Bankruptcy Outline:

1. Collection remedies:
a. Execution: at the beginning the judgment us worthless. The creditor is only a general/unsecured
creditor but the claim is now liquidated
i. Execution writ this is a writ fi fa/ fiere facias, writ of attachment. It allows the creditor to
give the sheriff an order to seize the property
ii. Levy: this is when the property itself cannot be moved
b. Nulla bona means that no property was found
c. Turnover orders: this is used primarily for intangible goods or when one has possession but not
ownership
d. Judgment liens: recorded lien against a piece of property usually done at the county land office.
If there is more than one of these, then the first in time prevails. There is a non-consensual
creditor involved
e. Voluntary liens: where the unsecured creditor goes from being unsecured to secured by taking a
lien in the property. This is covered by UCC article 9 and usually requires a writing
i. PMSI: purchase money security interest, or the money that is lent is lent with the purpose
of buying the good
ii. This involves a consensual creditor
f. Deficiency judgment: when the item sold does not cover the debt in full; if this is done by a
secured creditor he is now unsecured
g. FTC v. Affordable media: the Andersons, defendants, ran a telemarketing venture that was really
a ponzi scheme. Before the house of cards fell, they deposited their money in an irrevocable
trust in the Cook Islands. When threatened with a law suit, the trust reverted to the trustee and
the money could not be repatriated. The defendants still recovered some money out of this for
other things but not this suit. The court held that it was not impossible to get at the money
i. Generally, a total inability to comply with and order of the court is a complete defense to
civil contempt even when the ability to not comply is self induced. This trust was set up
for this purpose but the defendant does not meet this high burden and his attempts are but
a charade. They have received monies to pay off other debts, so they have really retained
control.
ii. A debtor may be excused from paying a judgment if it is impossible for him to do so, but
this is a high standard to meet
h. Race of diligence: this means that the first to perfect or to turn an inchoate into a choate lien
wins. This generally must be done item by item because there is no general levy power. A
secured creditor will win over an unsecured one. The first to record a judgment usually has the
right to the good
i. In re estate of Robbins: the D inherited his mother’s estate after he became indebted.
One warrant was docketed 10-18-65, the other 5-10-68, and another 9-28-62. Decedent
dies 4-27-67. D had no interest in the property before this. The court held that the
creditor that gave after the D had an interest in the property would take first
1. There cannot be a judgment on property one does not own or control.
ii. Weaver v. Weaver: the weavers were divorced but before the property was split there
were 3 judgments entered against the husband. 2 were in 1981, one was in 1986. The 2
in 1981 did not renew their interests, so the wife was given the house free and clear. The
one in 1986 did object. The wife had to give the husband 3K for the house. The money
may go to the creditor but the liens do not go with the house. Since 2 were not renewed,
they are expired and are no unsecured.

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i. Dormant judgment: these still exist but cannot be collected on without renewal. This can be
avoided by making periodic attempts to collect
j. Credit Bureau of Broken Bow v. Moninger: B got a lien against M in 1977. M renewed a loan
with B in 1978 using his pigs and his truck to secure it. On 6-27, 1978, B got a writ of execution
after the loan was renewed. On 7-7-78 the sheriff levied on the truck but did not remove it. On
7-10-78 bank and M signed a security agreement on the truck. On 7-13 the truck was seized and
sold on 8-14. The bank wants it money, claiming it was secured and the sheriff had notice of a
possible lien. The court held that the creditor, b, became perfected in his security when the
sheriff levied the truck.
i. Rationale: a lien is perfected when the sheriff executes the lien; whether or not he
removes it is up to him. If one becomes a secured creditor after that date, then they are
second in time and nothing can be done to change these priorities.
ii. The act to prefect a lien is to levy on it.
iii. A symbolic lien executed at the courthouse should date back to the date it was entered
(4.1)
iv. Some courts do not think that there has to be a physical interference with the property for
there to be perfection of the attachment. (4.2)
v. If the goods are left in the hands of the debtor for a long time then the inaction of the
creditor will destroy the lien. (4.2)
vi. With the question of the quid pro quo pullback, this might be enough to vitiate the lien
even if the sheriff had delivered the writ. (4.2)
vii. There is a waiting period between the judgment and the enforcement of the judgment.
Under the federal rules, you must wait 10 days. This is so the debtor can wait to pay or
file a notice of appeal. Even if there is a notice of appeal the enforcement does not
necessarily stop the enforcement because D must post a bond for the collection to stop. If
the D posts a bond and loses then the C collects immediately from the sale of the bond
before collecting more money on the remainder of the non-exempt money.
k. Consensual lien: the person who does this grants a property interest in the thing in exchange for a
concession which is usually credit. This also means that there is a consensual creditor
l. Real estate mortgages, deeds of trust: these are two-step transactions in which step one
establishes the rights between the creditor and the debtor and the second one is accomplished by
filing and creating rights against the world
m. Security interests in personal property: these are usually under UCC article 9. This requires 2
steps as well:
i. Attachment: this requires an agreement, value and rights. The debtor must have rights in
the collateral but does not have to be the only one with rights in it
ii. Perfection: this can be accomplished by filing which prefects the right against the world.
This is the combination of attachment and filing
1. attachment:
a. debtor signs a security agreement
b. C gives value
c. D has rights in the collateral
iii. Article 9 follows the theory that the first in time is the first in right.
iv. When there is a filing of the lien there is a relation back. This means that the time of
attachment relates back to the date of the filing.
n. Judicial liens: these are involuntary and usually require the creditor to act to get his money
o. Real property liens: these usually require filing or docketing to be effective. They are superior to

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 any new interest
p. Tangible personalty liens: the execution of the lien is called a levy. It must be given to the
sheriff because the sheriff is neutral. Some/most states only require the sheriff to tag the goods
but others require a physical interference with the property
q. Garnishments: these exist because third parties hold and control the property of the debtor. This
requires a special writ of garnishment.
i. Garnishee: the third party who holds the debt to or property of the debtor. In 5.1 this is
the bank ASB.
ii. Judgment Debtor: the debtor who owes the money
iii. Garnishor: the people who the obligation is owed to, also the judgment creditor usually
iv. Writ of garnishment: this asks the third party what property of the debtor he holds and
commands it to be turned over. When there has been one of these served the property
cannot be diminished. These work as an ancillary law suit against the garnishee
v. Webb v. Erickson: W obtained a default judgment against E, a realtor. W served a writ of
garnishment against B who bought his house from E. B never answered the petition
because he thought his house was in escrow and had no control of payment to E. W then
obtained a full default judgment against B who learned of these 3 years later when his
wages were garnished. The court held that a writ against a defaulting garnishee should be
dismissed if he does not understand the garnishment.
1. Rationale: although a garnishor can obtain full judgment against a defaulting
garnishee, the laws allowing this should be construed in the favor of the
garnishee. This is because he is an otherwise disinterested party but one that is in
danger of being injured. This writ did not contain clear directions on how or
when to answer so B’s failure to answer was excusable neglect.
2. A defaulting garnishee may be held liable for the full amount of the default.
3. The key act for the first in time rule in garnishments is delivering it to the
garnishee. (5.1)
4. the person that is unfairly hurt in the garnishment process can ask for a pro-rata
sharing (5.1)
5. There is a duty on the garnishee to not deplete the funds in the account. (5.1)
6. If the check is delivered to the bank before the garnishment it can still be paid
after the writ is served. (5.1)
7. The garnishee stands in the shoes of the judgment debtor vis a vis the judgment
creditor. (5.2) this means that the garnishee has the right to keep the good under
a valid agreement but when the agreement is over then he must turn it over. He is
entitled to any right that the judgment debtor would have.
8. There is a temporal net that comes into play once the garnishment has been
levied. The thing being garnished upon cannot be decreased.
9. What is the garnishor entitled to from the garnishee?
a. What rights do the judgment debtor have against the garnishee on the date
of the garnishment—the judgment creditor/garnishor will step into the
shoes of the debtor and gain his rights
b. The value of the amount might increase during the time of the net which is
the time from service of the writ and the answer to the writ
c. The garnishee may not reduce the amount/value of the thing after the writ
is delivered unless there is an unexercised writ of set off which allows the

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 bank to take its money first for the debts that the account holder owes
before paying the garnishment
d. So does garnishing an employees pay from the bank allow circumvention
of the laws that restrict garnishment of wages?
i. Yes, because the bank is not required to determine where the
deposit came from, this would invade the privacy of the account
holder
ii. Other circuits, the bank must comply with the wage garnishment
act. The bank must trace where the money came from. The
garnishee must then approach the employer first, then there must
be a deposit of these funds, and then the employee must have
reasonable time to withdraw these monies
vi. Wage garnishment:
1. There are restrictions on this so that the debtor is not disincentivized from
working. Allowing too much to be taken would drive the D into poverty, and
many of these people are already poor and need protection
2. Commonwealth Edison v. Denson: D owed money to ConEd who delivered a writ
of garnishment on D’s employer, CAT. CAT sent ConEd money but not the full
amount because they were already withholding money for child support. The
court held that support order deductions should be taken into account when
computing the amount of the debtor’s earnings.
a. Rationale: the law must allow only a deduction of an amount that is the
lesser of state law or 25%. State law may establish priorities because there
are none in federal law. Support orders and garnishments should be
considered together which means that the garnishee does not get a too
large chunk of the remaining money. Congress has stepped in to protect
the debtor’s family in this respect.
b. there is a limit on how much can be taken from a debtor through the
process of garnishment and when determining this, the support he must
pay for children must also be considered
c. A bank is not required to consider federal wage restrictions on a direct
deposit paycheck. This is because there would be a lot of difficulty in
tracing the funds.
vii. Setoff: banks are usually the easiest way to reach the debtor but the bank will have the
right to set off. This means that the bank is also a creditor and it may use the deposit
account of the debtor to pay off the other debts first. The garnishor then gets the rest of
that.
viii. Things that cannot be garnished:
1. Network Solutions v. Umbro International: U did not register its domain name
first. A Canadian did. A court found that umbro was the rightful owner of the
domain name and ordered a writ of garnishment to be served on N, who is
responsible for registering and keeping track of domain names. N claimed that
there was nothing of garnishable property that it had because domain names were
assigned through personal contracts. Umbro claims it is an intangible, valuable
asset and property which may be garnished. The court held that domain names
were assigned under personal contracts and as such they could not be garnished.
a. Rationale: domain names are essentially human readable forms of IP

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 addresses. N assigns these on a first come-first-served basis and does not
independent verification except to require the registrant to warranty that
his use does not interfere with the rights of others. They also have a
policy to revoke the name if there is litigation over the ownership.
Because the domain name is a contractual right to have an association with
an IP addresses and name, it is a contract for a service, making it
ungarnishable. Allowing garnishment here will allow garnishment of
other services. Just because there is a type of verification does not mean it
is any different than other services
b. garnishments may be had on intangible things as long as they can be
considered property
c. there can be no garnishment of something that is created out of a contract
for personal services because there is no property to garnish
2. Pre-judgment remedies: there must be a hearing in order to comport with due
process requirements. There are procedural protections for the person who will
face the garnishment.
3. There cannot be reduction of an asset once a garnishment order has been
received. If there is, then the garnishee is liable for the difference
r. Exemptions: these statutes put personal property into classes which leads to a lot of
disagreement. The personal property in some of these classes may not be seized to fulfill a
judgment
i. In re Johnson: the debtor wishes to exempt a 60-person bus, claiming it is a personal car.
The court held that a bus can be a car.
1. Rationale: the plain language of the statute says motor vehicles and this cannot
only mean cars. The size and the purpose do not matter–it is a species of motor
vehicle and may be exempt.
ii. In re Pizzi: P won the lotto and agreed to accept annuity payments. She does not want to
give up those payments and claims that they are exempt because they come from an
annuity. The court held that the proceeds coming from lottery winnings are not exempt.
1. Rationale generally an annuity may be exempt from seizure, but this was meant to
protect life insurance payments and retirement benefits. It is illogical for her to be
able to borrow against it and then claim it is exempt.
iii. In re Williams: NH workers compensation law provides that money coming from
workers compensation settlements is exempt from creditors. W received the check,
deposited it and then took the money out to buy a car. The court held that otherwise non-
exempt assets bought with exempt funds may be exempt.
1. Rationale: payments for workers compensation is usually made by check and
simply cashing it does not change the exempt nature of the money. There is no
basis to distinguish between a bank deposit and what is purchased with that
money, even when it is a sports car. These funds are exempt and so are the goods
purchased with them as long as it is traceable
2. Non-exempt assets bought with exempt monies, as long as it can be traced,
become exempt. This view is not always followed.
iv. Holmes v. Blazer Financial Services: H’s bank account was garnished. He claims that
the account was exempt because there can be no garnishment of the wages of the person
who is the head of a household. The court here held that the wages lose their non-exempt
status on deposit.

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 1. Rationale: the intent of this legislation was to protect the wages once they were
received but there is no protection of them in the statute once they have been
received. Although the law is harsh, it is not the place of the court to rewrite the
law
2. Moneys that were exempt before deposit may lose their exempt status on deposit.
3. wages due does not mean wages received
v. Partially exempt: this is property that may be seized and sold but the D is given back
money first. He gets money back up to the limit of the exemption. The rest will go to the
creditor.
vi. Homestead exemptions: this is the most common and important type of exemption
because the home usually represents the greatest source of wealth of most people. These
laws were often written to attract settlers and in TX also reflect the Hispanic culture and
the value of the hacienda. Some states have limits on these while others do not.
vii. As a general rule, the more generous the state exemptions, the better debtors do. (6.1)
viii. Given the right facts and circumstances, debtors can do better in a state that is stingy on
its exemptions (6.2)
ix. If the person who wants to seize and sell the property will not realize any money after the
exemption and the senior creditor have been paid, then the court will not order the sale
(6.3)
x. The senior creditor will get paid first, then the exemption will come into play. (6.3)
xi. 2 points concerning bank garnishments
1. the actual garnishment restrictions laws require more info than that which a bank
would have
a. the bank could not do this without great difficulty of getting the
information
2. There is a federal social security act that protects those benefits from everything
either before or after receipt
a. Court says congress should have used this same language if they meant to
protect salary more
xii. General observations:
1. Exemption stand for the basic proposition that the debtor cannot be deprived of
the basic necessities of life so they can keep things that have little or no value to
the creditors but have high utilitarian and sentimental value to the debtor.
2. Even exempt property may be seized by the lienholder
3. state law remains the governing law of exemptions because the states may opt out
of the federal rules
4. tenancy by entirety protects spouses and acts like an exemption when one spouse
acts alone
5. Summary on garnishments- (five ideas)
a. What is the garnishor entitled to from the garnishee?
b. What rights did the judgment debtor have against the garnishee on the date
of service? The garnishor inherits those rights of the judgment debtor
(stands in the shoes of the debtor).
c. The rights of the garnishor might increase during the “net” (the period
between the service of the writ to the garnishee and the answer)
d. The garnishor rights against the garnishee cannot decrease as of the date of
the garnishee’s receipt of the writ. This differs from the garnishee’s

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 unexercised right of setoff (if a previous debt exists between the debtor
and the garnishee).
e. What is the fifth idea?
s. Fraudulent conveyances and transfers:
i. Twine’s case: P owed T £400 and C£200. P had £300 in chattels which he gave
ownership but not possession to T secretly. T then resisted the sheriff’s writ saying that
he owned them and not P. The court held that this was a fraudulent transfer.
1. Rationale: there were marks of fraud in this such as the continued possession after
the sale, secrecy and the use of a trust. There is a trust when a debtor gives all of
these goods to one C and shuns the others.
ii. Most cases will look at the intent of the debtor to delay, hinder or defraud creditors. This
presumption arises when there is a sale or gift without transfer of possession.
iii. There are tow main types of FT: actual and constructive. This is a bit of a misnomer
because they do not require any mens rea.
iv. Remedies:
1. The concept is that the remedy with the FT is not to give the C more rights against
the D; it is to give new rights against a party who got the gift or who is owed the
obligation from the D
2. The key to this is to find a new person to take stuff from, one who might be able
to satisfy the j’ment
v. The Uniform Fraudulent Transfers Act was written in 1984 to make technical changes
and improvements to this group of laws but contained most of the common law theories
such as actual and constructive fraud.
1. fraud, §5(a): an exchange made for unreasonably low consideration and when the
debtor was insolvent
2. Reasonably equivalent value: this is a balance between the fair market value and
the item given up. Intent is not necessarily a factor, but the REV will look at the
totality of the circumstances like the market value for same/similar items
a. ACLI Government Securities v. Rhodes: Dan transferred property that he
co-owned with this sister N wholly to N on the day before he suffered a
1.5M judgment against him. The siblings had inherited this property and
D had received 3/5 of it; they were tenants in common on the property
which was worth about 325K. D transferred it to N for $1 and other good
consideration. The court held that that this was a fraudulent transfer.
i. for the creditor to succeed he must show three things. First, the
transfer must be made without or for little consideration. N
claimed that D owed her for a 400K investment but this does not
seem to create a creditor-debtor relationship—it appears to be
more a bailment. Without a debt there is not adequate
consideration. Secondly, it must appear that the debtor is
insolvent. This burden is on the plaintiff. D offers that he has
other property but it is not enough to show that he is solvent.
Finally, the creditor must show that the debtor acted with actual
intent, which may be shown from the circumstances. Inter-familiar
transfers are carefully scrutinized. Here the deal was made hastily,
to thwart a seizure, in secret with circumspect timing and without
adequate consideration.

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 ii. In an actual FT, the attacking C must show:
1. The deal was made for little or no consideration
2. The debtor appears insolvent
3. The debtor acted with an actual intent to defraud, hinder or
delay. This may be shown by the badges of fraud.
iii. If this is not reasonably equivalent value then what remedies are
allowed
1. See section 7: avoiding the obligation incurred sufficient to
satisfy the C’s claim; §7(a) (1)
2. The suit then is against the person who bought the piano,
see §8B
a. The C can recover the j’ment value of the item
transferred or the amount necessary to satisfy the
creditor’s claim, whichever is less
3. What if the buyer was in good faith but nevertheless did not
pay for full value?
a. See §8D for the protections of the buyer:
i. Transfer must be done in good faith
ii. The C can get a lien against the good faith
buyer
iii. §8d3: reduction of the amount of liability of
the j’ment
iv. here the reduction would be 7.5K—the
extent to the value that was given in good
faith; they do not get to keep the good deal,
but they get their money back
v. enforcement of any obligation incurred
vi. a reduction in the amount of liability of the
judgment
vii. this helps because the liability can be
reduced by the value given, or $7500
viii. don’t get to keep good deal but get to get
their money back
4. 7B—there is a j’ment against the debtor allows the C to
levy on the asset
a. this is new and has an advantage to it—there is
nothing about good faith
i. writ of garnishment on the D if the D has
assets
ii. it can follow the asset and levy it no matter
who holds it; the court must order this
iii. the protection of the party in possession
when the JC follows the assets to wherever
it may fit
iv. there can now be a lien
vi. Constructive fraud:
1. Section 5 A, constructive fraudulent transfer

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 2. There was a transfer made or a obligation incurred
a. Here there was a transfer made
b. An obligation incurred could be a guarantee of an obligation without
getting any or enough value
i. This is what happens in the LBO context, where there is debt
incurred to perform the buyout and there is no value to the
company for the buyout
c. There must be an intent to deceive the C
d. The C must exist before the claim is made
e. Property that is exempt does not count as an asset
3. Element 2: there must be an exchange without getting reasonable value
(reasonably equivalent value)
a. This means that the sale fetched a fair market value under the
circumstances of the sale
i. Here this debtor is under duress to pay her rent
ii. This is discussed in 3B, and argument by analogy: this was written
to protect buyers who participate in properly conducted foreclosure
sales—this was written to reverse a line of cases where these
buyers were subject to FT because they paid so little
iii. Here she was trying hard, even though this was not a proper
foreclosure sale
4. Element 3: there is insolvency—this can happen in the course of the transfer
vii. Quasi-FT:
1. This is quasi-constructive FT with a lesser mens rea if negligence
a. The C would have to show that the D was negligent in the transfer and
subsequent incurrence of more debt
b. This covers creditors both before and after the transfer
2. see problem 7.2
viii. Leveraged Buyouts (LBOs): many of these are considered to be fraudulent because the
company is borrowing money to give to another to buy out the equity holders. Basically,
the company is getting nothing of value and taking on a large debt
1. In re Bay plastics: Debtor company, BP brought this action to recover funds it
paid out during a LBO. BP was formed by three people who were nearing
retirement. M wanted to buy BP and formed a subsidiary N which formed
another subsidiary BPI to acquire BP. M did not borrow any money to do this;
rather BP borrowed 3.9M from BT giving BT a first security in the company. BT
then gave BPI 3.5M and BPI gave BP 3M to buy out the equity holders. Before
all of this happened S was a supplier of raw materials to BP. They were talked
out of their security agreement with BP to allow the deal to go forward. Then BP
crashed and burned. The court held that the LBO was a FT.
a. Rationale: FT substantially hinders the cash flow and the viability of the
company. There must be a transfer or an obligation incurred, a lack of
reasonably equivalent value in exchange and this must render the debtor
insolvent (or the debtor was before) and must be attacked by a pre-transfer
creditor. Since there was a transfer, the second element, reasonably
equivalent value must be explored. To the shareholders it appears there
was a sale but to the creditors it appears they the company got very little in

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 exchange for the debt load that it incurred. The D must also be rendered
insolvent by the transaction. Although balance sheet insolvency may be
arrived at in many ways, adding goodwill to the balance cannot be a
sufficient way to show that the company was solvent. This is also
suspicious because the company never used this before on their balance
sheet, so this should be subtracted, and this makes the debtor insolvent. S
was a creditor before and one who become unsecured as a result of the
transaction. Although payments at the point of the transfer were current, S
was still a C. The secrecy of the transaction is also unsettling. This looks
like a gift to the shareholders; one paid in the guise of a sale but is paid by
the company itself with a high risk of detriment to the creditors. And
LBO cannot force a company into insolvency; it can only survive a FT
attack if there are good financial progression or luck; the C should not
shoulder the burden of unforeseeable risks in this context.
b. To prove a constructive transfer, the creditor must show that he is:
i. there is a transfer or obligation incurred
ii. that there was not reasonably equivalent value given
iii. the D is rendered insolvent
iv. that the C was a pre-transaction C.
c. An innocent buyer in a FT may get his money back or pay the REV and
keep the good. (7.1)
i. This is known as the bona fide purchaser harbor. If the BFP paid
full value it cannot be unwound at all, even if it was a FT. Liens
will be given to BFP who make improvements to a good when they
did not pay full value. (7.4)
ix. If there is a constructive FT, this must be attacked by a preexisting creditor. (7.2)
x. The creditor must be insolvent when the transaction was made for there to be a
constructive FT. (7.3)
xi. There are a lot of things that can be used to show that a company is insolvent, like not
paying employees. (7.5)
xii. The theory behind the prevention of FT is that it is an unfair, un-bargained for risk.
Creditors have a right to think that debtors will act in a normal rational manner
xiii. These are susceptible to attack because it seems that the company gets a lot of debt for
little or no value—new management is not usually considered a REV.
xiv. summary of FT:
1. Fraudulent transfer: Types
a. Actual intent to have an FT §4A1
i. Intent to make an FT—state of mind
ii. Protects future and present C
b. Pure constructive FT §5A
i. No state of mind
ii. Protects creditors prior to the transaction
c. §4A2, quasi-constructive FT: less than reasonably equivalent value,
unreasonably small amount of capital remaining or a reasonable belief that
there would be not enough money remaining (negligent state of mind)
i. negligent state of mind
ii. protects future & present C

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 d. Remedies
i. 7A: avoidance of a lien
1. no property transfer
ii. 7A1 & 8B: j’ment against the transferee for the amount owed to
the C.
1. there is an actual transfer of property
iii. 7B: lien on the property
1. Direct levy on the property; allows the property to be
followed. There must be a j’ment against the D before this
can be done
e. Main defenses—these require that the transferee be in good faith and these
are a function of the value of the good faith transferee gave
i. 8A: good faith transferee who gave reasonably equivalent value
for the good
1. this should only occur in the context of a 4A1 FT
ii. 8D1: lien that works against an 8B action when the C wants to
levy the property wherever it sits. There must be some value given
iii. 8D?: reduction in judgment works against a 7A action
iv. there is a reduction for the amount that is given in good faith
2. consumer bankruptcies under chapter 7:
a. Elements common to consumer bankruptcies: these are generally filed by middle class families
who own a home and are overwhelmingly in debt. They tend to be baby-bombers who
experience an income loss, medical problems, credit card troubles or divorce.
b. Chapter & was designed to give consumers a fresh start
i. This means that there is nothing that can be seized from what is earned after bankruptcy
to satisfy pre-existing debts
ii. But, to get this fresh start the consumer will have his other goods seized from him as long
as they are non-exempt.
iii. This also allows for a discharge of all preexisting debt not subject to an exemption
c. Creation of the bankruptcy estate:
i. When a consumer files for chapter 7, there is a fictional bifurcation of the person and the
debts. The human being goes on but leaves a shell, known as the estate. Included in this
is all of the property of the D, including exempt property. All wages earned after this
point are exempt.
ii. What property counts as part of the estate:
1. in re Palmer: P filed on 6-18-85 and on 12-7-85 he received a merit bonus check
from work. P claims it was not expected and cannot be considered part of the
estate. The court held that a bonus check based in part on work done before the
filing of the estate may be properly excluded from the estate.
a. Rationale: the employee handbook from the place of business brings
clarity to this situation. Bonuses are given for meritous work based on
performance reviews in April and October. The employee must be
employed for the entire fiscal year. It is not a gift or something that
happens automatically and remains within the discretion of the president
of the company to award and his decision is not appealable. Congress
wanted to keep the subsequent wages of the debtor out of the estate. Here
the important factor is that this was conditioned on post-petition work,

11
 which seems to fall within the exemption that Congress intended. Here
the work had to continue at the same competent level after filing and he
could not quit. The discretion of the president also shows that it was not
potential property. He could not have sued to get this in June, so he had
not rights in it until the company decided to give it. It should not be
included because it is not a property right.
i. Things that cannot be sued on and collected in state court at the
time of the bankruptcy filing are not considered property of the
estate and cannot be brought in afterwards
ii. Pay that is based on post-petition work is not property of the estate
b. In re Orkin: O owned a real estate agency and set up a retirement plan for
himself in an attempt to keep money out of the estate, he filed for chapter
7 the same month he set up the account. The court held that the plan was
not exempt and could properly be considered part of the estate.
i. Rationale: §541c2 allows for protection of spendthrift trusts that
are ERISA qualified. ERISA imposes many requirements and
follows the rules of the IRS. They must also have an enforceable
non-alienation provision. But the employee that is also an
employer cannot participate in an ERISA plan. The plan may also
qualify under state spendthrift rust which means that the D cannot
have absolute control of the plan. Here there is a 60-day
termination provision showing that the employee had control.
Allowing protection here will allow debtors to shield their assets
from C.
ii. A person cannot use a guise to shield their assets from the
creditors
c. In re Burgess: B operates a brothel under license from the state. He filed
for bankruptcy on 7-20-97; his license was revoked on 6-2-98. B
petitioned to have this undone because it was property of the estate. The
court held that a license could be considered part of the testate.
i. Rationale: congress intended for the estate to encompass a lot but
the issue of whether a brother license is to be included is a novel
one. Many types of licenses are considered privileges but they can
also be property. Liquor licenses are similar and have been found
to be property before. Here this license has enormous value and
without it there is no business to reorganize, which is contrary to
congressional intent.
d. Trustees have the duty to gather and protect the property, maintain it and
sell it for the highest price, and then distribute the proceeds among the
creditors. The trustee really works for the unsecured creditors and
attempts to maximize the estate for their benefit. He then collects a fee
based on a percentage of the distribution.
e. If there are no assets, then unsecured C are encouraged to not file a claim.
f. Debtors pay $175 to file a claim of which $60 goes to the trustee.
g. Anything that can be found can be considered property. (8.1)
h. Even if something says it cannot be transferred if it is not a purely
personal right then it can be transferred. (8.1)

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i. Things that can considered offspring of the estate can be considered part
of it. (8.1)
j. Things that are encumbered with liens greater than the value are still part
of the estate. (8.1)
k. If the income is contingent and the odds are high that it will become
property then it cannot be property of the estate. (8.2)
l. If there is a legally enforceable right to be the beneficiary (i.e. there was a
contract) then there is more than a mere contingency, there is a property
right that would be legally enforceable. This means the concept of the net
does not need to apply because there is a legally recognizable interest
(8.2)
i. The legally enforceable right/contingent right test:
1. This came from a Supreme Court case where the D would
be entitled to a tax refund because of their losses on their
taxes. These did not technically accrue until after the date
of the filing, specifically at the end of the calendar year
2. The S.Ct. considered this a property right even though the
right to the taxes was not legally enforceable right at the
point of filing
a. There was nothing else that could impact the right
to the refund; the right became enforceable with the
simple passage of time with no further
contingencies
b. With life insurance, there is not an enforceable right
and there is another contingency that must happen
other than the passage of time
3. So maybe in the end the test is: the passage of time is
enough to determine if there is an expectancy that is legally
enforceable or will it become enforceable with the passage
of time?
m. A lottery ticket that is bought with money that would have otherwise been
part of the estate is part of the estate and so are the winnings. (8.2)
n. Being named the beneficiary of a will is not enough to become part of the
estate because the date of death is not certain and is too contingent. (8.2)
i. Under the operation of 541a5, if the person dies within 180 of the
filing then the money can become part of the estate.
o. If the debtor works on the land or property and makes improvements to it
then he should be able to recoup this value—this should not be property of
the estate. (8.3)
p. Basically all of the property that could be considered part of the estate will
be whether or not the debtor has possession of it at filing.
q. Since chapter 7 is considered a fresh start, any assets that the D receives
after filing are not part of the estate except in the case of bequest, devise,
and inheritances within 180 days and property from a divorce
r. Property can include rent, products and proceeds of the estate but NOT the
wages earned after filing, things held for another, leases that expire—these
all fall out of the estate.

