DEBTOR CREDITOR OUTLINE I. Introduction: a.

Loans: Credit worthiness: Do not look at the asset value to decide if you should lend. Income/potential income/cash flow must be enough so that all expenses can be paid plus there is enough money to pay off the loan. Assets available upon default should not be basis for a loan, b/c dont want to go to the remedies. Assets are important on default, but cash flow tells the likelihood of default. Due diligence: Before lending, get financial statements telling assets and liabilities (balance sheet) and income and expenses (cash flow statement). Put covenants in the loan agreement to limit the indebtedness of the debtor, like D agrees not to borrow any money outside the ordinary course of business w/out consent of C (have provision stating what constitutes default, like missed payments or decrease in inventory, along w/ an acceleration clause to enforce the covenants). Lending at the operating level: When lending, you would rather be an unsecured creditor of the corporation (at the operating level) than a secured creditor of the owner (the equity level): this way, upon default you can go after the assets of the company instead of the stock. Could also lend to company w/ personal guarantee of equity holder. This way, if no money, creditor gets paid in full before equity is paid, so owner is at the bottom of the food chain. Structural Subordination: b. Liens: A lien is a limited property interest in collateral, which secures an obligation. If there is a default, the lien is used to satisfy the debt. [not a contract right, but a property right] A lien is a grab, the first to grab, gets. The first creditor to get a property interest in the property has priority. There are 2 types of liens: 1. Consensual Liens: Put it in loan agreement, this is better than judgment lien. UCC Art. 9 governs consensual liens on personal property. If you have a lien on assets, you are a secured creditor. Creating a Security Interest: To create an enforceable security interest in the form of a lien on personal property, the security interest must attach. For a lien to attach, need: i. Agreement between debtor and creditor granting a security interest; ii. The debtor must have rights in the collateral. iii. The creditor must give value in exchange for the lien. Perfection of a Security Interest: You can defeat all 3rd parties w/ perfection of the security interest/lien. Filing a financing statement puts all other parties on constructive notice of the your lien. An unperfected interest is good against the debtor but not as against third parties. So if

you arent perfected and another creditor or a BFP has possession of the collateral, they get to keep it b/c the one who grabs first, gets. Usually filing a UCC-1 perfects a security interest, but creditor taking possession may substitute for filing. 2. Non-consensual liens: judgment liens: sue the debtor, get a judgment, and get an order of attachment that creates a lien. [i.e. statutory liens most common is the tax lien] 3. Judicial liens: when the unsecured creditor sues and gets a judgment. [i.e. an order of attachment] Security Interest in Inventory: 1. Give a loan in exchange for a security interest in inventory of the corporation: in order to protect the lender, put in after acquired property clause (presently owned and hereafter acquired). 2. Floating Liens: In inventory and accounts receivables, the lien/security interest floats from old to new inventory as it leaves the building, b/c want people to be able to buy it. When a business sells inventory in the ordinary course of business, the buyer takes free of the lien. If the debtor doesnt replenish the inventory, the security interest will become valueless. So creditor can require that the inventory must always be worth 110% of the debt, so that the balance of the loan is always secure, and if it drops below that, there is default and acceleration. This requires oversight. c. Negotiable Instruments: Promissory Notes: are negotiable, freely alienable. The lender can sell the loan to someone else. Can be sold w/ or w/out recourse, w/out recourse means no COA against original lender. If the secondary lender who buys the loan is a holder in due course, the borrower has no defenses against the secondary lender that he would have had against the primary lender. To become a holder in due course, the buyer has to purchase in good faith, pay value and not have notice of any defenses (like fraud by original lender). So by signing a negotiable promissory note, the borrower was agreeing to cut off defenses available against any purchaser of the note (could always sue the original lender but this isnt always a good option). Note that it is unfair trade practice to use negotiable promissory notes in consumer transactions. It is still OK for commercial transactions. Suretyship: A guarantor agrees to be liable for the debts of another. If the debtor and creditor change a loan agreement w/out consent of the surety, the surety is released from liability. Can have a consent to modifications in the original guarantee agreement. d. Default: Upon default, agreement usually provides that notice of default must be served on the debtor. After default, creditor can go out and take the collateral so long as there is no breach of the peace.

If D resists, must file a complaint and ask for a judgment. If a lien/security interest already exists, you dont need an order of attachment to get possession of assets. The secured creditor can sue in replevin to get possession of what is rightfully Cs. 2 ways to get a judicial lien: either an order of attachment, where creditor must prove that if there isnt an order of attachment, the assets will disappear. The second way is to give the writ of execution to the sheriff, who levies personal property and sells it at auction to satisfy the debt. Can also get a levy on bank accounts or account receivables, where a restraining notice will freeze accounts, if the bank doesnt comply, the bank is liable. P/Creditor must investigate assets post-trial. This is done through supplementary proceedings, like post-judgment depositions, info. subpoenas, etc. Exemptions: some assets are exempt: a creditor cannot levy insurance policies, personal items, tools of the trade (dont want to take away livelihood). Homestead exemption: most states, they can take your house and sell it, but you are entitled to some money. In NY, it is a 10K exemption (20K if owned as TbyE). In NY, if you have a 300K home w/ 280K mortgage, you have 20K in equity. If the value of the house goes down to 250K, and you default, the bank can foreclose and keep the full 250K, b/c when you give a consensual lien, you are waiving your right to declare the asset exempt. e. If the C threatens foreclosure on inventory after default by D, which will put D out of business, declaring bankruptcy can hold off the Creditor. II. Declaring Bankruptcy: a. Bankruptcy: a legal proceeding where a D either voluntarily or involuntarily declares bankruptcy. It is not a financial condition, but a legal proceeding. You can be solvent and still bankrupt. Insolvency under Bankruptcy Code (BC) 101 is when liabilities exceed assets- this is balance sheet test. UCC uses Cash Flow test (Insufficient income/assets to pay debts as they come due) and balance sheet test for insolvency. b. The Bankruptcy Code: Chapters 1, 3 and 5 apply to all other chapters. 1. Chapter 1 is definitions. 109 says who may be a debtor. 2. Chapter 3 is administration (subchapter IV is administrative powers). 3. Chapter 5, subchapter I is claims of creditors; subchapter II is debtors duties; subchapter III deals w/ the bankruptcy estate. When filing a bankruptcy petition, put down what form of relief is sought. There are Five Forms of relief, according to what chapter you are filing under: 1. Chapter 7: Liquidation. Most common for individuals.

In liquidation, debtor is ready, willing and able to give up assets, to be liquidated by the trustee, and the proceeds go to creditors. Individuals give up all non-exempt assets in return for a discharge of old debt. Businesses go out of business. 2. Chapter 9: Adjustment of debts for a municipality Applies to cities and smaller govt units like school districts. 3. Chapter 11: Reorganization: Business remains open, and rehabilitates. Individuals may also use Ch. 11 but usually do Ch. 13. The focus of Ch. 11 is the reorganization plan: the new debt/equity structure (see subchapter II). 4. Chapter 12: Family Farmers BR. 5. Chapter 13: Consumer Bankruptcy: This is for individuals w/ a regular stream of income. Use post-petition income to pay off pre-petition debt. c. Eligibility to pursue a BR Claim: 109: Who may be a debtor: Any person that resides or has a domicile, place of business or property in the US may be a debtor. A corporation resides in the state of incorporation. 109(b) says what entities are not eligible to file BR. RRs cant liquidate under Ch. 7, either can banks. But other than the exceptions in 109(b), just about any kind of entity can liquidate under Ch. 7. 109(d): Anyone eligible under Ch. 7 is also eligible under Ch. 11. RRs may also use Ch. 11. d. Commencing a BR Proceeding: See Ch. 3 Subchapter 1: Voluntary Bankruptcy Proceedings: 1. 301: file a petition laying out what Ch. you are seeking relief under. Filing constitutes an order for relief, so creditors cant file an answer to challenge the petition. But under 707(a), can request a dismissal if the debtor is ineligible. 707(b) only the judge or trustee in bankruptcy can dismiss for substantial abuse. 2. Notice and hearing: required to give notice to creditors, but really this only means notice and opportunity for the creditor to request a hearing. See 102-1. 3. 302: Joint petitions: for husband and wife, not partners. Each can have individual debts and still file jointly, just to avoid fees. Involuntary BR Proceedings: 1. 303: If debtor doesnt want to go into BR, creditors can force either a Ch. 7 or 11 BR proceeding. 2. 303(b): If 12 or more creditors, need at least 3 to commence involuntary BR. If less than 12, only need 1. BR is commenced by filing of a petition under Ch. 7 or 11. 3. 303(d)-(e): Debtor is entitled to file an answer, and then there will be a hearing to determine if grounds for an involuntary BR exist.

