Bankruptcy and Article 9 Flashcards
General
When a debtor enters a bankruptcy court they will likely get nothing unless the court recognizes the validity of the S.I. held by that creditor in an assets of the debtor
Federal law allows debtor’s trustee to use various theories to attack the S.I.
—-If this fails then the creditors rights will continue and they will retrieve collateral (or its value)
The Trustee’s Status
The filing of a bankruptcy petition creates an automatic stay of any further creditor collection activity. Thereafter, creditors must pursue whatever rights they have in the bankruptcy proceeding only. The rule is clear: filing a bankruptcy petition stops all creditor actions done without the permission of the bankruptcy court, and violations lead to contempt of court citations
If a financing statement is effective when debtor goes into bankruptcy it is not necessary to file a continuation statement to preserve perfection
The trustee in bankruptcy is given a number of useful rights in resisting or attacking creditors’ claims:
Strong arm clause = trustee with the state law status of a hypothetical judicial lien creditor who acquires a lien on all of the debtors property as of the moment of the filing of bankruptcy petition – the trustee steps into the shoes of specified creditors or purchasers and, therefore, can avoid certain transfers that these parties could avoid at state law and exercise other powers that these parties could exercise at state law
Trustee may avoid unperfected S.I.s
Trustee can use whatever defenses the debtor would have had against the claim
SOF, SOL, etc
Trustee as Lien Creditor and as Successor to Certain Creditors and Purchasers
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
—-(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists; . . . or
—-(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
(b) The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.
Limitations on Avoiding Powers
(b)(1) The rights and powers of the trustee under section 544, 545, or 549 of this title are subject to any generally applicable law that—
(A) permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of such perfection; or
(B) provides for the maintenance or continuation of perfection of an interest in property to be effective against an entity that acquires rights in such property before the date on which action is taken to effect such maintenance or continuation. . . .
Preference
prebankruptcy transfer from the debtor to a creditor that, if honored in bankruptcy, would put the recipient in a better position than other creditors of similar rank and priority.
Whether trustee may avoid a given transfer as a preference:
Whether all the general elements of an avoidable preference are satisfied
If yes, whether the defendant has a viable affirmative defense
General Elements of an Avoidable Preference
The debtor made a transfer:
- Of an interest of the debtor in property
- To a creditor or for a creditors benefit
- For or on account of an antecedent debt that the debtor owed prior to the transfer
- While the debtor was insolvent
- On or within 90 days prepetition, or one year prepetition if the creditor was an insider when the debtor made the transfer; and
- In a way or amount that enables the creditor to receive more than it would if the transfer had not been made, the case has been filed under chapter 7, and the creditor has received the appropriate distribution in chapter 7
The Floating Lien in Bankruptcy
an interest in “a constantly changing mass of collateral” on (a loan) that fluctuates as payments and advances are made.
The UCC clearly permits after-acquired property to be covered automatically by the security interest,
the Code is drafted so that the security interest cannot attach or be perfected until the debtor acquires an interest in the property and, arguably, that occurs within the four-month period
Bankruptcy code solution to after-acquired property/preference has a test where the courts compare debt/collateral different at two points
- 90 days before filing of the petition and
- Date of the filing of the petition
There is a preference to the extent that the creditor’s position has improved within this period
Fraudulent Transfers
the trustee may avoid a transfer of an interest of the debtor in property that occurred within two years prepetition, as well as an obligation that the debtor incurred within two years prepetition, under two alternative tests: actual fraud and constructive fraud
Put another way, an existing or later creditor (and the bankruptcy trustee, per §544(b)) may avoid two types of fraudulent transfers:
those where the transferee from an insolvent debtor does not give “reasonably equivalent value in exchange,” and
those where the transferor and the transferee have the actual intent to defraud the debtor’s creditors.
Actual Fraudulent Transfers
The trustee may avoid a transfer as actually fraudulent if the debtor voluntarily or involuntarily made the transfer or incurred the obligation with actual fraudulent intent – that is, actual intent to hinder, delay, or defraud any creditor
Badges of Fraud (intent of fraud)
a. Whether the transfer or obligation was to an insider.
b. Whether the debtor retained possession or control of the property transferred after the transfer.
c. Whether the transfer or obligation was disclosed or concealed.
d. Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
e. Whether the transfer was of substantially all the debtor’s assets.
f. Whether the debtor absconded.
g. Whether the debtor removed or concealed assets.
h. Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
i. Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
j. Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.
k. Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.