13
 s. If faced with the prospect of losing an entire inheritance because of the
180-day rule, it is better to file now because the person may survive the
limit. (8.4)
i. When the person dies the trust loses its character as a spend-thrift
trust. This means that the triggering event happened.
ii. 541a5 should trump 541c2 in the case where the triggering event
occurs because a5 pretends that the even occurred right before the
filing.
t. Bonuses will look at whether it is contingent or non-contingent (8.5)
u. Sometimes even when a good says it cannot be transferred it can be and if
this is the case then it will have value to the estate especially in the case
when there would be noting to reorganize without this good. (8.6). this is
the test under 541c1: When to ignore a restriction on transfer: § 541(c)(1)-
“Except as provided in paragraph (2) of this subsection, an interest of the
debtor in property becomes property of the estate under subsection (a)(1),
(a)(2), or (a)(5) of this section notwithstanding any provision in an
agreement transfer instrument, or applicable non-bankruptcy law…”
v. Property of the estate—distinction between an interest and a value to the
estate can be different
i. 541A1: this brings into the estate any of the property of the D
even if there is no value currently to the estate
ii. this can be abandoned by the trustee by 545 if there is no value
iii. it still must be accounted for
iv. the estate’s right to the property interest is no better than the debtor
1. so if the debtor has a limitation such as the property has
been leased, then the trustee is also subject to the same
limitations
2. the trustee will step into the shoes of the debtor
v. contingent interests and expectancies: when do these become
property of the estate and when is it too contingent to be
considered property of the estate that the trustee can inherit for the
benefit of the C
vi. restrictions on transfer: the D may own certain property that is
subject to restrictions under 541C1A
1. it will come into the property of the estate and the
restrictions
2. 541C2: the only recognized exception is a state-law
recognized spend-thrift trust; this will not fall into the
estate at the time of filing
d. The automatic Stay:
i. Andrews University v. Merchant: M attended school at AU and received student loans
guaranteed by the school. When M defaulted AU became the sole student loan creditor
and refused to give M her transcript. M sued claiming it was a violation of the automatic
stay. The court held that the school cannot withhold the transcript because it would
violate the automatic stay.
1. rationale: the automatic stay attaches immediately so that all debts are due and
past deficiencies are wiped clean. Because educational loans are not excluded

14
 from the automatic stay under 362, the stay attaches.
2. Even when something will not be dismissed in bankruptcy later, the automatic
stay attaches to prevent collection during the period of the confirmation and
before dismissal.
3. University transcript case- “good faith” misinterpretation of the law.
ii. The automatic stay works to maintain the status quo while the court is in the process of
sorting things out.
iii. Nissan Motors v. Baker: B filed for bankruptcy and was in arrears on their payment for
their car. N repossessed the car, claiming they had no notice of the claim. Even after N
received notice they sold the car. The court held that the creditor could not do this after
receiving notice of the bankruptcy filing.
1. rationale: 362a3 prevents all acts to obtain possession of property. This means
that a C cannot engage in self-help. A C cannot play dumb and willfully violate
this and if they do then they are guilty of willful violation and might be liable for
punitive damages
2. to prevent creditors from violating the automatic stay, the court may assess
punitive damages
iv. when a D files for b’ruptcy, he fills out schedules and if he does not do so accurately then
he may lose his discharge. After filing these, the creditors meet in a 341 meeting—this is
40 days after filing.
v. The automatic stay does not prevent actions to collect on a bad check because this is a
criminal charge under 362b1. (9.1)
1. If the debtor waited a day to file bankruptcy and recovered the paycheck and
cashed it, it approaches fraud. He could turn it into exempt assets.
2. 366 will keep the lights from ebbing shut off but the TIB will have to make a
deposit
vi. Generally the only actions that can be stayed are non-criminal actions.
vii. The power of the court will protect all property of the debtor, even that which has been
seized before the filing.
viii. Basically, the idea is to prevent further actions to collect or to persuade collection. There
are some exemptions to this, like payment of child support, governmental actions taken
pursuant to police powers and criminal actions. A person who leased goods to the D may
retake the goods if the lease expires before confirmation.
ix. The automatic stay terminates when the property is no longer part of the estate under
362c1 or when the case is closed or dismissed, 362c2.
x. A creditor that willful violates the automatic stay may be held for damages under 362h.
This does not mean that they cannot contact the debtor, they just cannot act in a way that
appears like they are trying to get payment.
xi. §362(a)- categories overlap – they are not intended to be mutually exclusive
1. Future wages- §541(a)(6) post-petition wages are not included. Fresh start. The
garnishment will not continue as to future wages due to § 362(a)(6). The pre-
petition claim of the garnishor will be settled within the bankruptcy estate.
2. Waiting until tomorrow to file- any funds remaining from paycheck will become
part of the estate. Any purchases made with the funds will become part of the
estate. Any exempt purchases would probably be fraudulent transfers. Some
courts will not allow any claims to be discharged if a fraudulent conversion took
place on the eve of filing.

15
 3. Criminal charge for bad check writing- § 362(b)(1) exception to stay “…the
commencement or continuation of a criminal action or proceeding against the
debtor…”. What if in the jurisdiction, criminal charges are dropped if the debtor
covers the check? That could be seen as a veiled attempt to collect on a pre-
petition debt.
4. Utility service in the future- utilities have great leverage (even greater than
creditors). §366 service cannot be refused based on pre-petition history (a), but
utility company can require large deposit or security (b). As to pre-petition
delinquency, the utility is in no better a position to recover than any other creditor.
But the utility can demand a deposit. That deposit, however, cannot be put
toward past due amounts.
5. Eviction- stay applies § 362(a)(1), (a)(3), (a)(6). “Consider the negative
implication of §362(b)(10).” →What is the landlord to do? §362(d)- lift of stay
for cause (creditor’s rights), including the lack of adequate protection. Go to
judge and ask whether Joe will remain in lease and pay all back rent (§ 365) or
pay damages for breach of lease and get out. Could Joe offer to pay rent for 1
year in advance in order to stay (and not pay for any pre-petition debt)? No, the
stay cannot be used as a sword, offensively, to obtain rights not otherwise entitled
without filing.
6. Child support- §362(b)(2)(B) exception
7. Repossession of car- allowed in stay
8. Credit card debt- stayed. Shaming or harassing letters to cancel may be seen as
attempt to collect.
e. Liquidation bankruptcy: after the D files for b’ruptcy the trustee gathers all of the property,
returns what is exempt fully, and begins selling it. When things are sold, if the property is
partially exempt then the trustee returns the amount that was exempt. The TIB must also
determine who else might have an interest in the property. After the property is sold and the TIB
determines what amount to give back to the D, then the C are paid
i. Exemptions: there is some property that is exempt for the D’s fresh start. The D should
not emerge from bankruptcy a pauper and without any assets. The D may even lose his
property if there is a security interest in that property.
ii. Federal exemptions: States may opt out of the federal scheme. The federal provisions
were written in 1994 and these prices have been price adjustments every 3 years since
1998. this leads to problems of classification of the property
1. Taylor v. Freeland & Kronz: D was pursuing an employment claim against her
last employer when she had to file. On her schedule she claimed her potential
proceeds as exempt with an unknown value. The C claimed that the suit had a
value of 90-110K but the TIB doubted it had any value. D settled for 110K and
the TIB demanded that it be turned over and D refused. The court held that
because the TIB did not timely dispute the value of the claim it was barred from
becoming part of the bankruptcy estate
a. Rationale: 522 and 4003 set out a specific time limit to filing a claim in
bankruptcy. This may seem unfair in the particular case but it upholds the
reasons for having deadlines. If the TIB could have had a hearing to
determine the potential merit of the suit, then the deadline stands. This
will not encourage people to file a bad-faith exemption because they may
be sanctioned.

16
 b. Dissent: equitable tolling may apply here been if there is no bad faith
because this seriously injures the C
c. If the TIB does not contest the claim of exemption it may stand.
2. Choosing the federal exemptions will allow a debtor to use the 522d5 wildcard
which can allow the debtor to keep something valuable to them that is otherwise
not exempt under the federal exemptions found in 522. (9.3)
3. Tools of the trade does not allow a vehicle to be claimed under 522d6 because the
exemption is already found in 522d2. (9.4)
4. non-possessory, non-purchase money agreements:
a. If the secured C does not get possession as part of the loan deal, then it is
non-possessory
b. This refers to whether the secured C possesses it part of the loan deal
c. If the loan was not made for the purpose to purchase the collateral—so if
the loan purchased something else it is not a purchase money agreement
iii. Valuation: this issue stands at the heart of many bankruptcy appeals. It is the process of
putting a value to the property.
1. in re Walsh: the TIB wants to evaluate the goods at FMV. The D wishes to have
them evaluated at liquidation prices so that he may keep more goods. The court
held that the fair market was the correct valuation tool.
a. Rationale: the value under 522 is considered to be the FMV on the date of
the filing. This is the plain meaning of the statute. FMV is the price at
which the parties are willing to trade, but here considerations should be
brought to bear. This means that the definition is not invariable but the
value should be looked at in the context of the case and in which the
valuation question has arisen. This generally means that the FMV is the
liquidation price.
b. The correct value is the FMV in the light of the circumstances and seems
to approach a value closer to the liquidation value
2. in re Marshall: M’s w has a 6.18 carat diamond ring that he paid 30K for in 1978,
She wears it constantly and claims it is necessary clothing. The FMV valuation of
this is 36K, but the liquidation value is 7.8K because the time and cost of reselling
it. The court here held that the liquidation value was not the correct value to place
on this.
a. Rationale: there is plain language calling for the FMV but when the FMV
will only punish the D and not help the C then a lower value should be
chosen. TX has chosen to have a cap on personalty and it must be of an
approved type. This is sensible and strikes a balance between the debtor
and creditor without leaving the D destitute. This balance here is not the
liquidation value.
iv. Security interests in exempt property: when exempt property is encumbered by a secured
lien, the lienholder moves ahead of the both the D and the TIB. If the C is oversecured
then the D may be able to take the equity.
v. Lien avoidance: some liens may be avoidable. Consensual security interests as defined in
522f1b and most judicial liens except alimony and child support may be avoided. Some
voluntary security interest can also be avoided. This shows that congress can encumber
some property rights validly without running afoul of the 5th amendment takings clause
1. in re Reed: R sold 34.5K worth of goods, which represented 50% of their value, 2

17
 weeks before filing bankruptcy. He then applied this to his home liens. Many of
these goods were sold to friends and acquaintances. D also used these monies to
make home improvements. The court held that the homeowners’ lien exemption
should not be avoided.
a. Rationale: the D received less than the REV for all these goods. Debtors
are allowed to put non-exempt property into exempt ones but they are not
allowed to do so in a fraudulent manner. Here, undoing the homestead
exemption would do violence to the TX constitution so even in the face of
fraud this cannot be undone.
b. A debtor may change non-exempt goods into exempt ones if it is not
fraudulently done or if the exemption is provided for in the state
constitution.
2. in re Coplan: Coplan’s business in WI was in serious financial trouble. In 1989
he lost 44K and resigned. He then relocated to FL and began to look for work
without success. He managed to move within a month of resigning and paid
nearly the same amount for their new house in FL. D obtained employment in
8/90 after looking for 9 months. To live during the time the D liquidated most of
his non-exempt assets. A year almost to the day after moving, he filed for
bankruptcy. The court held that he had not earned the homestead exemption
under FL law.
a. Rationale: D is a resident which would normally allow him an unlimited
exemption in his home. WI law allows 40K. D’s wife admitted that the
move was to take advantage of the FL laws. Here the timing was critical:
the D was financially sophisticated and able to take advantage of the
timing. They filed a year to the day of the move showing a well-planned
scheme. Since this is not an unexpected disaster like the ones that put
most people in bankruptcy, the court should see this differently. This is a
concerted effort to defeat creditors and maximize exemptions. The court
cannot allow this type of manipulation.
b. Bankruptcy planning may backfire if the debtor looks like he is trying to
take advantage of the system
3. lien to impair an exemption—this means that the lien prevents the debtor form
taking the exemption; lien avoidance then kicks in
a. This is not unlimited. Congress has chosen to limit this to 5K.
b. This is because the consensual lien holder will take before the exemption.
c. This is found in 522f1a which says that the judicial lien will be avoided to
the extent that it impairs the debtor’s exemption.
f. Claims and distributions: creditors will receive a proof of claim from which must be filed within
90 days according to FRBP 3002. this allows for any distribution and is taken on its face unless
a creditor objects under 502. most parties usually agree but any party, including the TIB, may
object. Basically, Congress decided that some creditors are more equal than others.
i. In re Lanza: PNB held 3 proofs of claims against L. One is disputed in amount. The
court held that it may reduce the amount of the claim to the lowest figure presented by
both the parties.
1. rationale: the bank’s practices of paperwork were poor but unless the debtor can
contest clearly the entire amount then the lowest figure will be sued. The onus is
on the debtor to overcome the claim’s validity but the C bears the burden if the

18
 recordkeeping is poor
ii. all claims begin with a calculation under 502.
iii. Unsecured creditors do NOT get interest after filing a 502b2 claim because the interest is
unmatured
1. the interest must be matured on the date of the filing
2. So if any interest accrues after the date of the filing then it is not allowed because
it was not there when the claim was filed.
iv. 506a gives the secured creditors a claim up the value of the collateral, not to the value of
the loan if they are undersecured.
1. if the collateral is worth more than the loan, then the C is fully secured
2. if the collateral is worth less than the outstanding loan balance, then the C is
partially secured and the remainder of the loan becomes an unsecured claim
v. 506(b) allows an oversecured creditor to make a claim for interest up to the value of the
collateral
1. this also entitles oversecured secured C to post-petition attorney’s fees
2. undersecured and unsecured creditors are not allowed any attorney’s feed under
5602b, 506b and 503
vi. 503 allows for a claim of administrative expenses which are given a first priority under
507a1.
vii. the TIB will pay for the broker’s fees for selling a stock before he pays the creditors
under 506c, a cost necessary for disposing the claim (11.2)
viii. the contract between the c & d must allow for attorney’s fees before they will be given
(11.3)
ix. The amount of time and money that the attorney spends on trying to collect on the claim
must be reasonable in the light of the claim. (11.3)
x. §101(5) allows claims that are speculative: this is a broad and expansive category.
xi. 502 operates to refine allowed claims. Most claims are allowed without much objection.
Some of the limitations of claims vary from state to state but the rest are found in 502(b).
some claims will also arise after the case has been filed
xii. administrative claims may be paid before secured claims in 503. These are the costs t
preserve the estate, compensation of the trustee and the reimbursement of expenses of
selling.
xiii. If the sale proceeds and the creditor that thought he was oversecured ends up with a
deficiency then the remaining amount becomes a general unsecured claim (11.4)
xiv. If there is the potential to a claim but it has not been set in amount (it remains un-
liquidated) the court may use a reasonable estimate under 502c.
xv. Three types of attorney’s fees
1. pre-petition attorney’s fees provided for by contract or law for secured or
unsecured creditor
a. there is a claim
i. it is in time and has a contractual basis
2. post-petition attorney fees of an over secured creditor when provided for by
contract
a. there is a claim under 506b
3. post-petition attorney fees for an attorney for the debtor or attorney for trustee in
bankruptcy
a. They get claim status and priority for administrative fees

19
 b. They are an administrative expense priority claim
xvi. Timing in claims
1. Suppose an individual debtor negligently runs someone over with a car sustaining
injuries
2. File bankruptcy the next day
3. Does one have a claim in the bankruptcy
a. 502a makes it a claim since it happened pre-petition
b. The court will have to take its best shot as to what will be owed
c. The definition of claim under 501a includes any payment regardless if it is
liquidated, which means it is reduced to judgment
4. Individual debtor injures person post-petition
a. One does not have a claim in the bankruptcy because there is no claim as
of the date of filing
b. 502b provides for the date of the filing requirement
5. 101 10a
a. one must hold claim before the order of relief or at the time of
b. to be a creditor one must have a claim at the time of filing
6. What about the automatic stay
a. Can I still sue you even though you just declared bankruptcy
i. 362a makes a distinction between acts against estate and acts
against the debtor
1. acts against the debtor were only barred if they are based
on claims that arose pre petition
2. all acts are barred against the estate it seems
3. Thus the injured person would have to go after property not
of the estate, like post petition wages
4. One does not need to get lift of stay for this purpose
xvii. The priorities of unsecured claims
1. administrative
2. 502(f) arising in the course of business/gap claims
3. wage claims up to 4K 90 days before filing
4. contributions to an employee benefit plan 180 days before filing
5. farmers/fishermen’s claims
6. lease/down payment/layaway for purchases of consumer goods and services
7. debts to spouse, ex, child for alimony or support
8. tax, customs, duties and penalties
9. maintenance of capital in compliance with the FDIC
10. unsecured bonds, commercial paper and tort obligations
g. exceptions to discharge: discharge is not given as a matter of right but will be given unless a
creditor objects under 523 to a particular debt or under 727 to all of the debts. This may prevent
the debtor from getting the relief he has sought.
i. In re Harron: H trans-mingles personal and business funds. He as the sole owner and
stockholder. He filed for bankruptcy and several of the creditors objected under 727a.
the court held that the debtor should be denied a global discharge.
1. rationale: H began selling assts including his trade name without using adequate
record keeping. This lack of records shows the debtor to be disingenuous.
Creditors are entitled to adequate record keeping so that they know where they

20
 stand unless there is a good and justifiable reason for the lack of records.
2. debtors must keep reasonably decent records so that the creditors and TIB can
determine the true state of the debtors affairs
3. when a D does not keep adequate records he may be denied a discharge. (13.1)
4. The court might allow admission of records that are a complete disaster as long
as no one is adversely affected. (13.1)
ii. Mere forbearance may make a debt dischargeable. (13.2)
iii. In re Reed: R opened a store which quickly failed. He let the bank run the store through
a receiver but in the end was force to sign it over. R has set up a corporation to pay him
his salary from his other job. Before he filed he spent money on guns and antiques but
then sold these to friends to reduce his mortgage. He also ran through 20K in cash that
he cannot account for. The court held that a global discharge should be denied in this
case.
1. rationale: people are not allowed to shield asserts or convert them into non-
exempt ones on the eve of bankruptcy, except when they act in a non-fraudulent
manner. Discharge may be denied when fraud is found. Non all conversions are
fraudulent but when there is a patent intent to commit fraud, the court may find
that a discharge should be denied. The debtor has the right to rebut this after the
creditor makes the prima facie case.
2. debtors that act fraudulently with an intent to hinder or delay may be denied a
global discharge.
iv. In re Dorsey: D ran up several credit cards with purchases of luxury goods and services
including several trips. During this time she received 480 per month from social security
but claimed she received more from her boyfriend. While she wads traveling her mobile
home was purportedly broken into but she never reported this to the police. AMEX filed
a denial of discharge claiming that the D racked up the debts with no intention to ever
pay them. The court held that the discharge should be denied
1. rationale: the court begins by making several observations about how easy it is to
obtain credit and how unscrupulous some credit card issuers are. But this does
not offer comfort to the debtor: they are not given a license to steal or commit
fraud. This would render the debt non-dischargeable under 523a2a. when a
debtor takes on debts he knows he cannot pay and never has an intention to repay
then there is fraud. The creditor carries the burden to convince the court of this
2. a debtor who runs up a bill with no intention of repaying it commits fraud and
may be denied discharge.
v. In re D’Ettore: D studied at devry institute and got a degree in computer programming
with average grades. She has not been able to get a job with her degree but is working.
She lives with her family and has debts for her education and some luxury items. The
court held that there was not an undue hardship so this debt cannot be dismissed.
1. rationale: congress made student loans non-dischargeable to prevent abuse of the
system. The undue hardship provision has been interpreted very harshly. Simply
because the debtor experiences hardship is not enough. Here this debtor is not
experiencing any more than garden-variety hardship and she has made no effort to
pay and cannot show that she faces undue hardship
2. undue hardship means that the debtor has a choice of poverty or paying the loan,
not just feeling a financial pinch.
vi. In re Hill: D, in his divorce, agreed to not pay support to his wife in exchange for

21
 assuming the marital debts. Debtor cannot currently make payments on those debts and
filed for bankruptcy. The ex wants these paid so she filed an exception to discharge. The
court held that these may be discharged on a showing of undue hardship.
1. rationale: sometimes when an ex-spouse assumes the debts he gets a lot of
detriment but little relief. These may look more like a property settlement. If it is
alimony, on the other hand, I may be dischargeable only if there is an undue
hardship which may be shown if it takes so much money from the D that he
cannot reasonably support himself. Here this debtor looks exactly like the model
for hardship. If the non-debtor ex will not be harmed the debt should be
discharged. If there benefit to the debtor ex is very high is should also be
discharged.
2. Undue hardship operates to dismiss otherwise un-dischargeable debts if an only if
a showing can be made.
3. If the debt taken on after a marriage is alimony or support it is usually not
dischargeable (13.3).
4. the debtor may claim that he has a hardship to a non-dischargeable debt under
523a15:
a. Note 523a15 which says that there are a bunch of outs for the debtor who
may claim that:
i. If the debtor has so many other obligations that he has not
disposable income to pay this then it will be dischargeable
ii. Compare the benefit of the debtor to the benefit to the ex-spouse
1. So what if the wife is wealthy in her work?
a. She should not need this—this tends to cut in the
favor of the D
2. If she is a homemaker, then this cuts in her favor
3. If J is wealthy then it cuts in her favor
a. This makes it more likely that he is paying alimony
b. Ti might be strange that he is filing for bankruptcy
b. The lump sum sounds like a property settlements
c. The monthly payments sound more like alimony and child support
i. The payments decrease after the children are grown
d. What if this is in TX where most alimony is disallowed
i. Here federal law controls
ii. 523 has some confusing language but this does not modify what
counts as alimony but does modify what counts as a court of record
iii. what counts as alimony is in b’ruptcy law
vii. In re Milbank: M and her father S loaned money to M’s ex husband who is the debtor. S
loaned D money because the marriage was in trouble and D wanted to have a new
building to conduct his business in. S thought the loan would help the marriage. M also
gave $ to D to buy a car. During the entire time D was having an affair and finally left
M. both M & S thought the money would stabilize the marriage. The court held that
these debts were not dischargeable because the debtor never had an intention to repay
them.
1. rationale: although the ex said the money would be used to help the marriage the
entire time he was subtroverting the relationship. These loans were made on
reliance of good faith—otherwise S would not have made them. The bankruptcy