4. 303(h): Grounds for relief: Petitioning creditors must show that, as to debts where no bona fide dispute exists, the debtor is generally not paying debts as they become due. Debtor can answer, saying that he doesnt belong in BR, b/c looking at the undisputed debts, the debtor is generally paying them as they become due. 5. 303(i): If you file an involuntary BR petition and it is dismissed, there are serious penalties levied on the creditor. If filed in bad faith, may face punitive damages. So must do due diligence; courts will look at what inquiries were made to determine if undisputed debts were generally being paid as they cam due. You need to do an exhaustive investigation to determine the financial condition of the debtor. e. The Automatic Stay: 362 When filing a BR petition under 301, 302 or 303, a petition acts as a stay. The time of the petition may be based on the need for a stay, like if the bank is going to foreclose tomorrow, file today and get a stay. The automatic stay stops the collection process and foreclosure on the collateral. Purpose of the stay: stops the grabbing in order to ensure fair and equal treatment of similarly situated creditors (unsecured creditors get pro-rata share). Scope of the Stay: 1. 362(a)(1): pre-petition causes of action are stayed. So cant bring any COA (even negligence of company) if the claim arose prepetition. See 101-5 for when claim arises. Courts have held that Congress intended the definition of claim to be as broad as possible, and capture as many rights of payment as possible, in order to give max protection to D. Ex. you buy something from a company pre-BR, and then 2 years later you get hurt by it, this claim arose pre-BR, b/c you had a relationship w/ the debtor and the claim arose when the negligent act was performed. If Ps claim is stayed, cant sue. 2. 362(a)(2): enforcement of any pre-petition judgment is stayed. 3. 362(a)(3): Any act to obtain possession of property from the estate or to exercise control over property of the estate is stayed. 4. 362(a)(4): Cant perfect a security interest after petition is filed. 5. 362(a)(6): Any act to request payment or recover any claim is stayed. What isnt stayed: 1. 362(b)(1): Criminal Actions. But if the primary motive behind the criminal proceedings is to get the debtor to pay, collection is stayed. 2. 362(b)(2): Paternity Actions.

Lifting the stay: 362(d) After notice and a hearing, the court will grant relief from the stay: 1. 362(d)(1): for cause, including lack of adequate protection of an interest in property of the party in interest requesting relief from the stay; If the debt is far above the value of the collateral, the creditor is under-secured, but relief from the stay is not appropriate b/c the interest in the property is not threatened. Must look at the property and determine if value would decrease over time. Adequate protection includes lost opportunity costs, so must maintain the value of the collateral plus interest. Could make periodic cash payments to prevent depreciation, the money would go to escrow and become part of the collateral. 2. 362(d)(2): relief from the automatic stay may be granted if the debtor has no equity in the collateral and the property is not necessary to an effective reorganization.

III.

Chapter 7: Liquidation: a. Once eligibility is established, the vast majority of cases are voluntary (under 301). Filing the petition is an order for relief; the first relief is the automatic stay. b. Debtors Duties: 521: Obligations of the debtor once the petition is filed: Must file a list of creditors, w/ names and addresses. Then the court sends out notice to creditors, letting them know the case has been filed, the automatic stay is in effect, when the meeting of creditors will be and deadlines for objecting. Shortly after this, the debtor must sign and swear to a schedule of assets. c. Meeting of Creditors: 341: a 341 Meeting is scheduled in original notice from the court. It is presided over by a US Trustee. Under 307, any party may appear and raise any issue in any case. d. 343 Examination of the Debtor: Debtor is questioned at 341 meeting as to where the money went. In small cases, creditors dont even go to 341 meeting, only debtor and trustee. e. Trustees: The US Trustee will appoint an Interim Trustee under 701, who is a regular trustee like a lawyer or accountant. Under 702(d), the unsecured creditors can elect a trustee at the 341 meeting if they dont like the interim trustee, must have creditors holding 20% of outstanding debt. If no new trustee is elected, the interim trustee serves as trustee. 703: successor trustee may be appointed in case of death or something. 704: Trustees duties: collect assets and liquidate, investigate financial affairs of the debtor as the basis for objecting to a discharge, examine proofs of claims to make sure they are legit, and oppose discharge of debt if necessary. 705: Creditors Committees: at a 341 meeting, creditors could also elect a committee to represent creditors, but this is rare in Ch. 7. f. Assets of the Estate: 541: Property of the Estate:

If property is not part of the estate, it will not be sold as part of Ch. 7 liquidation. But, the automatic stay does not protect property outside of the estate. Determine property of the estate by looking at the petition date. 541(a): all legal or equitable interest in property acquired pre-petition is part of the estate. EXCEPTION: 541(a)(5): any property received postpetition by reason of bequest, devise, life insurance policy or divorce, w/in 180 days of filing a BR petition, become property of the estate. 541(a)(6) and (a)(7): Proceeds or profits from property of the estate, such as new inventory or proceeds of inventory, that can be traced back to an estate asset become property of the estate. 541(c)(1)(b): any restriction, limitation, or condition based on the insolvency or financial condition of a person is not enforceable- so land subject to a reversion back to the debtor if the debtor files bankruptcy is part of the estate, even though the interest is acquired post-petition. g. Exemptions from What is Part of the Estate: 522: EXEMPTIONS: Whatever is exempt may be kept by the debtor. Debtor may exempt the property in either 522(b)(1) or 522(b)(2). 1. 522(b)(1): Debtor may exempt assets listed in 522(d) 522(d)(5): Wild Card Exemption: the debtors aggregate interest in any property not to exceed $850K plus up to 8,075 of the unused portion of the homestead exemption in 522(d)(1) may be exempt. This means that you can keep almost 9K of whatever property you want, including cash. This was included to help people that didnt have property to use the homestead exemption. A lot of states opt out of this. 2. 522(b)(2): Property that is exempt under Federal Law, other than 522(d), or that is exempt under state law. h. Liabilities of the Debtor (and Claims of the Creditors): 501: Proofs of Claims or Interests: Creditor, debtor or trustee may file a proof of claim. 101-10: Creditors claim must have arisen prepetition. 502: Allowance of Claims or Interests: 1. 502(a): A claim is allowed unless a party in interest objects, meaning the debtor, the trustee, or another creditor. 2. 502(b): If an objection is made, the court, after notice and a hearing, will determine if a claim is valid. There is a list of valid objections to a claim, such as 502(b)(1), where it is a valid objection if the claim is unenforceable under state law. Any defense good outside of BR is good now. 502(b)(2): claims for unmatured interest are not allowed. BR petition stops the running of interest, and all creditors get the same amount of interest: zero. Pre-petition accrued interest is allowed, but no more. o 506(b): If the collateral is worth more than the debt, and the creditor is over-secured, then post-petition

