Intro & Overview

Question 1

§109: Entities that are eligible to file

Answer 1

1. 109(a): (1) a person that resides or has a domicile, a place of business, or property in the United States, or
   (2) a Municipality
2. 109(b) Ch.7: i. A person except for the following-
3. Railroad
4. Domestic insurance company or bank/Savings and Loan
5. Foreign insurance company or bank/Savings & Loan
6. Def. of a person- individuals, partnerships, and corporations (no governmental units)
7. 109(d) Ch. 11: RR and a person who can file Ch. 7 can file Ch. 11

Question 2

§362(d): Relief From The Automatic Stay

Answer 2

1. The filing of a voluntary or involuntary petition under C 7 or C11 invokes the automatic stay.
2. On request of a party of interest and after notice and hearing the court shall grant relief from the stay:
   1) For cause, including lack of adequate protection.
   2) if debtor doesn’t have equity in property AND such property is not necessary to an effective organization.
   * 3. The fact that debtor doesn’t have equity in property doesn’t necessarily mean the property is ineffective to organization.

Question 3

§1112: Conversion or Dismissal

Answer 3

1. Petition can be dismissed or converted to Ch. 7 “for cause.”
2. Code doesn’t define “for cause,” but below are some examples. Courts also read in a good faith basis for filing.

[A] Substantial or continuing gloss to or diminution of the estate and the absence of a reasonable likelihood of reorganization

[B] Gross mismanagement of the estate

[C] Failure to maintain appropriate insurance that poses a risk to the estate or the public

[D] Unauthorized use of cash collateral substantially harmful to 1 or more creditors

[E] Failure to comply with an order of the court

[F] Unexcused failure to satisfy timely any filing or reporting requirement

[G] Failure to attend meetings of the creditors or an examination

[H] Failure timely to provide information or attend meetings reasonably requested by the US Trustee

[I] Failure timely to pay taxes owed after the date of the order for relief or to file or confirm a plan, within the time fixed by this title or by order of the court

[J] Failure to file a disclosure statement or to file or confirm a plan

[M] Inability to effectuate substantial consummation of a confirmed plan

[N] Material default by the debtor with respect to the plan

[O] Termination of a confirmed plan by reason of the occurrence of a condition specified in the plan.

Question 4

What are Factors Indicative of Bad Faith In Filing for Ch. 11?

Answer 4

1. There is no express good faith requirement as far as filing is concerned, but courts have nevertheless found existence of implied good faith requirement, and dismissed reorganization cases in the absence of good faith. (In re Victory)
2. Some factors are:
   1) Few unsecured creditors;
   2) previous bankruptcy petitions
   3) Few debts to non-moving creditors (those who wish to see dismissal of case)
   4) Reorganization essentially involves two parties.

Question 5

Can a Debtor convert a Ch. 11 petition to a Ch. 7 one? 1112(a)

Answer 5

Yes 1112(a), D has presumptive right UNLESS 1 of 3 exceptions apply::

1) D is not DIP (where there is a trustee and D is not in charge)
2) Case was commenced involuntarily under Ch. 11 (since creditors were the ones to pick the chapter in an involuntary case)
3. If the case had already been converted from some other chapter to a Chapter 11 (other than on D’s request)

Question 6

Who Can File a Chapter 11?

Toibb v. Radloff

Answer 6

1. The plain language of §109(d) allows anyone who is eligible to file a Chapter 7 to file a Chapter 11, as long as everything is satisfied under the code (especially the best interest of creditors test).
2. individual debtors without ongoing business may file chapter 11
3. Even though chapter 11 is to help rehabilitation of business, it doesn’t mean to exclude individuals without business

Question 7

What are the basic goal of Ch. 11?

Answer 7

1. Preserve asset value (ring most value out of those assets)
2. Provide jobs, etc. and
3. Enhance recovery for creditors (give creditors as much as possible)

Question 8

Single Asset Real Estate (SARE)

11 U.S.C. § 101(51B)

Answer 8

Real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor[1] who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental.”

Question 9

What is the consequence of a debtor owning a SARE?

§ 362(d)(3)

Answer 9

1. Unless the debtor starts making interest payments, it gets only 90 days to submit a reorganization plan (or 30 days later than when the court designates the case a SARE case, whichever is later), compared with 120 days for a debtor without SARE property.
2. In SARE cases, there is often one unsecured creditor who is so big that if he’s in a class w/ other unsecured creditors, he can decide the vote. In such cases, courts side w/ current case and prevent creating a new class for this giant for the purpose of accepting a plan.

Question 10

When can a court convert or dismiss a ch. 11 proceeding?

Answer 10

The Court can dismiss or convert for cause (1112b) , but will not
find for dismissal if there is unusual circumstances specifically identified by the Court that establish the request for
conversion or dismissal is not in the best interests of either the creditors and the estate.
(Nester v. Gateway Access Solutions)

Question 11

Is filing a Ch. 11 proceeding to gain a tactical litigation advantage permissible?