22
 conduct was a sham and he advanced may false pretenses. In other words, he
committed fraud and rendered the debts non-dischargeable.
2. if a person acts in a fraudulent manner to get the money, he may be denied
discharge of this debt
viii. Tort debts: debts that come from the commission of a tort are usually not dischargeable if
there is a willful and malicious injury. (13.4)
ix. Luxury goods: debts that come from the purchase of luxury goods are not dischargeable.
(13.5). this will look at the definition of what is a luxury.
x. Tax priorities and discharge: taxes are given a priority under 507a8a-g and ay unpaid
portion is exempted from discharge. Prepetition interest shares this priority if the claims
and also enjoys non-dischargeable status.
1. Penalties are not dischargeable either unless the tax debt is also dischargeable
under 532a7, See also 13.6, the parking tickets case.
xi. A C cannot refuse to deal with a customer if this refusal to deal with them is a thinly
veiled attempt to get them to pay the dues. (14.1).
1. a refusal to deal is not allowed under 524a2
2. This may also be seen as discrimination against a bankrupt which is also
specifically disallowed under 525.
xii. Bankruptcy crimes: these may also trigger a denial of the discharge and may also end in
jail sentences.
1. United States v. Cluck: C had a judgment issued against him for 2.9M. C at the
time owned some cars which he sold for 32K with a right to repurchase. He then
filed for chapter 7 with no mention of the cars or the right. He received his
discharge and then required the cars. He was caught and convicted of
concealment. The court held that he committed intentional fraud and could be
sentenced.
a. rationale: it is manifestly clear with the reposted omissions that there was
a clear plan sufficient to find fraud.
xiii. General observations:
1. discharge is the goal of most debtors. It is an individual thing and is given to the
individual debtor, not those also jointly responsible with him.
2. liens will survive bankruptcy but this is not the same as a secured claim which
does not survive bankruptcy unless the debtor wants it to
3. denials of discharge may either be global (the whole thing) or specific to a debt.
4. the common reasons to deny a discharge are:
a. fraudulent transfer or concealment
b. failure to maintain minimal records: concealment or destruction will count
unless there is a good reason. This operates to save creditors from the
negligence of the debtor. There is no specific way in which people have
to keep their records
c. repeated filings: the 6 year bar
d. not filed by a human
h. the end of the automatic stay and the beginning of the new world:
i. 362 and 524a2 are bookends of protection of the bankrupt
1. under 362a the automatic stay begins as soon as the petition is filed and runs
under 362c2 at the earliest at the time the case is closed, dismissed or the case is
discharged/denied discharge

23
 a. it can end at another time for a particular creditor under 362d where there
is a lift for cause by a single creditor
b. this bars actions on certain claims:
i. possession of property of the estate
ii. bars pre-petition claims from continuing
iii. there is not a bar on actions brought post-petition unless it is an
action of the property of the estate
2. under 524a2 begins at the discharge and does not end
a. this bars actions on:
i. discharged claims
ii. with claims that cannot be discharged they cannot be attacked
during the automatic stay period but the creditor may begin their
attack anew after the discharge
ii. Once the case is closed, the debtor cannot agree to pay the old discharged debt unless
the creditor files this with the court. (14.2)
iii. Hardship affirmations:
1. 14.3: BM has a motorcycle with an 18K debt which is worth 15K. He also has a
house which he proposes to sell to redeem the bike. Should there be a hardship
agreement?
a. This would be under 722 if it is applicable
b. This looks at the congressional intent: they wanted a hardship
reaffirmation procedure but not as big of a worry for the redemption
i. This is paternalistic
ii. With a reaffirmation the debtor might be taking on a greater
hardship than they originally had
iii. This also looks at which is more important—the secured debt or
the secured debt
1. With the unsecured debt the court would have completely
discharged the unsecured debt
2. With the secured debt, if there is a debt the debtor pays for
the asset (FMV) so the debtor will never pay more than the
fair market value
iv. If he did redeem here, how much would he owe?
1. 15K in cash today, not over time
2. this is not a bad deal because the debtor pays either the fair
market value or the loan amount, whichever is less
3. This is tangible personal property intended for personal,
family or household use. There is another pre-requisite,
which is the debtor must exempt the property or the trustee
must abandon it
a. Here, will there be a need to exempt or will it be
abandoned?
i. It will likely be abandoned because the loan
payoff amount is more than the FMV of the
bike
ii. With the exemption, there is a consensual
lien holder, so the first question is there

24
 equity in the property (the debtor cannot
exempt what he does not have)
iii. This really means that the consensual
secured creditor is unsecured
iv. There is nothing to exempt
v. There is no equity brought into the estate so
it will likely be abandoned
i. reaffirmation, redemption and ride through
i. reaffirmation: when the D gets a discharge, the automatic stay disappears and a 524 post-
discharge injunction falls into place preventing any attempt to collect a discharged debt.
The debtor may not want to discharge all of his debts and may choose to reaffirm under
524c. this must be filed with the court and the debtor has a 60 day rescission option.
This must be affirmed by the attorney in the case. since liens are not discharged the
debtor may redeem the collateral or reaffirm it. Some states also allow a ride
through/retention. This is binding and makes the debt non-dischargeable. The C can also
repossesses or sue to get the deficiency.
1. in re pendlebury: FLSA wants their debtors to reaffirm their loans. For each of
these, FLSA tacks on a $250 attorney fee. The court held that they may not
collect this fee
a. rationale: if the contract specifically allowed for this it would be allowed.
Debtors may add terms to the negotiation as a part of the give and take.
This does represent the real cost that the bank endures. Still, this is unjust
and the debtors will seek the court’s help if the amount is too much. This
is not a job the court wants
b. when the debtor reaffirms his loan that is all he is reaffirming unless the
contract provides that the creditor may tack on fees
2. when the debtor is negotiating for the reaffirmation the creditor has the advantage
but may not take advantage of the D in this situation.
a. In re Latanowich: L filed a chapter 7 bankruptcy in which he owed Sears,
who contacted him about reaffirming the debt. L did this in the promise of
getting new credit. S never filed a report with the court. L did use the
new credit. L then wanted to reopen the case and have the debt
discharged. The court held that this may be reopened because a creditor
cannot elicit a reaffirmation and not file it with the court.
i. Rationale: reaffirmation is only allowed when it will not harm the
debtor and when it is filed with the court. These requirements are
mandatory and exist to protect the D form his own stupidity. Here,
this was a very bad deal for the D and S manipulated the process to
make it un-reviewable. This makes it unenforceable. Because it
was void ab initio S is enjoined from any recourse. This conduct
was blatant and sanction-able.
3. Note 524c for the requirements:
a. C1: must be before discharge
b. C2: clear and conspicuous statement that it may be voided in 60 days or
until the discharge—the rescind ability must be clear
c. C3: must be filed with the court and represents a fully informed decision
and is not a hardship on the D

25
 i. This is what was discussed in Sears
d. C4: the rescission period passes with no rescission
e. C5: the court has to inform the D of the effect of the reaffirmation
f. C6: not represented by an attorney then the court looks at the undue
hardship of the D—this is a paternalistic role
4. Is there a discernable benefit to the debtor when he reaffirms the unsecured
debtor?
5. With secured debt, reaffirmation as a matter of course should be encouraged
unless:
a. If the debt-collateral ratio is out of whack, or the debtor is upside-down
ii. Redemption: the debtor must pay off the loan or value of the collateral whichever is less.
This is in 722.
iii. Retention/ride through: this allows the bankrupt to keep making payments as he did
before without redeeming the collateral or reaffirming the debt. This is not in the code
specifically.
1. in re Burr: B owned a van with an 8K PMSI. When they filed for bankruptcy the
bank sent them a letter asking them to redeem, reaffirm or surrender. The bank
then sought lift of the automatic stay. The court held that the debtor must choose
one of these options.
a. Rationale: 521 does not contemplate remedies that are outside of the
system of bankruptcy. The language is clear and unambiguous—there is
no right to retention in the code. The debtor must make a choice of one of
the options in the code.
b. There is a split among the circuits if there is a retention option.
iv. It will depend a lot on the creditor if the debtor will be allowed to reaffirm or retain the
good he seeks to. It will also depend on the laws of the jdiction if ride through can be
elected. (14.4)
j. Bankruptcy is an in rem proceeding. It is universal and binding on all of those involved except
the state and federal government under the 11th amendment.
i. In re Collins: C was a bail bondsman who filed for bankruptcy and was discharged. The
state continued to press him for repayment claiming that they had 11th amendment
immunity. The court held that the bonds may be discharged.
1. rationale: this was not a suit against a state and the state did not claim SI in the
proceeding. The state was not names as a creditor or required to appear in court.
They may have been involved but here was no jdiction issue because the jdiction
extends to the bankrupt and his estate. It may alter the state’s rights but this is not
a tax, fine, penalty or forfeiture and is not a suit against the state.
2. the state’s rights can only be reordered when there is not a suit against the
state—basically the state can be a creditor as long as it isn’t a party
3. The debtor cannot institute an adversary proceeding to get old tax problems
dismissed but the court can hold that they are discharged and not butt up against
the 11th amendment. (14.5)
ii. In re Neary: N filed owing the state 2.2K, an amount not disputed. The state filed suit
claiming that a determination of the discharge-ability of the debt violated SI as did the
automatic stay. The court here held that the bankruptcy court was barred from acting
1. rationale: the state claims that the bankruptcy court can only proceed if the state
concedes jdiction, if there is a valid abrogation or if this is brought under the Ex

26
 Parte Young doctrine. The D may continue if there is no other court that will hear
the case. this is not the case as it was not properly pled under one of these
theories.
3. chapter 13 bankruptcies:
a. general observations:
i. Chapter 13 focuses on the uses of the D’s future earnings by taking a percentage of them
to pay the creditors. When this plan is completed then the D gets a discharge. This is
done under the supervision of the court and this last usually between 3 and 5 years. The
D retains control of his estate. The TIB has to object to the claims and assist the D in his
performance. The TIB must also approve the plan and ensure they the payment of the
plan begins within 20 days.
ii. The most common reason people choose chapter 13 is when they have significant non-
exempt assets, like a home.
b. Secured creditors and adequate protection:
i. A chapter 13 secured creditor has a better position because he must have adequate
protection under 362d. the secured party is entitled to have his payments during the plan
in exchange for forbearing to collect
ii. In re Radden: D bought a 1979 mustang on an installment contract which he then missed
2 payments under. He did not cure these before filing for bankruptcy. The car’s value is
2.7K, but he owes 4.4K. under the plan G will receive full payment of the secured
portion but only 70% of the unsecured part. G does not like this and wants to repossess
this claiming it is not necessary for the reorganization. The court held that a car is
necessary and that G was getting adequate protection.
1. rationale: people need cars and he easily shows that he needs this for
reorganization. G is in the best position to protect this. Because they will get
interest they have adequate protection
2. the debtor may defeat an adequate protection claim by showing that the thing is
necessary for an effective reorganization
iii. A claim that the newer model is coming out and the current collateral that the debtor has
will decrease in value might be a good basis for an inadequate protection argument.
(15.1)
1. This will mean that the creditor is basically making an argument that the
depreciation of the good will leave them without AP soon.
2. When the C is oversecured the AP argument is harder to make but the C will also
have the right to an equity cushion.
a. This means that there is a hedge against the depreciation of the good
compared to the rate of the payments on the debt
b. Although the equity cushion might shrink a bit, the court will not feel
sympathy for the C
c. If the equity cushion will shrink to nothing or the over secured C will
become under secured because of depreciation then the court will have
more sympathy. This will be a decent argument here, but might not
always win
d. Alternatively, the C might argue that there is not adequate insurance being
maintained as required by the contract. This will mean that the value of
the collateral will not matter.

27
 3. The argument under 362(d)(2): the C does not have equity in the collateral will
trigger the use of this subsection
a. When does the D have equity in the property is the main question here,
and the D will have equity when the collateral is worth more than the debt
b. This will be an unsuccessful argument because both parts of this must be
met. Since the first part is not met, the argument is lost.
iv. Steps in the allowed secured & unsecured claims:
1. What is the creditor’s secured claim in chapter 13
a. 3 steps
i. What is the total claim (same as chapter 7)
1. section 502 tells us what are allowable claims
2. principle and interests and fees are allowable
ii. What part of that claim is secured and what part is unsecured
(same as chapter 7)
1. 506a says what the collateral is worth is the secured claim
2. bifurcated claim when under secured
a. have secured claim and unsecured claim
iii. What then is the creditor entitled to demand for its claim
1. for secured claim 1325a5 tells us one can
a. secured creditor can agree to plan
b. debtor can surrender collateral1325a5c
c. 1325a5b must let the creditor retain lien and is
entitled to present value of secured claim over the
course of the plan
i. What interest rate should be used
ii. Hollins case says lets look at what the
market interest rate would be for a
comparable loan with this collateral securing
it
iv. What is an unsecured claimant entitled to?
1. 3 things
a. paid pro rata in the plan along with other claimants
1322b1
i. equal treatment
b. get paid at least what they would under chapter 7
i. 1325a4
ii. best interest of creditor’s test
iii. this is tough because one must pay the value
of the non-exempt property had one declared
chapter 7
c. demand all disposable income used to fund plan
i. 1325b1b
v. when the creditor seeks to have the stay lifted they will have an uphill battle to show that
they do not have adequate protection
vi. Associates Commercial Corp v. Rash: R purchased a truck and had 41.1K remaining on
the loan when he filed. R claimed that the value was 28.5K and A claim that they were
fully secured. A wanted the stay lifted. At the bankruptcy court they found that the

28
 replacement value was 41K but that A would only realize about 32K if they repossessed
it and sold it. The supreme court held that the correct value of the truck is the
replacement value.
1. rationale: the code that the value the C has secured is the value to the estate. This
is looked at in the light and circumstances of the case and the use under 506. this
leads to valuation of what the estate would pay to replace it. The code speaks
obliquely on how this should be done in the 2nd sentence of 506a: proposed
disposition or use. This allows the D to pay for the item or return it. Allowing
the lower standard renders these words meaningless. Replacement value measures
the use, not the foreclosure which will now not happen. Legislative history here
is of no use
2. dissent: the meaning is unclear but points to the repossession value. The language
suggesting valuation from the creditor’s point of view, which is the repossession
value. This also holds with the larger goal of the code to keep recovery the same
for all creditors.
3. Replacement value: because of FN6 in this case the value is not crystal clear. It is
somewhere between the retail and the wholesale.
4. The debtor will want to argue that the lower amount should apply in her case
because this allows her to make lower payments. (15.3)
5. There is no strip down o a secured claim in bankruptcy according to 1322b2.
(15.4). this is not allowed because it would be a form of modification.
a. Once there is a secured debt, it cannot be modified in amount. Large long-
term debts cannot be modified to make them short-term debts.
b. 1322b2 prevents these modifications
c. Interest charges and the rate: the rate of the interest is one of the more litigates portions of
chapter 13. this is allowed under 1325a5. the actual rate to be used is no where in the code but
secured creditors are allowed present value treatment which means that they get interest so that
the dollars they get 3 years from now, with the interest are roughly equivalent to the dollars they
laid out for the debtor. This is added to the collateral on the date of the filing.
i. In re Hollins: H has a car with equity and was paying 11.5% on the note. He proposed to
pay 6% under the plan but the C objected saying it was not enough. The court held that
the debtor does not have to pay the contractual interest rate during the plan.
1. rationale: some courts have found that when the prime rate is lower when the
case is filed the lower interest rate should prevail. The correct rate is that for a
loan that is similar in character, duration and amount. There is no reason to give
bankrupts preferential treatment and the rates do not serve to put the C in the
same place. This would require the C to operate at a loss. So the correct rate is
the one that seeks to re-compensate the C. Using a similar loan standard provides
a bright line. The K does not act as a cap but may be a starting point of the
negotiations. The C should get the time value of its money because it is forced to
accept deferred payments
2. the correct percentage rate for interest during the life of the plan is that
percentage rate that would be charged for same or similar loans
a. in determining the interest rate the court must also determine the amount
of the secured claim under 506a and the present value under 1325a5bii.
This idea reflects that a dollar today is worth more than a dollar tomorrow
and absent the automatic stay the C would repossess and see his money

29
 today
3. There are three steps that the C will want to use in a AP claim: the amount, the
amount of the security and the present value of the collateral. (15.2)
a. if they are allowed present value, this means that they will be entitled to
interest which is based on the same loan for the same customer
b. With the unsecured portion, 1325a4 mandates the BIOC test so that the
person will get as much as they would in the hypothetical chapter 7 case.
c. A person that is partially secured and partially unsecured can make a claim
for interest on the secured portion under 506b.
i. right over time when they could and would otherwise foreclose on
the collateral
ii. This will be from the confirmation of plan to the end of the plan
d. cure and maintain:
i. payments of a home mortgage, because many/most of the people that file for chapter 13
own a home present a special problem. They are allowed to catch up on the past due
portion and make payments as they come due in the course of the plan. The courts have
looked at the plain meaning of 1322b2 and the idea of adequate protection drops to the
rear in this case. the major problem in these cases is saving the home from FC and
protecting the lenders in the long term
ii. in re Taddeo: T had a mortgage that he fell behind in. P held the mortgage and sought to
foreclose. T filed a chapter 13 listing P as the only creditor. P sought lift to foreclose
because state law allowed it. The court held that the bankruptcy code prevented action
under state law because the case had been filed.
1. rationale: the plain language of the code comprehends the ability to cure &
maintain which necessarily allows for deceleration. This is the long term history
of this provision and it is strongly supported by policy considerations. This is not
a modification and it is allowed. Just because the lender has a cause of action
under state law does not mean that the mortgagee does not have a remedy under
federal law
2. when the case has been filed creditors cannot resort to state law for self-help
3. when the case is filed the loan is decelerated
4. As long as the house has not been sold at the FC sale, 1322c1 allows the debtor to
cure and maintain. (15.5)
iii. When the law allows a debtor to cure, it means in real dollars, not bankruptcy dollars
because the D must pay for the privilege of using the thing. (15.4).
iv. When the good is not something necessary to the estate of the debtor for successful
reorganization then the court is less willing to let the debtor keep it and is more willing to
find that the creditor does not have adequate protection. (15.7)
e. payments to unsecured creditors:
i. priority claims are under 507 and they are entitled to payment I full. Unsecured creditors
are best served by high payments but have security in the best interest of creditor’s test
which is in 1325. this says that the D must devote all of his disposable income to the plan
payments during the life of the plan, the plan must be in good faith and the payments
have to be at lease as much as the creditor would have gotten in a hypothetical chapter 7.
this leads to a lot of litigation
ii. What is disposable income under 1322?
1. In re Carter: C is married and resides with her H as a tenant-in-entirety. C

30
 suffered a judgment and filed for chapter 13 alone. S, a creditor objected and says
that her husband’s income should be considered. The court held that the income
of the non-paying spouse should be considered as a part of the disposable income.
a. Rationale: disposable income is not defined in the code. This should look
at what is reasonably necessary for support, and this means that the spouse
must be considered. Married people live as a unit pooling their resources.
This omission is not in bad faith though
b. Even if the debtor files alone a spouse’s income must be considered to
determine what is truly disposable income
2. in re Matter of Wyant: D engaged in extensive pre-bankruptcy planning designed
to avoid payments to unsecured creditors. He was divorced and was ordered to
pay alimony but his ex-wife died. He did update his schedules to reflect her death
but this change upped his other expenses as well. The court held that these
adjustments were not allowed.
a. Rationale: some of the adjustments are minor and reflect correction of
errors which would be allowed. Others, however, are totally new
expenses which are not allowed. The D must act in a reasonable manner
to best pay his creditors.
3. good faith: chapter 13 plans divvy the money between necessities and payments.
This may be a 0% payment to unsecured C if it represents to best effort of the D.
this is a flexible standard and is designed to force the D to live a more modest
lifestyle.
a. In re Greer: G owed an outstanding balance on the mortgage but were
current on the luxury cars. G was also behind on the unsecured payments.
The plan was proposed to pay 1% of the unsecured amount and basically
appeared to be a method to cram-down the car note and not pay much
unsecured debt. The court held that a 1% payment to unsecured creditors
is not per se in bad faith and the creditors cannot force a longer plan.
i. Rationale: good faith is not defined but the general idea is that
substantial payment is not required if the D meets the best interest
of creditors (BIOC) test and agrees to give up his disposable
income for 36 months. D may have left a cushion in this, but this
is small and necessary to help the D meet emergency expenses and
to possibly prevent modification later. Here the D did not act
unfairly or in bad faith, which would be required to determine bad
faith. Instead, they acted equitably and meet the BIOC test. A
more substantial payment to unsecured C is not enough to extend
the plan; otherwise most plans could be extended.
ii. Making no or a small payment to unsecured creditors is not in bad
faith per se
b. In the Matter of Strauss: S had filed chapter 7 but accumulated substantial
new debts quickly, so they filed a chapter 13. their plan pays nothing to
unsecured creditors who object to the plan saying it is in bad faith. The
court held that this plan was indeed in bad faith.
i. Rationale: the C claims that the plan is in bad faith because it is a
chapter 7 in disguise. Here these D could not file another chapter 7
so quickly. When a chapter 13 is really a chapter 7 in disguise it is

31
 in bad faith. A debtor should not be denied relief of the court
simply because they have used the system before. The court
should look at the totality of the circumstances and determine if
they represent an abuse of the provisions and the purpose of
chapter 13. here these D give a large portion of their income over
60 month. If the plan proposes to pay nothing to unsecured C and
the same would occur under chapter 7 it may be a disguised
chapter 7 liquidation. Here, since the priority claims will be paid
in the same way it appears like a disguised 7 and an attempt to
circumvent 727
ii. It is in bad faith to propose a chapter 13 plan that would
accomplish the same thing as a chapter 7 plan
4. a debtor with few or no assets that will require modifications of the plan as it
progresses would fare better under chapter 7 in many cases (16.1)
5. chapter 13 is not designed to support a luxurious lifestyle, it is meant to support
the ‘Target/Wal-Mart lifestyle’ so that the children cannot continue in the private
schools. Private schooling is a luxury that is not allowed in chapter 13 (16.2)
6. creditors cannot force the debtor to work overtime so that they will be paid more
money. The amount of income should be based on the salary that the person
makes before any additionals (16.4)
7. debtors may make contributions of their salary, up to 15% to a charity even
though they have never done this before according to 1325b2 (16.5)
f. A creditor cannot bring a cause of action to extend the debtor’s plan to more than 3 years. So
why would a debtor choose a five year plan? There are several scenarios where this might
happen:
i. 1325(a)(4) best interest of creditors test; the debtor might have a lot of non-exempt
property that he or she would like to keep and this test will require the debtor to give the
unsecured creditors as much. There might not be enough disposable income to meet this
without the 5 year plan
ii. If there is an under-secured creditor and the debtor wishes to strip down the claim so that
the unsecured portion is paid for pennies on the dollar. Rather than cure and maintain,
the debtor wishes to pay as little as possible even though they will take care of the
secured portion. But the D may not have enough income to take care of this in 3 years
but can accomplish this in 5 years
iii. The super discharge option: there may be a debt resulting from a violent tort. Under a
chapter 13 claim, this is dischargeable where it is not under chapter 7. This might cause
the court to look at the plan to see if this is in good faith, so the court might require the
plan to be 5 years before they will confirm it. This is under 1325(a) (3), the requirement
of good faith. It is not bad faith per se to have a 3 year plan with a 0% payout however,
according to the Greer court
iv. If one is in the position to make a 70% payment then a chapter 7 discharge is available
within 6 years of a chapter 13. this is 727(a)(9), but if there is less than 70% payment
then there cannot be a chapter 7 within 6 years of the chapter 13
v. 1322(a)(2) the priority unsecured claims must be paid in full during the course of the
plan. The D might not be able to meet this within 3 years but can do this in 5 years. If
these are not paid then they will not be discharged
g. taxes and other priorities:

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 i. bankrupts may pay the filing fee as a priority
ii. priorities are found in 507(a)
iii. repayment in full of priorities is a requirement if chapter 13 for the plan to be confirmed;
these C no longer divvy up the pie like they did in chapter 7. if the D cannot pay these
then he cannot go into chapter 13. disposable income is not the cap but is the floor
iv. taxes are not dischargeable under either chapter 13 or chapter 7. when debtors have tax
problems, many time chapter 13 is better for them. This is because 502 prevents the
addition of post-petition interest for unsecured tax claims. Pre-petition interest is
allowed. If the taxing authority has taken a lien then the post-petition interest is allowed
under 506, 1325a5.
1. tax penalties that represent an actual pecuniary loss (i.e. they are more interest
than anything else) are allowed
2. in re Baker: B filed C13 in 1995 after receiving a C7 discharge in 1994. he owed
taxes of 72.8K from 1990, 1991, and 1993. they have a graduated payment scale
planned with the last payment representing a balloon payment. The IRS objected
because the payment ins only 32K, not the full amount due and owing. The D are
elderly, one has cancer and they both want to retire. The court still held that the
plan could not be confirmed.
a. Rationale: the IRS has a properly formed lien and a secured claim for the
60K. the IRS may apply the payments it receives in any way they so
choose according to their own statutes. This policy of the IRS is to pay
the oldest tax first but the court may order that the IRS do otherwise to
allow for successful reorganization of the D. Here this is not required to
reorganize the D so the court may not direct the debts be paid in any
particular manner
b. If a D is not going to pay the tax bill in full then the chapter 13 plan
cannot be confirmed
3. in re Zeig: Z filed fraudulent returns in an attempt to avoid taxes. Z then filed
C13 and the IRS objected claiming that the taxes were a priority. The court held
in an ironic twist of fate that prepetition taxes with respect to a fraudulently filed
return or a willful evasion could not be entitled to a priority under 507a8.
a. Rationale: these charges are specifically non-dischargeable but they are
also not specifically a priority claim under 507a8Aiii and 523a1c. this is
the plain language of the statute. Congress has not changed this but could
have done so and voiced their intent. It is not inconsistent with the rest of
the code
b. Taxes that are not paid because of tax evasion are not paid as a priority
under C13
v. When a spouse has taken debts out of a marriage according to the marriage decree and
then defaults on them, the ex-spouse may be liable for the debts but would be able to later
seek contribution. (17.1)
vi. The automatic stay may work to protect the co-debtor but only if the debtor wants it to
under 1301a2. (17.1)
1. This is very narrow though and only protects the co debtor to the amount that the
person will pay, so if the debtor is going to pay 10% then the creditors cannot
come after the co debtor for 10% of the debt but they can come after them for the
other 90%.