interest is allowed to accrue up to the value of the collateral. This is b/c secured creditors have a property interest in the collateral, but are not entitled to any more than the value of the collateral. 502(b)(6): landlords claims against tenants are capped at either one years rent or 15% of balance of lease term (not to exceed total of 3 years rent), whichever is higher. Still have full claims for back rents, but for future rents, the cap is the amount the landlord can put in for, and then gets paid pro-rata just like other unsecured creditors. 502(b)(7): employees can only claim future wages of one year, measured from the time of termination or time of petition. Can get back pay, though. 3. 502(c): Estimated Claims: Creditor must estimate a contingent or unliquidated claim, this comes up when the Debtor is a guarantor on a loan. The court will hold a hearing to determine the probability of the primary payer defaulting, and multiply it by the full amount owed, and then the Creditor will get that amount, and release the Debtor from liability as a guarantor. This would be done if there was say 5 years left on a loan, but if only 3 months, then wait and see if the claim arises. The guarantor/debtor has the right to reimbursement from the primary obligor. Administrative Claims: These are post-petition 1. 503(b): After notice and a hearing, post-petition administrative expenses are allowed claims. These include the necessary costs and expenses of preserving the estate, including wages, salaries or commissions for services rendered post-petition, taxes incurred by the estate, and compensation and reimbursement to certain parties (like lawyers). i. Secured vs. Unsecured Claims: Secured Claims: BR only interferes w/ K rights, not property rights, and a lien is a property interest. Liens create secured claims. 1. 506: Determination of Secured Status: i. 506(a): An allowed claim of a creditor secured by a lien on property in which the estate has an interest is secured up to the amount the estate has an interest in the property. Bifurcation of a claim: a secured creditor is only secured up to the value of the collateral, so if a lender is under-secured, the amount of debt over the value of the collateral is unsecured. ii. 506(b): see above re: oversecured creditors and post-petition interest. Note that unsecured and

under-secured creditors dont get interest, so they are in a hurry to get the proceeding over w/, while the over-secured creditor wont care until the interest causes the debt to reach the full value of the collateral. A secured creditor can get relief from the stay and have the collateral sold if depreciation of the collateral causes its value to equal the debt or the interest accrues to the point where the debt and collateral are the same, b/c this is inadequate protection of the creditor. Allowance of an Unsecured Claim: 507- priorities of unsecured claims, and claims of under-secured parties (where the debt is greater than value of the collateral. Secured creditors get the value of their collateral, and anything left goes to unsecured creditors in the order listed in 507. The first priority has to get paid 100 cents on the dollar before the next in line gets a dime, and anything left after priorities goes pro rata to general unsecured creditors. In most Ch. 7 cases, general unsecured creditors end up w/ about 4%. 1. 507(a): Priorities of Unsecured Claims: i. Administrative expenses allowed under 503(b) (those reasonable expenses necessary to maintain the estate and administer the case). This includes paying trustees, lawyers and auctioneers. Also included are payments to suppliers in time of bankruptcy, b/c these are expenses necessary to keep the business going. ii. Claims in Involuntary BR Proceedings: This encourages creditors to lend to those who have an involuntary petition filed against them. It would be unfair to allow a creditor to file against a debtor and prevent a business from getting loans from another source. iii. Employee Wages: Up to 4300/employee for wages earned w/in 90 days of the BR or cessation of the business, or whichever occurs first. This includes wages, salaries, commissions, vacations, severance, sick pay, etc. iv. Employee Benefit Plans: Up to 4300/employee for 180 days minus the amount received under (iii). v. Claims by grain producers and fisherman vi. Unsecured claims of individuals up to $1950 arising from a pre-petition deposit for a sale. This is a consumer priority. This number is adjusted for inflation. vii. Past due alimony and child support is paid seventh, but anything not paid remains, and is not discharged. viii. Tax Claims: Income taxes owed for the last 3 years. j. Discharge of Debt: Ch. 7 promotes entrepreneurship, and allow discharge of debt when debtor gets into trouble. Creditors pay, but they can adjust interest rates. Certain provisions will prevent discharge of debt.

Objections to Discharge: 727- if one of these occurs, the court can refuse to discharge the debt: 1. 727(a)(1): If the debtor is not an individual, cannot get a discharge of any debt. Corporations can file for Ch. 7, but debt is not discharged. The purpose of a corporation going into Ch. 7 is to terminate the business and liquidate the assets. Dont need a discharge b/c the corporation is not making a new start. 2. 727(a)(2): Fraudulent Conveyances: Cant fraudulently convey assets one year prior to petition date, or any time after filing, with the intent to defraud, hinder, delay, etc. The burden is a preponderance of the evidence, such that it is more likely than not that the transfer was made to hurt creditors. If a debtor is insolvent and transfers assets, it is an easy case for the creditor to make. Fraudulent Conveyances can be cured in some jurisdictions by having the property conveyed back. 9th Circuit says that literal reading of the code doesnt allow for cure. 10th circuit says that if you only found out it was fraudulent after the fact, you can be allowed a discharge. 3. 727(a)(3): If debtor conceals, destroys, mutilates, falsifies, or even fails to keep adequate records of financial condition, then the debtor cant get a discharge. The main issue here is whether it was reasonable to have kept the records that are being litigated over. 4. 727(a)(4): Debtor cant make a false oaths or claims in connection w/ the BR proceeding. 5. 727(a)(5): Failure to explain a loss of assets: even if you spent all your assets on hookers, so long as you are truthful, and even if it is illegal, you can get a discharge. But if you dont tell the court anything, you dont get the discharge. 6. 727(a)(6): Refusal to obey court orders. You can plead the 5th amendment right to refuse to incriminate yourself, but if you are given immunity, you have to tell. 7. 727(a)(7): If debtor has done anything in 727(a)(2)-(6) in connection w/ another BR case of an insider (see definition), w/in the past year, debtor cant get a discharge. This would occur if an insider lies about corporate assets and then 6 months later goes into personal BR. 8. 727(a)(8): No discharge if the debtor has received a discharge w/in past 6 years. 9. 727(a)(9): No discharge under Ch. 7 if debtor has received a discharge under Ch. 13 w/in past 6 years, unless in the Ch. 13 case the creditors were paid 100%, or got 70% of claims and the debtor made the best good faith effort possible to pay 100%. 10. 727(a)(10): The court will grant a debtor discharge of a debt unless the court approves a written waiver of discharge executed by the debtor after the petition date. Banks can loan money post-

petition, and get a waiver while the BR is still going on of any discharge of that debt. But cannot waive discharge before the BR case is commenced. What debts are discharged: 727(b): All debts incurred before the order of relief (any pre-petition debts) are discharged, except as provided in 523: o 523(a)(1): Tax or customs duty not discharged: Taxes are a priority under 507, so no matter what the govt always gets their money. The exception is income taxes only go back 3 years form date of petition. The priority in 507 helps the debtor b/c pay taxes out of estate before paying general unsecured creditors, but if the estate doesnt have enough money to get to the tax priority, it isnt discharged. Note also that tax liens are a statutory lien, so the IRS is a secured creditor. o 523(a)(2): credit obtained through false pretenses is not discharged- so cant use false financial statements in loan application that the bank relies on in extending credit, or else it isnt discharged. Note that 523(a)(2)(A): Oral statements re: financial condition, even if completely fraudulent, are OK- bank cant reasonably rely on oral statements of financial condition. But oral statements about other things like marital status will prevent discharge. Creditor needs to prove there was intent not to pay. There is a presumption in 532(a)(2)(C) of fraud as to debts owed to one creditor greater than $1100 w/in 60 days of filing for luxury items (not necessities). Creditor must reasonably rely on materially false info re: financial condition made w/ intent to deceive. If there is a credit report on file and lender still relies on info in loan app, debtor may get discharge. Consider whether or not it is reasonable to get/forego a credit report when extending credit. o 523(a)(3): Exception to discharge for unlisted creditors. Debtor has to give creditors notice, if debtor doesnt list creditor on schedule of debts w/in 90 days of first 341 Meeting, no discharge of that debt. Note that actual knowledge, regardless of how obtained (like if creditor saw it in newspaper) will not prevent