Answer 11

1. No. There must be some threat to the company’s long term viability, or that the company is experiencing serious financial or managerial difficulties at time of filing .(In re SGL Carbon Corp. )
2. The possibility of a future need to file doesn’t establish good faith. You cant file a Ch. 11 to stave of potential plaintiffs in an antitrust sit.

Question 12

Are SPEs always bankruptcy-proof?

Answer 12

1. No, a bankruptcy remote structure did not make an entity
   bankruptcy “proof,” and in situations where a loan is made to an entity that is part of a real estate company with many properties or affiliates, the SPE structure may not provide protections from all bankruptcy
   risks.

Question 13

Determining the Value of the Enterprise: Book Value

Answer 13

1. Assets - liabilities = net worth
2. Fair market value - debt = equity
3. Under GAAP, asset is valued at cost (price at which it was bought)
4. Not really accurate b/c it doesn’t account for intangible assets.

Question 14

Determining the Value of the Enterprise: Liquidation Value

Answer 14

1. Bring market value, not book (at cost) value

2. No depreciation b/c it’s already incorporated in the market value

Question 15

Determining the Value of the Enterprise: Going Concern Value

Answer 15

1. How much money is the business generating? Go from payment stream → dollar value evaluation.
2. Discounted cash flow (what future earnings are worth now).
3. Discount Rate
   - Risk free rate of return (treasury bill rate)
   - Risk premium
   - beta= average cost of capital
4. Look at Income Statement (before financial charges and depreciation).

Question 16

How do you determine the going concern value of an entity? (In re Cellular Information Systems, Inc.)

Answer 16

1. When determining the GCV of a company, one must not ignore such factors as downward pricing pressures or other factors that might affect the company in the future. Look at it both horizontally and vertically.

Question 17

§1108 Trustee Authority to operate business

Answer 17

1. Unless the court, on request of a party in interest and after notice and a hearing, orders otherwise, the trustee may operate the debtor’s business.
2. So technically, the trustee doesn’t have to operate the business - he can opt to liquidate it.

Question 18

§1107 - Rights, powers, and duties of DIP

Answer 18

1. (a) DIP has all rights and powers of trustee (other than compensation of officers under §330), subject to court’s limitations. DIP, having powers of trustee, can hire professionals, too.
2. (b) Professional not disqualified simply because he has worked for debtor pre-petition.
3. If a debtor is authorized to operate business, it is authorized to continue to employ employees, including high level employees, and to compensate them in the ordinary course of business without notice and hearing

Question 19

363(a) Cash Collateral

Answer 19

1.CASH COLLATERAL is cash proceeds from the sale of a collateralized asset.

” “cash collateral” means cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a security interest as provided in section 552(b) of this title, whether existing before or after the commencement of a case under this title.”

Question 20

363(b) Transactions Outside the Ordinary Course of Business

Answer 20

1. Trustee, after notice and hearing, may use, sell, lease, other than in ordinary course of business, property of the estate. Court’s permission is not required. § 102(1) “After notice and a hearing” = hearing is not necessary if there was proper notice and there was sufficient time for a hearing. If you’re a creditor, and there’s any doubt as to whether a transaction is ordinary, provide notice and a hearing.
2. §363(b) and (f) authorize the court to order a sale of assets free and clear of the liens, claims, and interests of others.

Question 21

363(c) Debtor Not Presumptively entitled to use Cash Collateral

Answer 21

1. Even though a trustee can operate the business, under § 363(c)(2) the trustee can only use cash collateral if the debtor or the trustee obtains the permission of the creditor secured by the collateral or by permission of the court. §363(c)(2), see also 363(d)(1 & 2) (providing secured creditors “adequate protection”)
2. Burden on creditor to convince the court to stop the debtor from using the collateral [court must act promptly (c3)].
3. Cash is fungible and can quickly disappear. As such, the code bars the trustee from using the cash collateral without consent of the secured party or a court order. § 363(c)(2).
4. 1. When the court approves non-consensual use of cash collateral the decision by its very nature presents the irreconcilable and conflicting interests of the debtor and the lien holder. Such use must be balanced according to the circumstances and the equities of the case, in order to achieve the possible protection of both interest and in order to carry out the plan.

Question 22

Bankruptcy Rule 6003: Cooling Off Period

Answer 22

1.Except to the extent necessary to “avoid irreparable harm” the court shall not grant the following orders within 20 days of the filing of the bankruptcy petition:

1. Retaining Professionals
2. KERPS
3. Request to pay prepetition claims (Critical vendors)
4. Request to sell assets outside the ordinary course of business
5. Request to assume or assign executory contracts
6. Request for DIP financing
7. Exceptions:
   1) authorization to obtain DIP financing
   2) authorization to use cash collateral