General Flashcards
What are the 4 decision making mechanisms in bankruptcy?
1) Contract
2) Administrative
3) Negotiated Approach
4) Sale/Market Approach
What are examples of the contract approach?
Outside of bankruptcy (UCC/State Law)
Repo+Derivatives
What are examples of the administrative approach?
The old bankruptcy code; Atlas Pipeline; Case v LA Lumber;
What are examples of the negotiated approach?
The current bankruptcy code
What are examples of the market approach?
363 sale; Cumulus Media (“Where are the buyers?”)
What are some of the costs of bankruptcy?
Brain drain; supplier flight; legal fees; distracted managers; lost customers; failure to act on promising opportunities
What are some inventive solutions to the long-expensive bankruptcy problem?
1) Sell the whole thing or use a stock float on the assets
2) Give each tier an option to buy the firm at the price of all senior claims and gradually eliminate claims
3) Sell the firm regardless b/c the costs of an actual sale will be less than the costs of a hypothetical sale/valuation
What is bankruptcy about (2 answers)
Debt and how it is negotiated ex-ante
Who gets how much + cap structure
What triggers most bankruptcies? (2 answers)
Lack of cash & need for a dip loan
Acceleration provisions + cross-defaults
Why would anyone add a NPC?
unsecured creditors fear getting bumped down in priority by future security interests?
Are NPCs enforcable?
No because a NPC does not create a security interest and UCC says that regardless of contracts otherwise a debtor can still transfer their property as security. Plus no equitable liens per Kelly v Central Hanover Bank
Are NPCs useless?
No.
1) the prospective lender might fear tortious interference with contract
2) The prospective lender might fear the debtor might immediately default and head into bankruptcy and then the loan’s not profitable
3) The NPC holder can immediately call default, accelerate, and maybe force a bankruptcy (just have to monitor). Pairs well with a provision that periodically forces the CFO to attest that covenants have not been breached
Why are new value plans suspect?
Fair and equitable prevents junior claims from taking anything unless middle claims consent or are unimpaired, so if the shareholders take anything “on account of” their old claims, they violate the 1129b cramdown
What is an easy way around the new value plan concerns benefitting shareholders?
Shareholders offer new money to the company to buy the equity. Of course there is skepticism about the arms-length nature of these deals, so enter La Salle Market Test
What are the 2 ways that new value plans get approved?
1) Everyone consents
2) La Salle Market test to shown that the shareholders take nothing “on account of” their old claims (still this disregards the insider informational advantage)
What’s the difference in a gift plan and a new value plan?
A gift plan is an offer to give more $ to a party after the bankruptcy is over and are usually done outside of court. New value plans are done inside of court and try to prove that the value given to the party is not on account of a prior claim. The taking value/gift “on account of” the junior claim is still the concern.
What are the 3 ways a gift plan gets approved?
1) Everyone consents
2) they are formally made for permissible purposes (like incentivize management)
3) They are done with informal handshake deals
What is the small business debtor reorganization act?
alters absolute priority and requirement to pay admin claims in cash and instead grants them “disposable income” of the business for the next few years
Also eliminates the requirement that at least one impaired creditor consent
Reasons why it is a bad idea for a bank officer to sit on the board of a company
Bank may become an insider for preference purposes
Debt might start to look more like equity
Bank might start to look like partner (partnership liability)
Increased chance of looking like the creditor controls the debtor for purposes of equitable subordination