o o

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discharge, so long as creditor found out about it w/in time to file a claim. 523(a)(4): fraud while acting in a fiduciary capacity, ex. lawyer stealing escrow money. ???? 523(a)(5): No discharge of alimony, maintenance, child support. But there is a discharge of obligations arising out of property settlements as a result of divorce, see 523(a)(15)- like if, instead of getting the Jaguar, wife gets 5K/month, that 5K per month can be discharged in BR proceeding of Husband. But, under 523(a)(3)(B), if the property settlement is really just a label for what is truly alimony or support, the court can ignore the label. Look at the amount. Note that property from the settlement would go into the BR estate, and be divided up for all claims, so wife is a general unsecured creditor. See below re: 523(a)(15). 523(a)(6): liability for willful or malicious injury by the debtor to a person or property is not discharged. 523(a)(7): fines, penalties, traffic tickets, or any punitive fines are not dischargeable. 527(a)(8): Student loans are non-dischargeable, unless it would create an undue hardship. Most courts will allow undue hardship to justify partial discharge, so that there are lower payments. 523(a)(9): Liability from death or personal injury caused by drunk driving is not dischargeable. 523(a)(10): debts that existed in a prior BR proceeding, where there was an objection to discharge of the entire debt, are not discharged in a subsequent case. Ex. is fraudulent conveyance within one year prior to first BR proceeding that renders all debts non-dischargeable. In a subsequent case 5 years later, those debts that existed in the first BR proceeding are not dischargeable now. 523(a)(15): Property settlements where an obligation is incurred in the course of a divorce are not dischargeable unless: 1: The debtor cannot afford to pay the debt. OR 2: If the debtor can afford to pay, do a balancing test: detriment to the debtor vs. benefit to the creditor of receiving the payment. So if she doesnt need it, and he can barely afford it, she dont get shit.

k. Effect of a Discharge:

524(a): The discharge voids the in personam obligation (the obligation to repay the debt) but does not destroy any property interests (the liens). Once the automatic stay is gone, the lienholders can now foreclose on the property as secured creditors. 524(c): Reaffirmation of the debt: this is only done in the debtors best interest, if the debtor wants to keep the car, and continue to pay the loan. Only allowed if the value of the collateral exceeds the loan amount. This is different from waiving the discharge, b/c individual discharges of specific debts may only be waived if: 1. An agreement was made before discharge was granted; 2. there must be a clear and conspicuous statement in the agreement that it could be rescinded w/in 60 days. 707(b): Dismissal of Ch. 7 proceeding to prevent abuse of process. In consumer debt cases in Ch. 7, a case may be dismissed sua sponte (decided by the judge w/out being asked by either party) or on the motion of the trustee, if there is substantial abuse of the provisions of Ch. 7. It is usually substantial abuse if you would be able to pay all your debt.

IV.

Chapter 13: See pg. 29 of Jackies notes for summary. Ch. 13 is for debtors that dont want to go through Ch. 7 liquidation; would rather keep non-exempt assets that would have been liquidated, and in exchange pay over time the money owed to pre-petition creditors. a. Eligibility: First determine eligibility. Under 109(e), an individual (not a corporation/partnership) w/ regular income that owes on the date of filing unsecured claims of less than 269K and secured debt of less than 807K can opt for Ch. 13 (it is completely voluntary). You cant be a debtor if you were dismissed by the court for willful failure to obey court orders or withdrew voluntarily w/in 180 days (109(g)). b. The Automatic Stay: Ch. 13 Debtors get the automatic stay in 362, but there was feeling that this wasnt broad enough b/c no protection for guarantors. 1301 Co-Debtor Stay: o If debtor files Ch. 13 petition, creditors are stayed from suing the debtor and the guarantor until a Ch. 13 plan is filed by the debtor. If the plan provides that the debt which is guaranteed will be paid in full by the debtor, the 1301 stay remains and the creditor cannot go after the guarantor. But if the plan says that only 75% of debt will be paid, creditor can go after guarantor for the remaining 25%. There is no such protection under Ch. 7. o Usually, debtors will propose a plan where they will pay 100% of the debt owed when they have a friend as guarantor. c. The Ch. 13 Trustee: In Ch. 7, trustee collects and liquidates assets. In Ch. 13, under 1302, the trustee has the same duties as in 704, except for 704(1). The Ch. 13 trustee acts only as a dispersing agent: every month the debtor pays the

trustee a sum of money that the trustee distributes to the creditors according to the plan. If the trustee thinks the plan is impermissible, the trustee can reject it. d. The Ch. 13 Plan: 1321: Only the debtor may file the plan and say how much the debtor shall pay. Involuntary Ch. 13 cases are not allowed (see 303- only Ch. 7 or 11 can be involuntary). 1307(a): if debtor changes his mind, it can be converted to a Ch. 7, so debtors can give it a try and if it sucks they can do a liquidation. 1322: Contents of the Ch. 13 Plan: 1. 1322(a): The plan shall (must): i. 1322(a)(1): provide that a certain portion of future income/earnings will go to the trustee to pay creditors; ii. 1322(a)(2): provide for the full payment (could be deferred) of all claims entitled to priority under 507, unless the holder of the claim agrees otherwise; and iii. 1322(a)(3): treat all creditors within each category of claims the same. 2. 1322(b): The plan may: i. 1322(b)(1): designate classes of unsecured claims as provided in 1122 (all creditors in a class must be substantially similar/similarly situated). You can discriminate, but only if it is fair. Look at the priority of the creditors; if they have the same priority but the plan provides that 5 credit card companies get 20 cents on the dollar and another 5 credit card companies only get 10 cents on the dollar, it is unfair discrimination. But if you have 10 credit card companies in one class plus money you owe to your dentist in another class, all of these are the same class of unsecured creditors. So ask if there is a rational basis for wanting to make sure that a certain creditor gets more than others. In this case, yeah, you dont want to piss off your dentist, b/c you will have to deal w/ him in the future and he can fuck w/ your teeth. Under 1322(b)(1), a plan may discriminate against unsecured creditors so as to protect a guarantor. So if you owe bank on an unsecured loan secured by Uncle Harry, you can provide that it gets paid 100%, while credit cards only get 50 cents on the dollar. ii. 1322(b)(2): you can modify the rights of secured creditors, except for security interests in real property only (mortgages). So you cant use Ch. 13 to reduce mortgage payments, but you can reduce payments on other secured loans. Also, if the loan is secured by the property and the

