Cases

Question 1

when determining the secured creditor’s interest in property—look to state law. (non-bankruptcy law) UNLESS there is a clear statement in the bankruptcy law to the contrary.

Answer 1

Butner

Question 2

consistent with Butner. Preserves the interest under state law, but the notion of property is broader— board seats on the exchange count as property. (even though this definition is broader than what would be considered property of the estate under state law…).

Answer 2

Chicago Board of Trade

Question 3

o Key Q: Does form or substance prevail?

First tries to see if “simple trust” can be fit into the language of 101-9a, since it is not limiting language—“including.” BUT looks to LH to say that code should not be considered as extending the definition of “simple trust” beyond its common law definition, without specific statements to that effect.

Answer 3

In re Treasure Island Land Trust

Question 4

In chapter 7 case–obligation to pay for environmental damage the result of a statute. Court says statutory based claim is still a claim:

Answer 4

Ohio v. Kovacs

Question 5

Chapter 11 case— Epstein is “future claim representative”. Sets out four tests for whether “future claims” are claims, and holds this didn’t qualify as a claim.

1. State law definition of “claim”—court rejects this definition.
2. Did debtor’s conduct occur before the bankruptcy—court rejects this definition.
3. Conduct + relationship (pre filing)
4. Piper Test–Conduct + relationship (including post filing but pre “confirmation” of the injury) between debtor and creditor.

Answer 5

Epstien V. Official Committee

Question 6

SC says that individual can file a chapter 11 even if they don’t have an “ongoing business.” No such requirement under the statute

Answer 6

Toibb v. Radoff

Question 7

SARE (“Sole Asset Real Estate” Case)—somewhat common issue. Goal was to use this as leverage in negotiations with creditors for reduction on the debt service, to enable it to continue financially.
• Was not a “shield” but rather a “sword” and the bankruptcy court determines it was not filed in good faith—dismisses the case.
• Now a law in SARE cases that give small window for filing of a plan, or else the case is dismissed.

Answer 7

Victory Construction

Question 8

Filed with pending consumer antitrust litigation against it. Court dismisses the filing as “litigation strategy” to coerce settlement from those suits. “inchoate risk” of insolvency is not enough to file.
o Company had filed press release saying that the company financials were fine.

Answer 8

SGL

Question 9

Q: whether Weil should have been disqualified under section 327 for improper disclosure of conflicts?
• Concludes that Weil was not disinterested but sanctions should suffice, and the report was not tainted
• Case stands for proposition that need to take Rule 2014(a) very seriously—disclosure obligations of “connections” whether you think it is “adverse” or “material” or not up to the judge to decide.

Answer 9

Leslie Faye

Question 10

§327(d)-exception for hiring accountants or law firm when it is your own firm. Fees were originally disallowed b/c of conflict, but district court overrules, saying the disclosure was adequate, and their was no issue—should have been paid

Answer 10

Marvel

Question 11

violated the automatic stay by compelling payment, in that they said they would not ship new goods unless they received payment for the previous ones. Court gives equitable relief, despite lack of contract with the debtor, and orders Wilson to ship despite lack of payment

Answer 11

Wilson

Question 12

• But for immediate payment, vendors would cease dealing
• Continued transactions with these vendors will leave residual benefit to unsecured creditors, such that they will be no worse off than if these payments were not made.

Here, court holds no sufficient showing made, and rejects theory of “reliance” as a reason not to avoid these preferential payments.

Answer 12

KMART

Question 13

peaks and valleys in the value of the collateral, so need to take a long term view of whether it will be adequately protected or not.

Answer 13

Dynaco

Question 14

unsecured creditor after appointment to the committee was no longer an unsecured creditor, so trustee wrote to say they are no longer on committee. They sue, but court agrees that they no longer belong on the committee.

key Q: Are they thinking like a secured (take collateral and let it die) or unsecured creditor (if possible let the company live, and everyone will be better off)

Answer 14

American West

Question 15

Ad-Hoc committee (an informal committee so NO fiduciary duty aside from to other members of the committee)
• Must pay their own fees, subject to exceptional circumstances
o Often hedge funds—information they acquire on the committee can be used as opposed to the official committee where it would be treated as insider trading.
• Case is about disclosure obligations of the ad-hocs committees.