33
 2. It is often that when one spouse assumes the debts from the marriage and then
defaults, the other spouse is also thrown into bankruptcy. They may have claims
for contribution to the payments that they had to make but usually cannot make
the payments.
vii. For a chapter 13 case to be confirmed all of the tax liabilities have to be paid. (17.2)
viii. there are some things that are not dischargeable under a chapter 13 except for things
listed under 1328(a) 1-3:
1. Student loans, drunk driving payments, criminal fines
2. Since this is not specifically listed then they are dischargeable
3. If this is so, then why do people not always choose chapter 13 if they have tax
problems?
a. There are 3 years, possibly 4 that must be paid in full as a priority
b. 1322(a)(2) makes these payable in full over the life of the plan—this
means that if there is a large liability it does not make this more attractive
ix. Tax penalties do not get a priority under chapter 13 according to 507a8g. (17.2)
x. The automatic stay will prevent the IRS from filing a lien if it has not already done so
under 362a. 17.3
xi. Are taxes dischargeable? The simple answer under chapter 13 is that they are
dischargeable, but why isn’t this always the better choice for one with a lot of tax debt
1. the footnote to the statement that taxes are dischargeable, to the extent that the tax
is a priority they must be paid in full although the interest does not continue to
accrue interest.
2. in 17.2 there is a huge difference between tax liability that are really taxes which
is payable in full and those that are real punitive penalties—these do not have a
priority and do not have to be dealt with in full under the plan
3. In problem 17.3 there is a question of why is important for the IRS to have a lien
when it is a priority creditor. Having a lien allows the IRS to accrue interest to
the amount that they are over-secured
a. This also allows the IRS to get paid for those taxes that are too old to have
a priority. These would otherwise be dischargeable in the absence of a
lien.
b. The lien changes the claim for a non-priority dischargeable claim to a
secured priority claim that gets interest
4. What is the advantage to filing a chapter 13 for someone who has tax problems?
a. These are only advantages when there is not a lien
b. The interest stops running
c. To the extent that the claims are too old to qualify for a priority then these
are discharged without payment in full
d. In the extent that the claim is punitive penalties these are also
dischargeable without payment in full
h. Favoritism in repayments:
i. Generally debtors cannot discriminate among their claims to determine who gets paid
first. The only exception to this is when there is a co debtor. This reflects life: there is a
special need to protect these debts because usually it is a relative who guaranteed them.
Additionally, although not discussed, it is not fair for the bankruptcy process to ruin the
other person’s credit rating.
ii. In re Bentley: the debtor here proposes a 5 year plan in which he ranks his debts, paying

34
 off 100% of his student loan but only 5% to the other unsecured creditors. The court held
that this kind of discrimination among creditors was not allowed.
1. rationale: some debtors may discriminate if there is a reasonable basis for this
and if this is in good faith. It boiled down to a reasonable balance among the
debts. Here the D does this simple because student loans are not dischargeable
which alone does not justify the discrimination. There must also be a good
reason, such as a public policy concern for this type of discrimination
2. a debtor cannot simply rank the unsecured creditors and pay the ones that he
ones that he likes.
iii. Discrimination is allowed for an alimony or child support payment (17.1)
i. Modification and dismissal of C13:
i. Because of the financial difficulties that often place D in C13m their plans and
expectations do not always work out as they wish. This means that the court will allow
them to seek modification as necessary.
ii. In re Faaland: Debtor has missed several payments because of bad weather. D believes
that with a modification he would be able to pay in full according to the plan. The C
seeks dismissal. The court held that missing 2 monthly payments is not reason enough for
dismissal.
1. rationale: 1307a6 allows conversion for material default. Until the time of the
default, C had substantially complied. This default was outside of their control
and does not evidence good enough reason for dismissal
2. missing a payment or two is not enough reason for dismissal without other factors
being present
iii. some courts simply will step up enforcement through garnishments but this will not work
when the D has lost their job.
iv. This may take several months before the dismissal
v. If there is a dismissal then the D cannot re-file for 6 months.
vi. Courts are often lenient with late payments but not with D who change their minds about
paying the plan
vii. In re Meeks: D filed for relief and proposed to repay G over 36 months instead of the 14
remaining on the contract. The D then wanted to modify the plan and surrender the car,
which was allowed. G sold it and there was a deficiency, which G wanted to get as an
unsecured payment. The court held that on modification and surrender, the deficiency
cannot be reclassified as an unsecured claim
1. rationale: because §1329 and 1327 operate together, res judicata does not operate
when there is a material and substantial change, allowing for modification of a
plan to deal with problems that occur after confirmation. Under 1329, once a plan
has been confirmed there is no modification of the amount but acceleration and
deceleration are both allowed. There are no other modifications allowed in the
code. Congress intentionally limited modifications and barred all of the rest.
2. A debt, once a plan has been confirmed, cannot change from secured to
unsecured or the other way around.
3. modifications can only be to accelerate or decelerate the payments
viii. in re Delmonte: D filed a plan and agreed to pay 395 a month for 6 months, 595 a month
for 30 months and a balloon payment of 10K at the end representing a 30K deficiency
form a judicial sale before the case. D then came into some money and paid the whole
thing in 2 months. The court held that this was not a permissible modification and did

35
 not count as the completion of the payment plan.
1. rationale: modification is usually allowed but the D must complete the plan.
There is compliance on two levels. Neither the amount not the number of
payments alone is dispositive of completion—they both have to be done. This
here does not show that the D has paid their C to the extent of their abilities
during the plan period. This, if allowed, reads the code disjunctively, without
respect for its reasons and goals.
2. a debtor cannot come into money and pay off the plan early simply to be able to
escape bankruptcy.
ix. The court may allow a debtor to begin making payments after the 30 day deadline, but
only if there is good cause and it looks like the D will be able to complete the plan with
this help. (18.1) See also 1326a1 & 1323
x. Trustees are reluctant to dismiss debtors from their plans even when they miss payments
because this is how the trustee gets paid. (18.2) See 28 USC §528c
xi. When a debtor begins making more money the creditors are entitled to a modification
because they are entitled to the debtors disposable income during the plan period. (18.3)
1. This is because the bankruptcy court is one of equity—the debtor that is asking for
relief must have clean hands.
xii. General observations:
1. a plan, once modified, is the plan
2. modification cannot change the rights of the creditors
3. there is no requirement that the debtor show cause at all for modifications but
usually there is an unexpected expense
4. the trustee cannot bring issues up at the modification hearing that could have been
brought before the court earlier—these are barred because of res judicata
j. regular income:
i. to be able to qualify to go into bankruptcy, one must have regular income according to
§101(30). Naturally, this is not defined (oh, joy). So there has been litigation to
determine what exactly regular income is. It can be annuity payments, payments from
the government, and payments from a job. Regular income does NOT include an
allowance that is given by another person though
ii. in re Murphy: the Debtor lives with her employer and takes care of members of the
family. She receives about 800 a month to pay her bills. Her car was seized after a
judgment was levied against here but she filed for c13 before it was sold. The JC
objected to this because she did not have a regular income. D would fund the plan and
pay 600/month and the JV would receive 100% after lien avoidance. The other
unsecured C would receive at least 20% in a 5 year plan. The court held that this income
was regular enough to qualify.
1. rationale: 101(30) defines regular income as regular and stable enough to fund a
plan. The source is not important. Here the employer has signed something
agreeing to fund the plan. There does not have to be a legal right to the income
because then people that live in a right to work state could not file c13. This is at
least as regular and stable as other incomes.
iii. An income that comes from sporadically working may not qualify as a regular income
because it cannot meet the test of stable & regular (19.1)
k. Types of claims:
i. In re Mazzeo: M was the president of a company that withheld taxes from the employees

36
 but, whoops, forgot to send them to the DOR. M was responsible for making these
payments and the person who was responsible within the company may be held
personally liable for the deficit. M filed c13 and partially listed the tax liabilities but not
fully because he claims that he was unaware of the true nature of the, the trustee objected
to the plan saying that his liabilities exceeded the amounts allowed for a c13 debtor—the
statutory max in 109(e) was exceeded. M said that is was still a contingent claim because
it was not final that he was responsible for these taxes. The court held that these tax
debts were not contingent and they were liquidated.
1. rationale: 109(e) says that only non –contingent & liquidated debts can be
including in c13. these are not defined but congress meant for this to be broad
and encompass a lot of different dents. Non-contingent means that no future
event has to happen for there to be liability. Here, the responsible person is
unconditionally liable for the unpaid taxes—there is no contingency. Liquidated
refers to the amount, not the existence of the liability. Liquidated means that the
amount is easily ascertainable, which it is here
2. simply because one disputes a debt does not mean it is not liquidated and not
contingent.
ii. Even when a debt is uncertain, the D should not be denied access to c13, but on the other
hand, allowing this D in means that the court has to spend precious resources determining
how much the D has to pay. This is why the debts have to be non-contingent and
liquidated.
iii. When a debtor only works sporadically, even if it is at a well-paying job, he does not
have a stable and regular income. (19.1)
iv. A debtor can pay down some of his debts so that he can fit under the debt ceiling, or in
other words, the attorney does not have to take the debtor as he finds him. (19.1)
v. A debtor cannot file for c13 if her debts exceed the ceiling or if she is not really in
financial trouble and owes a debt (19.2)
vi. A guarantor would have a right to subrogation which says that the person guaranteeing
the debt bay step into the shoes of the C and go after the collateral. (19.2)
vii. The cash savings of a person might be able to be used to fund the payments of a plan if
they are in interest bearing accounts. (19.3)
viii. The court may delay the first payment of a debtor if he is in the process of getting a job or
if there is another good reason. (19.3)
ix. A court will look with a lot of suspicion to the debtor who files a lot of bankruptcies, even
if they are spread out over the years. (19.4)
x. If a person files for a chapter 7 now and gets the regular old discharge then the
bankruptcy system will be closed to them (at least chapter 7) for a period of 7 years.
(19.4)
xi. The debtor that was granted a hardship discharge under 1328b then he may refile under
chapter 7 even though he did not complete his payments under chapter 13. (19.4)
1. hardship discharge: is not as good for the debtor but this is because he is not as
good to his creditors
a. this is under 1328b
b. debtor has not completed payments under the plan
c. the debtors failure to complete these was due to circumstances outside of
his control

37
 d. the creditors end up receiving through the unfinished plan at least as much
as they would have gotten in chapter 7
e. modification under 1329 is not practicable
f. this tends to arise when the debtor begins the plan in good faith, loses their
job and cannot continue to pay & modification will not work
g. there are a number of exceptions in 1328c
i. any secured debts
ii. 1322b5 long term payments
iii. debts that have no prior permission
iv. anything that is not dischargeable under 523a is also not
dischargeable here
h. So what good is this?
i. It is still better because this is not subject to the global discharge
exceptions in 727a
j. This would happen if a C found one of these then the debtor gets no
discharge at all
k. Even if a debt is not discharged under the hardship he still gets credit for
the payments he or she did make
xii. When the debtor files in anticipation of being made to pay a claim, since the claim is not
liquidated and is contingent, the filing is in bad faith. (20.1)
l. Policy debates about the consumer bankruptcy system:
i. B’ruptcy policy making should be based on empirical and normative conclusions. When
using normative views, this leads to policy debates about what conclusions to draw from
the facts
ii. One of the first questions to ask in determining policy is do the creditors fair better inside
or outside bankruptcy
iii. There is a general feeling that people use c7 when they really could have repaid some of
their debts
1. the national Bankruptcy review Commission made some recommendations about
this.
2. Another study, called As We forgive found that 2-7% of people could repay
some—this focuses on the question of whether debtors are taking advantage of the
system
3. a group led by creditors found that 20% or better could repay some of their debts
iv. this highlights the second question of whether bankruptcy comes from irresponsibility or
misfortune
v. there has been a general lowering of the standards to get credit in the last decade but just
because credit is easy to get does not mean that people should act irresponsibly
m. the c7-c13 choice:
i. because D pay back some in c13, there has been a push to create incentives for filing c13.
creditors, especially unsecured C are pushing to limit the access of people to c7
ii. c13’s incentives include:
1. the ability to keep your property. This incentive includes the ability to:
a. lower the monthly payment
b. the ability to keep the home—this has a perverse effect that it forces non-
homeowners into chapter 7, and this has little/no effect in a state with a
homestead exemption

38
 c. the ability to keep personalty: this does not always work because of the
exemptions under state laws
2. the broader grant of discharges aka the super discharge
a. this has been shown to not really affect D’s choices
3. Denying a c7 discharge until years has passed from the last one
a. This will force many 2nd timers into c13 because there is no time limit
here. Courts may also disallow c7 if there appears to be substantial abuse.
4. To save the home from foreclosure; this allows the debtor to cure the default and
decelerate the mortgage
5. Broader discharge, also known as “super discharge”
a. This is based on the exceptions in 523
6. Debtor gets to keep all of the non-exempt property, but this comes at a cost to the
debtor, which is the best interest to creditors test. This means that the creditors
must receive under a chapter 13 at least as much as they would under a chapter 7
a. Although the debtor gets to keep the property, it is more like they are
buying it from the estate on an installment payment plan
n. Substantial abuse:
i. In re Walton: w had filed c7 in 1974 & 1985. the b’ruptcy court found that he had over
200/mo in disposable income and said that this was substantial abuse. W feels that this is
not because he filed in good faith and the code is there to give him relief. The appeals
court held that this was substantial abuse.
1. rationale: there is not unfettered access to c7 any longer; only needy D should
have access. If the D can meet his debts without difficulty as they come due then
there is substantial abuse. Although the standard of finding this is flexible and
may consider other factors, finding the future income sufficient to repay debts is
sufficient, by and of itself it should be sufficient to show substantial abuse.
2. dissent: the future-income test looks at too many speculations and seems to undo
the intent of the congress. Finding substantial abuse should not rest on a results-
oriented test alone but should look for actual abuse
3. the court may consider a future-income test to determine if the debtor has the
ability to pay back some of his debts, and if he does then a c7 filing may be
substantial abuse.
ii. 707(b) does not allow a filing when there will be substantial abuse. This is looked at
usually sua sponte and some courts never consider it. Because it is litigated on a case-by-
case basis there is little impact of this.
4. Strategic and systematic incentives:
a. In re San Miguel: A bunch of debtor cases are included in this appeal. Each of them has a 16
month c13, paying the unsecured C $1 each but spreading the attorney fees out. The attorney felt
this was good for the clients because it allowed them access to the system because they did not
have to pay up front—this was the only advantage for these clients to file c13. each of the D in
the case is dismissing less than 10K of debt and each feels it is his best effort. The court held
that these cases were not in good faith and violated the spirit of c13 laws.
i. Rationale: good faith means more than paying unsecured more than what they would
have received in c7. here these plans are carefully crafted to defer attorney fees for those
who file and would otherwise be denied access to the system. None of these plans
promotes repayment and although it is not bad faith to pay unsecured C nothing, its
suspicious

39
 ii. A debtor cannot file chapter 13 simply to spread out the attorney fees
iii. This seems backwards because chapter 7 is supposed to be for people who really cannot
pay their debts
b. Chapter 20: this is filing a chapter 7 and following up quickly after the dismissal of this with a
chapter 13.
i. In re Saylors: S filed c7 and owed money on their house. They reaffirmed this debt.
Without curing this, they then filed for a c13 right after the discharge from the c7. they
filed the 13 because right after the discharge the ME was going to FC on their house.
The court held that it was allowable to file a c13 on the heels of a c7.
1. rationale: the c7 turned this into a non-recourse loan which can be cured in c13.
there is nothing in c13 that prevents this cure. C13 is closed to undeserving D,
but filing c7 does not necessarily make them undeserving or have filed in bad
faith. The previous c7 does not prevent them from meeting 1325a requirements.
Not allowing this prevents the intent of congress.
c. A bankruptcy case will be stayed and the automatic stay will remain in place while a criminal
trial is going forward. (20.1)
d. When a debtor files a chapter 20 this is not a reason to dismiss the claim but it is reason for the
court to view this with extra scrutiny. (20.3)
e. The notion of the person’s potential future income can form a backbone to a claim of substantial
abuse but it should not be counted if the income is contingent and very indeterminate. (20.4)
f. The court cannot make a person stay in a job or return to a job simply so that they can make
higher payments to their C. (20.5)
g. An attorney cannot force a client into chapter 13 simply to get a higher fee; the attorney should
make the best choice for the client, not the attorney. The attorney may get the chapter 7 fees as a
priority later in the case. (20.6)
5. business bankruptcies:
a. general observations:
i. there is no discharge under chapter 7 for something that is not a human. This is because
when the business is liquidated, there is nothing left to get a discharge. This means that
the individual seeing the corporation into the liquidation rally has no interest in the final
result
ii. after a bness goes through c7 there is nothing left
iii. the classic liquidation is primal: it is the collective response to a total collapse
iv. a lot of liquidations begin as c11; c7 is the endgame when reorganization is not
successful so the c11 will always work in the shadow of the 7.
v. The automatic stay is one of the most important functions because this will prevent a
free-for-all and promotes an orderly procession, giving the TIB room to breathe and then
work with the C. the second most important part is the ability to undo preferences.
vi. Legal rights, not a mad scramble should take precedence—this is why the automatic stay
can hurt the C as much as help them
vii. Business bankruptcies
1. Under 727a7 the court shall not grant a chapter 7 discharge to an individual
a. Here this means a flesh and blood human being
b. One must be more than a person, they must also be an individual
c. Why is this? Don’t corporations need a fresh start too?
i. No because after a chapter 7 liquidation he corporation ceases to
exist

40
 ii. Under chapter 11 there is something left and this is where the
corporation gets their fresh start
d. With this there is a bifurcation of the person from the estate, where the
person goes on debt free and the estate goes into bankruptcy
e. There cannot be such a bifurcation with a corp. because when it gets
dissolved and distributed there is nothing left; the property is the
corporation and there is no individual to send forward
b. initiating the case:
i. there is a consensus that may companies will wait to long to go into proceedings. C are
allowed to initiate the proceedings but this is restricted because of a lack of information
and the operation of the law.
ii. Ideally the party with the most information, usually the D, should start the proceeding
when there is still some value within the company.
c. involuntary bankruptcy: this is under §303 of the code. It allows the creditors to file for the D.
the procedures for this are cumbersome and the penalties can be high, so there number of these is
low.
i. General observations:
1. These are usually filed by unsecured C.
2. These can be used as a threat to the D
3. Traditionally these were c7 but the C can put the D into a c11. this would allow
the C to get important information about the D
4. Attorney’s fees and sanctions under 303i prevent marginal cases from being filed
5. The other protection that is offered to the D is that there must be at least 3 C to
file the case.
6. Involuntary bankruptcy:
a. This is in the context of the business but an individual can be forced into
this
i. Individuals are not forced into this because the creditors do not
want this because the C will get less in b’ruptcy
ii. For a business the C is worried about several things:
1. The corp. might be choosing a preference
2. They might be dissipating the assets
3. There might be unperfected securities
ii. Who may file:
1. In re Gibraltor Amusements: G runs juke boxes and is indebted to W. WA is a
subsidiary of W and deals with their commercial paper. G is also indebted to
WA. W & WA filed together to put G into involuntary and G said that they could
not count more than once. The court held that a wholly owned but separate
subsidiary could count towards the three creditors.
a. rationale: there is a complete absence of fraud and a strict honoring of the
corporate firm. Connivance of friendly creditors was contemplated by the
code. The counting is liberal but it should not be too liberal. WA took
these notes in the OCOB without reference to bankruptcy. Since there
was not direct control of this, the corporate form should be honored.
b. dissent: just because they appear to be separate does not mean that they
really are. There should be a good look at this because of the stigma that

41
 goes with bankruptcy. This means that C should not be allowed to
scheme. 3 separate C really means just that.
2. 22.1: R is a mud supply company who has late-paying customers. G owes 1.1m
and is 10 months late. R thinks it can find other C that G owes. How can R show
that G is not paying its debts as it comes due? What factors should be shown to
do this?
a. Are they making payments as this comes due?
i. This will consider what the custom is in the field
ii. There is a three factor ‘test’ that is applicable here:
1. Length of the lateness of the payments (how late are they?)
2. The relative number of creditors that are not being paid on
time
a. This will look at the percentage of people that are
not being paid on time and the size of these claims
3. Relative amount of debt not being paid on time
b. Is the debt between the two companies disputed?
c. What are the sources of information that one could use to determine if the
D is not paying on time
i. Informal search in the community
ii. Suit in state court
1. This will lead to discovery and allow one to discover if this
company is not generally paying
iii. Credit reports
iv. Private investigators
d. What is the risk if one is mistaken about the company?
i. If the court finds that the company is generally paying the debts as
they come do then the court may also award the company
attorney’s fees and the like under 303i
1. Although this may be permissive this is the usual practice
of the court
ii. If there is bad faith on the part of the person who brought the
company to court then there can be damages under 303i2
1. Punitive damages are unusual however
e. Suppose 2 months ago D owed 8 creditors 10K each. Since then 5 have
been paid in full and on time. The remaining 3 are overdue. Of the
remaining 3, D has a dispute with one of them claiming that he only owes
7K, not 10K. The D has a 4th C whose claim of 50K will be due one year
from now. The 5th C is owed 20K but the debt is due one year from now.
This is all of the C.
i. Under 303h how is the disputed claim handled?
1. This will not be ignored completely per the insolvency test
2. 7K is undisputed so this should be counted against the D
3. the D will claim that 7K is undisputed but the leverage in
settling the dispute is not paying; if the D pays part of this
then the D will lose their leverage—they should not be
forced just to keep them from bankruptcy

42
 ii. Is D late on 3 of 8 or 3 of 10—which is the more fair way to look
at this?
1. The wording in 303h is “as such debts come due”
2. Why should there be credit for those if we do not know if
he will pay those or not
3. These are unmatured debts and they might or might not be
paid
4. This will give him credit for something he has not done
iii. Is he 27K late on 77K or 27K late on 157K?
1. On 77K because again this would give him credit for
something he has not done
3. 22.2: B is behind on his bills but has written to his creditors. He owes 22K to
SSB who wants to foreclose. He wants to work with the C and has offered to do
so.
a. Is there any way for him to come up with 20K? Can he sell anything or
borrow more money?
i. Certain provisions in the agreement make this un-sellable—it is
not liquid enough to borrow against
b. There are 40 C, of which some are SSB customers. Some of these have
been paid on time but B is worried SSB will pressure these to help file.
i. They could be liable for the action if it fails
ii. They could be liable for sanctions if they file in bad faith
c. Legally bribing SSB?
4. 22.3: L is debtor store. SSB has noticed an ad in the paper for a liquidation sale.
What can be done?
a. If this is a chapter 7, then the property is turned over to the estate and the
D does not have further control over the property
b. If this is a chapter 11 then the D becomes a D-in-possession
c. This looks like a fraudulent transfer; this is not in the best interest of the
creditors
d. Note 363
i. Compare 363b1 with 363c1
ii. In c1 the trustee may come in and run the business
1. In the ordinary course of business without notice or hearing
iii. Under b1 the trustee may come in only after notice and hearing
iv. So the question is the sale the ordinary course of business
1. If this is then there is no need for a notice and hearing
2. If this is not then there must have been notice and a hearing
to the creditors
3. A hearing is not necessarily a hearing under 101
a. The court might not decide to have one because
there is not time
b. The parties may also waives this
c. Basically a hearing means that there is notice of one
e. What if this is an unauthorized sale—what will the damages be
i. The extent to which the return on the claim will be reduced by the
lower amount versus sale through a sale in the proposed method

43
 ii. But whom may this be recovered from?
1. Good faith buyers have protection if there is an authorized
sale but this is later overturned; this means that by
implication if there is not an authorized sale the BFP might
not have protection
2. Maybe against the TIB for negligence
f. Best relief
i. Stopping the sale in the court
ii. There is not a good chance of recovery if the D is sued
5. In class hypothetical: A is owed 12K past due but has a perfected security in the
property for 14K. B has a state tort claim that has not been determined or settled
but if B succeeds it will yield up to 20K. C is owed 8K which is past due and has
a security interest worth 6K. D is owed 10K which is unsecured but the loan is
not due for a year.
a. 11,625 in unsecured claims; number of C must also be met to bring an
involuntary action under 303b. what do each of the C contribute to the
case
i. A is over secured but it is still a claim; it is not contingent but does
not contribute to the 11,625
ii. B’s claim is un-liquidated and is contingent. This means that this
is contingent and disputed and this is not counted as a claim
iii. C is under secured. They have a claim and 2K will count towards
the 11,625
iv. But what if the debtor wants to aggregate the claims and the
securities?
1. He wants to add the claims and the secured portions
2. But C has no legal right to the portion that A holds
3. C cannot take advantage; A’s claim is limited to the lesser
of the size of the claim or the collateral
v. Does D have a claim?
1. Yes even though it is not due yet
2. The definition of the claims under 101 is very broad and
takes into account even unmatured
3. This would count against the 11,625 and push it over the
top
b. Does this mean that a D in no trouble could be placed in involuntary
b’ruptcy
i. He must be acting as if he is in bankrupt
ii. He must generally be not paying the debts
iii. 303b1 is where the 3-separate C test is found.
iv. There used to be a requirement that the business had committed an act of bankruptcy but
this antiquated system was gotten rid of in favor of the generally not paying creditors
standard.
1. This means that the D must not be generally meeting his debts as they come due
2. The presence of paying some is not enough to save the D’s skin
3. On the other hand, disputed claims are not counted towards this.

