach of contract damages, but can then go on to buy/sell/lease elsewhere if it so chooses. i. As we know from 1L contracts, this will be the difference between the current market value and the old contract price. 1. DIP is selling: this is the extra amount the other party has to pay to get the goods that the DIP decided not to sell. 2. DIP is buying this is the amoun the other party lost on the sale, subtracting the actual sale price from the contract price it had with the debtor. ii. So if the other party gets a breach of contract claim that is equal to the differnce in value, then what good is rejection? 1. Whether the debtor breaches pre-filing, or the DIP rejects in bankruptcy, the other party has a general unsecured claim; this means that it gets paid out at the pro rata distribution rate, which will be paid at pennies on the dollar. 2. As a result the benefit to the other creditors is essentially the percentage differenctial if the estate ends up paying out at 40 cents on the dollar, then if

the cost of cover is $1M the estate gains from rejecting and entering a new contract, 40% will go to the other party (400K) and 60% goes to the other general unsecureds (600K) 2. If this is a lease, and the DIP/TIB is the landlord, the tenant can a. Accept the rejection and take its unsecured damages claim, or b. reject the rejection and stay under the lease, offsetting costs but it does not get a claim for any costs that exceed the outstanding balance due. v. Assuming the Contract 1. If the DIP/TIB assumes the contract, things continue as they were a. But if it has already defaulted, it must cure or provide adequate assurance of prompt cure, before or at the time it assumes 365(b)(1) i. Curable breach: must be cured before assumption ii. Non-cureable breach: 1. Prevents assumption of non-real-estate contracts 2. Is not required to be cured for residential property 3. Is deemed to be cured by performance at and after the contract is assumed, and the payment of damages caused by the default. iii. Special rule for shopping malls b. What is default v. termination? i. A term of dating contract 1. Default: boyfriend did not acknowledge birthday. In breach of their terms. 2. Termination: she dumps him. vi. Difference between 365(b)(2) and (e)(1) 1. 365(b)(2) s telling you that you do not need to cure a default (as provided in (b)(1)) f that default is just abreach of a bad term a. Code defines these bad terms in both of the specified code sections, but essentially the idea is that we wont enforce these terms that mae it breach to become insolvent or file for bankruptcy b. So if the contract says that you are in default if you fall below $1M in the bank, even if you are making your payments on time, the bankruptcy court will not view this as a default for purposes of (b)(1) 2. 365(e)(1) takes aim at the same bad terms, but here it is in the context of saying that it wont enforce bad terms that purports to terminate or modify the contract obligations after the filing of the bankruptcy case. a. SO if the term says that your rent doubles if you file for bankruptcy because you are a bigger risk, the court is saying that it wont enforce that term. 3. Yes, the same term can violate both these provision of the Code.

vii. Severability 1. Severability impliedly suggested by 365(b)()s reference 2. There is no per se rule saying that the contract must be assumed/ rejected as a single unit, or that each provision can be individually assumed/rejected a. Dont want to permit contracting out of bankruptcy by saying no severability, since then every evil banker would just add in a $1 loan on the last day of the lease. b. Dont wan to allow TIB/DIP to take advantage beyond what was contemplated in 365, which is already generous 3. Instead, the court will look at whether the unassumable terms are so intergrated with the terms the TIB/DIP wants to assume that they cannot be separated, and whether they are truly material. viii. Timing 1. Must assume within 60 days (ch7, 365(d)(1)), or before confirmation (ch 11,13, 365(d)(2)), or deemed rejected 2. The code is unclear on the timing for cure and adequate assurance a. Some courts say no tolling, if a time is provided in the contract, must assume and cure within that period b. Other courts permit tolling i. Some say you must assume immediately (not the longer period in the code) and propose a plan that provides adequate assurance within 60 days or a reasonable time ii. Others say that you still have 60 days to both assume and cure iii. These are competeing interpretations of 365(b)(1)(A, 108(b)(2) and 365(d)(1,2) ix. Assignment 1. 365 also gives the TIB/DIP the power to assign the contract, where it has a good deal but doesnt need the thing anymore 2. The same restrictions apply from 365(c) on which contracts are within the scope of these special powers. 3. The same logic from assumption also applies when it comes to disregarding contract provisions that purport to prevent the assignment to the DIP/TIB, and then from the DIP/TIB to a thirdparty, but the court wont force an assignment where prohibited by background law (e.g. no assignment of patent) a. 365(f)(1) invalidates provisions that condition or limit assignment i. the court will enforce provisions that merely restrict assignment as with a landlords ight of first refusal [no case cite needed, but an example is EZ SERVE, 289 BR 45] ii. But drawing the line is really difficult, when one considers a term letting the landlord have 50% of the profit would be invalidated, but the effect of a first refusal clause could be monetarily the same.