Answer 15

Northwest case

Question 16

What happens to the “right of set-off”?
• Can’t do it: interfering with property of the estate.
o §362a7 says need to lift the stay even though §5__ protects the right of set-off.
• What about a temporary hold on an account?
o Justice Scalia says this is allowed—temporary freeze is not “exercising control” of the funds.

Answer 16

Citizens bank of Maryland v. Struck

Question 17

automatic stay can extend to cover insurer IFF the policy has a limit that is reached and which is not sufficient to cover the debtor. Prevents the limited pool from being prematurely depleted.

Answer 17

AH Robins

Question 18

–Where company executives put their own assets as collateral, the stay does not protect their individual assets.
• But sometimes key employees or guarantor are protected as an extension of the automatic stay (§105) if there role is so integral to the continued operation of the business. (“unusual circumstances)

Answer 18

Crestar Bank

Question 19

• Distinguishes b/w penalties (not allowed to violate stay) and fees e.g. for environmental upkeep
  o Exception to the exception: “to enforce a money judgement” (construed narrowly to give greatest leniency to state authority).
• Where action to collect is brought in the bankruptcy court. (Ie. while an action seeking declaratory judgement in district court would violate the stay, not true if brought within the bankruptcy court.

Answer 19

NLRB case

Question 20

first method of adequate protection is the making of cash payments to compensate for depreciation of opposing entity’s interest. (periodic payments) §361(1)

Answer 20

Bermec

Question 21

rejects forced liquidation valuation (for purposes of determining the amount of disposition from collateral and therefore payments necessary to cover any depreciation) in favor of “commercial reasonableness” standard akin to protections in the UCC provided debtor continues to operate going-concern.

• Net recovery realizable from disposition as near as may be in the ordinary course of business.
• “collateral margin or equity” is amount by which projected net recoveries from a commercially reasonable disposition exceed the debt secured.
• §361(2)—adequate protection through replacement liens

Answer 21

In re. American Kitchen Foods—

Question 22

• Asks 4 questions
  o What is the “interest in property” being protected?
   Secured creditor gets more protection/ Senior vs. junior lienholder
   Real vs. intangible property
   whether value fluctuates or remains stable
   Proposed use or idleness of the property
  o What aspects of the “interest in property” require protection?
   Only the value of the lien requires protection, not the overall debt
  o For what is the “interest in property” being protected?
   Only that decline in value which but for the stay could be Prevented or mitigated.
  o What is the method of protection?
• Alternate view: (court here rejects this view)—stay should be terminated when equity cushion will be absorbed through interest, commissions, and other costs of resale.
  o Absence of equity cushion is not dispositive—must be weighted against necessity of the property for effective reorganization

Answer 22

In re. Alyucan Interstate

Question 23

(SC): motion to lift stay in which the claim was Undersecured. But the security was increasing in value (so no diminution of value). Creditor claims “lack of adequate protection”—that lack of ability to foreclose should be compensated– and bankruptcy court grants percentage/annum grant to the creditor. SC reverses because 506b only applies to oversecured assets. So no interest or compensation for the delay.
- Section 506:
o For oversecured collateral—creditor can ask to take out the interest on the security in compensation for delay.
o Does NOT apply to undersecured assets
- Only compensated for delay when there is a dimunition in value of the asset.
- Once creditor shows they are undersecured though, under the code—burden shifts to debtor to show it is necessary for effective reorganization.
o Requires: successful reorganization within reasonable amount of time!

Answer 23

Timbers of Inwood Forest Assc

Question 24

previously supportive of DIP management, but relations sour after reneging on previous agreement.
• Applies “clear and convincing” standard
• Mismanagement prior to filing not grounds for trustee, but continuing mismanagement after filing is grounds for trustee.
• Since analyzing under (a)(2)—public interest weighs heavily in the analysis.
• 4 factors:
o Trustworthiness of the debtor
o Past and present performance and prospects for debtor’s rehabilitation
o Confidence or lack thereof of the business community and creditors in present management
o Benefits derived by appointment of a trustee, balanced against the cost of the appointment
• Also weighing heavily—no one willing to support continued use of escrowed unencumbered cash without appointment of T—alone sufficient under (a)(2).