44
 4. In re Faberge restraint of Fl, Inc.: F owed and 3 people filed. He objected to 2.
3 more then filed. F then paid these people off and said that there were no longer
3. the court held that on the date of filing there were 3 that had filed and had not
been paid.
a. Rationale: there are many tests that work to help the D including the
generally not paying debts, the 10K minimum and the 3 person
requirement. A payment to these people after the filing does not deprive
the court of jdiction though. This is because at the date of filing there
were 3 who met the other tests.
b. paying off C will not save your skin in an involuntary if they had a claim
on the date of the filing
v. sanctions and penalties under 303i: these operate to make it a stiff penalty if one files an
involuntary and there is not a case. this is permissive but operates to chill those who
might file. At the very least attorney’s fees are given and there is also the possibility of
sanctions.
1. in re Silverman: C filed an involve c7 against S. they have been bness partners
for years and then apparently S stiffed C. S did some digging and found one other
C but also found that C was generally was paying his debts on time. S filed
saying that a dispute amount cannot count towards the amount needed but C said
it could here because S admitted he owed C at least 50K. the bankruptcy court
agreed with C and awarded him fees and assessed a sanction against S. the
appeals court upheld this saying that there is the ability to put punitive damages
on S because of his actions in bad faith.
a. rationale: 303i is permissive and within the discretion of the court. The
court may also sanction for a filing in bad faith under 303i2b. filing when
there was a bona fide dispute can show an action in bad faith. The amount
of sanctions should be considered because S could have researched
thoroughly and the absence of forbearance is telling. We have to punish
pissed off millionaires. This petition was to harass and a substantial
award, 50K (S is worth 30M) is allowed.
vi. Problem 22.5-
1. Gibraltar case – as long as three companies earned debt separately and as long as
the corporations are truly separate (and separateness is recognized under state
law)
2. What is the argument against allowing sibling companies to force involuntary
bankruptcy? See Gibraltar dissent. →Public policy behind requiring 3 creditors.
This may influence the way creditors set up their companies
3. Perhaps the creditor can show that the debtor artificially created other debts, such
as hardware store and brother-in-law attorney, to prevent creditor from being able
to file for involuntary bankruptcy [§303(b)(2) “insiders”].
4. *Will the brother-in-law be considered an “insider”? §101(31) “insider includes
(B) if the debtor is a corporation—(VI) relative of a general partner, director,
officer, or person in control of the debtor.”
5. *Will the brother-in-law be considered a “relative”? §101(45) “relative means
individual related by affinity (marriage) or consanguinity (blood) within the third
degree as determined by the common law, or individual in a step or adoptive
relationship within such third degree”

45
 6. →Why have exclusion under §303(b)(2)? To prevent the debtor from creating
“friendly debts” to avoid involuntary bankruptcy.
7. If there are not 12 legitimate creditors, one creditor with aggregate, unsecured
claim of at least $11,625 may file.
vii. Problem 22.6-
1. §303(a) – exceptions: farmer, family farmer, or corp. not operating for business or
money
2. §101(9) – “corporation (A) includes—(I) association having a power or privilege
that a private corporation, but not an individual or a partnership, possesses; (ii)
partnership association organized under a law that makes only the capital
subscribed responsible for the debts of such association; (iii) joint-stock company;
(iv) unincorporated company or association; or (v) business trust; but (B) does not
include limited partnership.
3. It is a corporation, but is a not for profit corporation, so it is exempt.
4. Consider state law claims against persons within the committee.
viii. Problem 22.7-
1. Is AFF a “farmer”? §101(20) – “farmer means person (incl. corporation) that
received more than 80% of such person’s gross income during the taxable
year…[and] was commenced from a farming operation owned or operated by
such person”
2. §101(21) – “farming operation”
ix.
d. Chapter 11 reorganization:
i. General observations:
1. Many of these are known as balance sheet reorganizations because there is no
shifting of the operations and old equity is often wiped out as unsecured become
stockholders.
2. In smaller businesses especially, there is no reason to believe the managers are
replaced because they are the business
3. Managers will face definite termination in c7 so they will urge for c11.
4. Other times, TMA firms will come in and stabilize the company.
5. There is a benefit for stockholders for a c11: the company will often emerge but
generally they have little or no protection
6. There is a push to get a company into a c11 before it collapses.
e. Mechanics of Chapter 11: 362(a) puts the automatic stay into place, but the bness continues to
operate under 363(b) OCOB with the DIP who controls a new entity, the estate
i. §1107 give a DIP most of the rights and duties as a trustee
ii. the DIP is limited in the use of assets encumbered by a security interest under 363c & e
iii. the DIP has avoiding powers under 547, he may assume or breach executor K under 365;
avoid fraudulent transfers, 548, 544; set aside unperfected/late perfected security interests
544, 547
iv. a creditor’s committee is formed under 1102. there is a representative from each of the
classes. These people supervise the activity of the DIP
v. a plan must be proposed that deals with each class of C to pay them a percentage. It must
be approved of by the majority of each creditor class, 1126c. if the committee approves
of it then the court will also usually approve it if it meets the BIOC test under 1129a7
f. logic of c11:

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 i. there are substantial assets at stake: jobs, bness relationships, legal obligations
ii. some question the use of c11 as a high priced delaying tactic. Others see it as the
opportunity for a lower cost negotiation
iii. if c11 is an invitation to negotiate, then it is one that is issued at the 11th hour
iv. bigger businesses will use c11; smaller ones just go straight intoc7 more often. This is
because there are a lot of c in a big business and they can be forced to play along. For the
smaller bness that one c may be the only one in its class, which can lead it to be obstinate.
This has led to the emergence of the pre-packaged or pre-ranking by the bness facing
difficulties. This is used to separate the dissenters and put them in different classes where
they will not impact the outcome.
g. The automatic stay: this is one of the most valuable tools to the DIP but it is one that is not
without cost. The DIP must show adequate protection under 362g.
i. Innocent actions that violate the automatic stay may be voidable
ii. Farm Credit of Central FL v. Polk: Before bankruptcy F & B had agreed that F could
violate the automatic stay. B now claims that it cannot contract out of this and wants the
automatic stay in place. The court held that the DIP cannot contractually waive the
automatic stay.
1. Rationale: this is an older business with may different C and a lot of Obligations.
Courts have allowed the enforceability of these contracts when there is one
creditor and there is no prospect of a successful reorganization. Here, this Is not
the case. the automatic stay is a key component of bankruptcy law and goes into
effect regardless of the contractual provisions that the creditor and the debtor have
in place. The purpose is to protect the debtor and the interests of the other
creditor. One creditor cannot waive these rights. this prevents a creditor from
seeking this remedy to the disadvantage to the other creditors. Otherwise, what is
the point of the automatic stay?
2. The automatic stay may be violated in the single asset, single creditor case when
there is no hope of reorganization
3. The debtor cannot be forced into a contract that waives protection of the
automatic stay because this would do violence to the code
iii. US v. Seitles: the US brought an action against W, the company that was run by S for
violation of the false claims act. The claim is for a total of 1.67M. S had bribed a
government officer and the government is not seeking restitution. S has to repay the
amount levied against him personally. W filed for c11 and sought a stay of the
government proceeding claiming it was a violation of the stay. S also sought protection
under the stay. The court held that the stay may operate to stop an ongoing case by the
government.
1. Rationale: the stay is part of the larger purpose of the code, which is to obtain
protection against the creditors and to provide an orderly resolution. This may not
operate against government actions that are taken pursuant to police powers and
that are necessary to protect public health and welfare. To determine this, a
public policy test is used and a pecuniary test is also looked at. The pecuniary test
will look at the presence or absence of a continuing harm as well as the threat to
the public health/safety. Here this was a monetary threat and it has been ended.
The public policy test will look for good reasons to prevent the automatic stay. It
only appears that the government is trying to get its money in another suit when
they could have gotten it before. As for S, bankruptcy laws are only designed to

47
 protect the entity that filed under the code. A non-debtor codefendant is usually
not entitled to protection under the bankruptcy code but the court has a lot of
power to extend the stay under §105 if there is going to be irreparable harm and
either there is a success likely on the merits or there is a sufficient question on the
merits and a balance of hardships tips the scale to the non-debtor codefendant.
Here there is harm and this will prevent the successful reorganization of the
company. S will also undergo serious hardship.
iv. Involuntary gap period: this is the period between he filing of the involuntary petition
and the order of relief of the b’ruptcy court.
1. Is the automatic stay in effect? Yes according to 362(a) a petition filed under 303
qualifies for this
2. How should one do business with the debtor during the gap period: A is a
cleaning service, B is a hotel. How should A do business with B
a. E is the Credit
b. R is repayment
c. A will do this on a cash-basis, to the credit and repayment are
simultaneous
d. A is being paid with property of the estate—property comes into place
when there is a petition filed
e. Is this a permissible transfer of the property of the estate to do business on
a cash basis
i. 303f allows the debtor to operate in the ordinary course of business
during the gap period
ii. 303f does not deal directly with how a C is dealing with the D
during the gap
1. this is under 549a-b: any post-petition transfer of the
property of the estate are allowed as long as the D got value
during the gap period
2. this is allowed to the extent that the debtor received value
3. Suppose A provides cleaning services for B on a credit basis during the gap
period. Now suppose of being paid immediately, and A is not paid during the gap
period. There has been no pay until the order of the relief. With the respect to
A’s claim can they argue for a better position than a per-petition C? 503b1a,
502f, 507a2 and one other might work here:
a. 503b: the intro to this is instructive
b. this refers to 502f: a claim arising after the commencement of an
involuntary case but before the appointment of a TIB and the
commencement of the claim
i. this is a definition of a gap claim which is an exception to the
general rule that claims must arise before the filing of the case
ii. this is an exception to the timing problem, and is an exception to
502a-b’s requirements of timing
c. 502b1a: this is not an administrative expense
d. 507a2: this gives priority to claims under 502f
i. this is not as good as an administrative claim but this is a very high
priority
e. so the repayment here will be tendered

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 4. Suppose A did cleaning prior to the filing. During the gap period A demanded
and received payment for the pre-petition claims during the gap period.
a. If A asked for it then it is a violation of the stay
b. Even if they did not it is receipt of the property of the estate
c. 549a2a and 549b make this a void-able transfer
d. 303f allows the debtor to act in the ordinary course of business, and A will
say that this is ordinary course of business
e. the trustee may avoid a transfer made under 303f according to 549a2a
f. Does 549b give this a shield/is this one of the exemptions?
i. A claim is not avoidable if the transaction arose and the value was
given after the filing of the claim
ii. Because this occurred before the filing of the claim then the claim
does not fall into this exception. This means that it may be voided
g. When the payment is avoided, what will a get in the actual case?
i. A will have to give the money back
ii. There is a claim still
iii. It becomes a general pre-petition claim, and the debtor will only
pay a portion
v. 23.1: this brings us back to the automatic stay in some detail. PA is owed 186K at prime
+6. They have a secured claim in D’s equipment. This has a value at 140K wholesale
but 220K in retail. There is only one buyer out there. Can they lift the stay and foreclose
1. If they want to lift the stay then they will argue for the lower wholesale value
2. Under 361d2: argue lack of adequate protection because the C is under-secured
a. This will mean that they will want to argue the lowest possible value
b. This is not impossible; this is not the liquidation value but might be the
replacement cost for the debtor
c. They might also want to argue that the debtor has no equity in the
property, which will mean that the C will want to argue that there is a low
value of the property, so the debtor owes more than it is worth
3. 361d1 will have to make the argument that there should be a lift of stay for cause
4. If they wanted to have the highest secured claim possible to get a highest return
possible, then they will argue for the high value. They would do this if they thing
the debtor can re-organize
a. this will mean that they can get 506b post-petition interest if the payments
will not eclipse the value of the goods
b. they will get present value treatment of whatever portion of their claim is
secured
vi. 32.2: C owns CWI, a bunch of theme parks. AF is owed 1.8m on a jet. C wants to keep
the jet; AF wants to foreclose on it. It was valuated at 1.1m. It will not decrease much in
value in the next few years. What is the C, AF’s, best argument?
1. 362d will allow this if the C can argue that there is no adequate protection
a. this will mean they will want to show that the collateral is under secured
b. and there should be a declination in the value of the collateral, which is
not occurring here
c. the other way the interest in the collateral might be lost is if the D does not
have proper insurance on the collateral—this means that the D could crash
it and AF would lose all of it

49
 d. the D will respond to the lack of adequate protection by showing that the
value is not declining much
e. D can offer small cash payments to make up the difference
f. Offer other property for replacement liens where other property is
substituted for the loss of value
2. Under 362g, who has the burden of proof?
a. D has the burden of proof to show the C is adequately protected and for all
other issues other than initial proof of value
b. The C will have the first burden of proof to make a realistic argument to
show he is not adequately protected—this will mean that the C will have
the burden of showing the value of the property
c. If the argument is under 362d2: there is no equity cushion and the plane is
not necessary for the reorganization
d. The D will claim that he needs the plane to travel on corporate business
and it is more efficient than commercial air travel
vii. 23.3: R borrowed 12M from BOW. BOW has a lien on the leases and the equipment. R
makes payments of 100K of interest only. She agrees to make further payments after
filing but finally misses one before confirmation. At filing the equipment was worth
12.3M but now it is only worth 11.4M.
1. What is the C 362d1 argument:
a. They are not going to get paid and the collateral is declining
2. Suppose D claims that the post-petition payments were to reduce the principle,
giving the D a 400K equity cushion
3. The C will argue that the original loan was for interest only payments, and these
post-petition payments did not reduce the principle
4. Under 506b, this is problematic—at the point of filing they were only 200K over-
secured. How then can they get 1M in post-petition interest? this would eclipse
the value of the collateral
5. There is nothing in 506b about the timing of the post-petition interest must be
paid
6. What some courts will do is look at the value at filing and allow this to be the
extent of the post-petition interest
7. Other courts are willing to look at the debt level and collateral value at other
points; this would lead to problems in a case like this: there is a problem of
valuations and restructuring the payments at different times.
viii. 23.3: The collateral was originally was worth 12.2m. After the petition was filed the
value fell below 12M, the value of the loan. It is now worth, 10 months later 11.4M. The
payments per month have been 100K.
1. If these were all interest then
a. The secured creditor has become under secured and is not entitled to 506b
interest payments
b. This would be inconsistent and as such cannot be all interest
2. If these were all adequate protection payments
a. This seems to be inconsistent because of the original loan
3. What if there was 200k in interest payments and 800K in balance payments
a. The creditor is still over-secured
b. This means that they are entitled to post-petition interest

50
4. Known:
a. 506b interest payments do not reduce the loan balance
b. to the extent that the payments are intended to be adequate protection they
do reduce the loan principle
i. this is like a series of mini-liquidations by use
ii. the debtor can use it and is paying for the reduction of value
5. unknowns: where courts differ:
a. when there is an entitlement to interest should there be a snap-shot at the
beginning of the case and say that is the extent to which the creditor can
get post petition interest or should there be a series of measurements
i. if they are both declining then they might decline at different rates;
this might mean that at times the creditor is over-secured and at
other times they are under-secured
ii. this will allow the C to get interest at times and not at other times
b. is there an entitlement to 506b interest at the start of the case or when it
becomes part of the claim—this is a timing question
i. this is not in the code per se
ii. 506b does not say when the post-petition interest payments should
be made, it just says that there is an entitlement
iii. this allows the court to make the decision to pay this now or later
when the claim is brought into the plan
c. whether an equity cushion at the debtor has at the beginning of the case
ought to be preserved for the benefit for the creditor
i. here there is a 200k equity cushion here
ii. the court may do one of 2 things with that:
1. the collateral is declining in value and the debtor will make
adequate protection payments to reflect the value of the
collateral decline
2. this means that the secured creditor remains over-secured
throughout and will be entitled to interest payments
throughout the case
3. other courts could say that when the equity cushion
dissipates then they may not get interest payments
a. they would get adequate protection payments at the
point when they cease to be over-secured
6. preserving the rights of the secured creditor rationale:
a. they thought ahead
b. they gained a property right in the asset
c. if bankruptcy law did not protect this right then it would impinge on the
constitution because of the taking of property without compensation
d. this would be the end of the secured property loaning institution
i. this would be bad because secured loans are a win-win situation:
1. the cost of loaning the money is cheaper and the creditor
has some comfort
2. for the debtor they get to use the property and get the
money cheaper

51
 3. for creditor this accommodates the taste for a low-risk
proposition
ix. 23.4: AS has recently filed for chapter 11. They owe H 35K in a press; H has a PMSI in
the press. This is secured. C has an unsecured loan in the press for 30K; this is a non
PMSI. The press is worth 50K. Can H get the press?
1. AS owes 55K in the press that is worth 50K.
2. H will argue lack of adequate protection to which AS will respond that H has a
15K equity cushion in the press
a. Is this successful?
3. Under 362d2 can the creditor point to the success of the D overall or must they
simply point out that this debtor does not need this for an effective reorganization
a. The court will allow the creditor to look at both
4. Here there are two questions to keep property:
a. Not necessary for reorganization—this does not matter if there is equity or
no equity
b. If there is equity in the property then we do not want the creditor to come
in sell it even if the property is not necessary for effective reorganization
i. Hypothetical: there is a 3K PMSI in property worth 5K. If they
get lift and sell it, they will not care about the price if they get their
amount.
1. Any additional amount will go to the unsecured creditors
2. This creditor will not want to do this—the estates interests
are at the margin, they do not care about the unsecured
creditor
ii. If the property is worth 2K and they are owed 3K, they will have a
high incentive to get all of the money that they can.
c. Here because the debtor has equity in the collateral they will not have an
incentive to get more than their PMSI. They do not care about the junior
lien holder’s interests
5. What if the junior lien holder wants to lift the stay, will the court use a different
rationale?
a. The junior has the best incentive to sell because the senior lien-holder will
be paid first
b. They will be willing to look at for purposes of equity the senior leases; if
the junior creditor is the one petitioning then it is well-settled that the
court will look at the senior notes first
x. 23.5: B has a building that was built for 4.5M. It is now running at about 30%
occupancy. The FDIC has taken over a bank that held a secured loan in the building.
The property is worth 2M and has a chance to decline more. What should the strategy
be?
1. He has not put together a plan for reorganization which is required within 120
days; if the debtor has not done this then the creditor may do so
2. In single assets real-estate cases, there was a special provision for these types of
cases.
a. This was because in these cases, the building owners would file
bankruptcy and wait for the market to turn around
b. They would wait for the market to turn around and never file a plan

52
 3. They might be able to get adequate protection payments
4. The debtor lacks equity in the property. It is necessary for reorganization but will
this debtor be able to reorganize
a. In real estate this became hard to prove so D3 was written
i. the debtor must file a reasonable plan that has a chance of being
confirmed
ii. OR they must commence adequate protection payments, so if they
want to wait they must make payments
5. Can the creditor get payments ob both types?
a. No, they will not be able to get both because the D will not be able to do
this
b. Cannot get blood from a turnip
c. This was reversed in D3 for the single asset real estate cases
xi. 23.6: the judge must deal with the lift of stay case within 60 days or the stay is
automatically lifted.
xii. If the bankruptcy court is not following the law it is hard to get writ of mandamus to have
the BAP/circuit to tell the bankruptcy court to tell the judge he or she is not following the
law
xiii. Tactically this is pretty stupid because this attorney will have to deal with the bankruptcy
judge in the future
6. operating in c11:
a. the central concern here is the operation of the business
b. the amount to be paid to the C depends on the past successes of the bness
c. because this is often the same people who ran the bness into the ground there is often an
acrimonious relationship. Out of this there are a lot of disputes on running the bness.
i. In re Sharon Steel Corp.: two C are appealing the appointment of a trustee for S.
One of the furnaces was down at the company and the other was on the verge of
breaking down. The company filed c11 and S remained the DIP. In 5 months some of
the C became dissatisfied with the progress that S was making so they filed to have a
trustee appointed. S had made some avoidable transfers and fraudulent conveyances
in the months leading to the filing of the case and the C cited these as reasons to have
a TIB. S had not acted to recover these payments. The court also criticized the
accounting firm S was using because it had not provided accurate statements and
furthermore, S had not sought to refinance some loans to a lower interest rate. Finally
the court questions the expenditure of 300K in attorney’s fees to fight having a TIB
appointed. The court held that the lower court’s determination of the need to appoint
a TIB was accurate.
1. rationale: 1104 requires the court to appoint a trustee when it finds cause to
do so. There is also a flexible standard under 1104a2 which means that
review of this is under abuse of discretion. The lower court paints a picture of
a company floundering and doing little to get itself out of financial trouble.
The prepetition management did not try to recover preferential payments and
the company could not afford to fix the furnace that is responsible for
producing the sole product of the company. It is not per se a conflict of
interest for the same management to keep running the business and without
adding to their mistakes they may continue to do so. But here nothing has
been done to correct the prepetition incompetence.

53
 2. the court may appoint a trustee if it feels the DIP is not making progress in an
effort to reorganize
3. the old management may stay in place as long as they try to correct their
mistakes
ii. appointment of the trustee becomes a life or death struggle for many of these
companies. this comes because the C wants to oust the management who they do not
think they can work with. Often it is problems with this management and these
particular C that brought the case to the court in the first place.
iii. The C will usually face a lot of difficulties when the want to have a trustee appointed
even when the DIP has done some fishy things.
iv. Because of the many problems with both sides, the courts will turn to the middle
option: appointment of a trustee under 1104(c). this allows the DIP to stay in place
and this can be valuable because he is the one that knows how to run the bness. This
provides the comfort that the C seek because there is now a court appointed neutral
babysitter. This problem has also seen the rise of a new profession: turnaround
management
v. Sometimes the problem is opposite: the DIP management team wants to leave.
1. in re Geneva Steel Co.: G wanted to implement an employee retention
program to keep the core management in place. This provided for severance
payments equal up to 9 months of salaries and bonuses if they stuck around to
get the plan approved. The bonuses were 20-50% of the yearly salary. G
feels that this is critical to keep the management in place and is based on
sound bness j’ment. Some of the C groups agree with this but the trustee and
the union think it stinks. This may be a priority if the case is converted. It
also does not have a lot of definite terms and the people would be paid if the
bness liquidated. The court held that THIS plan was not allowed but that the
debtor could choose another plan that was not so expensive.
a. Rationale: granting this motion or the availability of a plan to keep key
employees may be critical to the company but it will also serve to piss
off the union. The union covers the people who actually make the
products. There can be a severance plan put in place but this should be
lessened in case they find other work—otherwise it is a windfall. The
severance payments would be entitled to a priority payment. This is
necessary because replacing these people would be expensive both in
terms of time and money. But to get the severance as a priority then
the company would have to be liquidated which could adversely
impact the chapter 7 case. the emergence bonus should be paid
entirely in stock because otherwise they would get it in c7.
b. Here the court is acting to make sure that the management team does
not walk away with they keys to the kingdom and leave nothing behind
but a carcass
c. It is important to keep the key executives during the reorganization but
not at the expense of making the C mad or possibly jeopardizing the
later case.
vi. Running the business:
1. Oddly enough the management that ran the business asunder will be the
management that runs the business in bankruptcy

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 2. Appointing a trustee to run the business is an odd situation because this person
will have to come in and learn the business
3. The congress gave the management the benefit of the doubt:
a. There was a bad market
b. The management knows the business
c. If another person comes in there will be some time while they learn the
business and during this time the business could go fully under and be
liquidated
d. What happens to the cash?:
i. A lot of times a company will file c11 because they are facing a lot of cash
difficulties. Right when they really need an infusion of cash the financing sources
dry up. Congress has placed few restraints on the DIP’s use of the cash as long as it
is within the OCOB.
1. many times the DIP will agree to a lock box where he agrees that payments
will be sent to a post office box and collected by a third party who will then
hold it in escrow and divvy it out.
2. this will also implicate the cash collateral problem. This will often arise early
in the case.
a. in re Earth Lite: S brought an action to lift the automatic stay. S had
loaned money to E both before and after the filing of the case. when it
agreed to make the post-petition loans, E’s insiders personally
guaranteed them. E was in the process of paying down the loans. In
addition, payments it received went into a lockbox controlled by a 3rd
party. E then missed one payment and S freaked out. S sought to have
the stay lifted so it could go in and raid the business. E resisted this
claiming that it was well on its way to a successful reorganization.
The court here held that S was adequately secured and could not move
to lift the stay.
i. Rationale: if this is allowed E will be doomed. 363 allows for
special protection of cash collateral because of its highly
volatile nature. D points out that S has an equity cushion but
this is not the type of protection that was envisioned. It is nice,
but not sufficient. There are also personal guarantees showing
that S is protected against the people who run the company as
well. Here the D should be allowed to use its cash collateral to
cure the deficiency and missed payment. S is more than
adequately protected because the business is worth more than
its debts, there is an equity cushion and S has personal
guarantees of its loans
ii. The right of setoff: this is not a bankruptcy right per se but is recognized to coexist
with the bankruptcy code under 533. the right is to basically seize the money that the
D has in the bank account and use this money to pay off the loan
1. this is a state law right. Many courts allowed this but others did not. To clear
this up, the supreme court accepted and heard Citizens Bank of Maryland v.
Strumpf. Here the court held that the C had to seek the approval of the court
before taking the money but while it was in the process of seeking approval it
could put a freeze on the account.