furniture, it isnt a claim secured only by real property, so you can mess w/ it. iii. 1322(b)(3): The plan may provide for the curing or waiving of any default. A Ch. 13 plan is usually 3 years. But if debtor has a 10 year loan for 10K, it would be better if the loan wasnt subject to the Ch. 13 plan b/c then 10K would have to be paid back over 3 years, instead of just 3K plus interest (or if debtor could only afford 50 cents on the dollar, 5K over 3 years). So debtor has the option to leave the long-term loan in place- see 1322(b)(5). Without this, loan would accelerate and the entire balance or whatever percentage the debtor can afford would have to be paid in 3 years. iv. 1322(b)(4): payments on secured and unsecured debts can occur simultaneously, although secured creditors still must get 100 cents on the dollar. v. 1322(b)(5): Allows debtor to cure default on long term loans w/in a reasonable time. This includes mortgages, notwithstanding (b)(2), a debtor can cure default and reinstate the mortgage to its original terms. If this wasnt allowed, the only way to save the home from foreclosure would be to pay the entire amount. Under-secured Mortgagor: stripping down the mortgage is not allowed. Generally you have to bifurcate claims under 506(a): secured claims are only secured up to the value of the collateral. If a mortgage of 450K is outstanding on a 400K home, the debtor would like to bifurcate so that there is only a 400K mortgage, and the other 50K is reduced to whatever percentage general unsecured creditors are getting. The S. Ct. said no dice, the entire amount is secured by the home. This is b/c if the house subsequently appreciates in value, the debtor would get a windfall. W/ second mortgages, when the value of the home is less than the first mortgage, some courts say that since the second mortgage is completely subordinated to the first, it can be restructured. Look at agreement: if anything other than real property secures the mortgage, the entire thing can be restructured. vi. 1322(b)(10): Catch-all: any other appropriate provisions may also be put in. e. Confirmation of a Plan: 1324: Confirmation Hearing: Notice and opportunity to be heard must be sent to all creditors. All parties may object.

1325(a)(5)(B): If owe secured creditor 1500, but collateral worth 1K, plan can provide that lien remains, loan gets extended; so long as 1K plus interest is paid back. 500 left over see 1325(a)(4).

1325: Confirmation of the plan: all 6 of these must be met in order for the court to approve a plan and make it binding on all creditors: 1. 1325(a)(1): The plan must comply w/ provisions of Ch. 13, meaning 1322(a). 2. 1325(a)(2): All fees must be paid. 3. 1325(a)(3): The plan must be proposed in good faith and not be forbidden by law. o Good faith means no phony schedules, no fraud. However, even if you could afford more than you are proposing in the plan, it is not bad faith to offer less. 4. 1325(a)(4): The value, as of the effective date of the plan, that you pay to unsecured creditors must be at least what they could have gotten under Ch. 7 liquidation. o Must account for time value of money, the present value of the payment plan must equal liquidation value. 5. 1325(a)(5): as to secured claims: i. 1325(a)(5)(A): The secured creditor/holder of the claim has to accept the plan; OR ii. 1325(a)(5)(B): The plan can provide that the secured creditor retains the lien securing the claim, but the value to be paid as of the effective date of the plan must be full value of the collateral (S. Ct. says use wholesale value). This can be stretched out over a longer period of time but must account for interest (as to any unsecured portion of the loan, bifurcate claim according to 506(a) and see 1325(a)(4)). OR iii. 1325(a)(5)(C): The debtor can just surrender the property securing the claim to the secured creditor. 6. 1325(a)(6): The court will only approve a plan if the will be able to make the payments under the plan be able to comply w/ the plan. 7. 1325(b): If the trustee or holder of an allowed unsecured claim objects to confirmation of the plan, the court may not approve the plan unless: i. 1325(b)(1)(A): The value of distribution under the plan is full value; or ii. 1325(b)(1)(B): The plan provides that all of the debtors projected disposable income to be received during the 3 years of the plan will be applies to make payments under the plan. Disposable Income: income in excess of amount reasonably necessary to survive (see 1325(b)(1)(B)(2)). Judge will determine what is necessary and what is a luxury.

 1325(c): The court could order any entity that debtor receives income from to pay any or all of it to the trustee. New Law would use a means test: income you have after necessary expenses according to IRS standards would go to plan. f. Discharge under Ch. 13: 1328: After completion of payments under the approved plan, you get a 1328(a) discharge, discharging all debts except: 1. 1328(a)(1): Any long term debt you cured pursuant to 1322(b)(5); and 2. 1328(a)(2): the 3 non-dischargeable debts in 523(a) exceptions: alimony (523(a)(5)), student loans (523(a)(8)) and debts from DUI (523(a)(9)). o Difference b/w Ch. 7 and Ch. 13 discharge: 727 objections to discharge do not exist in Ch. 13; and except for the 3 above, the 523 exceptions dont exist in Ch. 13. g. Modification After Confirmation: 1328(b): Even if you didnt make all of the payments and you cant offer any modifications as covered by 1329 (see below); you can still get a discharge so long as everyone got liquidation value. BUT, under 1328(c), all 523(a) exceptions apply. 1329(a): A plan may be modified after confirmation but before completion, upon request of Debtor, Trustee or the holder of an allowed secured claim for various reasons. The modifications must comply w/ 1322(a) & (b), 1323(c) and 1325(a). Cant modify so that payment extends beyond 5 years of date that first payment on original plan was due. h. Revocation of Order of Confirmation: o 1330: w/in 180 days of date of order of confirmation under 1325, and after notice and hearing, the court may revoke an order procured by fraud. If revoked, the case is disposed of under 1307 unless the debtor proposes and the court confirms a modification under 1329. Chapter 11 Reorganization: o Ch. 11 is designed to facilitate a negotiated settlement between a debtor and his creditors. This is similar to what an out of court settlement would look like, but you need the BR system to help do this- otherwise you would have holdouts and creditors that wont agree, fucking up any chance a debtor has to get his shit together and recover. a. Eligibility for Ch. 11 BR: 109(d): any party who can be a Ch. 7 debtor under 109(b) may be a Ch. 11 debtor. However, individuals usually opt for Ch. 13 unless their debts are too high to be eligible for 13.

V.

1. Note that stockbrokers and commodity brokers can only do Ch. 7 unless they sell off all of their accounts. 2. RRs may do Ch. 11 even though they are ineligible under Ch. 7. Ch. 11 Subchapter IV deals exclusively w/ RRs. 109(g): Cant be a debtor if you were dismissed by the court for willful failure to obey court orders or w/drew voluntarily w/in 180 days prior.

b. Debtor in Possession/Trustee: 1101: Default Rule: usually no trustee is appointed, but the current management remains to reorganize, this is know as debtor in possession Usually in Ch. 11 cases there is no outside trustee b/c they dont know how to run the business. 1104: Appointment of Trustee: 1. 1104(a): A creditor can request appointment of a trustee and oust current management if there is cause to do so: Fraud, dishonesty, gross mismanagement, etc. 2. 1104(c): court can order the appointment of an examiner who will oversee the process if it is in the interest of creditors or equity holders. Can also be done if certain debts exceed 5M (see 1104(c) (2)). o Note that a trustee/examiner is an administrative expense, so the estate pays for it (which really means the creditors pay for it b/c they get less). 3. 1104(d): The U.S. trustee, after consulting the parties in interest, appoints the trustee if one is requested. c. Creditors Committee: 1102(a): The U.S. trustee appoints a committee of unsecured creditors (usually 7 of the largest unsecured creditors-1102(b)(1)). This committee should be representative of the difft types of creditors (like landlords, bondholders, vendors, banks, etc.). The committee is there to negotiate and investigate on behalf of all unsecured creditors, b/c cant negotiate w/ 20 or 30 people at once. A creditors committee is mandatory, and the U.S. trustee also has discretion to appoint equity holders committee. 1103: Powers and Duties of Committees: 1. 1103(a): The committee may hire professionals like lawyers, accountants, investment bankers, etc. to help them determine how to best reorganize. This is done w/ court approval, and expenses are paid out of the estate. 2. 1103(b): The professionals hired may not represent any other entity having an adverse interest in the case, but representation of one or more creditors of the same class as represented by the committee is not per se an adverse interest. 3. 1103(c): The committee may: i. consult w/ trustee or DIP re: administration of the case;

investigate the conduct and financial condition of the debtor, operation of the debtors business and other matter relevant to the case or formation of a plan. iii. Participate in the formation of a plan; iv. Request appointment of a trustee or examiner under 1104; v. Perform other services in the interest of those represented. 1109: Right to be heard: i. 1109(a): SEC can always be heard on any issue, but cannot appeal BR Court decision. But the other party may appeal all the way up until SEC loses. ii. 1109(b): Any other interested party (creditors, debtor, committee, trustee, equity holder, etc.) may raise and be heard on any issue, and may appeal any ruling/judgment/order. iii. NOTE: 307 U.S. trustee may be heard in any matter in the case, but cant file a plan pursuant to 1121.