Answer 24

Ionosphere

Question 25

DIP challenges appointment of trustee by creditor’s committee.
• Appointment of trustee in chap. 11 considered “extraordinary act” presumption of DIP control
• Rejects standard of showing of “clear and convincing evidence” justifying appointment of T rather only preponderance standard required allowing for greater judicial discretion.
o Failure to disclose material and relevant information to the court and to creditors is grounds for appointment of T.
o Existence of grand jury investigation and civil suits (which would drain management focus) at least relevant
o Questionable business transactions with related companies sufficient.
• Simplicity of a business weakens presumption in favor of DIP management, rather than weighing against it.

Answer 25

Tradex Corporation v. Morse

Question 26

On MSJ Absestos company—future litigants committee and other committees reach agreement on plan with management, but opposed by the equity committee of shareholders, b/c their share could be diluted under the plan by 90% or more. Instead wants to elect new officers who would oppose the current plan (under provision of Delaware law allowing special meeting to be called). Court finds issues of triable fact as to whether there was “clear abuse.” (though the decision was affirmed on remand).
• Can only impair vote of stockholders in case of “clear abuse.” AND “irreparable injury” (for injunction)
o Attempting to get more bargaining power is not “clear abuse”
o Rather question of whether rehabilitation is “ seriously threatened rather than merely delayed” by the vote.
 Delay is allowed as “concomitant of the right to change boards”
• Dicta: This changes in the zone of insolvency—stockholders no longer real parties in interest
o BLL: insolvency does not affect corporate governance.
• On remand: Affirmed w/ new considerations
o Some of the stock bought after the chap. 11 filing
o Finding of good faith on the creditors committee and the DIP.
o Finding that the delay could imperil the possibility of reorganization.

Answer 26

Manville

Question 27

family business in which some members of the board are moving for instillation of new board to prevent current CEO’s plan to reissue stock that would divest the rest of their equity. Court says that the current management has more experience, and has made some progress, whereas the proposed board does not have experience or a concrete plan in mind.
• Though generally don’t interfere with corporate governance, in case where ie. salaries are excessive to insiders or case like this—court can order temporary abridgement of those rights.

Answer 27

Lifeguard Industry

Question 28

§1108- “unless the court orders otherwise, the trustee may operate the debtor’s business”
• BJR rule applies, so we don’t second guess decisions of the trustee where in good faith, upon a reasonable basis, within the scope of his authority under th code= “arbitrary and capricious” standard.
o “unless the court orders otherwise” means if the court determines that it is proper to dismiss/ change to liquidation where proper—not that the trustee’s management can be conditioned or second guessed rebuttable presumption of continued operation.
o Code sections allow judicial oversight of the DIP, but those provisions are missing from §1108, suggesting the same limitations don’t apply to an appointed trustee

Answer 28

Curlew Valley

Question 29

Allows for dismissal of trustee for DIP in two cases:
• “improvidence”—finding based on facts not originally available that trustee should not have been appointed in the first place.
• “change in circumstances”—the circumstances which gave rise to the order appointing a trustee no longer exist.

Answer 29

§1105

Question 30

court will not interfere with day to day operations of the DIP—possessing all the powers of a trustee—and creditor committee should not be involved in day to day decisions either.
• But in large cases with creditor involvement or where DIP financing is required, debtor may solicit advise from creditors as sign of goodwill to encourage cooperation and confirmation of an eventual plan.
• ++§363(b)(1)—limited to ordinary course of business. Otherwise notice and hearing required.

Answer 30

In re. UNR Industries

Question 31

DIP terminating medical malpractice insurance was considered not to be “ordinary course of business”—so the insurance was reinstated b/c had no right to cancel the policy without notice and hearing.
• Horizontal—losing policy is “professional suicide
• Vertical—massive tort claim could threaten all creditor’s claims…

Answer 31

Medical Malpractice Insurance Association v. Hirsch

Question 32

trustee’s employees are also fiduciaries bound by duty of loyalty

Answer 32

Butler’s Shoe

Question 33

introduces concept of zone of insolvency—clarified by later opinions

Answer 33

Credit Lynonais

Question 34

shield not a sword does not establish a new cause of action for creditors of insolvent firms. Rather shield to directors who in good faith reject a risky strategy urged by shareholders.