55
2. this case said that the bankruptcy code did not preempt this law
3. a bank may setoff against a regular account but it may not do so against an
account held for special purposes.
4. in re HAL, Inc.: HAL filed a c11 and the aviation broad decided that HAL
had overpaid excise taxes. HAL owed other government agencies, so the
excise tax surplus was used to pay off the other agencies. This was contrary
to what HAL wanted to do, which was pay off all unsecured people with
stock. The court held that government agencies could be considered mutual
bodies under the bankruptcy code and thus setoff was thus allowed.
a. Rationale: §533 allows for the right of setoff as defined by state law.
State law says that setoff can only happen when the parties are the
same or substantially the same. Here, it must be determined if
government agencies are mutually equivalent. There is some
precedent to hold that they are not under the confines of bankruptcy
law. The court dismisses this and noted that they were the same thing.
For the purposes of bankruptcy law it is fair to say that they are the
same party. The organization of the government is enough to find that
they are the same party. Because they are, then their right may exist.
The scope of 533 reduces the right to setoff because it may be a
preferential priority. Absent a compelling showing of this though and
a showing that other creditors will be really harmed, this may stand
5. Banks routinely rely on the availability of this remedy.
6. 24.1:
a. 1107 is one of the most important principles: the DIP has almost all of the
powers and duties as the trustee
b. this refers to 1106 which refers to 704: these are solely the duties of the
trustee
c. 1107: powers and duties
d. to find the powers of the trustee and DIP:
i. some are under 363—use, sell or lease property
ii. 574 and the power to avoid unperfected security interest
iii. 547 and the power to avoid preferences
e. Here the DIP wants to business as usual. Can he do this?
i. Assuming here this will mean using the proceeds of the sale of
inventory
ii. the inventory is also Main State’s collateral
iii. 363c1—the business of the debtor is allowed to operate under 1108
1. there is a right to utilize this
2. the trustee may enter into a sale in the ordinary course of
business
3. the issue is then can he spend the money: this allows the
property of the estate to be used in the ordinary course of
business
4. this is the default; there does not have to be a hearing for
this unless there is an exception
5. here the 363c2 contains the exceptions:

56
 a. trustee may not use sell or lease cash collateral
under ¶1 of this subsection—even if this the
ordinary course of business
b. unless each entity in each cash collateral consents,
so if the person consents to the sale
c. if there is a recalcitrant secured creditor if the court
orders this to be used as the DIP wants
d. 362a defines cash collateral
i. cash or cash equivalents
ii. what makes it cash collateral in which the
creditor has an interest in; in which someone
other than the debtor has an interest
iii. this does not say what the interest is or
needs to be
iv. the most common kind of interest to make
something a cash collateral is a secured
interest
v. the other way to make it cash collateral is if
the bank has a setoff right in the cash
iv. will the lien holder have a right under 552a
1. when a creditor has a perfected pre-petition security interest
in the inventory of the debtor what happens to the security
interest
2. this section is a little odd: it starts with a default mode
3. under 552b1 the exception usually swallows the rule
4. 552a: the D took his own money and bought things with
this. That security interest in all of the inventory does not
stretch to this collateral
5. usually the creditor’s right is cut off at the point of filing
but if the property is bought with traceable proceeds then
the lien does attach to the new property
6. this concept 9-315a also talks about this
v. Here the proceeds are being used to purchase new goods; the
proceeds are directly traceable to something that the creditor had a
lien in at filing. This is indeed cash collateral
1. the bank has an interest under 362a, 9-315a, 552a, 552b1
2. once these are brought together it is indeed cash collateral
3. then 362b2 comes in and says that the trustee many not use,
sell or lease the cash collateral without authorization of the
creditor or court
f. If the creditor allows the DIP to use the cash collateral, what are the rights
of the creditor pursuant to 363?
i. Under 363c4 the creditor has some protections but there is an
exception under ¶2—the debtor must segregate and account for
this
ii. But here has been given authority to use the cash collateral so
where does the creditor get his protection from?

57
 1. 362e, noting the first sentence
2. the court should give the creditor adequate protection of the
interest; this is a concession given to the C in exchange for
the D to use the property
3. when there is adequate protection this entails the same
queries that are made under 362d motions
4. this gives the C usually cash payments or additional liens
7. Supposing that the lien has not been perfected pre-petition should F use the
proceeds of the inventory or should he abstain?
a. Before perfection there is attachment; attachment means the agreement is
effective between the parties. Without perfection it is not effective to third
parties but here this should be effective between the parties
b. At the point when the security interest is discovered to be unperfected it
should be struck down (later this week) under 544
c. The cash collateral should not be used because this has not been avoided
as of yet
iii. 24.2: T owes the bank 150K. On the date of filing T has money in the account of 40K.
The bank had made a demand on July 1st that T keep money in a bank account. Is this
money cash collateral?
1. Cash or equivalent with a security interest or a right to setoff
2. So here, what is the right to setoff on the part of the bank?
a. 506a a setoff right is the equivalent to an allowed secured claim
b. this right is further explained in 553: if the C has the right to offset a
mutual debt; this means that bankruptcy sees a right to setoff that exists
outside of bankruptcy
i. the right to setoff outside of bankruptcy depends on a mutual debt
ii. the debts both have to be matured; due and owing on both sides
iii. bank accounts are considered due on demand to depositor; the
debtor owed to the bank is mature, due on filing of bankruptcy
because the claims will be accelerated
c. there must be an act of setoff under 362a7
i. the automatic stay applies to setoff
ii. So one portion allows setoff but the other says they are subject to
the automatic stay. How can this be reconciled by the party who
seeks to use setoff
1. there must be a judicial hearing
2. the C will be asking for lift of stay
3. this should be obtainable under 553
4. there should be a right to do this subject to the exceptions
of 553a
d. how does 553a cut back the right of this creditor to use the setoff
i. how much of the debt was owed 90 days before the date of filing:
553a3a3
1. after 90 days before the filing of the petition
2. this gives the benefit of the assumption that the debtor is
insolvent under 555a3c
3. How much is accepted from the setoff right?

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 a. There is an exception to setoff of 10% of the loan,
which is 15K here, leaving a right to setoff of 25K
e. So how much is cash collateral?
i. 25K is valid setoff and this is considered to be the cash collateral
ii. 15K is income for the debtor
3. If on may 1st there was 15K. The bank then demanded that the D keep a
compensating balance in the account. This is 120 days before filing. Does this
change the analysis
a. this does not implicate the 552a3a requirements
b. But seems that there is a difference in the 90 days. Before this it was
simply an account, after this it was required to be kept in the account
c. to look at the policy implications to this exception to setoff, why should
the bank be punished for looking ahead and acting prudently
i. the bank is trying to prefer itself as against other creditors
ii. this violates the equality of distribution principle
iii. The bank does not have the right to help itself at the expense of
others.
iv. 24.3: how much of the 61K in the account will FT be able to use without court approval?
1. The account is a special use account set aside for the payment of payroll
2. This is back to setoffs under 553a
3. Usually a creditors state law rights of setoff will be honored, but there are some
exceptions under 553a:
a. 553a2: the debt was transferred by someone other than the creditor
i. within 90 days before the date of the filing
ii. this disallows the right of setoff
b. here this will effect the entire setoff right but-for the exception they would
have had a right to setoff of 50K
c. this means that this is not cash collateral so the D will have the right to use
all of the money in the checking account because the right to setoff is not
good here
v. 24.4: E owes 20M, had 10M in equity. What is the best idea?
1. 1104 would allow for the appointment of a trustee—the D will have to oppose this
and this takes time
2. there could be an examiner, which is a matter of right because of the amount the
unsecured debt
3. insist on the valuation of the going concern value of the reorganized company; if
this is in excess of 20M, then there is an entitlement that is not being met for the
old equity holders and the unsecured creditors get more than the value of the
claims 1129b
4. these are costly and time consuming; when they are threatened with these
provisions the bankrupt will usually make concessions for the person bringing the
claim
e. post-petition financing:
i. for some businesses already suffering a cash flow problem, a cash injection is needed for
survival. Finding a lender can be a challenge though. This will cause the DIP to want to
offer the post-petition lender a security to be able to get money on a reasonable term (or
at all). The pre-petition security interest may lock up all of the property that the D has at

59
the moment of filing but 522(a) works to prevent these interests from attaching to any
property that is acquired after the filing of the case.
1. this can be undone by the C under an argument that comes from UCC §9-315
which says that if the new property can be directly traced to the proceeds of
selling the old stuff then the interest attaches to the new stuff. This is sometimes
known as a proceeds argument.
a. in re Garland Corp.: G manufactures and sells women’s clothing for its
own label and Levis. After filing for chapter 11 they sought to borrow
money from NE Bank and P. the judge allowed this and then later after
the creditors committee gave their approval allowed them to borrow
another 700K, for up to a 1.4M credit line in total. The committee then
blocked them getting another 500K saying that it is unlikely that they will
reorganize successfully. When the moneys were originally given the
banks were given senior liens on the receivables and junior liens on
everything else. The C felt that this was a taking without compensation.
The court held that the D could borrow the money because with it there is
a chance they will be rehabilitated.
i. Rationale: there is a high likelihood that there will be substantial
benefit if the DIP is allowed to take this money. There is a good
chance that they will emerge from this. The DIP cannot obtain
credit without offering a security—otherwise money was not
available. There is no requirement that unsecured C get adequate
protection and these liens do not hurt them
b. in re Hubbard Power & Light Co.: H wants to borrow 750K from Enron.
H collects wood and debris, burns it and turns it into energy. They were
found to be in violation of the DEC ordinances and their power production
was stopped. Then their woodchip piles caught fire and burned the factory
to the ground. They spent 1M to fight the fire and to clean up from it.
Then the town put a lien on the property for back taxes. They did not have
the funds to finish the cleanup job they had been ordered to do. No one
else would lend them money except E who was to get a super priority
claim under 362c and a priming lien under 364d and a first priority interest
on the revenues. Of these proceeds there is a budget of 300-400K for
cleanup and the rest is start up capital. O has a pre-petition interest on the
property and contests this. The court held that this deal could go through.
i. Rationale: if the D is to reorganize he needs this money. Without
it there will be liquidation. If the D does not get the money the
land will likely be abandoned and the county will be forced to
clean it up. No one will be able to buy it because they will have to
clean it up first. Without the clean-up the property has no value.
The lien will improve the value of the property to the amount of
the lien, so it is of greater property to the estate if its cleaned up.
The county’s interest will not be harmed—it is protected through
this. In fact, if they can clean it up and reorganize they will get the
full value of their lien. The D cannot get money without these
liens. The goal of adequate protection is the give secured liens so
that the D may reorganize. This safeguards the C too, because like

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 here, the land is worthless but giving the D the money will greatly
improve the value of the land. It will improve the position of all of
the creditors so it should be allowed.
ii. Cross-collateralization: this involves in some cases the securing a
pre-petition obligation with new or additional collateral post-
petition obligation with a new post-petition loan.
c. Shapiro v. Saybrook Manufacturing Co: SM filed c11 and filed for a
motion to use their cash collateral and incur some debt. At the time of the
filing they owed H 34M. the value of the collateral for this debt was less
than 10M. H still agreed to let them borrow more money—3M to
facilitate reorganization. H received a security interest in property
obtained before and after filing for this loan. This secured the pre-petition
debt as well as the post-petition. This enhanced their position greatly as
compared with other creditors. The court held here that cross-
collateralization was not allowed.
i. Rationale: the purpose of 364e is to encourage the extension of
credit to D be eliminating the risk that any lien securing the loan
will be modified on appeal. By its own terms this is only
applicable id the challenged lien or priority came from 364. cross
collateralization is not mentioned in the code. This means that it
cannot be found in 364. this is beyond the scope of the equitable
power of the court and contrary to the scheme of the code. This
does not authorize the granting of liens to secure pre-petition debt.
This would allow the court to treat one class of C differently, and
this is not within the power of the court. This would operate to
give the lender’s per-petition unsecured claims a priority over
other unsecured pre-petition claims
ii. This is the minority view. Other courts allow this because they see
it as the lesser of the two evils. Yes, it might not be in the code per
se, but on the other hand it allows the D to reorganize so it cannot
be all bad.
• Lending money to the bankrupt:
ƒ The question is who would want to lend money to the DIP
ƒ The DIP usually needs an infusion of money to continue operations
ƒ A lot of time the lender is the same lender as before bankruptcy
ƒ The code made this more attractive for the lender to give them
protection
• This favors the lenders who lend after the commencement of
the case
• 25.1: G owns some property this is in an area where there is a no-growth statute.
Because the property is subject to a grandfathering clause and can develop the
property. If there is water and sewage on the land then it can be sold but the
purchaser cannot provide a loan for this. How can a lender be convinced to give the
DIP money to do this?
ƒ 362b or d will give the lender some protection
ƒ the code does force one to walk through a certain sequence if the aim
is the highest level of unsecured claim
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ƒ only as a last resort will the DIP give the lender a security in the land
ƒ the loan is under 364
• the default rule is 364a which is an administrative claim under
503b
• 364a covers two situations:
• normal unsecured credit in the normal operation of business
o if the extension of credit or the borrowing is part of the
ordinary course of the business then the debt is under
364a
o there is no need to go to court and have a hearing for
this loan
• this then is a priority under 507a as an administrative expense
priority
• if the extension is not part of the ordinary course of business
then the claim is under 364b
o this requires the DIP to have a hearing
ƒ here this loan would be a 364b loan
• This is not in the ordinary course of business.
• To determine if something is within the normal course of
business the court will look at:
• How the business works and where they spend their money
o Trade credit v. bank loans
o Trade credit is getting supplies from suppliers, which is
considered to be ordinary course
• Bank loans are not considered to be OCOB
• Small loans v. big loans: small loans are generally considered
OCOB; big bank loans usually indicate a large improvement
which is not OCOB
• What if the lender lends and the later appellate court disagrees
with this later. The loan has been made already; they
considered it the OCOB
o They should be given a claim but they should not be
given a 597 administrative claim
ƒ This is because they did not do their due
diligence
ƒ The claim should be allowed but as a general
unsecured claim
ƒ But this treats them as a general unsecured
creditor which is only pre-petition—claims are
usually are pre-petition
ƒ This is a problem because this is not a pre-
petition claim and might lead to problems
ƒ Suppose the lender is not willing to give the loan on the basis of 364b.
What can the DIP do?
• Under 364c they can be given the highest administrative claim
• This looks at 503b allowance provisions; 507a1 orders the
priorities
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 • This gives the unsecured claim the highest claim and then
refers to 507b claims
o This is for the case where there is adequate protection
granted by the court and it is later discovered that the
adequate protection is inadequate
o This gives a super-priority for claims
o But if 507b is a super-priority then what is 364c1
claims? They trump the 507b claims
o Although all of these give a priority none of them is a
lien or gives the lender a priority
ƒ If the lender will not agree to this, 362b: lien on unencumbered
property
• There is 364c: junior lien in unencumbered property
• 364d: a joint lien or a priming lien
o this allows the post-petition creditor to come before the
older lender
o But what protection will the pre-petition lender have?
ƒ This is only given when the existing lien holder
has adequate protection
ƒ A 364d1 claim is difficult to obtain: the DIP has to give adequate
protection to all of the previous lenders
• This is hard to prove because this will require the DIP to make
payments to the other lenders or to give them replacement
liens—neither of these situation is very likely with a bankrupt
• 25.2: LP has a 500K loan from FSB. LP has an unsecured debt of 250K. They got a
post-petition loan of 250K. FSB brings a claim for adequate protection claim. This
throws the bankrupt into liquidation. FSB as a 250K shortfall, HF has a 100K
shortfall. There are attorney’s fees owing: 150K for the chapter 11 attorney, 50K for
the chapter 7 trustee. There is also an additional debt, unsecured and pre-petition
claim of 250K. There are total assets remaining of 350K.
ƒ FSB
• 507b super-priority; their claim when they were granted
adequate protection but it was later found to be inadequate
• can this be converted into a 507b, 364b super-ultra-priority
ƒ HF: had a lien under 364c2 but this has been exhausted
• This means that this is now an unsecured claim because the
lien was realized
• This is a post-petition administrative expense claim; this should
have the benefit of 364b
o This is because there was court approval, this was
outside of the OCOB and was granted as a secured
claim
• They will claim that to the extent that there is a shortfall they
should be given a 364c1 claim
o They were not given this from the outset

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 o This means that because this was not given at the outset
they cannot default into this—it must be given from the
beginning
ƒ Chapter 11 attorney:
• They are under 507a as an administrative claim
• This is a 507a1 claim
ƒ Chapter 7:
• They are originally a 503b2 claim which allows their claim to
be under 507a1
ƒ Pre-petition unsecured have no priority
ƒ Ranking of claims:
• FSB has the highest priority claim
• Chapter 7 attorney because of operation of 726b
o This speaks about claims incurred after conversion into
this title from another
o This means that the chapter 7 claim comes before the
chapter 11 attorney
o This trumps any 503b claims from
o This is known as the burial expense trump:
ƒ How else could someone get a chapter 7
attorney to come in and finish the job
ƒ The theory is that to get someone to do this is to
make them the highest priority under the chapter
7 case
• HF and the chapter 11 attorney are tied in priority but
• Outcome:
o Chapter 7 attorney gets 50K
o FSB comes second and gets 250K
o HF and the chapter 11 attorney are tied, get pro-rata
shares
o They will each get 20%
o Unsecured claims: nothing
• 25.3: what are the chances of getting court approval for the proposed plan?
ƒ This is a cross-collateralization claim
ƒ Some circuits allow it, the 11th circuit does not
ƒ This is seen as a bad thing and is disfavored
• The Shapiro court notes that this gives the post-petition lender
too much power over the DIP and allows them to perfect their
pre-petition claim
• This seems to be a priority of the pre-petition claim
• But this could be the lesser of two evils
o If the other creditors have a better chance for repayment
by allowing this to happen
o It might be the lesser of two evils: there might be a
cross-collateral loan at a better rate than there would be
of a new loan
f. Owner financing:
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 i. Some debtors will turn to old equity holders as a source of funds. The bankruptcy
code prevents the participation of these people in the post-bankruptcy corporation.
The code follows the rule that equity cannot retain value unless all of the unsecured
creditors have been paid in full. This is aka the absolute priority rule
ii. when equity provides a new value to the company that cannot be obtained from
elsewhere to finance the reorganization then the court may allow this because it
represents the best bargain that can be made
g. reshaping the estate through the strong arm clause:
i. these types of avoiding powers give the DIP real teeth during the c11. this is because no
matter how similar they appear, the DIP is not the same person as the D. the DIP works
for the C and other constituencies come second. This means that he has the job of
working to pay off creditors in a fair and rational manner.
ii. The strong-arm clause is found in §544(a). this determines the TIB’s pecking order in
state laws and under the UCC. The TIB has all of the rights on the date of filing as a
judicial lien holder and as a BFP.
iii. Wonder-bowl Properties v. Hi Ja Kim dba Laura’s French Baking Co & Laura’s bakery:
K is the DIP in the c11. K filed an adversary proceeding to set aside a j’ment lien against
W that it had obtained for 208K. W had filed its lien against some of the real property of
H. When W filed the abstract of j’ment it did not complete all of the information that
was needed on it. It then sought, after H filed, to amend this. The court considers the
issue of whether a hypothetical BFP charged with notice of the defective j’ment would
have been deprived of notice and held that yes he would have been deprived and thus lien
could be avoided under the strong arm powers.
1. Rationale: §544 says that a trustee may avoid any lien that he does not have
actual knowledge of. Because the abstract did not have all of the information it
did not impart actual knowledge. Only actual knowledge is relevant because of
the wording of the statute. This is because the DIP assumes the same amount of
knowledge as the TIB. The TIB was not privy to the transaction and acts a BFP
without any special knowledge. Looking at constructive knowledge would undue
the words chosen by congress. This would also make the action brought by a DIP
different than the one brought by the TIB, which was not the intent.
iv. When the subject is personal property and not real estate, the TIB has only the lesser of
the two powers, that of the lien creditor.
1. This can work to establish the TIB’s position regarding federal tax liens.
• Payment for the attorney:
o The firm that takes on the representation will often go to the court and asked to be
paid early
o If the business crashes there is a problem if the attorneys have been paid 100% of
their claim
ƒ This means that comes courts are reluctant to make the interim payments
especially if the company has a chance of going insolvent
ƒ If the case does go administratively insolvent then the court will go back and
get the money back from the firm
• The alternative is to not try to get this back but this sets bad precedent
ƒ This is a hotly contested issue
• Summary of priorities in a chapter 11 case that is converted to a chapter 7 case:
• Secured claims
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 o A lien is the best way to go
o But the question is the validity of the lien
ƒ Are the state law requirements met?
• This means that there must be an act to give them a priority
ƒ Then is there anything in bankruptcy that changes this?
• 541 strong arm powers
• 547 preference powers
ƒ if the lien was recovered post-petition then the bankruptcy requirements
must be met under 362c2, c3 and d1
• c2: on previously unencumbered property
• c3: post-petition junior lien on encumbered property
• d1: a priming lien on property that already has a lien on it
o who comes first of there are multiple liens
ƒ go to state law and looks at the priority of lien holders
ƒ this is the notion of the race—who took the action first with respect to the
collateral
ƒ under state law could be changed by bankruptcy
• both by preference law
• and by 364d1 priming lien: there is a post petition loan made and
there is a demand for a priming lien; this is within the court’s
discretion as long as adequate protection is given to the senior lien
• 726b post-conversion administrative expense claim, the so called ‘burial expense’
o it must start out as something other than chapter 7
o first in category
o second: 507b—adequate protection that is not adequate
o third: basic 507a1/503b things including if the chapter 7 debtor incurred debt
after the first filing under 364a or 364b, the fees of the trustee
• chapter 11, pre-conversion, 364c1, the so called super-duper-priority incurred in the pre-
conversion case
• chapter 11 incurred 507b super-priority claim for the secured creditor who has inadequate
protection to the amount that the adequate protection is inadequate
o how much was the adequate protection worth when the C asked for it and how
mush is it worth now
• chapter 11 expense priority claimants
o 507a1, 726a1
o the key ones: OCOB under 361a, approved by the court under 364b, incurred by
the estate under 362b12,
• rest of the 507 priority claimants in the order of 507a claims
o other than 507a1 claims, these are all pre-petition so they are all incurred pre-
petition
• general unsecured pre-petition claims
o 502a & b
• finally, under 726a3-6 unusual claimants
o late filed pre-petition un-secured claims, punitive fines and penalties
o these are in a worse position than unsecured claims
• The DIP and his identity:

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• this is the same business as the pre-petition debtor
• even though it is the same entity at another level it is a totally different entity
o the DIP has certain powers that the pre-petition debtor did not have
o this is because of to whom the fiduciary duty runs
o pre-petition the fiduciary duty of the corporation runs to the shareholders
ƒ the shareholders claim here is at the margin
ƒ the assets exceed the liabilities
ƒ the shareholders feel the gain or pain of decisions
o if the corporation is insolvent, there are more liabilities than assets
ƒ the general unsecured C are the ones that feel the pain/gain
ƒ this means that they are at the margin
ƒ this is to whom the fiduciary duty is owed
ƒ this is why the DIP wants to strike down the unperfected claim
because this will help the unsecured C
• the DIP has the right to sue to recover payments and transfers
made pre-petition; this seems strange but this is because the
fiduciary duty is to another person
• So what interest do the shareholders have in bankruptcy?
o Their equity is worth nothing right now
o But suppose the company emerges from chapter 11
with a going-concern value that exceeds the claims
against the estate
o So for now the shareholders are holding a future of a
sort
o This leads to a lot of conflicts of interest with the
business plan that the company will pursue
o So for the shareholders a high risk strategy that could
have a high return looks good; to the C this is not good
because they are owed the fiduciary duty and they see
their money disappearing
• 26.1: W bought a plane. W just filed for chapter 11. M never filed the claim on the
plane which they sold on credit to W. What can M do?
o According to 544 there is not much they can do
ƒ This means that they cannot act to give themselves a priority
ƒ The trustee will use 544a1: lien on property
• There is not a real judicial lien holder
• This is a hypothetical one whose lien arises at filing
• How do we know that the trustee wins with the hypothetical
judicial lien holding
• This then will refer to state law and look to see if the property
has been levied on—but this is a hypothetical lien holder, but
he must still do everything he can to perfect his claim
• Under UCC §9-317a2 a security interest is (look this up)
• They will be an unperfected security interest which is really no
security interest
o Is there an advantage to an unperfected security interest
over an unsecured interest? yes
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 • There is still an interest between the creditor and
the debtor, but not to the rest of the world
• The C can foreclose on this as long as this can
be done without breach of the peace
• This is not as good as the perfected interest
which gives the C a type of title which is
effective between the C, D and the rest of the
world—this means that the C has won the race
and will get the profits at the foreclosure sale
• 26.2: W bought another plane from another person from Aero a week before filing.
When A learned of the filing they filed their claims with the proper persons. A’s
financing agreement gave them property in this plane as well as others
o Their claim is secured at the moment of filing
• 546b is a limitation on the 544 voiding powers
o subject to generally applicable law….before the date of perfection
• A has a PMSI because the proceeds of the loan were used to purchase this
collateral; also known as an enabling loan
o This is distinguished from the case where the D borrows money but
gives collateral in something they already own
o This is under 9-17(e) which says that one who gives a PMSI and files
within 20 days has a priority over a unperfected judicial lien holder
• The lien on the other things may be avoided but they will still retain the lien
on the plane which their money enabled them to purchase
• 26.3: LC bought a mortgage from DD. DD never filed this. The ME is now bankrupt
o 544a3: BFP and gets priority against LC because he never took the act that gave
him the lien that would be good against third parties
o he has an unsecured claim against the purchaser in bankruptcy
o suppose LC can show that the homeowner knew about the lien
ƒ this does nothing to the interest—it is whatever knowledge that the
hypothetical BFP would have from looking at the record
ƒ LC cannot make an argument that any hypothetical BFP would have
knowledge of the interest that LC had
• 26.4: T sold S an a/c with a lien and down-payment. T filed this lien with the secretary
of the state. Will this hold up?
ƒ The lien is valid under 544
ƒ Which section will apply?
• Not under 544a3 because this is a fixture
• This is under 544a1
• So why is this important?
o Because 9-334e3 makes it clear that a perfected interest in a
fixture will defeat the interest of a lien creditor in the real
property
o The filing will be good enough under 9334-e3
o Noting 9-334e1 to measure the rights of a BFP and the
fixture filing makes it less clear that a filing with a
secretary of the state and not the real estate files is
sufficient to give knowledge
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 ƒ This says that it must be in the county land records
to be sufficient
ƒ They are still able to beat a lien creditor but not a
subsequent BFP
o This is critical that 544a3 because this places them as a
judicial lien creditor because this is easier to defeat than a
BFP under 544a3 as to the fixture.
7. preferences:
a. general rules & observations:
i. This is a new power given to the DIP in bankruptcy. It is unlike anything found
elsewhere in the law.
ii. These are all under 547b which constitutes what is a preference
iii. These permit the Dip to review the payments it made as it neared bankruptcy and get the
money back
b. Defining a preference
i. Gilbert v. Gem City Savings Association: the TIB filed a complaint against GC seeking to
recover a payment of 1,079 made before the filing. G holds a mortgage lien on the RE of
the D, G. This payment was made less than 90 days before the filing. The D was
insolvent at the time of the payment. The payment represented the current amount due
plus an arrearage. The value of the RE is 38K and the loan had a balance of 24K on the
date of the filing. The court held that this was not a preferential transfer.
1. Rationale: the court will look at seven factors. Most important in this case is
whether the payment has an effect on the equal distribution of the estate of the D
and not the effect on the C. This will determine if the C received more than his
fair share as compared to other C in his class. The court is required to determine
what he would have received if there had not been a payment. This will construct
the hypothetical case. Here this C would have received the same thing because he
was fully secured so there is not a preference.
ii. In re Calvert: C filed a petition in March 1997. He was a manager of a KFC owned by
DN. In December 1996 C borrowed money from his parents to pay a settlement with
DN. C had stolen money from the KFC. His parents gave him the money, directly
payable to C’s attorney. C executed a note on the house promising to repay the amount.
They also gave a lien on their car, of which the only writing is the title. The house was
worth 52K but at the time of this mortgage they had no equity. The car was
unencumbered but worth less than the lien. The trustee filed this to recover the payment
made to DN. The court held that the earmarking doctrine saved this from becoming a
preference.
1. Rationale: there must be a transfer of a security interest. In order to satisfy the
earmarking doctrine, there must be 3 things: the existence of an agreement must
be the existence of three things between a new lender and the debtor that the new
funds will be used to pay a specific debt; 2—performance of that agreement
according to its terms; 3—the transaction, viewed as a whole (including the
transfer in of the new funds and the transfer out of the old C) does not result in the
diminution of the estate. There is not a preference when a new creditor is
substituted for an old one. The trustee bears the burden of showing that this does
not apply. For there to be a lien against a vehicle the indebted party must be in
possession of it and there must be a signed agreement. There is no written