ii.

d. Keeping the Debtor Alive: 361-366: 361: What is adequate protection: This relates to the automatic stay and depreciation of collateral securing a loan. If adequate protection is required by 362, 363 or 364, it can be provided by making payments to the creditor in the amount that the stay decreases the creditors interest in the property. Also, could provide an additional lien in lieu of cash payments. 362: The Automatic Stay: In Ch. 11, this permits the debtor to continue to do business, and secured creditors cant foreclose, or even send letters demanding payment. Any pre-petition debt remains outstanding, and debtor doesnt even have to pay debt service charges. This gives the debtor a competitive advantage in the market place. 1. 362(d): Secured creditors can seek relief from the automatic stay, so the debtor must be sure that the collateral is adequately protected from depreciation (see 361). The secured creditors can immediately file for relief from the automatic stay, and then the burden shifts to the debtor to show there is adequate protection, or debtor has to create protection according to 361. The debtor still gets continued use of the collateral, w/out making payment. Also, interest doesnt accrue on the debt, except to the extent that the debt is over-secured. 363: use, sale or lease of property: 1. 363(b)(1): Says that trustee may use, sell or lease other than in the ordinary course of business after notice and a hearing. If no one objects, then dont need court order, b/c it is assumed it is a fair deal. But a purchaser from a DIP will want a court order anyway, called a comfort order.

2. 363(c)(1): If the business is authorized to be operated under 1108, the DIP may enter into transactions in the ordinary course of business w/out notice or a hearing. o 2 tests to determine if in the ordinary course of business: i. Horizontal Test: Is this the kind of activity that is customary or usual in similarly situated companies in this industry. If so, then it is in the ordinary course of business. So if a company hires lobbyists, it can be in the ordinary course of business if other companies like them regularly do so. ii. Vertical Test: Dont look at other companies; instead ask if whether, historically, the debtor company engaged in this kind of activity. 3. 363(c)(2): Cash Collateral: Can never use cash collateral (defined in 363(a)) unless each entity w/ an interest gives consent, or the court authorizes it. o This is one case where the Ch. 11 debtor has less rights than he would have not in BR: Ex. if Bank has security interest in accounts receivables, ordinarily it is understood that when the account is paid by the customer, the company would use the cash in the ordinary course of business. However, when in Ch. 11, when get cash from customer to pay account receivable, the debtor cant use this cash b/c of 363(c)(2). 4. New Inventory: 552(a): Property acquired by the debtor postpetition is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case. o If have company, and Bank has security interest in all accounts now owned and hereafter acquired. If debtor files Ch. 11 and provides services to a new customer, this is a post-petition generated new account receivable. If no bankruptcy, Bank would clearly have a security interest in the new account receivable. However, 552(a) says that post-petition new account receivables are not subject to a pre-petition security interest. This allows the debtor to get new financing. o EXCEPTION: 552(b): If the security agreement was entered into pre-BR, and the property acquired post-petition (new inventory) is proceeds of the pre-petition collateral, then the security interest attaches to the new property. If you are able to trace the current property to pre-petition collateral, security interest survives. Obtaining New Credit: 364: 1. 364(a): Unless the court orders otherwise, the trustee/DIP may obtain unsecured credit in the ordinary course of business. o 503(b)(1): administrative expenses get priority over any other unsecured claims. This is an unsecured claim, and credit

extended under 364(a) is treated as an administrative expense. (the plan must provide that all administrative expenses get paid 100 cents on the dollar before any other claims are paid). o This encourages lending to debtors in Ch. 11. 2. 364(b): If not in the ordinary course of business, the court, after notice and a hearing, may authorize a trustee/DIP to obtain unsecured credit. This requires a court order, even if no objections. If there is a court order, this is treated as an administrative expense. o Under procedural rules must give 15 days notice before you can have approval of financing. On Day one, 364 permits the ct w/o notice or hearing, to approve obtaining enough financing to get you through the 15-day period. 3. 364(c): If creditor cant get unsecured credit that would get priority under 503(b) as an administrative expense, the court, after notice and a hearing, will allow: i. The new loan to have priority over all other administrative expenses (called super priority administrative expense, meaning the new loan gets paid before lawyers and everyone); ii. The court may give the bank a lien on unencumbered assets; and iii. The court may give a junior lien on already- encumbered assets. 4. 364(d): Last resort: may grant a senior or equal lien to a new creditor on already encumbered property, but only if: i. the debtor is otherwise unable to get credit; and ii. there is adequate protection for the first creditor who would be subordinated (the original lien must be fully secured by what would be left of the collateral if the new lien is fully realized). 365 Executory Ks and Unexpired Leases: Executory K is a K that still hasnt been performed in a material way by both parties. If one side has fully performed, it is not executory. Ex.: Before BR, D decides to buy 50K worth of widgets, then files for BR, but not being delivered until 30 days later. If widgets are worth 60K, trustee would want to keep this b/c the K is an asset. But if only worth 40K the trustee would want to abandon the K. o 554: the trustee may abandon assets that are burdensome (if it would cost more to keep the asset). But the trustee cannot abandon the liability; it would be a claim against the estate. o 365(a): subject to court approval, the trustee may either assume or reject an executory K or unexpired lease. But what is the effect of rejecting the K? See 365(g)(1): rejecting a K is treated as a breach of the K immediately before BR petition, so a claim for

damages by the other party is allowed. If widgets are now only worth 40K, the damages to the seller are 10K. But this is still good for the estate/DIP, b/c instead of losing 10K (by buying 40K worth of widgets for 50K), they are paying to the creditor/seller whatever other unsecured creditors are getting, like 30 cents on the dollar or something. If assume the K, and breach it post-petition, it becomes an administrative expense entitled to first priority (and in Ch. 11 must get paid 100 cents on the dollar). It is admin. expense b/c DIP is assuming the K in order to preserve the estate. 366: forbids utilities from cutting off debtor. But they may require adequate assurance of future payment, like a security deposit.