1. Creditors as residual risk bearers—can only press claim as a derivative action (not direct).
2. Change in fiduciary duties only occurs at actual insolvency, not zone of insolvency

Answer 34

Production Resources Corp. v. NCT Group

Question 35

b. “Deepening insolvency”—prolonging existence of troubled firm as separate cause of action mostly rejected as legal theory absent underlying misconduct

Answer 35

Trenwick

Question 36

No “adequate protection” where asset encumbered by its lien will remain so encumbered”, and suggestion that property may or may not gain value over time is not certain enough

Answer 36

Resolution Trust Corp

Question 37

Provisions that courts find problematic:
o Must allow carve out from super-priority status for payment of fees to debtor and committees’ counsel and possibly trustee’s counsel to preserve adversary system.
o Problem with default clauses triggered by appointment of trustee or examiner.
o Problem with exclusivity agreements (only seek financing from this lender)
o In general: won’t approve where the apparent purpose of the financing is the benefit a creditor rather than the estate.
 BUT there is a “good faith” safe harbor (§364(e))

Answer 37

In re. Ames Dept. Stores

Question 38

Applies vertical and horizontal test to determine whether loan was in the ordinary course of business, and finds it was not.
• Notes that “nunc pro tunc” order is possible—(retroactive approval of a loan) reserved though for “extraordinary and unusual circumstances”. (3 elements):
o Court would have approved the laon if timely application made
o No creditor was injured by the continuation of the business made possible by the loan
o The debtor and lender honestly believed they had authority to enter the transaction.
• The court goes even further, declaring that b/c it doesn’t get admin expense treatment, it isn’t even really a “claim” within the meaning of the bk code, so won’t be treated on par with unsecured claims.

Answer 38

In re Ockerlund Construction

Question 39

“cross-collateralization” (securing pre-petition debts post-petition as condition of lending) not allowed. Maybe same with “rollups” provision (payin prepetition debt, in whole or in part, with post-petition financing).
• Those courts that do allow—only where:
o Business operations would fail absent the proposed financing
o Unable to obtain financing on acceptable terms
o Proposed lender won’t accept less preferential terms
o Proposed financing is in the general creditor body’s best interest

Answer 39

Shapiro v. Syabrook Manufacturing

Question 40

Free and Clear Sale—and then payout from proceeds. (5 possibilities):
• Applicable nonbankrupt law permits sale of property free and clear of such interest
• Entity asserting the interest consents
• Such interest is a lien, and the price at which such property is to be sold is greater than the aggregate value of all liens on such property
• Such interest is in bona fide dispute
• The entity asserting the interest could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

Answer 40

363(f)

Question 41

reverts to “perishable” property concept to authorize sale of substantial all of the assets outside of the formal chapter 11 protections of a plan. Court found no compelling business justification for the sale. (proferred justification was the “desire of creditors”)
• Rejects “emergency” approach—only allowed if imminent danger of loss of the asset
• Rather—business judgement approach “best interest of the estate” approach
o Need for expedition is not enough
o List of factors:
 Proportionate value of the asset to the estate as a whole
 Amount of elapsed time since the filing
 Likelihood of plan confirmation in the near future
 Effect of proposed disposition on future plans of reorganization
 Proceeds to be obtained vis a vis any appraisals of the property
 Whether the proposal envisions use, sale, or lease of the property
 Most important: asset decreasing or increasing over time—“perishable” concept.

Answer 41

In re. Lionel

Question 42

)(both a sale of substantially all assets case to “new company” holding all assets of prior company and a free in clear case)
• Reaffirms multifactor test from Lionel
• Improper sale known as “sub-rosa” (secret) plan of reorganization
• Affirms JG opinion approving the sale:
o Equity stakes in New Chrysler attributable to new value—ability to get certain gov. loans, new tech, and new management which were not assets of debto’s estate.
o Immediate liquidation found to be only alternative and would yield less value.
 Fit paradigm of “melting ice cube”
• Finds no issue with free and clear sale: Consent was sufficient. Personal injury claims could similarly be extinguished through 363(f) sale.
o “ any interest in property” in §363(f) includes claims that “arise from the property being sold.”