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 evidence here and therefore it is not enough to show a security agreement.
Although the new C has the title, this is not enough. But this is not enough to
show that one never existed. So there is a presumed one and the earmarking
doctrine can apply.
iii. Fidelity Financial v. Fink: B purchased a car and gave FF a promissory note secured by
the car. 21 days later FF mailed this to be filed along with the correct application fee. 2
moths later B sought relief under c7. The court held that this was perfected when the
party loaning the funds takes the last step to make the security perfected.
1. Rationale: F cannot avoid the lien if it falls under 547c3 which requires that the
transfer of the security interest be perfected on or before 20 days after the debtor
receives possession. Perfection then means that a transfer of real property is
perfected when a creditor on a simple contract cannot acquire a judicial lien that is
superior to the interest of the transferee. There is a relation back doctrine so that
the perfection, if it occurs within the 20 days, is said to relate back to the day the
debtor took possession. Not until the secured party takes the final act is the
interest perfected. This will prevent anyone from getting a superior interest in the
item. 20 days is given for the perfection of a security interest in presonalty. This
means that under the plain reading of the code, the secured part has 20 days to
perfect his lien if he wants to qualify under the enabling loan exception under
547c3b.
iv. Voidable preferences can act as a sword for the bankrupt because he can say: if you make
a demand of me today and I file tomorrow you won’t get to keep the money because it is
a preference.
v. For the benefit of allows one that will indirectly benefit from the payment to be called
into question. In the important case, because the payment indirectly benefited an insider,
the length of time was extended under the insider rule. It may also work to promote a
junior lien holder to a senior because the old senior is now gone—should this be an
indirect preference?
c. Voidable preferences at state law:
i. The UFTA, discussed earlier, promotes the idea that there should be fair dealing among
the C.
ii. This means that in the case of an involuntary the payments can be set aside by the
petitioning C.
iii. This also requires the insider that received the payment to know or should have known
that the debtor was insolvent when he received payment.
• Problem set 27: 27.1: ML is an unsecured creditor of W. W owes ML 14K. 60 days
before the filing W pays ML 1.4K. He then liquidates and unsecured get 10%.
o Look at 547b and the elements of a preference (7):
ƒ First are in the introduction to b:
• Transfer
o Although this seems silly, but there are cases where there is
an issue if there has been a transfer
• Of the property of the debtor
ƒ To or for the benefit of a C
ƒ On account of an antecedent debt
ƒ While the D is insolvent—b3

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 • Here is the benefit of 547f: presumed to be insolvent on an 90
days before the petition
ƒ Made within 90 days of filing or 1 year for insiders
ƒ Enabled the C to receive more than it would have if this was a chapter 7
liquidation (b5)
o Here the only issue is the b5 element
ƒ The payment they received prepetition is the same it received in the
liquidation, 10%
ƒ This is the wrong analysis though:
• After the payment there is a claim of 12.6K
• In the bankruptcy they got paid 10% of this, or 1.26K
• This is on top of the other money they received, the 1.4K, bringing
the total to 2.66K
• Had the transfer not been made, their recovery would have been
1.4K, not 2.66
• This is because they would have taken a claim of 14K into the
bankruptcy
o Suppose the unsecured C got 100% of their claims, would this affect?
ƒ Yes, the b5 element would not be met
ƒ They would have gotten their full claim regardless
o Suppose that the C was fully secured:
ƒ The b5 element would not have been met because they would have
received full payment anyway
ƒ This is what the Gilbert case in the book said
o Suppose that there is a rich guarantor of the D and will make sure that all C are
paid in full
ƒ Provided by the provisions of this title, meaning that we should only look
to the bankruptcy estate under a chapter 7.
ƒ This does not look at any outside elements, just the estate
ƒ The third party source does not affect this
o B5 is met unless the creditor is fully secured, priority unsecured that would
receive full payment or if all unsecured receive full payment
• 27.2: U files for bankruptcy. Before he did this he allowed OKC to take some
equipment. Is this an avoidable transfer?
o B5 is the major question here
• This creditor would not have gotten 100%
• There is a transfer of actual property—this question is to emphasize that transfers can be money
or property
• 547e:
o This is one of the hardest provisions of the code
o The function of this is to define the time of a transfer for preference purposes
o The usefulness is when the transfer involved is the transfer of a security interest
o The grant of a security is a transfer of property
o This defines at what point in time the transfer of a security interest has taken place
o If we are talking about something other than the transfer of a security interest (money or
property) then the timing question for preference purposes is that the time of transfer is
when there is a physical movement of the property
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 • The only exception to this is checks, in which the transfer is when the payer bank
pays the check not when the check is delivered
o 547e1: defines when a transfer is perfected
• this is defined as expected: if of real property then it is perfected when no later
BFP can get a superior interest to the transferee: 547e1a
• if it is a fixture or personal priority then it is when no judicial lien holder could
get a superior interest: 547e1b
o 4 variables in a secured credit situation, e, a, p & c
• e: which is the extension of credit from the C to the D
• a: attachment of the security interest which occurs: C has given value, the security
interest has been signed by D, the D has rights in the collateral
• p: point of perfection which is attachment and notice to the world which can be a
filing or actual possession of the collateral
• c: commencement of the debtor’s b’ruptcy case by filing
• depending on the time of the transfer, t, it will equal a, p or c
o 547e2 will tell us when the time of transfer takes place
• 547b2 says that the transfer has to be on account of antecedent debt; the extension
of credit must come before the debt so here e is always before t
• b3 says that the debtor is presumed to be insolvent at time t
• b4 says that the transfer must be within the 90 day time limit, 90 days before c
• so if b4 is met then it is likely that b3 is also met because of the benefit pf the
insolvency presumption of 547f
• this is why it is important to define t
• 547e2a says the following: if perfection occurs within 10 days of attachment then
the transfer of the security then the attachment is the time of the transfer (if p
occurs within 10 days of a, then t = a)
• this is the grace period
• it is also a relation back to the time of the attachment
• 547e2b: if perfection is more than 10 days after transfer, then the transfer is
deemed to have occurred at the time of perfection
• if p > 10 after a, then t = p
• 547e2c: if there is more than 10 days after the transfer and the filing of the case,
then the transfer is deemed to have occurred at the date of the filing
• if no p by later of (10 days after a) or c, then t = c
• technically it is the moment immediately before c
o security interest transfer test
• Step 1: is it a transfer a transfer of a security interest
• if yes, then step 2
• if no, then t = time of physical transfer
• Step 2: when is transfer (t)?
• This involves placing the four variables (e, a, p & c) on a time line
• Then this will lead you to the correct 547e section
• Step 3: given the time of t, is e before t?
• Is the transfer on the account of antecedent debt
• Is t within 90 days (1 year for insiders) of c? this is the b4 element

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 • If no to either question then it ends because there is not a preference
• If yes to both then step 4
• Step 4: are all the other elements of 547b met?
• If yes, then there is a preference
o Look for the 547c exceptions
o I.e. 547c3 allowing the secured creditor 20 days to perfect their
claim
• If no, then there is not a preference
• 27.3: R’s C had borrowed money form IC. They received a security interest on unencumbered
assets. Is there a preference?
• Security interest? yes
• Step 2:
o E = Jan 1
o A = 2/1
o P= 2/1
o C= 4/29
o When is t?
ƒ Here this is a 547e2a
• More than 10 days
• Therefore the t = a
• Is e before t? Yes within 90 days? Yes
• Are the other requirements met? Yes, it appears so
• This means that there is a preference here

27.4: time line: June 1, V makes a loan to NW for 50K. It perfects on June 20. On September 15, NW files
for bankruptcy.
• Day 90 (90 days before filing) June 17th
• Day 0 (date of filing) = September 15
• Steps:
o Yes there is a security granted
o The date of the extension is June 1st
o Attachment is also considered June 1st because V met the deadline
o Perfection is June 20th, which is day 87
o Is there an 547e2a, b or c case
ƒ This is a 547e2b case because perfection was more than 10 days after attachment
ƒ The timing of transfer t = p, which here is June 20th
ƒ Is e before transfer (was the transfer on the account of antecedent debt) yes
ƒ Is t the transfer within 90 days before c
o Are all of the other elements met:
ƒ Insolvent yes
ƒ Are the b5 element met in this case? yes because they went from unsecured to secured
• If the transfer had not taken place would they have been just as well off without
it? No, they are much better off here
• Variation 1: As in original, V makes the loan on June 1st, day 106. Here the security agreement is not
signed until June 12th, day 95. The signing is the date of attachment. The perfection still takes place on
June 20th, day 87. The debtor files on September 15th

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 o This is a transfer of a security interest
o Is this 547e2a, b or c
ƒ This is an e2a case, because perfection occurs within 10 days of attachment, therefore t =
a, June 12th
ƒ This is still on account of an antecedent debt
ƒ But here this is outside of the preference period of 90 days
ƒ The point of this is to show you how the 10 day grace period of 547e2a will save this
from being a preference by causing the date of perfection to fall outside of the 90-day
window, due to the relation-back doctrine
• This kicks this back to the date of attachment at least for the terms of preference
• Even though perfection was within 90 days
• Variation 2: V makes an unsecured loan on day 85, June 18th. On the same day there is attachment, so
a = day 85. Perfection takes place on day 78 when a financing statement is filed. Has there been a
preference?
o Is this an 547e2a, b or case
ƒ This is e2a because of the timing of perfection
ƒ The date of perfection is the date of attachment, day 85.
o Is e before t? they are at the same time
ƒ Because they are at the same time this is not on account of antecedent debt
ƒ The 10 day grace period saves the C again by pushing pack perfection to the date of
perfection
• Variation 3: at day 85 V makes a loan. Day 78 V decides it wants collateral so it both attaches a
perfects on this date. Debtor files on September 15th.
o Is this an e2a, b, c case?
ƒ It is again an a case because p occurs within 10 days, so t = a
o Is e before a? yes
o Is p within 90 days? Yes
o Other elements met? Yes
o The point of this is to show that the 8 day delay in the attachment and perfection but because the
gap is between e and a & p the grace period does not operate to change the date of transfer like it
did above
o The only gap that is closed by the grace is 10 days or less between a & p, not between a & e, or e
& p even where the C does not have a PMSI
o If the C has a PMSI they will be better off because they will have 20 days not 10 days
• Variation 4: Makes unsecured loan on day 85. On day 37 V asks for and gets a signed security
agreement. On day 29 V perfects with filing of a financing statement. When the D files, has there been
a preference?
o This is an e2a case, p is within 10 days after a
o The t = a again, which is day 37
o Does e come before t? yes
o T is within 90 days? Yes
o Other elements met? Yes
o The point of this is to show even where the grace period operates; it does not save the C from
preference operations. Yes it may be operating here but the mere fact that it operates is not
enough under these facts is not enough to prevent liability
o The placement of the transfer is still a preference because it is on account of an antecedent debt
and within 90 days
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 • Variation 5: the loan is made on day 85. On day 37 there is attachment. At the point of filing there has
not been a financing statement. There is no perfection. Is there a preference?
o Is this under e2a, b or c? it is under p because it has not occurred yet
o This means that t = c (really the moment before c to make it within the 90 days before c)
o Is e before t? yes
o Is t within 90 days before c? yes
o Are the other elements met? Yes
o This is an example of the operation of 547e2c. How else could this be avoided?
ƒ With the strong arm powers
ƒ This is a basic unperfected security interest
ƒ This could be avoided under this rationale, the 544a1 the hypothetical judicial lien
creditor power
• Variation 6: V makes the loan on day 4. They also get a signed security agreement on this date, day 4.
At the point of filing there is not a financing statement. V does perfect on day -3, 3 days after the filing
of the bankruptcy. Has there been a preference?
o Is this e2a, b or c? this is under e2a
ƒ It is not under e2c, because of the later of two points time
ƒ Because of the relation back and the filing within 10 days, t = a
o E is not before t
ƒ This is not a transfer on the account of antecedent debt
o Was V’s post-petition perfection allowable under the automatic stay?
ƒ Note 362b3
• If this falls within the period under 547e2a, then the automatic stay does not
prevent this
• This is allowable
o What about 544a1:
ƒ This is the strong arm powers of the trustee
ƒ Notes 546b1 which the 544 powers are subject to
• This refers to the generally applicable law; this means that it will refer to laws
outside of bankruptcy
• Since 547e2a is only in bankruptcy it is not generally applicable
• The PMSI would have a grace period as found in UCC article 9, as an example of
generally applicable law
• What 546b is telling us is that the strong arm powers are not subject to the grace
period because this is not a generally applicable law
o The surprise ending is that although this is not a preference, it is not good enough to save it from
the strong arm powers
27.5: HB files for bankruptcy. A year earlier MC had sold them 50K ovens. On Feb 1 the balance was 35K.
On Feb 2, each C received 5K in payment. HB was insolvent throughout. The unsecured would get less than
100% of their payment—this is true if they were insolvent throughout. Is the (got called on):
• C 2 is not avoidable because it is not a preference
• MC is avoidable because it was a preference
27.6: V, debtor filed May 25th. Day 90 is about February 25th. Here the problem does not say when the loan on
the original collateral was made or perfected. Assume that this was done on February 1st for the 150K in
collateral. On day 40 they get more equipment for 200K. This is an unsecured loan. Is this a preference?
• The tricky question is where does the floating lien attach to? Attachment requires that the debtor has
rights in the collateral.
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 o Here the debtor had no right in the collateral until day 40
o This is an e2a case where perfection is within 10 days. The date of this is the date the debtor got
the equipment.
o Does this meet the b5 element? Yes
o They are now over-secured.
o E3 makes this clear that the date is the date of the acquisition because a transfer is not made until
the date that the debtor acquires rights in the equipment
ƒ This was written to reverse case law which was using the Mississippi rive theory of the
floating lien: if you get the security interest in the whole river then all transfers were
considered to be dated back to the date of the first acquisition; this was reversed by the
code provisions
ƒ There is a provision in 547c for the inventory receivables and this is considered one of
the hardest provisions of the code, but were are not there yet (we will get there)

27.7: CS has a lien to HB on its machine. A fire destroyed the machine. On July 1st, before the fire, they had
made a payment of 20K. On august 1st because the fire they declared bankruptcy. Before the fire, the lien was
properly secured. The perfection was contemporaneous with the machine. If there is a preference then it must
be the payment.
• CS is assumed to be insolvent
• Under 547b5 is the creditor better off with the payment or is there no difference
o The issue is when is the b5 element met: at the time of the transfer or at the point of the filing
ƒ If this is at the point of filing the creditor would not have received this much
• This is more convenient because there are schedules filed by the bankrupt and this
means that there is only one analysis not multiple ones at the point of each
transfer
ƒ If the point is the time of the payment then the payment is not preferential if there is a
hypothetical liquidation
• The policy is if preference law is trying to prevent creditors form taking
advantage vis a vis other creditors, at this point they already have an advantage;
they are not preferring themselves anymore than they already were
o Getting the payment does not seem like there is a preferential motive or
intent on their part
o This also seems fair
27.8: what of CS has purchased another machine worth 300K unsecured after the fire but before the filing?
• The notion of buying this unsecured is unusual to say the least
• Is there is a preference?
o If HB does not have an after-acquired property clause to cover machines of this sort then there is
no preference because there is no transfer by the debtor
o If there is an after-acquired property clause works as it is supposed to then what is the debtor
transferring to HB? A security interest in the machine
ƒ This is then a question of timing; of when HB got their priority in the collateral
• It has been held under article 9 state law, a floating lien, the priority in the
collateral dates back to the date when the financing statement was filed
• Just because this is when the priority is measured under state law does not mean
that this is the point of transfer for preference purposes; this is not answered by
article 9

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 • Note 547e3, which says a transfer is not made until a debtor receives rights in the
property
o This means under preference law the transfer is when the debtor gets the
machine, not at the date they gave the original security agreement
ƒ This then turns into a b5 question
• Here clearly the creditor is better off at either point
• In this case there is a preference
• Even if the element is measured at the point of filing, the security interest in the
new machine will be avoided, but will the payment of 20K be a preference? Yes
because if above
• Suppose CS has insurance and used the proceeds from this to buy a new machine. HB has a security
interest in the proceeds of insurance payments if there is one under article 9, 9-203f, 9-315a2. This
means that there is a continuous attachment in the collateral, whether it is money, a new machine or
what. Is this a preference?
o It appears here that the collateral changes form but it is a continuously perfected interest; they are
not any better of but-for the change in the nature of the collateral
27.9: has there been a preference?
• Assume that there is not a security interest when the lien is made
o This falls more under the earmarking doctrine when unsecured money is borrowed to pay off
another unsecured debt
o Was it the debtor who said the C, lend me 50K so I can pay off existing C, and just send it to the
existing C. Or was it the bank saying, I will make you this loan but it was to go directly to the
creditors. So who is directing the payments?
o In the classic earmarking case, where the creditor is directing the payments, one of the elements
of 547b is not met.
ƒ This element is in the intro is that there was no transfer of the debtor in interest in the
property because the debtor did not direct the money; he had no choice
ƒ If the debtor had a choice then they do meet this standard because this is property of the
debtor
ƒ Basically, this emphasizes the question of who has control because this determines the
outcome
ƒ If the creditor directs the payment then the debtors are not any worse off; there may be
new faces but there is still old debt
o Here the lender is directing the payments and is perfecting with a lien on a forklift. Is there a
preference there?
ƒ The new creditor is not the same as the old
ƒ There is a lien for 20K, and as for that collateral the C will be paid 100% of this
ƒ This is not the same as the other unsecured creditors
ƒ These unsecured remaining creditors are hurt to the 20K
ƒ If there is a preference, what is it? Is it the payment to the other C or is it the receipt of
the lien on the forklift
• This is complicated
• The transfer of the security interest is a preference
• If the creditor is paid off, then look at b1, to or for a creditor. Here this meets the
for the creditor—this is a transfer for the benefit of the creditor who is paid off
o There is also an antecedent debt here
o This is an indirect preference
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 o Remember: even if the transfer of the security interest is for them
(although not to them) they TIB can recover from the creditor who made
the transfer
ƒ Note 550a1: the TIB can be from the initial transferee or from the
one who got the benefit
ƒ Once the transfer is a preference then the trustee can recover from
either party
27.10: April 20, SA repaid himself and this wiped out the last of the liquid assets. Within the 90 days the C
banded together to get advice. Should they file now or does it matter?
• The president is an insider and is subject to an expanded period
• Under 547f the benefit of insolvency presumption is limited to only 90 days before filing—there is not
an automatic extension for an insider
• The benefit that the insolvency presumption only lasts for 90 days
• Under state law there are other solutions:
o SA’s earlier contributions were equity and not loans; if this is own then it is an unlawful
dividend
o There is also fraudulent transfer law under the UFTA
ƒ Under §5b of this a transfer to an insider for an antecedent debt is fraudulent if the D is
insolvent and the C had reasonable information the D was insolvent
ƒ A D is insolvent is presumed to be insolvent if the debtor is not paying their debts as they
come due; this is rebutable
ƒ There is a 1 year statute of limitations on this type of transfer

8. The exceptions:
a. Congress has made it clear that on the eve of bankruptcy C cannot act in a way that is unfair to
the other C. On the other hand, we want C to continue to do business with a D so that they may
reemerge from b’ruptcy. Because of this concern, there are 5 major exceptions written into the
code (well, there are really 8, but 3 are not used very often). They are:
b. Contemporaneous exchange/enabling loan
i. In re Alexander: borrowed money from F to buy a house. F filed the deed 14 days after
the loan. A declared b’ruptcy about a month after buying the house. A claims the
property is exempt but they are behind and F wants to FC. F claims that this is was a
contemporaneous exchange and that they should be allowed to keep their secured
interest. The court held that is was not sufficiently contemporaneous and that the lien
could be avoided as a preference.
1. Rationale: the person contesting this has to show that both of the parties intended
for this to be a contemporaneous transaction and that it was indeed, substantially
contemporaneous. The intent of the parties makes no difference if the actions
were not substantially contemporaneous. This provision was written to avoid the
problem of the secret lien. Some delay is allowed when the transaction is
contemporaneous in fact. One good rule of thumb is if the security was granted
within 10 days. If it is not substantially contemporaneous then the security is
granted on the account of antecedent debt and may be avoided as a preference.
There is not a lot of room for flexibility in substantially. The only flexibility
should be within the 10 day window—if the filing is done in this time then it is
SC.
2. this should be policed for several reasons:
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 a. Prevent people from hiding secret liens and then filing them on the eve of
bankruptcy to give themselves a better position.
b. Preventing the C from attracting new unsecured debt by holding out
something that looks like it could be a security or be seized and sold to
pay the debt
c. Prevention of fraud
c. Ordinary course of business: this was written to balance competing concerns that we want C to
deal with debtors and we do not want to punish them for it. We do not want to punish the
business that supported the debtor as they slid into b’ruptcy
i. In re Roblin Industries: R filed a c11 that was converted into a c7. The trustee in the case
seeks to recover a payment that R made to F. F supplied R with raw materials and when
R fell behind in their payments they sought to have a deal with F. F agreed to this and
asked for payments every month. F continued to supply R with goods during this time.
Still, R managed to go bankrupt and the trustee wants to recover payments as preferences.
The court held that these were indeed preferences because they feel outside of the
ordinary course of business exception.
1. Rationale: this has three key provisions which the C must prove to be able to keep
his payment. Here the question turns on whether this was OCOB within the
industry. OCOB refers to the practices within an industry and what is normal. As
long as something is not so far outside of the range of normal, it can be OCOB.
Looking to see if it is OCOB between the tow people would render the third
requirement redundant which was not the intent of congress. This promotes the
ideas that C are encouraged to not pillage the D and that there should be fair
distribution among the C, especially those who play by the rules. This is an
objective standard and requires a factual inquiry. Here, if the industry standard
was to restructure a defaulted debt, then it would be allowed. F did not advance
any evidence that it was consistent with the OCOB.
d. Purchase money
i. This is based in part on UCC article 9. The idea behind it is that it is beneficial to the
estate to bring in new property and the people who deal with a failing D deserve the most
protection.
e. New value
i. See page 629.
ii. This only shelters preference payments that come before the new extension of value
iii. We do not extract repayment of preferences from the C who extended a new line of credit
to the D after receiving the payment.
iv. In essence, a new extension will wipe out an older payment but only to the amount of the
extension if it is smaller than the payment
f. Floating lien:
i. This was written with the intention to catch up to modern business practices where the
goods that the D is holding may change on a daily, even hourly basis. This allows the C
to have a lien on whatever goods the D is currently holding.
ii. This prevents the after acquired property right from being disturbed in bankruptcy.
iii. This also flatly rejects the relation back doctrine for the purposes of the floating lien. The
lien becomes good when the D acquires an interest in the thing.
iv. These are usually seen on accounts receivable

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 v. If there is an improvement in the position of the C during this time, then that amount can
be avoided.
vi. In re Nivens: N is a farmer and filed for b’ruptcy when the crop was in the field. He
was entitled to a disaster payment and the SBA wanted those payments. Since priority in
the support checks is derived form the rights in the crop, priority in those checks goes to
the one who has priority in the crop. B had a security interest in the crop but the TIB
claimed that taking the checks would be a preference. The court held that there was no
improvement in position and there was no preference so the bank could keep the money
1. Rationale: crops in the field are inventory. A preference will not result unless the
person goes out and improves his position during the 90 days. If there is an
increase in the value of the inventory due to market fluctuation outside of the
control of C or D then there is not a preference. If there thing comes into
existence during the period and the lien attaches to it, then there is a preference.
There was an increase in the value of the crop but it did not come into existence
during this time.
2. here there is no doubt that the farmer will be reimbursed for his work
3. if the debtor had used his own money to increase the value of the crop, then there
would be a pro-rata share