b. 365(f)(2) requires the DIP/TIB to provide adequate assurance, whether or not the debtor had defaulted, if it is assigning the contract/lease c. 365(f)(3) is just saying that it will not enforce contract provisions that terminate or modify the lease/contract terms solely because of the assumption or assignment of the lease. n. Reshaping the Estate Statutory Liens; Fraudulent Conveyances & Avoidance i. Avoidance actions s.544, 545, 547, 548, 553 1. Lien Avoidance/ Strong Arm (544a, 545) okay, I lost my priority treatment; Im not happy, but I can deal 2. Voidable preference/ Fraudulent Conveyances (544b,547, 548; 549 for post-petition) wait, I have to give back what you already gave me as payment that I am lawfully entitled to under our contract settlement, etc.? 3. Also know: turnover (547), setoff (553), post-petition financing (364), executory contracts (365), abandonment (554) ii. Statutory liens 1. Section 545 power to avoid certain liens that are created by the automatic operation of state law a. Bankruptcy priority liens 545(1) i. Created only when someone goes into bankruptcy or similar proceeding (A,B,C) ii. Created only when someone becomes insolvent, or fails to meet certain financial standard (D,E) iii. Skipping ahead in line if someone else levies the property, then at that instant a lien is created in favor of a 3rd person (F) b. Liens not properly perfected at time of filing 45(2), similar to strong arm c. Landlords liens 545(3,4) iii. Refresher on Fraudulent Transfer/ Voidable Preference 1. State fraudulent conveyance law transfer of assets by insolvent debtor for less than REV (reasonably equivalent value) a. UFTAs.4present and future b. UFTA s.5 present only 2. Section 544b lets TIB bring those UFTA actions under 544b of the Code, if there is an actual unsecured creditor that was able to bring an action (contrast to 544as hypothetical creditor) 3. Section 548 Codes own fraudulent transfer provision 4. Both get the same remedies of 550 iv. Fraudulent Conveyance 1. Section 544(b) Code provision that gives the TIB the ability to bring a fraudulent conveyance action if the creditors could have brought it under state law a. Must be an actual unsecured creditor who can (1) identify a fraudulent or illegal transaction, and (2) has standing to sue at