Answer 42

Chrysler

Question 43

court finds problem with provision of 363(b) sale and combined DIP financing that promotes pre-petition unsecured portion of a claim to an admin. Claim.
• Because that loan was sooo largeEffect of the DIP loan was to forclose payment to any other creditor including admin. Claiments.
• Break-up fee likely chilled the bidding. (fee to the proposed buyer if can get better offer for a sale.)

Answer 43

In re. On-Site Sourcing

Question 44

Court should approve assumption if it views it as appropriate business judgement (BJR). Court of appeals found fault though in the court’s decision that the debtor had not violated the key-man clause and that therefore assumption was proper. Because w/ exec contract there is no proof of claim, the party has not yet waived its 7th amendment Jury right (creates jx issue!)—Therefore, contract issues may not be decided as part of a motion to assume.

Answer 44

Orion

Question 45

undercapatlization is insufficient for equitable sub.—rather reverts to Mobile Steel test:
 Inequitable conduct
 Results in injury to creditors or unfair benefit to claimant
 Equitable subordination would not be inconsistent with the provisions of the Bk code.

Answer 45

o Lifschultz

Question 46

• Substantive Consolidation—only available in 2 circumstances:
o Did the creditors deal with the entities as a single unit and not rely on their separateness? OR
o Are the affairs of the debtors so hopelessly entangled that consolidation would benefit all creditors (ie. it would take way to long and cost too much to disentangle)?

Answer 46

Augie/Restivo

Question 47

“party in interest” in sec. 1121 = anyone with financial or legal stake in the outcome of the case, including a post-petition transfer

Answer 47

el comandante

Question 48

• Upon finding of cause (9 factors)—court can shorten or lengthen the exclusivity period:
o Size and complexity of the case
o Necessity of sufficient time to permit the debtor to negotiate a plan and prepare adequate information
o Existence of good faith progress
o Debtor continues paying bills as they become due
o Whether debtor has demonstrated reasonable prospects of viable plan
o Progress in negotiations with creditors
o Amount of time elapsed in the case
o Whether the extension is sought pressure creditors to submit to debtor’s demands
o Existence of any unresolved contingency

Answer 48

Express One

Question 49

defer to the judgement of the bankruptcy court in estimating the claims. (theoretically expected value, but judges will do things differently)

Answer 49

• In re Peele

Question 50

• debtor classifies unsecured trade creditors and unsecured portion of bank creditor (part secured, part unsecured) separately, to enable cramdown—In holding that §1122 does not permit manipulation of classes to force a desired result—“gerrymander the vote process”, court rejects 3 arguments: (Note: reviewed de novo)
• §1122 doesn’t prevent classification of like claims differently BUT existence of §1122(b) to specifically authorize class of smaller unsecured claims for administrative convenience suggests this overreads the discretion.
• Unsecured claims that only result from statutory magic (ie. dividing the oversecured claim into secured and unsecured) are different from other unsecured claims
• Good business reasons justify separating the claims—like good will BUT if the claims will be treated the same way, then they should also be classified together.

Answer 50

Phoenix Mutual

Question 51

separate classification of creditors approved, under similar analysis to Phonix Mutual, because this group had different stake in the future viability of the reorganized company and alternative means at its disposal for protecting its claim, and because that claim is connected with the collective bargaining process—“virtually unique interest”
• Note though, that the court basically just reviews for abuse of discretion.

Answer 51

Teamsters National Freight

Question 52

Plan Distinguishes b/w different types of possible future litigants—foreign vs. domestic, placing them in different classes. (NOTE: the foreign classes had approved the plan, so the court didn’t have to reach the issue of discrimination against a certain class, but also found good business justification for the distinction based on average payouts domestic vs. foreign courts.
• The court disapproved of the “legitimate reason” rationale from Phoenix Mutual etc… but nevertheless applied it:
o Argues that plain language reading of §1122(a) is can separate substantially similar claims and 1122(b) is more narrow—allows for administrative reasons to consolidate non-similar smaller claims.
o Plenty protection for other creditors in §1129 and good faith provisions.