28.1: E delivered gas to F. Because F was in financial trouble, E only made deliveries for cash. Three times F
did not have the cash on hand. F paid at the next delivery. Is there a preference?
• The three times when F paid later are preferences
• Suppose that with the cash deliveries, E pumps the gas first and then F pays the driver. Are those cash
payments preference?
o Technically this is antecedent debt
o But this will never stand as preferences because they are substantially contemporaneous under
547c1
ƒ A very short delay of a few moments be considered substantially contemporaneous
ƒ Will 547c1 save the few days delay from being a preference
• There must be intent
o The transfer must be intended by both the creditor and the debtor for new
value
o The intent must be for an exactly contemporaneous exchange
o The classic case for this is payment by check
o Here the intent should be measured with each transaction which updates
intent
o At the times of these 3 transfers the intent was not for contemporaneous
transactions
o As it turns out here this is failed so there is not a 547c1 exception
o This may fall under 547c2 ordinary course
o This could also fall under 547c4
ƒ This works to eliminate the first preference when there is a subsequent extension of new
value
ƒ Here the third time there is an extension then this is not eliminated
ƒ Even when there are new contemporaneous giving of gas, there it fails part of the test
28.2: B decided to buy 5 trucks on credit from G. They traded in 5 old trucks and signed a note for 300K.
They gave G a security interest in the trucks on the same day they signed the note. 90 days is July 2nd, the day
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after the security was signed. On July 12, the trucks were built. On July 28th the trucks were delivered to the
dealer. On August 11th the security interest was perfected. On September 30th, B filed for bankruptcy.
• E was July 1st
• The issue is when the debtor had the right in the collateral, and under UCC article 2, this is the date of
identification of the collateral. This would make it July 12th
• Perfection is on August 11th
• When is t?
o Note 547e2b
o This is clearly a preference
o If this was avoided then the there is an avoidance in the trucks
o Does the 547c exception apply?
ƒ Note 547c3b
• There is a timing question
• This had to be perfected within 20 days of delivery
• Suppose that B received the trucks on July 18th. Suppose also that in this state the D was in a state that
had a 30 day grace period under Article 9-317e for a PMSI. Does this help them for preference
purposes?
o They have a valid perfected security interest
o 547b makes reference to generally applicable law, but this exempts the section in 547c3, which
makes the 20 day window the only applicable law
o If they lose her could they win under 547c1?
ƒ Is this a contemporaneous exchange? The transfer was at a later date
ƒ The Alexander case says that when a party misses a grace period in c3, or another one
they cannot fall into the generally applicable category of c1
• This is the so called enabling loan grace period
There are three grace periods that we have covered so far. They are:
• 9-317(e)
o Who is eligible?
ƒ This is for the PMSI secured creditor only
o Length of the grace period:
ƒ Generally 20 days (some states might give one longer)
o Starting and end point of the grace period:
ƒ Start: debtor’s possession
ƒ End: perfection
o Effective with:
ƒ Intervening liens
ƒ 544a strong arm powers, 545, 549
o not effective with:
ƒ 547(b) avoiding powers
• 547(e)(2)(a)
o who is eligible
ƒ for any consensual lien holder
o Length of the grace period:
ƒ 10 days
o Starting and end point of the grace period:
ƒ Start: attachment
ƒ End: perfection
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 o Effective with
ƒ 547(b) avoiding powers
o not effective with:
ƒ strong arm powers 544(a)
ƒ intervening liens
• 547(c)(3)
o Who is eligible?
ƒ PMSI only
o Length of the grace period:
ƒ 20 days
o Starting and end point of the grace period:
ƒ Start: possession
ƒ End: perfection
o Effective with
ƒ 547(b) avoiding powers
o not effective with:
ƒ 544(a) strong arm powers
ƒ intervening liens
Preference liability and the ordinary Course of Business exception (OCOB)
28.3: GV filed for bankruptcy. Four weeks before filing they paid the utility bill of 4.2K. The utility had
threatened to cut off the power. Is this a preference?
• This is antecedent debt, made within 90 days, and they are insolvent. It appears that this is a preferential
payment
• Does the OCOB exception apply?
o How was the debt incurred? There is nothing unusual getting electricity on credit
o Made in the OCOB of the debtor and of the transferee?
ƒ It must be ordinary with the two parties dealing with each other
ƒ Must also be made in accordant with ordinary business terms
ƒ This gives three factors (the debtor, the transferee and the terms)
• But under 547c2c, what are ordinary business terms
o This could look solely to the party
o Of this could be measured from an industry standard
o This is in the roveland case which held that the ordinary course of
business should look at an objective industry standard
o The minority view looks only at the parties
ƒ Why do we need the subjective standard twice—it is already in
547c2b
ƒ One must show that the debt was incurred in an ordinary way
ƒ They must also then show it is ordinary in an objective sense
• But then what are ordinary terms of business?
o This is more of a statistical dimension
o How ordinary must it be
o The seventh circuit has held that ordinary means not extraordinary; as long
as it is inside the outer bounds of the business. See also Roveland
ƒ This does not fall under 547c2a
ƒ This is not under 547c2b

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 • Since GV pays late all of the time and they were more than 90 days late, this does
not seem ordinary
ƒ 547c2c: this does not seem extraordinary
• the meaning of this provision is to allow companies who are in distress to keep
operating
• in a way this looks at preferential intent
• should this be construed broadly
o this encourages people to deal with insolvent companies so they might be
able to restructure
o this has a cost on the estate because the estate will be smaller
• in the long run the judge will perform a ‘sniff test’: all other things considered
does this smell bad
• The June, July and August mortgage payment are all late and have a 50 penalty with them. Is this
ordinary course?
o The courts usually allow late penalty charge as OCOB
• SSB got a repayment in full of a loan on the day it was due
o Should OCOB extend only to short term trade debt or does it extend to long term debt
o There used to be a 45 day requirement: the loan had to be made 45 days before payment was due
o This was then eliminated in the 1984 amendments
o The Supreme Court then decided this in 502 US 151 and held that all debts could fit within the
547c2 could be considered OCOB debts no matter when they were acquired
ƒ There is no category exception for payment of long term debt
• Malloy was paid on a debt that he had given to GV could make payroll. This was a 30 day debt. M is
the principle stock holder. Is this OCOB?
o This does not appear to be OCOB
o In fact this really seems to be odd
o Was this really a loan or an equity infusion—a lot of time when stock holders loan money to
their company makes a loan it is an equity infusion
ƒ This also often fails the sniff test because this seems to be all too convenient
o What about section 5b of the UFTA
ƒ Under 544b lets the trustee use state law avoidance mechanisms as long as the trustee can
find an actual unsecured creditor who would have been in the position to use the state law
avoidance
ƒ So the trustee is not in the 544a role, but looks for an actual creditor in the bankruptcy
estate and would be in the position to do or use the avoidance
ƒ If the trustee can find this person then the trustee can use 5b which says that there is an
avoidance for payment to an insider
ƒ Why use this when it appears that 547b does the trick?
• There might be a situation where this works when 547 does not
ƒ There are then exceptions under 8f:
• Subjective portion only
• Subject to help the debtor and on an antecedent debt of the debtor; the debtor
gives a security interest to an insider and is on account of an antecedent debt and
is for new value and is done with the insider’s best intentions
• The granting of the lien might be a 5b preference but under 8f there might be an
exception
o Here will the payment more qualify under 547c2 or under UFTA?
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 ƒ Under the UFTA because there is only a subjective test which is a lower standard to meet
than the objective factor
ƒ But since the UFTA is derived from bankruptcy law it does not have any other remedies.
It does apply outside of bankruptcy which means that it can be used under state law; this
is its real utility
28.4: ON has a line of credit from DM. DM periodically advanced ON monies and when there have been
monies advanced ON pays it back. The timeline looks as such:
1. 1/1 Beginning balance of 80K
2. 1/3, payment of 5K, balance of 75K
3. 1/15, credit of 4K, balance of 79K
4. 2/10, payment of 2K, balance of 77K
5. 2/28 Credit of 8K (this wipes out the preference on 2/10)
6. 3/4, credit of 9K
7. 3/10, payment of 1K
8. 3/17, credit of 6K (this wipes out the preference of 1K on 3/10)
9. 3/20, payment of 10K
10. 4/1, payment of 9K
• the easy way to do this is to find the highest balance and the balance on the date of filing,
subtract
• all this assumes that the payments themselves were preferences which they likely were and that
the advances were all unsecured and the bank got nothing they could keep on account of the new
value
Class hypothetical: B prepays for a shipment of sugar, 2K, on day 88. On day 70 the sugar is delivered.
Manufacturer of sugar files for bankruptcy on day 0. Was the delivery a preference?
• T is on day 70.
• The transfer must be a transfer of the property of the debtor. The bakery will argue that this is not a
transfer of the property of the debtor because they had already paid for it. Since they had paid for it the
transfer was a transfer of the creditors property
• But couldn’t all creditors make this argument—the creditor has always already given the debtor money
and they could claim it is their money they are getting back
• What should the bakery have done when it prepaid the sugar? They should have sought a lien and this
would then be in a position that they would be no better off by the transfer of the sugar
Class hypothetical: D buys a 15K car with 5K down. This is on day 180. D agrees he will make payments for
the remaining 10K on a 60 month note. C gets a PMSI on the car. The seller insisted as a condition of the deal
that the D got insurance on the car; failure to insure would be a reason for repossession. D pays off the car in
full on day 88. D then quits paying the insurance because this is not a condition of keeping the car. On day 10
the car is totaled. D then files on day 0. Is this a preference?
• If we measure b5 on the point of filing without the payment there is a preference
o There is no car
o There is no insurance
o But this does not seem fair to the seller
ƒ If the transfer had not been made is an element
ƒ Here if the transfer had not been made there would have been insurance and there would
be insurance proceeds making the seller whole
ƒ He is not being made better off by the payment then
o There is a question of how far the hypothetical world is going to be taken.
• If this is measured at the time of the payment then the C is fully secured and there is not a preference
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29.1: P has a line of credit with C. At day 90 the debt was 4.0m and the collateral was worth 4.2M. In the 90
days before bankruptcy, C extended 600K in money and the collateral was worth 5.2M. At day 0 when P filed
for bankruptcy the debt was 4.6M and the collateral was worth 5.2M. Can the TIB make an attack against C?
Is there a preference under 547b, and how much is saved by 547c5?
• If there is a preference it is the increase in the value of the collateral
o To determine if this is a preference, then ask 2 questions
ƒ Was there a transfer at all
• According to Nivens, a mere increase in value is not a transfer
• If the debtor has bought the collateral with otherwise unencumbered money or it
they had made the purchase with an unsecured loan from a new creditor then there
would be a transfer
o It would be picked up by the ‘after-acquired’ security agreement and this
is the transfer that is the preference
• The middle ground would be if the 1M increase in collateral was purchased from
the proceeds of a sale of the collateral in which the C already had a security
interest
o It is a transfer because there is a transfer of security agreement from one
thing to another
o The transfer cannot take place until the debtor has rights in the collateral
ƒ Was the 547b5 element met
• No because there was not a transfer
• With the other two hypothetical ways that the collateral was increased (taking
unencumbered cash, making a sale) would the creditor be made better off
o With the unencumbered cash is the creditor better off? Yes because the
creditor did not have any claim for the money before the purchase and
now they do
ƒ The question is where would they be without the transfer
• They would have no claim in the money
• Now they have a special claim in the money
o When the debtor sells some inventory and purchases new inventory the
creditor is not better off because they still have a lien; the transfer does not
make them any better off
• In this situation it appears that the only transfer is the one where the debtor makes a purchase of
collateral made with unencumbered cash or with the proceeds of a new unsecured loan, is there a 547c5
exception?
o Will this help the creditor and make this a not preference or not work so that the transfer is still a
preference
o This section identifies a certain type of preference which is the creation of a security interest in
inventory or receivables, and then says that any perfected security in inventory/receivables then
it is excepted from preference at all
ƒ This is the starting point but there is an exception that says to the extent that the
aggregate that all such transfers to the transferee causes a reduction
ƒ The line of credit is given within the 90 days then this is the first point of the two-point
net improvement test
ƒ To the extent that these type of preferences are serving to reduce the unsecured
deficiency claim this is the extent to which we will call these preferences and not
protected
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 ƒ This makes one look at the first point and look at the unsecured deficiency claim and
whatever that is this will define the extent to which these transfers can be deemed
presences
ƒ Basically, you look to the beginning and see if there is a deficiency
ƒ If there is a deficiency then how much was it reduced during the 90 days before the filing
ƒ If there is no deficiency to be reduced then the statement that begins 547c5 is where one
should look—to the extent that this might have made the creditor better off it did not and
this is not recoverable because in reality the creditor is not made any better off
• Basically when there is no deficiency at the first time, then there is not a
preference because the creditor is not any better off
29.2: the C had made payments totaling 200K each in the 90 days before filing. Is this a preference?
• These will not be protected by the 547c5 exception because this is not the transfer of a security interest
in inventory/receivables
• The issue is a 547b5 issue
• This will be measured at the point of filing
• Here the payments reduced the debt to 4.4M but the creditor is over secured even if the absence of those
payments
• This means that there is not a preferential transfer
29.3: R has a value 450K. They owe N 430K. N becomes worried when the collateral drops in value. R buys
more inventory. Is there is preference
• Yes there is a preference under 547b when they bought the 200K in new inventory
o This is a transfer of the value under 547 and giving the C a new perfected security interest
• There is an exception under 547c5 because there is no improvement in the position of the creditor
o At day 90 the creditor is over secured
o Even though during the 90 days the collateral value drops to the point where the creditor is
unsecured, this is ignored for the 547c5 exception
o This is because 547c5 looks at day 90 alone and ignores flux in between day 90 and the time of
the filing
o This is a very wooden test and can protect the creditor who may have a preferential intent to
make the debtor shore up the creditors security interest
29.4: when the creditor’s value improves by a mere increase in value then there is not a preference. The
fluctuation in value is not a transfer under 547b.
Hypothetical 1: on Day 90, the debt was 15M. The line of credit was 10M. On the day of bankruptcy the debt
was 13M and the collateral was worth 11M. During the 90 days there was a collateral purchase from
unencumbered money of 1M and a repayment of 2M. What is the preference and how much can be avoided?
• Under 547c5 there is an assumption that the collateral purchase is not a preference except to the extent
that it put the creditor who was under-secured in a better position
• Here the purchase decreased the deficiency by 1M dollars. This is fully avoidable and not protected by
547c5
• The repayment of 2M is a preference under 547b5
o Here the collateral must be hypothetically be put back to 10M
o If the payment had not been made then the debt would have been 15M
o This made the creditor better off when the creditor was better off
o Here the preference is 2M
• Adding the two preferences there is 3M in avoidance

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Hypothetical 2: 15M in debt 10M in collateral. On day 77 there is a purchase of collateral fro 4M. On day 71
there is a repayment of 3M. On day 64 there is a collateral purchase of 2M. On the day of filing the debt is
12M and the collateral is worth 16M. Is there an avoidable preference?
• First aggregate the collateral purchases, which is 6M.
o Under 547c5 the collateral purchases would be protected except to the extent they reduce the
deficiency claim
o Here this means that it reduces the deficiency by 5, meaning that there is 5M in preference avoid-
ability
o 1M is not subject to preference avoid-ability
• Then the debt is hypothetically 15M and the collateral is worth 11M. with the repayment the creditor is
under-secured and the payment of 3M is a preference
Hypothetical 3: at day 90, the position is the same as in 1 & 2. On day 77 the collateral is destroyed
completely and there is no insurance. On day 71 there is a collateral purchase of 13M. On day 64 there is a
payment of 10M. On the date of the filing the debt is 5M and the collateral is worth 13M. Is there an avoidable
preference. What is the total preference liability?
Hypothetical 4: On day 90 the facts are the same. On day 71 there is collateral purchase of 30M. On day 64
there is a repayment of 10M. On the date of filing the collateral is worth 40M and the debt is worth 5M. What
is the total preference exposure for this creditor?
Hypothetical 1: on Day 90, the debt was 15M. The line of credit was 10M. On the day of bankruptcy the debt
was 13M and the collateral was worth 11M. During the 90 days there was a collateral purchase from
unencumbered money of 1M and a repayment of 2M. What is the preference and how much can be avoided?
• Under 547c5 there is an assumption that the collateral purchase is not a preference except to the extent
that it put the creditor who was under-secured in a better position
• Here the purchase decreased the deficiency by 1M dollars. This is fully avoidable and not protected by
547c5
• The repayment of 2M is a preference under 547b5
o Here the collateral must be hypothetically be put back to 10M
o If the payment had not been made then the debt would have been 15M
o This made the creditor better off when the creditor was better off
o Here the preference is 2M
• Adding the two preferences there is 3M in avoidance
• Here the collateral preference is 1m
• The repayment preference is 2M
• This means that the total preference is 3M
• If a creditor becomes wildly over-secured, the total amount of the avoidable preference is only the
amount that the deficiency is reduced for the purpose of 547c5; under 547b this would be the amount
that the creditor becomes over-secured
Hypothetical 2: 15M in debt 10M in collateral. On day 77 there is a purchase of collateral fro 4M. On day 71
there is a repayment of 3M. On day 64 there is a collateral purchase of 2M. On the day of filing the debt is
12M and the collateral is worth 16M. Is there an avoidable preference?
• First aggregate the collateral purchases, which is 6M.
o Under 547c5 the collateral purchases would be protected except to the extent they reduce the
deficiency claim
o Here this means that it reduces the deficiency by 5, meaning that there is 5M in preference avoid-
ability
o 1M is not subject to preference avoid-ability

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 • Then the debt is hypothetically 15M and the collateral is worth 11M. with the repayment the creditor is
under-secured and the payment of 3M is a preference
• There is a total transfer of 6 million
o This qualifies for protection except to the extent that it serves to reduce the insufficiency on day
90
o So here this 6M reduces the insufficiency by 5M so the creditor loses 5M of this as an avoidable
preference but gets to keep 1M under the protection of 547c5
• The repayment of 3M has a 547b5 question but this must be asked as if the additional gains in the
collateral had been avoided already
o This means that the repayment preference is 3M
o The collateral preference is 5M
o This means that the total preference is 8M
o For purposes of c5 all we really care about is the reduction in collateral insufficiency by
increases in the value of the collateral—this means that the 547c5 question should be asked first
ƒ What is the amount of the insufficiency
ƒ And what is the addition of the collateral
ƒ This does not implicate in the first step any of the payments under 547b
Hypothetical 3: at day 90, the position is the same as in 1 & 2. On day 77 the collateral is destroyed
completely and there is no insurance. On day 71 there is a collateral purchase of 13M. On day 64 there is a
payment of 10M. On the date of the filing the debt is 5M and the collateral is worth 13M. Is there an avoidable
preference. What is the total preference liability?
• Looking first at the 547c question, the collateral purchases:
o The 13M purchase is an addition of collateral and would be protected except to the extent that it
reduces the insufficiency
o This means it is not protected to the extent of 5M
o At the date of filing this is an under-secured creditor receiving payment
o Here 5 would be the maximum amount of liability
o The collateral acquisition is 13M
o Since the deficiency is 5M, and the purchase was for 13M, the transaction is avoidable to the
amount of 5M; 8M is not avoidable
• The repayment is also meeting the b5 element
• Alternatively:
o At day 90 there is an insufficiency of 5M. At day 0, with the payment is 2M. this means that the
cap on the preference is 3M
o This can only be avoidable to the extent that it reduces the insufficiency, which is 3M
o Here this means that 10M is protectable
o The maximum is still 5M, but here the reduction on the insufficiency is 3M
o The repayment is considered here first; what is the reduction due to acquisitions not by payments
o After the c5 analysis is complete then the payments are considered and determined whether they
are also preferences
Hypothetical 4: On day 90 the facts are the same. On day 71 there is collateral purchase of 30M. On day 64
there is a repayment of 10M. On the date of filing the collateral is worth 40M and the debt is worth 5M. What
is the total preference exposure for this creditor?
• Here this creditor goes from being slightly under-secured to being very over-secured
• The preference for c5 purposes will be subject to the cap of 5M
o This means that there is only a 5M preference
o The rest of the collateral acquisition is not a preference
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 • With the repayment of 5M and the collateral value is adjusted for the 5M preference (making the
collateral to this creditor worth 35M) then the question must be asked if the payment must make the
creditor better off
o The 10M repayment is not making the creditor any better off if the payment had not been made
o This is because at the date of the filing they are over-secured
o This means that the payment is not a preference
29.5: CB has a loan to M and M is in trouble. The bank wants to set off against the bank to prevent likely
losses. What questions should the firm ask the bank?
• What are the downsides of setting off right now
o This might precipitate an involuntary filing
o Then under 553b the set-off might be avoided if the debtor ends up filing within 90 days of the
set-off
• Without the set off if the debtor files
o Seek lift of stay and do a post-petition set-off
o Under 553b: this will not operate at all to the extent that the bank waits to post position to wait
and get lift of stay
o If this is done post-petition then the avoidance cannot be used to avoid this
o The downside of this
• While the bank does not set off the debtor can withdraw the money from the account and
there goes the set off
• If the debtor tries to withdraw then the bank can stop this without doing a setoff
• To clarify which position is better
o What is the clients vulnerability under the 553b test
• When while the person file for bankruptcy if at all
• If this was known then the avoidance test could be run
o Will the set-off immediately force the debtor into immediate bankruptcy
• This is often the case, so this should always be considered
• What then should be the things considered under the 553b standard
• How much was owed 90 days ago
• How much was in the account 90 days ago
• How much the debtor owes today and how much is in their account today
• Ideally the two numbers should be charted on a daily basis over the past 90 days
• Then this would allow one to look for this highest and lowest insufficiency points
• The test of 553b is similar to c5, but is different. It says that a set off that is made
within 90 days of filing is recoverable by the trustee to the extent that this
improved the creditor’s insufficiency compared to the insufficiency at the later of
2 dates which are 90 days before filing or when there was first an insufficiency
Variation No. 1 to 29.5: Suppose at the time of the phone call from Consolidated Bank there is $75K in the
mobile-home dealer's bank account and the bank is owed $200K. You look at the chart the bank has prepared
and see that 90 days ago there was $30K in the account and the bank was owed $210K. If the bank did the
setoff today and the debtor immediately filed bankruptcy, what would be the trustee's 553(b) recovery?
Knowing these numbers, does it make sense to set off now?
• The insufficiency right now is 125K. So even if the bank set it all off them would still be owed 125K.
• 90 days ago the insufficiency was 180K.
• the trustee can recover from the bank assuming that the debtor immediately files under 553b to the
extent that the insufficiency was less than it was 90 days ago
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 o 180K-125K =55K
o this may be recovered so that 55K will be avoided
o And the bank really might have hurt them because the rest of the claim now might be unsecured
Variation No. 2: suppose at the time of the phone call there is $125K in the bank account and the bank is owed
$100K. You look at the chart the bank has prepared and see that 90 days ago there was $130K in the account
and the bank was owed $210K.
If the bank did the setoff today and the debtor immediately filed bankruptcy, what would be the trustee's 553(b)
recovery?
Variation No. 3
Suppose at the time of the phone call there is $125K in the bank account and the bank is owed $100K. You
look at the chart the bank has prepared and see that 90 days ago there was $130K in the account and the bank
was owed $110K. You also see that while the loan balance stayed the same, the amount in the account
fluctuated as follows: Day 90:$130K; Day 85:$109K; Day 80:$200K; Day 75:$10K.
Under these facts, when does it make the most sense for bank to set off if we assume that debtor will file
bankruptcy as soon as the setoff is affected?
If the bank did the setoff today and the debtor immediately filed bankruptcy, what would be the trustee's 553(b)
recovery?
Given these facts, suppose the bank did set off and the debtor had some flexibility about when to file. If you
were advising the debtor, how many days would you have the debtor wait before filing to maximize the trustee's
recovery under 553(b)?
A. Assume that if you do setoff there is a good chance that the debtor will file bankruptcy
B. Problem hypo from email
a. The debt owed to the bank was 200k
b. The credit in the bank is 75k
c. The insufficiency from the banks perspective is 125k
d. On day 90
i. The bank is owed 210k\
ii. The collateral in the account was 30k
iii. The insufficiency is 180k
e. The 553b formula says
i. IP1-IP2=AP
1. insufficiency at point 1 minus insufficiency at point 2 equals the avoidable
preference
2. 180k-125k=55k
ii. This means the trustee can take 55k back
iii. The AP will always be capped by the amount the bank actually setoff, it cannot be for
more than they actually took
f. Why would one setoff
i. Because one could spend the whole 75k and the trustee would get noting
C. Variation 2
a. Day of setoff and filing
i. 125k in bank account
ii. 100k in debt
iii. There is no insufficiency, there is a collateral overage of 25k
iv. The lowest the insufficiency can be is 0, one does not call it a negative 25
b. Day 90
i. 130k in account

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 ii. bank owed 210k
iii. insufficiency of 80k
c. formula
i. 80k-0=80k is avoidable preference
d. variation 3
i. day 90
1. d=110k
2. c=130k
3. I=0
ii. Day 85
1. 109k=c
iii. day80
1. c=200k
iv. day 75
1. c=10k
v. What will be the best day for bank to setoff
1. must go to first point in the 90 days where there was insufficiency
2. on day 85 the insufficiency was debt 110 and collateral 109 so 1k insufficiency
3. Day 85 becomes the first point of the 2 point test because day 90 there was no
insufficiency and day 85 is the first date there is an insufficiency
vi. 1k-0=1k avoidable preference
vii. If one were advising the debtor how many days would one wait to maximize recovery?
1. I would wait another 15 days so that day 75 would be day 90
2. There would be a huge insufficiency
3. He said wait ten days
a. Only 200k in account on that day 90 so no insufficiency, point one still
moves to the 10k balance day which achieves what I wanted of having the
huge insufficiency
4. The bank would be able to avoid 100k instead of just a thousand dollars
D. Problem 29.6
a. Liberty bank lent money to Tulsa pool on
i. 90k outstanding debt
ii. Tulsa pool gets money to boost inventory from 30k to 100k
b. What do you advise the bank do to get the most money with the least avoidable preference
i. Assumptions
1. current line is 90k outstanding with the debtor 4 months behind on payments
2. day90 d=90k as well
3. c=30k on day 90
ii. April 30 c=100k
iii. On day 0
1. d=90k
2. c=100k
3. no insufficiency
c. The c5 exception here will fail to protect the preference that improves the position of the
creditor, so the 60k will be avoidable
d. So one does not want to push them into bankruptcy

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e. This means tell the bank to wait long enough so that when you force them in to bankruptcy the
purchase is outside the 90 days of preference avoidance
f. There is a risk to this strategy because if you do not force them in you might have to prop them
up for a little while
g. Is it unethical to prop a debtor just for self interested reasons
i. This not unethical because there is always the chance the debtor will succeed
h. Also, one usually takes a security interest in the proceeds of the collateral as well so waiting does
not prejudice you too badly, unless the debtor runs off to Reno with the money
g. Setoff preferences: the TIB is allowed to recover from the bank the amount it setoff and
improved its position.
i. if the C waits until bankruptcy and then does this with the permission of the court then
there is no problem
ii. In re Wild Bills, Inc.: WB filed for chapter 11 and this was converted to c7. Prior to the
petition U made loans to WB. 90 days before filing the opening balance for all of their
accounts was 211K. During this day another 130K was deposited giving a total of 341K.
They owed 1.433M on the loans on this date. 88 days before filing the bank declared the
loans in default. The bank then exercised its right of setoff. The remainder of the loans
was unsecured. The trustee contested this and the bank said that it had a valid right of
setoff. The court held that there was a valid right of setoff and that the bank had the right
to exercise it.
1. Rationale: the 90th day before b’ruptcy includes all of the activities that went on
in the account on the 90th day. Otherwise, we are only counting 89 days. On the
90th day WB owed 1.433M. After the setoff the bank was owed 1.094M. On the
90th day the insufficiency was 1.083M. This means that they did not act in a way
to put themselves in a better position as compared with position they were in 90
days before filing.

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