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Secured Transactions Assignment 6

Secured Transactions Assignment 6. Bankruptcy and the Automatic Stay. The Big Picture. Chapter 1. Creditors’ Remedies Under State Law No remedies against the debtor’s person Secureds and unsecureds have remedies against the debtor’s property Chapter 2. Creditors Remedies in Bankruptcy

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Secured Transactions Assignment 6

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  1. Secured TransactionsAssignment 6 Bankruptcy and the Automatic Stay

  2. The Big Picture Chapter 1. Creditors’ Remedies Under State Law No remedies against the debtor’s person Secureds and unsecureds have remedies against the debtor’s property Chapter 2. Creditors Remedies in Bankruptcy Secureds and unsecureds’ state remedies are interrupted by the stay Secureds’ debts are cut to the value of the collateral Unsecureds’ debts are discharged

  3. Article 9 Terminology §9-102(a)(52). “Lien creditor” means . . . a creditor that has acquired a lien on the property involved by attachment, levy, or the like . . . . §9-102(a)(72). “Secured party” means . . . a person in whose favor a security interest is created . . . under a security agreement. (Excludes mortgages) Security interests are contractual; liens are judicial. The categories are mutually exclusive. Security interest Lien

  4. Article 9 Terminology §9-102(a)(52). “Lien creditor” means . . . a creditor that has acquired a lien on the property involved by attachment, levy, or the like . . . . §9-102(a)(72). “Secured party” means . . . a person in whose favor a security interest is created . . . under a security agreement. (Excludes mortgages) Security interests are contractual; liens are judicial. The categories are mutually exclusive. Mortgage Security interest Lien Statutory lien

  5. Bankruptcy Code Terminology §101(51): Security interest means a lien created by agreement. (Includes mortgages) §101 (36): Judicial lien means lien obtained by judgment, levy, sequestration, or other legal or equitable process . . . §101(53): Statutory lien means a lien arising by statute, but does not include security interest or judicial lien §101(37) Lien means charge against property to secure payment Lien Judicial Lien Security interest Mortgage Article 9 security interest Statutory Lien

  6. Bankruptcy Courts Specialized courts: Bankruptcy is a separate court system

  7. Bankruptcy Courts Specialized courts: Bankruptcy is a separate court system • Federal

  8. Bankruptcy Courts Specialized courts: Bankruptcy is a separate court system • Federal • Fully electronic, 1997-2005

  9. Bankruptcy Courts Specialized courts: Bankruptcy is a separate court system • Federal • Fully electronic, 1997-2005 • 200 locations in the US

  10. Bankruptcy Courts Specialized courts: Bankruptcy is a separate court system • Federal • Fully electronic, 1997-2005 • 200 locations in the US Purpose: Coordinated resolution of debt problems a. Consumers b. Businesses

  11. Bankruptcy Concepts • Petition: Document that commences a bankruptcy case • Schedules: Lists of assets and debts, filed with petition • Proof of claim: Creditor’s statement of debt owing • Automatic stay: An “injunction” that takes effect on the filing of a bankruptcy case • Discharge: An injunction against future efforts to collect the debt from the debtor. • Motion to lift automatic stay: Secured creditor remedy 7. Adequate protection: Protection against decline in the value of the secured creditor’s collateral. In re Timbers of Inwood Forest Associates (1988). Example: Value of collateral drops from 100 to 90. Provided by payments, liens, cushion of equity, etc.

  12. More Bankruptcy Concepts • Reaffirmation: Debtor’s election not to discharge a debt • Property of the estate: “All legal or equitable interests of the debtor in property as of the commencement of the case,” except exempt property. Property of the debtor. 10. Trustee: Independent lawyer/accountant who administers property (“panel of trustees”) (as distinguished from the United States Trustee). Debtor in possession. 11. Pro rata distribution: Distribution of the same percentage of debt to each creditor in a class Example: 5 cents on the dollar 12. Plan: Proposal to make specified payments

  13. Liquidations: Chapter 7 Deal: "Fresh start" 1. Debtor surrenders all property to trustee

  14. Liquidations: Chapter 7 Deal: "Fresh start" 1. Debtor surrenders all property to trustee (Except exempt)

  15. Liquidations: Chapter 7 Deal: "Fresh start" 1. Debtor surrenders all property to trustee (Except exempt) 2. Court discharges all debt

  16. Liquidations: Chapter 7 Deal: "Fresh start" 1. Debtor surrenders all property to trustee (Except exempt) 2. Court discharges all debt (Except nondischargeable and reaffirmed debt)

  17. Liquidations: Chapter 7 Deal: "Fresh start" 1. Debtor surrenders all property to trustee (Except exempt) 2. Court discharges all debt (Except nondischargeable and reaffirmed debt) 3. Trustee sells the surrendered property and distributes proceed pro rata