Answer 52

In re. Downing Corp

Question 53

“adequate disclosure” for “typical” class member judge must approve the disclosure
• Can give different disclosures to different classes
• Maybe some question of who is the “typical” member in large class
• §1125(b)—neither acceptance nor rejections of a plan can be solicited until the court has approved the disclosure statement (by debtor OR by creditors…)
• **What info is necessary?
o Possible claims against creditors
o Most courts—require a valuation if the company were liquidated in chap. 7 to assist with the evaluation in case of cramdown!

Answer 53

§1125

Question 54

• Any default must be cured in addition to damages for “reasonable reliance” by effective date of the plan:
o court rejects argument that stayed order of foreclosure cannot be “cured” by deaccelerating the loan, even though the plan does not restore the foreclosure right then existing

Answer 54

o In re. Madison Hotels

Question 55

• “artificial impairment” not allowed
—where classes could have been paid in full on effective date of the plan, delaying the payment in order to claim those classes were “impaired” and move to cramdown vote, not permitted

Answer 55

In re. Windsor

Question 56

if creditor has improper motive, then can “designate” (read: discount) their vote.

Answer 56

Central Glove

Question 57

began discussing plan before exclusivity period had expired. issue was even setting aside the creditor’s claim, other creditors would know to wait for better planso court grants equitable subordination of the improper creditor to other claims in that class.

Answer 57

In re. Clamp All

Question 58

One creditor was bribed for their vote “good faith” requirement on voting for a plan.
• Here, had already rejected the plan, so even though can normally file motion to change vote, court said they could not change vote.

Answer 58

Featherwork

Question 59

secured creditor owned piece of property, and debtor wanted to break up and sell the property. Debtor claimed creditor would be “unimpaired.” So creditor tried to purchase unsecured creditor’s claims in order to make the class vote no, in order to protect its own interest in a case (RATHER than protecting someone outside the case—ie. a competitor)
•	If you buy all the unsecured claims in the classThe purchased unsecured creditors are not hurt so court approves, and treats each purchase of a claim still as one vote (rather than aggregating them as 1 single vote)
•	What about if you buy just enough to block confirmation then the other unsecured creditors are hurt, and the vote would be problematic.
•	AG: There should be something wrong with this. Shouldn’t be able to purchase votes in a separate class… (ie. secured can only protect actions of secured creditors not of unsecured creditors)—but courts don’t really follow this.

Answer 59

Figtor

Question 60

creditor buys up unsecured claims to prevent debtor plan. Here, though claims are designated because ulterior motive. Circuit court applies “good faith” requirement as basis for designating the claims.

Answer 60

Dish

Question 61

o Must pay at time of plan proposal the ASC portion of the bifurcated claim pay over time but pay interest rate so that the present value of that future payment equals the ASC.
 How to calculate this rate (BUT note that this case was chap 13 case, so would not necessarily apply to chap. 11)
• Formula rate– prime rate plus adjustment for risk, up to 3%.
o This is the easiest to determine
• Coerced loan rate if bank were to invest the money in another party with same risks, what would they charge?
• Contract rate revert to the contract rate, subject to small adjustments
• Cost of funds look to market rates what would it cost now?

Answer 61

Till

Question 62

If it’s a sale roman numeral II applies. So can’t give 1 million secured portion of the 1.3 million claim, and keep the extra .3 as “indubitable equivlent” of secured creditor rights.

Answer 62

Rad-lax

Question 63

SC decision that can’t issue new equity to partners (“old equity”) in exchange for new contribution—where unsecured creditors not paid in full b/c that that would violate the absolute priority rule.
 Maybe different if there was no “exclusivity” provision whereby only “old equity” had the right to purchase the new equity shares.
 Rule: §1129(b)(2)(B)(ii)—bars junior interest holder’s receipt of new property on account of his prior interest.

Answer 63

Lasalle Bank

Question 64

1st circuit case. Bank chooses to reroute by agreement a portion of the payout to the general unsecured creditors. (Once it had gone through 726 secured creditors in the priority structure) BUT this would NOT work if this was still the property of the estate—can’t unilateraly change the priority schedule followed in the bankruptcy.
o NOTE that normally property that a secured creditor has an interest in remains the property of the estate BUT under chap. 7, there is liquidation before distribution of the proceeds, so at that point (after 726 liquidation) it already belonged to the secured creditor, and they can now give that to who they want, bypassing the IRS.
o This arrangement is known as “gifting.”

Answer 64

• Spm manufacturer