state law for reversal not just a hypothetical creditor (544(b)(1)) b. But that creditor may prefer to go it alone. 2. Section 548 federal fraudulent conveynce law, meant to create a baseline minimum protection independent of a state law variation a. Any transfer of an interest of debtor in property/ new obligation to pay b. Made on or within two years before the filing date of the petitions c. And either i. Actual intent to hinder, delay, or defraud present or future creditors, OR ii. Less than reasonably equivalent value and insolvent (or about to be); 4 tests for insolvency. v. Limits on TIBs Avoidance Powers 1. Timing 2 years from order of relief (in voluntary petitions for bankruptcy, thats the petition date; the involuntary may be later) or 1 year after TIB appointed, whichevers earlier s.546a 2. 544, 545, 549 have additional limits 546(b)(1) secured creitro can finish perfecting a. If that means seizing property, that is done by giving notice to TIB rather than seizing 546(b)(2) b. Does not violate stay under 362(b)(3), if TIB powers are subject to under 546(b) or finish within the 30 day period of 547(e)(2)(a) 3. 544(a), 545, 547, 549 limited by reclamation rights under 546(c) a. Ordinaru courts of sellers business b. Received while D insolvent AND within 45 days of filing c. Writen demand within either 45ays after receipt or 20 days after filing, as applicable. vi. So, what happens? S.550 (applies to avoidance under: 544, 545, 547, 549, 553(b), 724(a) 1. TIB can seek either to get the property back, or the value of the property from any of 3 folks: a. Initial transferee (person who bought from D), b. Entity whose benefit it was for (your mom bought you a xmas present from D, so shes the IT but you are also now on the hook), or c. Subsequent transferee (thats the immediate or mediate transferee language) 2. Money to estate not secured creditor (550a, 551) limits on: a. Recovery action must be brought within one year of the avoidance action (550f) AND you can only recover from one entity (550d)

b. If the transfer was 90_ days, but to insider, can still avoid, but cant go after transferee who was not an insider (can go after insider) 550c c. If you (transferee) improved property in good faith, can have a lien on the property for the lesser of the cost of the improvement (minus what you got in profit already) OR increase in value 550(e)(1) 3. The initial transferee or for whom it was made a. Repay, despite good faith and lack of knowledge = undo the deal or repay the value if they dont have the property 550(a)(1), no 550(b) protection b. But if made n good faith, can recover under setoff for improvements cf. 550(e) 4. Subsequent transferee a. Does not have to repay if taken in good faith, gave value 500(b) b. If not good faith, must repay and no setoff because they are under 550(a)(2) and no 550(b) protection; also not good faith so no 550(e) setoff 5. Limit: can only recover once, 550(d), not against both 6. Setoff: IF you make improvements but are now having to return property, you get the lesser of the value of improvements or increase in value. o. Reshaping the Estate Equitable Subordination i. Basic Idea: For equitable reasons (read as you were naughty) we are sending you to the back of the line (read as you get paid last and therefore arent really going to get anything) 1. Basic example owners who undercapitalize their company with loans from the founding partners; court may say despite the loan label this was really startup capital meant to purchase their share of stock, and thus treat them as equity instead of lenders (p576+) a. Carolees Combine lender preference, but also equity? b. SI Restructuring problem, given the new value? Deepening insolvency 2. General test: a. Inequitable conduct b. Injury to others, or unfair advantage c. Granting relief wouldnt be inconsistent with Code 3. Result: dont just return money (if received), but paid after all others rather than a pro rata rate. p. Negotiating & Confirming the Plan Best Interests and Feasibility i. When? Can be filed at the same time as petition, or after ii. Who? S.1121, 1122(d)(2) 1. Debtor gets a period of exclusivity, 120 days (180 days if the debtor files a plan in the first 120) 2. During that period, creditors can only:

a. Accept the debtors plan b. Move to convert to ch 7 c. Move to end period of exclusivity 3. Court often extends period, but cant be more than a. 120 days to file extending to 18 months b. 180 day period to get it accepted extended to 20 months 4. What? See 1123 for checklist 5. Note: if a trustee is appointed, any party in interest can file (1121(c)) iii. Funding 1. Can borrow from existing creditors, get ne funding/investors, or sell assets a. Remember: non-ordinary course asset sales are done after notice and hearing under 363(b)(1) 2. Debtor want to use chapter 11 & 363, because it means they can continue to operate as the DIP until they can negotiate good terms; in contrast to a. Chapter 7 liquidation, which does not allow for continued operation b. Chapter 11 sales pursuant to the plan, which are less efficient in terms of time and cost. 3. But, dont have to offer cash; can use securities (dont have to meet securities registration requirements exemption under 1145) a. Either stock or warrants equal to the value of stock but without the obligation of reporting, etc. of stock q. Confirming the Plan Classification & Voting, Claims Trading i. Classification of claims 1. To be approved, need at least one class o support the plan; prefer unanimity to better ensure approval 2. All claims in a class must be substantially similar (1122(a)), and must receive the same treatment under the plan (1123(a)(4)) a. So secured claims, claims with priority, are different then general unsecured claims, so they cant be grouped together b. Often first mortgages will be in a different class than second mortgages 3. Small claims can be segregated if reasonable and necessary for administrative convenience - 1122(b) 4. Because the debtor wants to get the approval of one class, often they want to create smaller groupings our problem set presents the opposite problem, with a creditor seeking smaller groupings a. Separate long term suppliers willing to take long term notes/stock versus short term lenders not willing to take the deal. 5. Assume that the debtors biggest asset is a building 6. The bank that has the mortgage on the building is owed $20 million on a $15 million building

a. $15 million secured claim b. $5 million unsecured claim 7. Assume it has $2 million in other unsecured claims 8. This would mean that a. The bank is the only voter in the secured class b. Would be the biggest creditor in the unsecured class 9. As a result, it would have a veto power over every plan 10. For this reason, the courts have split on whether a single asset real estate creditor can be classified separately from the other unsecureds ii. Disclosure 1. The bankruptcy code takes the view that if creditors get adequate disclosure, they can decide for themselves whether or not to take the deal s. 1125 2. So the role fo the court is not to decide whether a plan is good or not, but to decide whether the disclosure is adequate: a. Copy or summary of the plan b. A written disclosure statement approved by the court for having adequate information reasonably practicable information required to enable a hypothetical reasonable investor typical of the creditors to make an informed judgment i. Condition of the debtors books (reasonably practicable) ii. Sophistication of creitors, shareholders iii. Nature of the plan. iii. Voting 1. Creditors with claims allowed under 502 and shareholders all get to vote a. The 502 requirement is deemed satisfied unless anyone dispute it as disputed, contingent, or unliquidated b. double-deeming = 1111 deems any scheduled claim to be filed unless contested, and 502 deems any claim or interest that is filed an allowed claim unless contested 2. Classes that are getting nothing are deemed to have rejected the plan so dont solicit their votes under 1126(g) 3. If the class is not impaired, deemed to have accepted so dont solicit under 1126(f) a. Claims are impaired unless, the legal, equitable, and contractual rights are not altered or the only alteration is the reversal of an acceleration on default, by curing the default and reinstating the debt. b. No determination of actual adversity required, just alteration. iv. 1111(b) Election 1. Consider our real estate claim again, partially secured, so have a claim for $15M secured and $5M unsecured (506(a))

2. 1111(b) allows the creditor to elect to hae $20M secured claim and no unsecured claim a. This election is made by the class of secured claims, not by each individual creditor; but it may practically allow for individual election in a SARE case, or where each secured creditor is put into a separate class. b. Advantage: gets paid the full debt of $20m (1129b), but it need not be cash today or have the present value. c. Disadvantage: cant vote with the unsecureds; cant participate in the distribution to unsecureds (which could be sooner. v. Tabulating the Vote 1. A class of claims has accepted a plan when a. More than one half in numer and b. At least two thirds in amount of allowed claims c. Actually voting on the plan to approve it. 2. Example from a hornbook a. 222 creditors, totaling $1M in debt b. Plan divides into 4 classes c. One class has 55 creditors with $650K claims d. 39 / 55 participate in vote; their claims total $450K/ 650K e. What do they need to approve the plan? i. 20 / 39 to vote yes, and ii. Those 20 must total at least 300K (2/3 of $450K) vi. Confirmation 1. Need not only approval through the vote, but also court confirmation a. Obviously, only one plan can be confirmed; if more than one gets enough support, the court selects, considering the preferences of creditors and equity holders 2. If every class accepts, looks to 1129(a) a. Must be approved by the court if every class of claims and interests has approved, and met the 13 requirements in (a) 3. 1129(b) applies where there is not unanimity (Cramdown) a. At least one impaired class has accepted b. Plan does not discrimintate unfairly c. Is fair and equitable d. (obviously, this override the 1129(a)(8) unanimity requirement) r. Confirming the Plan Cramdown i. Cramdown of secured claims (similar to ch. 13) 1. Determine amount of secured claim, based on collaterals replacement value a. Figure out the interest rate to be paid going forward

b. Have to pay out under the plan an amount at least equal to the amount of the secured claim (always satisfied; only matters where you make an 1111(b) election) 2. Example: a. 100K owed; 75K secured, 25K unsecured under 506 b. Under 1111b election can become 100K secured, so i. Cramdown means that the plan must have a present discounted value of 75K, and ii. That the payments face amount (not discounted to present value), total 100K ii. Cramdown of unecured claims 1. If a class dissents (doesnt approve), then any class junior to it cannot receive anything = revert to the absolute priority we saw before, now thats happening as between creditors and equity. 2. Example a. Plan provides for 70% payout to unsecureds; equity to keep their shares b. Can it be confirmed i. Yes, if it gets the majority of each class c. But, if any class does not accept the plan, then 1129(b) applies, and says because equity is getting to keep its shares and the plan isnt paying 100%, then the plan is not fair and equitable 3. Open question whether new capital infusion by equity is considered new value making it fair, or whether there is no iii. Best interests and Feasibility 1. Requirements of 1129(a)(7,11) 2. Feasibility 1129(a)(11): likelihood the plan will succeed a. Not guaranteed to work, nor are they just visionary schemes b. Must show reasonable likelihood of success 3. Best Interests 1129(a)(7): are the dissenters hurt, just one individual creditor being harmed is enough to bar the plan a. The creditor must get at least as much as in ch 7 liquidation, if they did not vote in favor of the plan b. So, you do a liquidation analysis, i. calculate the amount that you would get in a liquidation sale of each asset ii. then figure out what each dissenter would have received iv. What is Prepack 1. It just means that the bankruptcy plan was negotiated and accepted by the required number of creditors before the chapter 11 case was filed 2. The plan still has to meet the same requirements, but just changes the order 3. Reasons they are popular

a. Minimize the time operating in bankruptcy b. Reduces disruption to the business c. Gives more control over the process to the debtor d. Plan is finalized before being submitted to the court 4. Disadvantages a. Debtor doesnt get chapter 11 protections of automatic stay, rejection of executory contracts, reduced ability to use the superpowers of the TIB/DIP 4. Simulation a. Clarifying points form motion: DIP wanted to i. Get DIP financing to keep operating until it could have a longer auction process of the property; wanted to let the best bidder thus far provide bid financing ii. That financer insisted on 1. Super-priority for its $7.5M loan 2. Priming the liens of the senior and junior lien holders a. Seniors get adequate protection payments b. Juniors get 100% secured, 75% unsecured payout in plan 3. Being the co-proponent of the plan 4. $1M breakup fee if it is outbid in the auction b. Clarifying points from oral argument: DIP wanted to i. Waive 506 = make secured pay for costs of expenses that benefit it 1. Objection harms the unsecureds ii. Let the DIP lender and senior lien holder use the proceeds of avoidance actions (remember those?) to pay their super-priority claims 1. Objection they are already getting enough protections, that would wipe out the ability of the unsecureds to ever recover, that money should be saved for the unsecureds iii. Give SIP lender $50K/month for expenses 1. Objection should be an actual expense basis instead, also wanted more fees for unsecureds which were only getting $15K/ month in attorneys fees iv. Let the DIP lender be a co-proponent of its plan 1. Objection that gives the DIP lender too much control, the debtor should do it alone so it can be free to propose the terms it thinks best without being under the control of the lender.