  18. Liquidations: Chapter 7 Deal: "Fresh start" 1. Debtor surrenders all property to trustee (Except exempt) 2. Court discharges all debt (Except nondischargeable and reaffirmed debt) 3. Trustee sells the surrendered property and distributes proceed pro rata

  19. Reorganizations: Chapter 11 Deal: 1. Debtor remains in possession during case (Enron) 2. Debtor proposes plan to repay debt, makes disclosure 3. Creditors vote on plan (each “class” has a veto) 4. Court can “confirm” (“cramdown”) a plan despite class veto, if the plan follows the absolute priority rule 5. Confirmed plan binds all creditors

  20. Debt Adjustment: Chapter 13 Eligibility: Individuals (humans) with unsecured debt less than $337K and secured debt less than $1 million, §109(e) Deal: 1. Debtor keeps all of debtor’s property 2. Debtor proposes plan to pay Secured creditors to the value of their collateral Unsecured creditors all “disposable income” for three years (five years for debtors with above median incomes) 3. No voting; court confirms plan (“cramdown”) if it meets statutory requirements 4. If debtor performs plan, remaining debt is discharged

  21. Problem 6.1, page 109 What kind of collection action can Compusoft take against bankrupt debtors? File a proof of claim What about those bills Compusoft sends each month?

  22. Bankruptcy Code §362(a) (a) [A bankruptcy] petition operates as a stay, applicable to all entities, of -- • The commencement or continuation . . . of [an] action . . . against the debtor . . . to recover a claim . . . that arose before the commencement of the [bankruptcy] case • The enforcement , against the debtor or against property of the estate, of a judgment obtained before [bankruptcy] • Any act to obtain possession of property of the estate or of property of the debtor (4) Any act to create, perfect, or enforce any lien against property of the estate (6) Any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case.

  23. Bankruptcy Code §362(a) (a) [A bankruptcy] petition operates as a stay, applicable to all entities, of -- • The commencement or continuation . . . of [an] action . . . against the debtor . . . to recover a claim . . . that arose before the commencement of the [bankruptcy] case • The enforcement , against the debtor or against property of the estate, of a judgment obtained before [bankruptcy] • Any act to obtain possession of property of the estate or of property of the debtor (4) Any act to create, perfect, or enforce any lien against property of the estate (6) Any act tocollect, assess, orrecover a claimagainst the debtorthat arose before the commencement of the case.

  24. Problem 6.2, page 109 • Kansas Savings has a judgment for possession of some equipment. • Kansas Savings and the sheriff go to get the equipment • The debtor files bankruptcy. Can Kansas Savings go forward with the levy? No. Bankruptcy Code §362(a)(2) Can the sheriff go forward with the levy?

  25. Bankruptcy Code provisions §362 (a) [A bankruptcy] petition operates as a stay, applicable to all entities, of -- (2) The enforcement , against the debtor or against property of the estate, of a judgment obtained before [bankruptcy] § 101(15) The term “entity” includes . . . governmental unit . . . .” (27) The term “governmental unit” means . . . state . . . or instrumentality of . . . a state . . . .”

  26. Problem 6.2, page 109 • Kansas Savings has a judgment for possession of some equipment. • Kansas Savings and the sheriff go to get the equipment • The debtor files bankruptcy. Can Kansas Savings go forward with the levy? No. Bankruptcy Code §362(a)(2) Can the sheriff go forward with the levy? No. Bankruptcy Code §101(15), (27)

  27. Problem 6.3, page 110 We represent secured creditor Bank. The debtor just filed under Chapter 11.

  28. Problem 6.3, page 110 We represent secured creditor Bank. The debtor just filed under Chapter 11. Value $250K or less $250K Lien Prime Cuts Closed restaurant

  29. Problem 6.3, page 110 We represent secured creditor Bank. The debtor just filed under Chapter 11. Value $250K or less $250K Lien Can the bank foreclose? Prime Cuts Closed restaurant

  30. Problem 6.3, page 110 We represent secured creditor Bank. The debtor just filed under Chapter 11. Value $250K or less $250K Lien Can the bank foreclose? Not without lifting the stay Prime Cuts Closed restaurant

  31. Bankruptcy Code §362(d) (d) [T]he court shall grant relief from the [automatic] stay: • For cause, including the lack of adequate protection of an interest in property of such party in interest [or] • With respect to a stay of an act against property . . . if (a) The debtor does not have an equity in the property; and (b) Such property is not necessary to an effective reorganization

  32. Bankruptcy Code §362(d) (d) [T]he court shall grant relief from the [automatic] stay: • For cause, including the lack of adequate protection of an interest in property of such party in interest [or] • With respect to a stay of an act against property . . . if (a) The debtor does not have an equity in the property; and (b) Such property is not necessary to an effective reorganization Can the bank lift the stay?