e. THE PLAN 1121: Who may file a plan: 1. 1121(a): Debtor may always file a plan, at any time during the BR proceeding, even at time petition is filed. 2. 1121(b): Exclusivity Period: No party, other than the debtor, may file a plan w/in first 120 days of the case, w/ some exceptions. 3. 1121(c): Any party in interest (debtor, trustee, creditors committee, a creditor) may file a plan only if: i. 1121(c)(1): a trustee has been appointed in the case (meaning no DIP); ii. 1121(c)(2): the debtor has not filed a plan w/in first 120 days of case; OR iii. 1121(c)(3): after 180 days from the date of filing, the debtor has not filed a plan that has been accepted by each class of creditors that have been impaired by it. 4. 1121(d): court may increase or decrease the 120-day or 180-day period. 5. 1121(e): Difft rules for small businesses. Contents of a Plan: 1. 1123(a): A plan shall (must): i. 1123(a)(1): designate classes of claims according to 1122 and classes of interests, except for: 507(a)(1) claims: administrative expenses dont get put in a class, they just get paid. 507(a)(2) claims: unsecured claims arising out of 502(f). 507(a)(8) claims: govt claims. NOTE: 1122(a) says that you can only put similarly situated claims in the same class. But it doesnt say that you cannot divide up similarly situated creditors into difft

classes. HOWEVER, there must be a valid business purpose for doing so. Arbitrary division of substantially similar claims is not allowed. ii. 1123(a)(2): specify any class of claims or interests not impaired under the plan. (1126(f): if class is not impaired, it is conclusively presumed to have accepted the plan and does not get to vote on approval). o 1124: a class of claims is impaired under a plan unless, w/ respect to each individual claim in the class, the plan: a. 1124(1): leaves unaltered the legal, equitable and contractual rights of the creditor or b. 1124(2): If creditor is entitled to accelerated payment after default (like breaching mortgage), the D cures default, reinstates the a maturity or interest, compensates for damages, and does not otherwise alter the rights of the creditor. iii. 1123(a)(3): specify the treatment of any impaired class (i.e. 5 credit card cos. get 30 cents on the dollar); iv. 1123(a)(4): treat each claim w/in an impaired class the same, unless the creditor agrees to unequal treatment; v. 1123(a)(5): provide adequate means for the plans implementation, such as: A. Debtor retaining all or any part of the property of the estate; or B. Transfer of property of the estate to one or more entites; C. Merge, D. Sell any part of the estates property; or E. Etc. see statute. 2. 1123(b): the plan may: i. 1123(b)(1): impair any class of claims, secured or unsecured; ii. 1123(b)(2): assume or reject executory Ks pursuant to 365- see above; iii. 1123(b)(3): provide for the settlement of any claim belonging to the debtor or estate, or the retention and enforcement by the debtor of any such claim. iv. 1123(b)(4): provide for the sale of all or substantially all of the property, and distribute the proceeds of that sale among claim holders; This is liquidating the claim: this is done when a company wants to liquidate, but debtor and creditors dont want a Ch. 7 trustee, unfamiliar w/

the industry, to be in charge of it. This also eliminates auction prices, allowing for orderly sale. 1125: Post-petition disclosure and solicitation: 1. 1125(b): The plan must be sent out w/ a court approved disclosure statement which gives adequate info to the creditors so they can vote intelligently. This must include the amount each creditor would have gotten in Ch. 7 Liquidation. 2. 1125(a): definitions: Adequate info is what a reasonable investor with such a claim would need to know to make an informed choice. It doesnt require alternate plans. 1126: Acceptance of the Plan: 1. 1126(a): allowed claims and interests get to vote; 2. 1126(c): a class has accepted a plan if a majority of claims w/in the class and 2/3 dollar amount of the class vote to accept it. 3. 1126(d): for equity interests, 2/3 of the interests/shares of those who vote is needed to accept the plan. 4. 1126(f): A class not impaired is conclusively presumed to have accepted the plan, and the holders of claims in that class do not get to vote! Confirmation of the Plan (after acceptance, court must confirm): 1. 1128: Confirmation Hearing: After notice, there must be a confirmation hearing where the court will determine if the plan will be confirmed (and therefore become binding on every party in interest). Any party in interest may object to confirmation of a plan. 2. 1129(a): A plan may only be confirmed if all of the following: i. 1129(a)(1): The plan complies w/ Ch. 11 (goes back to 1123 and 1124). ii. 1129(a)(2): The proponent of the plan must comply w/ Ch. 11 (i.e. 1125 must send out disclosure); iii. 1129(a)(3): plan must be proposed in good faith and not prohibited by law; iv. 1129(a)(4): Any payment made to the proponent of the plan for services (meaning they would be administrative expenses under the plan); v. 1129(a)(5): the proponent must disclose who will be running the business (officers and directors), these officers have to be consistent w/ public policy and Cs interests, and must disclose which insiders will be staying on and what they will get paid. vi. 1129(a)(6): Any rate changes for utilities (meaning rate increases to be paid under the plan??) must be approved by govt regulators.

vii.

viii.

ix.

x. xi. xii. xiii.

1129(a)(7): (A): Each impaired holder of a claim or interest must either accept the plan or be getting at least what they would have gotten under Ch. 7 liquidation, plus market rate of interest to account for time value of money (requires doing hypo Ch. 7 looking at what the assets are, what liquidation values are, what would secured creditors get, what would be left for unsecured creditors); 1129(a)(8): Each class must either accept the plan or not be impaired by the plan (according to 1126, if not impaired you are deemed to accept)- if this provision isnt met, then go to cram down- 1129(b); 1129(a)(9): Unless the holder of a claim has agreed to difft treatment under the plan: o 1129(a)(9)(A): Administrative expenses are not put into a class, and get 100% as of the effective date of the plan- see 507(a)(1). o 1129(a)(9)(B): all other priorities are put into classes and get either deferred cash payments if they accept the plan or full cash value on effective date if they dont. o 1129(a)(9)(C): 507(a)(8) tax priorities must get paid in full over a period of no more than 6 years. 1129(a)(10): At least one impaired class must accept the plan w/out counting insiders (if this isnt met, cant cram down). 1129(a)(11): Feasibility Test: in order to be confirmed, it must likely that the debtor will not require future BR relief (better than 50% chance). 1129(a)(12): All fees must be paid. 1129(a)(13): all retiree benefits must be continued.

3. Cram Down Confirmation: 1129(b): Even if the requirement of 1129(a)(8) that each impaired class must approve the plan is not met, so long as the rest of the requirements of 1129(a) are met, the court shall (must) confirm the plan if, so far as the non-approving class is concerned: i. The plan does not unfairly discriminate: Compare all classes w/ similar claims (those that would be at same level in a liquidation) and ask if there is unfair discrimination. Is it reasonable under the circumstances to treat them in a disparate manner? What are the reasons underlying the difft treatment of similar classes? ii. The plan is fair and equitable: A. w/ respect to secured claims, C keeps the lien and total payments equal the amount of the allowed secured claim plus interest- cant deteriorate the

claim, so since they are getting full value, who gives a shit if they approve. W/ respect to unsecured claims, either give them property equal to the value of the claim, or anyone junior to them receives nothing until they get 100%. B. W/ respect to unsecured claims, either give them property equal to the claim OR anyone junior to them gets nothing until they are paid in full. This is the absolute priority rule: The plan is fair to you only if you get 100 cents on the dollar or are given absolute priority over those below you. f. The Effect of Confirmation of the Plan: Once a plan is confirmed, see 1141: 1141(a): A plan that is confirmed is binding on all creditors, security holders, etc. 1141(b): all property of the estate goes back to the debtor, meaning it is no longer a DIP. 1141(c): property dealt w/ in the plan goes back to the debtor free of all pre-bankruptcy claims and interests, but is now subject to the plan. 1141(d): Discharge in Ch. 11: the plan may always provide that a debt is non-dischargeable. 1141(d)(1)(A): confirmation of a plan discharges debtor from any debt owed before the date of confirmation (postpetition financing is paid as administrative expense). 1. 1141(d)(2): ch. 5 non-dischargeable debts are dischargeable so long as you are not an individual. This even includes 523(a)(2)debt procured by fraud (so long as corporation ousts the crook). 2. 1141(d)(3): If you use a liquidating plan under chapter 11, you dont get a discharge. It is a Ch. 11 liquidation if you liquidate all or substantially all of the assets, the company doesnt engage in business after consummation of the plan, and the debtor would be denied a discharge under 727(a). g. Trustee/DIPs Avoiding Powers 544-551. o Congress gave trustees the power to avoid certain transaction in order to maximize the estate for unsecured creditors. Fraudulent Conveyances: 1. State Law: Uniform Fraudulent Transfer Act (UFTA) in most states. UF Conveyance Act in NY and a few others. 6 year SOL instead of 1 year (this is important b/c of Trustee/DIP powers under 544(b)- see below). i. 7: any conveyance made and obligation incurred w/ actual intent to hinder, delay or defraud a present or future creditor is a fraudulent conveyance; ii. 4: A transfer of assets or obligation incurred while insolvent (or any transfer that makes D insolvent) is fraudulent if there was inadequate/unfair consideration.

