Commencing a BK Case

Question 1

Three Implementation Goals of BK? (Policy Behind it)

Answer 1

(1) Avoid race of diligence
a. BK replaces this w/ pro rata distribution
(2) Capital restructuring of firms in financial distress w/ going concern value
a. Financial distress (L > A +E) – current capital structure does not apply the biz to service its debt; a restructuring would allow it to and continue operating the biz.
b. Going concern value must be greater than the liquidation value
(3) Provides “honest but unfortunate” individuals w/ a fresh start
The goal of BK: maximize recovery for all creditors.

Question 2

Who is a debtor under 109(a)?

Answer 2

a person that resides or has a domicile, a place of business, or property in the United States.

§ 101(41): the term person includes individual, partnership, and corporation but does not include governmental unit.

Question 3

Specifics re. involuntary petition?

Answer 3

a. Generally, must have at least 12 creditors; the petition must be filed by 3 or more creditors, each of whom is the holder of an unsecured claim that is not contingent as to liability or subject to a bona fide dispute.
b. Undisputed, non-contingent claims must be aggregated to at least $18,600.
c. If > 12 creditors, only one creditor with a sufficiently large claim is needed.
d. 303(i) further provides that

Question 4

Filtering/ Screen Tools? (1/2)

What is it and what is the test?

Answer 4

• §305(a): dismissal in the best interest of the debtor or creditor
   Test for a motion to abstain: compare what creditors are receiving under the workout agreement to what creditors are expected to receive in BK
• Workout > BK  dismiss
• BK > workout  keep in BK (deny motion)
  o Rationale: According to Beard & Jackson, BK is for creditors

Question 5

Filtering/ Screen Tools? (2/2)

What is it and what is the test?

Answer 5

• §1112(b): allows BK court to convert or dismiss a Chapter 11 case for “cause” including “the absence of a reasonable likelihood of rehabilitation.”
• The doctrine of good faith (bad faith dismissal)
• Test: (1) does the BK serve a valid BK purpose; and (2) was it filed only to obtain a tactical advantage?

Question 6

WHY ARE SECURED CREDITORS WORRIED ABOUT BANKRUPTCY?

Answer 6

(1) Enforcement of SP’s security interest is stayed. 11 U.S.C. §362.

(2) Debtor can use SP’s collateral indefinitely during the bankruptcy provided that SP is “adequately protected” 11 U.S.C. § 361, 363.

(3) Debtor can “cramdown” a plan of reorganization on SP that re-writes the SP’s loan agreement. 11 U.S.C. § 1129(b).