  33. Bankruptcy Code §362(d) (d) [T]he court shall grant relief from the [automatic] stay: • For cause, including the lack of adequate protection of an interest in property of such party in interest [or] • With respect to a stay of an act against property . . . if (a) The debtor does not have an equity in the property; and (b) Such property is not necessary to an effective reorganization Can the bank lift the stay? What happens if the stay is lifted?

  34. Problem 6.4, page 110 Value $600K Can the bank foreclose? $210K Lien Sprouts Up head-quarters building

  35. Bankruptcy Code §362(d) (d) [T]he court shall grant relief from the [automatic] stay: • For cause, including the lack of adequate protection of an interest in property of such party in interest [or] • With respect to a stay of an act against property . . . if (a) The debtor does not have an equity in the property; and (b) Such property is not necessary to an effective reorganization Can the bank lift the stay?

  36. Bankruptcy Code §362(d) (d) [T]he court shall grant relief from the [automatic] stay: • For cause, including the lack of adequate protection of an interest in property of such party in interest [or] • With respect to a stay of an act against property . . . if (a) The debtor does not have an equity in the property; and (b) Such property is not necessary to an effective reorganization Can the bank lift the stay? No.

  37. Problem 6.5, page 110 Value $700K Boat is uninsured. Bank is afraid it will go out and not come back. $350K Lien Paradise Boat Leasing Commercial yacht

  38. Problem 6.5, page 110 Value $700K Boat is uninsured. Bank is afraid it will go out and not come back. Can the bank foreclose? $350K Lien Paradise Boat Leasing Commercial yacht

  39. Bankruptcy Code §362(d) (d) [T]he court shall grant relief from the [automatic] stay: • For cause, including the lack of adequate protection of an interest in property of such party in interest [or] • With respect to a stay of an act against property . . . if (a) The debtor does not have an equity in the property; and (b) Such property is not necessary to an effective reorganization Can the bank lift the stay?

  40. Bankruptcy Code §362(d) (d) [T]he court shall grant relief from the [automatic] stay: • For cause, including the lack of adequate protection of an interest in property of such party in interest [or] • With respect to a stay of an act against property . . . if (a) The debtor does not have an equity in the property; and (b) Such property is not necessary to an effective reorganization Can the bank lift the stay? Yes. “adequate protection” is protection against decline in the value of the collateral.

  41. Problem 6.6, page 110 Petition Now 3 months • We represent the bankrupt. Angry creditors are calling • How do we deal with Watson Investment, unsecured for $126K? What can Watson do? • How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(e) • How would we come out? Three views.

  42. Problem 6.6, page 110 Petition Now 3 months • We represent the bankrupt. Angry creditors are calling • a. How do we deal with Watson Investment, unsecured for $126K? What can Watson do? • How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(e) • How would we come out? Three views.

  43. Problem 6.6, page 110 Petition Now 3 months We represent the bankrupt. Angry creditors are calling b. How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(d). How would we come out? Three views.

  44. Problem 6.6, page 110 Petition Now 3 months We represent the bankrupt. Angry creditors are calling b. How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(d). Move to lift the stay. How would we come out? Three views.

  45. Problem 6.6, page 110 Petition Now Motion Hearing 3 months We represent the bankrupt. Angry creditors are calling b. How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(d). Move to lift the stay. How long would that take? §362(e). How would we come out? Three views.

  46. Problem 6.6, page 110 Petition Now Motion Hearing 3 months 60 days • We represent the bankrupt. Angry creditors are calling • b. How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(d). Move to lift the stay. How long would that take? §362(e). • How would we come out? Three views.

  47. Problem 6.6, page 110 Petition Now Motion Hearing 3 months 60 days • We represent the bankrupt. Angry creditors are calling • b. How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(d). Move to lift the stay. How long would that take? §362(e). What will happen at the hearing? • How would we come out? Three views.

  48. Problem 6.6, page 110 Petition Now Motion Hearing 3 months 60 days We represent the bankrupt. Angry creditors are calling b. How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(d). Move to lift the stay. How long would that take? §362(e). What will happen at the hearing? Macklin gets adequate protection against decline in the value of the collateral (Timbers) or the stay is lifted. How would we come out? Three views.

  49. Problem 6.6, page 110 Case end Petition Now Motion Hearing 3 months 60 days $50K $40K $35K $30K $25K We represent the bankrupt. Angry creditors are calling b. How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(d). Move to lift the stay. How long would that take? §362(e). What will happen at the hearing? Macklin gets adequate protection against decline in the value of the collateral (Timbers) or the stay is lifted. What decline?

  50. Problem 6.6, page 110 Case end Petition Now Motion Hearing 3 months 60 days $50K $40K $35K $30K $25K We represent the bankrupt. Angry creditors are calling b. How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(d). Move to lift the stay. How long would that take? §362(e). What will happen at the hearing? Macklin gets adequate protection against decline in the value of the collateral (Timbers) or the stay is lifted. What decline? Three views: from petition, motion, or hearing.

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