5: Conveyances made by a business for lack of fair consideration that leaves the business under-capitalized is a fraudulent conveyance. iv. 6: Conveyances made, or obligations incurred w/out fair consideration, when the D intends or believes that he will incur debts beyond his ability to pay is a fraudulent conveyance. Under 9, if there is a fraudulent conveyance, the creditor whose claim has matured has standing to avoid a fraudulent transfer. These state laws are important b/c under 544(b)(1), the Trustee in BR/DIP can avoid any transfer voidable under state law that an unsecured creditor could avoid. Use this when 548 cant be used (Ex. is fraudulent conveyance to Y, and then 3 years later D goes into BR- DIP/trustee cant sue under 548 to get it back, b/c has to be w/in a year. But under 544(b)(1), use UFCA claim, get 6 year SOL). 2. Bankruptcy Code 548: Fraudulent Conveyances: i. 548(a): Trustee/DIP may avoid any transfer or obligation that was made or incurred by the D w/in 1 year of filing a petition in BR if the D either voluntarily or involuntarily: made the transfer or incurred the obligation w/ the actual intent to defraud creditors, or if D receives less than reasonably equivalent value for the transfer and the debtor was insolvent when the transfer was made, had unreasonably small capitalization, or knew he would have inability to pay debts as they became due. Preferences: 547 A. 547(b): Except for transfers in 547(c), the trustee/DIP may avoid any transfer of an interest of the debtor in property if (all required): 1. it is to or for the benefit of a creditor; 2. it is on account of an antecedent debt owed before the transfer was made 547(e)(2) tells you when the transfer of a security interest is a transfer for the purposes of a preference. This is important b/c if Bank lends on 5/1, if the date of transfer of the security interest from D to Bank is after 5/1, it is on account of an antecedent debt. 547(e)(2): you have to perfect w/in 10 days of attachment in order for the date of the transfer to be the date of attachment (this is when the security agreement becomes enforceable against the debtor-the day it is signed). If not w/in 10 days, then the transfer occurs at time of perfection. (547(e)(2)(B)). So if

iii.

Bank lends on 5/1 and gets security interest from D, but doesnt perfect until 5/25, and D goes into BR on 6/1, the giving of the S.I. was on account of an antecedent debt: the transfer was made after the debt was owed. 3. it was made while the Debtor was insolvent (presumption under 547(f) that the debtor has been insolvent for 90 days prior to the filing); 4. It was made w/in 90 days before the filing of the BR petition (or if the creditor was an insider, then w/in 1 year before filing); AND 5. it enables the creditor to receive more than he would have if: i. It was a Ch. 7 liquidation; and ii. The transfer had not been made; and iii. ?? B. 547(c): EXCEPTIONS TO PREFERENCES: A trustee may not avoid a preference under 547(b) if (note: if it isnt a preference under 547(b), dont even bother w/ this): 1. 547(c)(1): Contemporaneous Exchange for New Value Exception: If the buyer and seller intended it to be contemporaneous, and in fact a substantially contemporaneous exchange occurred, it falls under the exception. Majority: Most courts say you cant use 547(c)(1) to save a Bank where there is delayed perfection, b/c it would make 547(e) useless. Minority view says that if you miss the 10 days by a day or two, then 547(c)(1) can save it. 2. 547(c)(2): Exception for Payments in the Ordinary Course of Business: The ability to avoid preferences is not intended to allow the trustee to avoid payments made in the ordinary course of business. 3 things must be satisfied: if the transfer was: o A debt incurred in the ordinary course of business (note the debt cannot be unusual, o The payment must be made in the ordinary course of business AND o The transfer was made according to ordinary business terms. 3. 547(c)(3): PMSI Exception. If borrow 1M for equip from the dealer, this is a PMSI, which would fall under preference if borrow on 5/1 and dont file security agreement until 5/12. The trustee may not avoid the preferential transfer that creates a security interest in property acquired by the debtor:

a. to the extent such security interest secures new value that was: i. given at or after the signing of the security agreement; ii. given by or on behalf of the secured party under such agreement; iii. given to enable the debtor to acquire such property; and iv. was in fact used by the debtor to acquire such property. AND The security interest is perfected on or before 20 days after the debtor receives possession of such property. So this exception only applies when there is a delayed perfection problem. 4. 547(c)(4): Subsequent Advance Rule: After the preferential transfer, the creditor makes an unsecured advance that wasnt paid for. To the extent that after the preference, the creditor gave new value to the debtor, not secured by an otherwise unavoidable security interest (so it is unsecured credit), and the new value wasnt paid for, the creditor may offset the new value. This would occur if D owes 50K unsecured credit to C, pays the 50K, and then C extends 10K worth of new credit to D, and then a few days later D declares BR. The trustee would be able to sue to get 50K back as a preference. C would then have a total unsecured claim of 60K in the BR. C may discount the 10K subsequent advance, and so only a 50K unsecured claim. But if creditor, when extending the additional 10K of new value, insisted it be secured, then creditor doesnt get to offset. 5. 547(c)(5): Exception for floating liens on accounts receivables and inventory: HYPO: Bank has security interest in all inventory now owned and hereafter acquired. Debtor owes Bank 1M, and about 90 days prior to filing for BR, inventory only worth 100K. Bank is way under-secured. Debtor knows it is going into BR, and knows cant give Bank 900K b/c it would be a preference. Debtor could buy 900K worth of inventory. When buy new inventory, the security interest automatically attaches to it. Assume that all inventory owned w/in 90 days of BR is all new inventory. Look at 547(e)(3): the transfer of the security interest in all the new inventory is a transfer to the creditor w/in 90 days- you could make argument that the entire security interest in that inventory is a preference. This would mean that no one would ever give a security

interest in inventory w/ a floating lien, dont want this. But also dont want to allow creditor to prefer that creditor by building up the inventory. Test: 90 days before BR, Debt =1M, Inventory=100Kthis is 900K unsecured deficiency. Date of BR, if have 800K Inventory, This is a 200K unsecured deficiency. Inventory security interest is a good security interest regardless of when inventory is purchased, but to the extent that banks position was improved during the 90 day period, it is a preference. So even if all inventory is new inventory where security interest attached during the 90 day period, which under 547(b) would mean the security interest in all inventory was a preferential transfer, the creditor will fall under the (c) (5) exception and the trustee would only be able to avoid the preferential transfer (attachment of security interest to the new inventory) to the extent the creditors position is improved from the beginning of the 90 day period. 6. 547(c)(6): IGNORE: dont bother w/ statutory liens. 7. 547(c)(7): If you pay a former spouse alimony, maintenance, child support, the trustee cannot avoid what would be a preference under 547(b). 8. 547(c)(8): Congress didnt want trustees suing to recover very small preferences, so cant recover a preference unless in the aggregate of all the transfers it is at least 600 dollars. The Last Avoiding Power: Strong-Arm Clause: