business reorganization in bankruptcy

Gebbia, Business Reorg., Spring 2011 - 1 -

Business Reorganization in Bankruptcy SYLLABUS AND COURSE OUTLINE

Law 826R, SPRING 2010, 3 credits Professor Karen M. Gebbia Classroom # 3205 [tentative] 415-369-5357, [email protected] Monday 9:00-11:40 am Office Hours: Monday 1-3 pm Office: 536 Mission, # 2337 Friday 1-3 pm

I. COURSE SUMMARY This course introduces you to the law governing the relations between financially distressed business debtors (those who owe) and their creditors (those to whom obligations are owed). We will begin by considering why businesses encounter financial troubles, and what remedies businesses may pursue outside of bankruptcy court to solve their troubles. We will then focus on business reorganization under the Federal Bankruptcy Code. We will consider, throughout the course, how creditors, debtors, and their attorneys take the effects of bankruptcy law into account in (i) counseling clients, (ii) negotiating, documenting and performing contracts, (iii) reducing risk, and (iv) resolving disputes with and without litigation. The course will meet one day a week for two hours and forty minutes (including a 10 minute break) as a “practicum.” A practicum is somewhere between a live-client clinic and a traditional class. It operates much like a team of lawyers working together to solve a client’s problems. In this practicum, we will begin the course with a hypothetical business (Foam Corporation) and we will follow that business through each stage of its financial distress and bankruptcy case. Each week, Foam and its creditors will face a new problem. We will discuss the problems and brainstorm ideas. You will work in teams representing the different “players” in the case to solve the problem. You will be given materials to read and related assignments, which may include small group teamwork, negotiating with other students, drafting portions of documents that would be filed in court, or preparing short small-group presentations for class. During each class, one group will take the lead in describing the practical and legal problem and the action they have taken. The other groups will respond. We will discuss your actions and solutions, negotiate as needed, consider litigation strategy, and identify new problems.

II. OBJECTIVES This course is designed to enable you to:

1. (a) identify the principal sources of law governing business bankruptcy, reorganization and financial distress, (b) understand the relationship between the federal Bankruptcy Code and other state and federal laws, and (c) understand the general principles that underlie and are the foundation for the continuing development of the Bankruptcy code.

2. Develop a working knowledge of the principal sources of debtor/creditor law that affect business debtors, most importantly the Bankruptcy Code.

3. Develop the skills necessary to apply in practice the legal principles examined in the


course. 4. Improve your skills of (a) critical thinking and analysis (including the ability to

discern the letter and spirit of the law, recognize the important elements of cases, problems and fact patterns, and distinguish well reasoned and poorly reasoned judicial decision), (b) independent discovery (including the ability to identify problems and issues and locate the applicable governing law), and (c) problem solving (including the ability to recognize problems faced by debtors and creditors, identify and choose among options and strategies, and use governing legal principles to formulate solutions and reduce risk.).

III. PROFESSOR’S COMMITMENTS: I will . . .

1. Provide you with a clear outline of course’s substantive topics and objectives, and give you as much advance notice as practicable of any necessary adjustments as the semester progresses. 2. Provide you with a clear recitation of the commitments expected of you and the bases upon which your performance in the course will be evaluated. 3. Be as responsive as possible to questions posed in class, without digressing unreasonably from the subject matter. 4. Be available to consult with you during listed office hours and make reasonable efforts to be available at other times, particularly if your schedules conflict with listed office hours. 5. Attempt to provide a dynamic learning environment that links theory and practice and facilitates your achievement of the course objectives. IV. STUDENTS’ COMMITMENTS: You are expected to . . . 1. Attend each class, arriving on time and not leaving early except in highly unusual circumstances of which you advise me in advance. 2. Complete all Required Readings and assigned projects prior to the class session in which such readings and projects are to be discussed. 3. Actively participate in class discussions, drafting assignments, and group projects in a manner that adds value and quality for the benefit of all students. 4. Complete all assignments by the date and time scheduled.


IV. EVALUATION CRITERIA There will not be a final examination in this course. Your grade will be determined as follows: 75% of your grade will be based upon an individual observation / research project. The format of the project is set forth on page 4 and will be discussed in greater detail later in class 25% of your grade will be based upon class participation. In this class, the full participation of each student is critical to the learning of the entire class. Students will not be allowed to “pass” or “note out.” Class participation includes in class performance and performance on individual and group hand-in assignments.

V. REQUIRED READINGS Required Readings will be drawn from the following materials, which you should acquire. You should work through all assigned problems and carefully read all assigned Bankruptcy Code sections and Bankruptcy Rules (including comments), other statutory provisions. Supplemental Readings may be distributed in class or via TWEN. Students will be responsible for obtaining copies of all handouts. 1. Scarberry, Klee, Newton & Nickles, BUSINESS REORGANIZATION IN BANKRUPTCY, 3d Ed. 2006, West (“TEXT”) 2. BANKRUPTCY CODE, RULES AND OFFICIAL FORMS, 2010 edition, West (“Code”) 3. This syllabus and course outline.

DUE DATES Project one: Schedules (each team)

Draft, 9 am Friday January 21, 2011 Law Faculty Center Final, 9 am Friday January 28, 2011 Law Faculty Center

Project two: Motion for relief from stay 9 am Monday February 7, in class (Secured Creditor team only)

Project three: Business plan 9 am Monday February 22, in class (debtor team only)

Project four: Motion to compel 9 am Monday February 28, in class (unsecured team only)

Project five: Proofs of claim 9 am Monday March 21, in class (each team) Project six: Questions for panelists 9 am Monday March 28, in class (each team) Final Project: Case Study

9 am, Friday May 6, Law Faculty Center


BUSINESS REORGANIZATION IN BANKRUPTCY: Individual Case Study Guidelines

75% of your grade in this class will be based upon a case study you will write concerning the chapter 11 case of a California business debtor. A list of debtors from which you might choose will be handed out in class. If you wish to write about a debtor not on the list, you will need my prior written approval. Your paper is not strictly a legal research paper. Rather, you are to write about how the principles we will be learning in this class applied in the case of an actual debtor in California. For your factual research, you should rely primarily on court files. You may also find other sources of information useful, including interviews with parties or their attorneys, news accounts, etc. Your understanding of the applicable law and strategy will be based primarily on what you have learned in this class. You are free to consult any sources you wish (statutes, treatises, case law, law review articles, bankruptcy experts, etc.) to explain the law and strategy in your case. Your paper should not be shorter than 10 pages, doubles spaced with reasonable fonts and margins, and may not exceed 30 pages, doubles spaced with reasonable fonts and margins. You may use footnotes or incorporate references in the text of your paper. Law review format is not required. Reasonable and obviously understandable abbreviations are acceptable. Bluebook or other uniform system of citation form is not required (but is encourages, you might see this as an opportunity to practice your skills in this area). Your paper should address the following issues, but it should be in a coherent narrative format, not a question and answer format. You may structure your paper in any way you wish: as a report on the case, a perspective of one party, a dialogue among parties, a judicial opinion, a bench memo, etc., but you must cover all topics with a sense of balance and objectivity. You will wish to emphasize the issues that were most significant in your case, and mention why other topics we covered in class were not important in your case. 1. What were the financial, business and legal challenges, if any, that led to the debtor’s chapter 11 filing? Did the economy or business climate in California play a role in the filing? Who precipitated the filing and why? Was it a voluntary filing? Were there any questions about the propriety of the filing? 2. What lawyers were involved? Were they all local to the case? Did they receive retainers? Were they paid during the case? Were there disputes regarding the amount they should be paid? Were other professional retained? If so, by whom and for what purposes? If not, why not? 3. Briefly describe the debtor’s financial/capital structure, corporate structure. Include a discussion of the principal claims and creditors; the principal assets; whether claims are secured, unsecured, or priority; the equity holders; business valuation (if available and applicable). 4. Who were the principal parties affected by the filing other than the debtor? Did the filing


have an impact on the community, industry, or any group other than the direct creditors? Did managers retain their jobs? Did other employees retain their jobs? 5. Were there motions for relief form the automatic stay, or motions to impose a stay under section 105? If so, who filed them, what issues did they raise, what were the rulings? If there were none, why not? 6. How did the debtor obtain funds to operate during the chapter 11 case? Was there any controversy or objection to the method of obtaining operating funds? 7. Roughly how many claims were filed or asserted (including in the schedules)? Were there serious disputes over certain claims? If so, why, and how were they resolved? What entity was responsible for claims resolution? 8. Were there significant actions by the debtor or any other party to bring property into the estate, including under section 548? (If there were preference actions, you can mention but need not analyze.) Was the assumption or rejection of critical contracts or leases important in the case? Were assumption / rejection matters disputed, litigated? How were they resolved? 9. What was the essence of the debtor’s business restructuring plan? What was the essence of the debtor’s financial restructuring plan? What was the essence of the debtor’s legal strategy for implementing its business and financial restructuring plan? 10. How long was the debtor in chapter 11? Was the case a “success?” Why or why not? Was it converted or liquidated? Was the business or substantial portions of it sold? 11. What parties, if any, proposed or sought to propose a plan? What was the basic structure of any plan, i.e., in what ways was the business and its financial situation or capital structure restructured? Generally describe the treatment of the major classes of claims and interests. 12. Was a plan confirmed? If so, what factors fostered confirmation? If not, what factors presented hurdles to confirmation? Were there objections to the disclosure statement or to confirmation? How were they resolved? Was the plan a cramdown plan? Did it involve any absolute priority / new value issues? Was the plan implemented? 13. Anything else of importance in this particular case. 14. Your impressions of the case. What did the debtor, other parties and their representatives do particularly well? Would you have done anything differently if you had been representing the debtor or any other principal party in the case? 15. How did your study of this case affect your views concerning the policies of chapter 11 in general, including the ability of business debtors to reorganize and remain in business without paying their creditors in full?


COURSE OUTLINE <Detail of weekly assignments and objectives begins on page 9>

I. Course overview Introduction to chapter 11 business reorganization ABCs of business finance; debtors and creditors Why businesses get into financial trouble Out-of-court workouts The costs and benefits of chapter 11 The “twin pillars” of bankruptcy First class, 1/10 II. Problem: Foam Corporation is in Financial Trouble Introduction to Foam Corporation Foam’s financial picture and financial statements First Class, 1/10 III. Problem: Can Foam solve its financial troubles through negotiation? If not, can Foam file

chapter 11? If so, what do the lawyers need to do? The workout attempt and why it failed Obstacles to a successful workout Eligibility for chapter 11 Filing the chapter 11 (petition, schedules, statement of financial affairs, and creditor

lists) Second class, 1/24

IV. Problem: Foam needs to understand who has power and control in the chapter 11 case. The “players” and their roles

Third class, 1/31 V. Problem: The lawyers will not work for free. Retention of attorneys and other professionals

Third class, 1/31

PART TWO: KEEPING THE SHIP AFLOAT THE IMMEDIATE IMPACT OF CHAPTER 11 ON THE BUSINESS AND ITS CREDITORS

VI. Problem: Unsecured creditors want to be paid but Foam needs the cash. Secured

creditors want to liquidate their collateral but Foam needs the property. The automatic stay Relief from the stay for secured creditors Adequate protection for secured creditors Fourth Class, 2/7 VII. Problem: How will Foam obtain funds to operate during the chapter 11 case?


Use, sale and lease of property Cash collateral DIP financing

Fifth class, 2/14

PART THREE: TURNING THE BUSINESS AROUND VIII. Problem: can Foam develop a viable business plan? Causes of business failure Turning the business around Developing a business plan Sixth class, 2/22 TUESDAY! IX. Problem: Can Foam retain property it leases and rights it enjoys under valuable leases and

contracts? Can Foam avoid burdensome contractual obligations? Assumption, rejection and assignment of executory contracts and leases Seventh class, 2/28

PART FOUR: CLAIMS BY AND AGAINS THE ESTATE

X. Problem: Pre-bankruptcy property transfers have diminished the estate; can the property be

recovered? Property of the estate Fraudulent transfers under bankruptcy law and state law Eighth class, 3/7 XI. Problem: Before Foam can develop a plan of reorganization, it must determine who is

entitled to a share. What must creditors do to assert their claims? How is the amount of each claim determined? Is interest added? What happens to claims that arise post-petition?

Claim allowance and disallowance Administrative expenses, other priority claims Secured claims, inadequate protection priority claims

Ninth class, 3/21 XII. The realities of chapter 11 in California The business climate and economy in California Guest speaker on the economy Business plans, valuation, and viability

Guest speaker from business Business reorganization in California

Guest speaker from legal practice Tenth class, 3/28

PART FIVE: THE PLAN OF REORGANIZATION RESTRUCTURING THE FINANCIAL AFFAIRS IN CHAPTER 11;


NEGOTIATING AND CONFIRMING A PLAN OF REORGANIZATION XIII. Problem: Foam needs to determine who should get what under a plan Exclusivity and filing a plan Classification of claims and interests Impairment Eleventh class, 4/4 XIV. Problem: Creditors need adequate information about Foam's history, finances, operations,

future prospects, and proposed treatment of all creditors in order to vote on the plan. Disclosure statement, adequate information Disclosure hearing and objections Soliciting votes Voting Twelfth class, 4/11 XV. Problem: Foam hopes that each group will accept the plan. What is required for a

consensual confirmation? Confirmation requirements and negotiation The confirmation hearing and objections to confirmation Counting votes Thirteenth class, 4/18 XVI. Problem: Some classes of creditors vote to reject the plan. Can the plan still be

confirmed? Can the creditors stop confirmation of a plan they dislike? Cramdown requirements in general Confirmation and cramdown in Foam’s case Fourteenth class, 4/25


First class January 11, 2010, module I & II I. Course Overview Introduction to chapter 11 business reorganization ABCs of business finance, debtors and creditors Why businesses get into financial trouble Out-of-court workouts The costs and benefits of chapter 11 The “twin pillars” Synopsis: We will examine chapter 11 reorganization in the context of and in contrast to out-of-court financial workouts and chapter 7 liquidation. You should understand generally the costs and benefits of chapter 11, the elements of a ‘successful” chapter 11 restructuring, and the policies underlying chapter 11 (the “twin pillars”). This is only an overview; we will explore these concepts in greater detail throughout the semester. Required Readings: TEXT, pages 1-42 (pages 17-42 are an overview of the materials we will cover in the course, you are

not expected to understand the materials fully at this time) Problems 1-1, 1-2, 1-3, 1-6 Bankruptcy Code, skim table of contents Bankruptcy Rules, skim table of contents II: Problem: Foam Corporation is in financial trouble. Introduction to Foam Corporation Foam’s financial picture and financial statements Synopsis: We will examine Foam Corporation’s financial situation, review its financial statements, and identify its financial problems. You should understand generally Foam’s financial picture and the purpose and nature of the information contained in the various financial statements. Required Readings: TEXT, pages 45-53 TEXT APPENDIX A, pages 965-983 Project Assignment: Nothing due today. After class, form your groups. You will work with that group for the rest of the semester. After your groups are formed, you should begin working on the hand-in assignment that will be due on Monday 1/25 (see Module III). I will answer questions about the assignment via email or by appointment in my office because we have no class next Monday. Handout: forms


WHY LEARN ABOUT CHAPTER 11 Economy Outer Limit / Framework Of Negotiation With Or On Behalf Of A Company In Financial Trouble Backdrop For Negotiation Of Commercial Transactions

Document The Deal With Possibility Of Chapter 11 In Mind When Determining Terms, Events Of Default, Remedies, Fees, Risk, Etc


Debtors and Creditors Contracts (goods or services)

Torts Criminal law IP Property Real estate

Community property Family law

Consumer protection Environmental law Labor and employment Sales Secured Transactions Implementing courses: civ. pro, crim pro, evidence, legal methods, App. ad, clinics


Debt: any type of obligation (legal equitable, monetary, injunctive) cf. Bankruptcy Code §101 Debtor: the entity that owes the obligation Creditor: Entity to which obligation is owed Secured: Interest is specific property to secure repayment Unsecured: General obligation


Financial distress and the race to the courthouse


__________________________________________ What Is Chapter 11?

___What Does It Allow A Business To Do?______


BUSINESS BANKRUPTCY POLICIES: the twin pillars

__________________________________________ DEBTOR CREDITOR oriented policies oriented policies


__________________________________________ Who May be Affected By A Business’ Financial

Troubles? __________________________________________


__________________________________________ Why Should We Let Businesses Reorganize? Why Not Allow Market Forces To Prevail?

Won’t Competitors Fill The Gap Left When A Business Fails?

__________________________________________ _________________________________________ Should there be some criteria to identify which we want to save, which we should allow to fail?


VALUATION, WHO YOU WILL HIRE?


__________________________________________ THREE COMPONENTS TO TURNING A

BUSINESS AROUND __________________________________________ BUSINESS (p 1.6) FINANCIAL (p 1.1, 1.2) LEGAL (p 1.3)


__________________________________________ A. Reading the Financial Statements

_________________________________________ B. What Do These Numbers Mean For Foam?

What Is Foam’s Financial Condition? __________________________________________

C. How Can The Threat Of Chapter 11 Facilitate A Workout ?

__________________________________________

A & B today, C next class


__________________________________________ A. Reading Financial Statements:

Understanding What Information They Contain And Why

__________________________________________ First, BALANCE SHEET Pages 52, 965 The Basic Information: Total Liabilities = _______________? Book Value = ________________? Do Liabilities Exceed Book Value? __________ What Are The Implications? How Much Was Invested? How Much Has The Business Lost To Date?


__________________________________________ BALANCE SHEET, Continued Pages 52, 965 What Are Current Assets? How Much Are They Worth? ___________ What Are Current Liabilities? How Much Are They? ____________ What Is The Ratio Of Current Assets To Current Liabilities? Does This Indicate A Problem? Why?


__________________________________________ Second, STATEMENT OF OPERATIONS P. 52, 967 The Basic Information: 2005 Expenses Exceeded Revenue By How Much? What Does This Indicate?


__________________________________________ Third, CASH FLOW STATEMENT pages 53, 981 How much more did Foam spend than it took in in 2005? How much greater was the cash flow spent on operations than the cash flow taken in from operations? Why was Foam’s total cash flow deficit less than its cash flow deficit from operations? How much cash does Foam have available? How much is Foam losing per month?

How long can Foam survive on its cash?


__________________________________________ CASH FLOW STATEMENT continued pages 53, 981 What happens to Foam’s receipts from accounts receivable? What is the importance of A.R. to Foam’s operations? How does the A.R. financing with Kick work? What would the consequence be if Kick stops lending on the revolving loan?


_________________________________________ A. Reading the Financial Statements

_________________________________________ B. What Do These Numbers Mean For Foam?

What Is Foam’s Financial Condition? __________________________________________

FOAM’S CORPORATE STRUCTURE

FOAM’S ASSETS AND LIENS

FOAM’S CREDITORS AND CLAIMS

FOAM’S CORE BUSINESS(ES)


FOAM’S CORPORATE STRUCTURE


FOAM’S ASSETS AND LIENS


FOAM’S CREDITORS AND CLAIMS


FOAM’S CORE BUSINESS(ES)


Second class, January 24, 2010 -- Module III III. Problem: Can Foam solve its financial troubles through negotiation? If not, can Foam file

chapter 11? If so, what do the lawyers need to do? The workout attempt and why it failed Obstacles to a successful workout Eligibility for chapter 11 Filing the chapter 11 (petition, schedules, statement of financial affairs, and creditor

lists) Synopsis: We will (i) consider why Foam’s attempt to structure an out-of-court workout failed, and whether it could have succeeded, (ii) determine whether Foam is eligible to file chapter 11, (iii) review the documents necessary to file the case and the schedules and statements of financial affairs. We will discuss the filing documents in class. You should understand the hurdles to solving Foam’s financial troubles outside of chapter 11, and the requirements for filing chapter 11. Required Readings: TEXT, pages 54-70 Problems, 2-1, 2-2 Bankruptcy Code §§ 109(a, b, d), 1101(1), 1102, 1103, 1104, 1105, 1106, 1107, 1108, 1109 Bankruptcy Rules, 1002, 1007, 1008 Bankruptcy Forms, hand-out (checklist link: Westlaw FBKR-FORMS B200) Project Assignment: EACH TEAM MUST PREPARE A PRELIMINARY DRAFT OF THE PETITION,

SCHEDULES, AND STATEMENT OF FINANCIAL AFFAIRS FOR FOAM using the forms handed out in class. You must bring your drafts to class on Monday, 1/24, and turn in the final working draft on or before FRIDAY, 1/28 at 9 A.M. (one per team). We may revisit and revise the schedules throughout the semester.

NOTE: You will need to read Bankruptcy Rule 1007 to prepare the forms. You do not need to do the other readings before you prepare the forms. DEBTOR TEAM will respond regarding the workout, and will lead the discussion of 2-2 UNSECURED CREDITOR TEAM will respond regarding the workout and will lead the discussion of 2-1 SECURED CREDITOR TEAM will lead the discussion of the workout attempt and why it failed, including the problems.


__________________________________________ Obstacles To || How Does Negotiating || Chapter 11 A Workout Out || Obviate Of Bankruptcy || These Problems __________________________________________


__________________________________________ C. HOW CAN THE THREAT OF CHAPTER

11 FACILITATE A WORKOUT ? __________________________________________


_________________________________________

WHY DID THE PROPOSED WORKOUT FAIL?

__________________________________________


PROPOSED WORKOUT STRUCTURE: 1 MORATORIUM ON DEBT COLLECTION

FROM FOAM, UFOAM, GRUFF 180 DAYS

CALLED A STANDSTILL OR FOREBEARANCE AGREEMENT

NEGOTIATE WORKOUT TRADE CREDITORS SELL C.O.D. 2 KICK STATUS QUO AT 82 % ADDITIONAL 1.1 MILLION OVER 6

MONTHS, SECURED BY ALL ASSETS; NEW COLLATERAL WOULD NOT SECURE OLD LOANS

3 EQUAL TREATMENT, EXCEPT

UTILITIES AND INSURANCE COMPANIES, NO ONE PAID IN ADVANCE OF OTHERS


CREDITORS’ REACTION TRADE GENERAL SUPPORT WHY? ASK GRUFF TO SUBORDINATE WHY? KICK REJECT OUT OF HAND 100,000 FOR NEXT MONTH LOAN, IN EXCHANGE ALL ASSETS SECURE ALL LOANS GRUFF PERSONAL GUARANTEE OF

NEW LOAN, MORTGAGE ON PLANT GRUFF OWNS TO SECURE ALL LOANS

WHY?


REPAYMENT PLANS - COMPARE THE ALTERNATIVES

FOAM’S PROPOSAL TRADE DEBT 5 YEARS NOTES, 65% OF FACE, 8% INTEREST INTEREST YEARLY 6% PRINCIPAL END OF TWO YEARS ANOTHER 10% END OF THIRD YEAR ANOTHER 10% END OF FOURTH YEAR REMAINING 74 % END OF FIFTH YEAR TRADE PROPOSAL trade debt 5 years notes, 100% of face, 12% interest INTEREST YEARLY 15% PRINCIPAL FIRST YEAR 15% PRINCIPAL END OF TWO YEARS 15% END OF THIRD YEAR 15% END OF FOURTH YEAR REMAINING 40 % END OF FIFTH YEAR


PROBLEM 2-1 TRADE DEBT 5 YEARS NOTES, 70% OF FACE, 10% INTEREST INTEREST YEARLY FOAM’S PAYMENT TERMS PROPOSED DEAL BECAME EFFECTIVE IF 95% DOLLAR AMOUNT SIGNED ON ASSUME THAT 98% DID SIGN ON WHAT IF ONE WHO DID NOT SIGN ON PURSUES COLLECTION? WHAT IF ONE WHO DID SIGN ON PURSUES COLLECTION?


FOAM’S ATTORNEY AND MANAGEMENT MUST CONSIDER FOUR STEPS IN ORDER TO PUT FOAM IN CHAPTER 11: DETERMINE WHETHER FOAM IS ELIGIBLE TO FILE CHAPTER 11 OBTAIN PROPER AUTHORIZATION FROM FOAM (I.E., USUALLY BOARD OF DIRECTORS) TO FILE CHAPTER 11 DETERMINE WHERE PETITION CAN BE FILED, WILL BE FILED (JURISDICTION AND VENUE) PREPARE THE PETITION, SCHEDULES AND LISTS TO COMMENCE THE CASE


PROBLEM 2-2


Third class, January 31, 2011 – Module IV & V IV. Problem: Foam needs to understand who has power and control in the chapter 11 case. The “players” and their roles Synopsis: We will examine the roles of the principal players in the chapter 11 case. You should understand generally the roles of the debtor in possession (DIP), examiner, trustee, United States Trustee, the Court (the “board of directors in robes”), the Creditors’ Committee(s), and secured creditors. V. Problem: The lawyers will not work for free. Retention of attorneys and other professionals Synopsis: We will determine which attorneys and other parties are entitled to be paid from the bankruptcy estate. You should understand what the attorneys must to do be hired and paid, and consider what amount of retainer you will request. Required Readings: TEXT, pages 70-85, 243-66, 283-98 Problems 2-3, 2-4, 2-5, 6-1, 6-4 Bankruptcy Code §§ 327, 328, 330, 1101 - 1109 Bankruptcy Rule 2014 Bankruptcy Forms, none Project Assignment: none DEBTOR TEAM will explain the DIP’s role and objectives in the chapter 11 case and the degree to which it can continue to control the business, will lead the class discussion explaining the petition and schedules, will lead the discussion of retention of counsel in general, will lead the discussion of problems 2-3, 2-4, 2-5 and will consider objections to the Committee’s motion to retain counsel UNSECURED CREDITOR TEAM will explain the Creditors’ Committee’s role and objectives, will lead the discussion of problem 6-4, and consider objections to the debtor’s motion to retain counsel SECURED CREDITOR TEAM will explain the secured creditors’ role and objectives, will lead the class discussion of problem 6-1, and will consider objections to the debtors’ and Committee’s motions to retain counsel. Can secured creditors’ lawyers be paid from the estate? What will your position be if the attorneys request a retainer from cash that is your collateral? NOTE: HEREAFTER YOU SHOULD BRING YOUR SCHEDULES TO EACH CLASS


US trustee Role DIP Role Objectives Trustee When will a trustee be appointed Role of trustee Unsecured Creditors’ Committee How many representatives Role of creditors' committee in chapter 11 case What if you are not on the committee Role of secured creditors in chapter 11 case


Creditors’ considerations: Foam has filed, you have just been told What steps do you take immediately To whom do Committee members owe loyalty What do you want from Foam, what would be the best result for you What general concerns do you have What specific concerns do you have What do you expect Foam to do next; how should you be prepared?


Debtor’s considerations Foam has just filed What general concerns Specific concerns What immediate actions will you need to take *keep in mind the reasons for filing breathing space keep the ship afloat turn the ship around


Section 327 (a) professional person employed by DIP / trustee must -Not hold or represent an adverse interest -Be disinterested (c) not disqualified solely because professional represents or is employed by a creditor -unless a creditor or the us trustee objects -disapprove employment if there is an actual

conflict Section 327(e) Special counsel May be attorney who has represented the debtor If best interests of the estate attorney does not hold or represent an

adverse interest with respect to the matter for which the attorney is employed


Section 328(c) Court may deny compensation and expenses if at any time during employment professional was not disinterested professional holds or represents an adverse interest with respect to the matter on which the professional was employed


Section 1103 Committee counsel, professionals May not represent any other entity having an adverse interest, while employed by the Committee Representation of one or more creditors of the same class as represented by the committee is not per se an adverse interest


Conflicts of interest Disciplinary rules "interest adverse" (section 327, 1103, 101) Statutory requirements disinterested interest adverse Disclosure requirements judicial determination of standards Denial of compensation section 328(c)


Fourth class, February 7, Module V V. Problem: Unsecured creditors want to be paid but Foam needs the cash. Secured creditors

want to liquidate their collateral but Foam needs the property. The automatic stay Relief from the stay for secured creditors Adequate protection for secured creditors Synopsis: We will examine the scope of the automatic stay, the bases for relief from the automatic stay, and the concept of “adequate protection.” You should understand the stay’s impact on general unsecured creditors, vendors and suppliers (including utilities), and consider what assurance unsecured creditors will have of payment if they continue to deal with the debtor after the chapter 11 is filed. You should also understand the stay’s impact on secured creditors, the bases upon which the secured creditor may obtain relief from the stay, and how adequate protection may be provided. Required Readings: TEXT, pages 87-99 1st 2 paragraphs, 116-122, 130-149, 160 part E, 1st paragraph only Problems 3-1 parts 1 and 2 only, 3-4, 3-6, 3-8 Bankruptcy Code §§ 362, 105(a), 361, 506(a)(1),(b) Bankruptcy Rule 4001, 9013, 9014 (compare rule 7001) Bankruptcy Forms 16A, 16B Project Assignment: At the beginning of class Today, the SECURED CREDITOR TEAM must present (sufficient copies for each group) an outline of a motion for relief from the automatic stay on behalf of Kick Credit (see especially problem 3-6; use caption under form 16B). During class, the DEBTOR TEAM and UNSECURED CREDITOR TEAM each must formulate an outline of their objections to the SECURED CREDITOR’S motion and proposal to provide adequate protection, if applicable. UNSECURED CREDITOR TEAM will lead the discussion of the scope of the automatic stay in general and of problems 3-1 and 3-8. Will you continue to deal with debtor after it files chapter 11? What protections will you request? Does section 366 help? SECURED CREDITOR TEAM will lead the discussion of relief from the stay and adequate protection, including problem 3-6. DEBTOR TEAM will lead the discussion of objections to the motion for relief from stay and problem 3-4.


TERMINOLOGY (WE HAVE SEEN SOME PREVIOUSLY) LEGAL AUTOMATIC STAY, RELIEF FROM STAY EQUITY, EQUITY CUSHION ADEQUATE PROTECTION OVERSECURED, UNDERSECURED BUSINESS LOCKBOX TERM LOAN, REVOLVING LOAN, REVOLVER BORROWING BASE, AVAILABILITY FORMULA, OUT OF FORMULA OPEN ACCOUNT (VERSUS CONTRACT)


CREDITOR INCENTIVES FOR A MORATORIUM PRESERVE GOING CONCERN VALUE PAY HIGHER PERCENT OF CLAIMS RETAIN THE DEBTOR AS A CUSTOMER RETAIN VALUE OF COLLATERAL STATE-LAW INCENTIVES TO DECLINE A MORATORIUM RACE OF DILIGENCE WINNER TAKE ALL PRIORITY STRUCTURE, AS COMPARED TO PRO RATA DISTRIBUTION


AUTOMATIC STAY *UNDER WHAT CODE SECTION DOES IT ARISE *WHEN DOES IT ARISE *WHAT DOES IT DO *HOW LONG DOES IT LAST *WHO AND WHAT DOES IT AFFECT *WHY IT IS IMPOSED


STAY RELIEF AND THE SECURED CREDITOR -- SECTION 362(A) 1 -- JUDICIAL OR OTHER PROCEEDING AGAINST DEBTOR 3 -- OBTAIN POSSESSION OR CONTROL OVER PROPERTY OF THE ESTATE POSSESSION OF PROPERTY FROM THE ESTATE 4 -- CREATE PERFECT ENFORCE LEIN PROPERTY OF THE ESTATE 5 -- CREATE PERFECT ENFORCE LIEN PROPERTY OF THE DEBTOR TO SECURE PREPETITION CLAIM 6 -- COLLECT ASSESS OR RECOVER PREPETITION CLAIM AGAINST DEBTOR


SECTION 362(D) RELIEF FROM THE STAY 1 -- CAUSE

INCLUDING LACK OF ADEQUATE PROTECTION

secured claim: section 506(a) adequate protection: section 361

2 -- ACT AGAINST PROPERTY NO EQUITY

NOT NECESSARY TO AN EFFECTIVE REORGANIZATION

3 -- SINGLE ASSET REAL ESTATE 4 – REAL ESTATE


CONSEQUENCES OF THE STAY & PROSPECTS FOR RELIEF FROM THE STAY (CONSEQUENCES: WHAT DOES THE STAY PREVENT THAT THEY OTHERWISE COULD HAVE DONE)

1. SECURED CREDITORS CONSEQUENCES PROSPECTS FOR RELIEF 2. UNSECURED SUPPLIERS OF GOODS AND SERVICES CONSEQUENCES PROSPECTS FOR RELIEF 3. LESSORS CONSEQUENCES PROSPECTS FOR RELIEF 4. PARTIES TO ONGOING CONTRACTS

WITH THE DEBTOR CONSEQUENCES PROSPECTS FOR RELIEF


2. UNSECURED CREDITORS AND STAY RELIEF

*continue with litigation *take assets CAUSE ??? WHAT IF THE DEBTOR HAS INSURANCE ? COMPARE UNDER SECTIONS 362 AND 105: * DIRECT ACTION AGAINST DEBTOR * ACTION AGAINST INSURER, THIRD

PARTY THAT REQUIRES THE DEBTOR'S TIME AND ATTENTION

*ACTION AGAINST INSURER, THIRD

PARTY THAT MAY OR WILL AFFECT THE DEBTOR FINANCIALLY (E.G., GUARANTOR WITH SUBROGATION AGAINST THE DEBTOR)


3. LESSORS & STAY RELIEF CONSEQUENCES PROSPECTS FOR RELIEF 4. PARTIES TO ONGOING CONTRACTS WITH THE DEBTOR & STAY RELIEF CONSEQUENCES PROSPECTS FOR RELIEF LATER (MODULE IX): CONSIDER INTERACTION OF §§ 362 AND 365


1. SECURED CREDITORS AND STAY RELIEF

*continue with litigation? *take assets? (non-bankruptcy law) CAUSE ? ADEQUATE PROTECTION ?


SIMPLE STAY RELIEF -- FIRST BANK CLAIMS (AMOUNT, NATURE, TERMS) $550,000 $700,000 COLLATERAL $550,000 SECURED BY FRESNO $700,000 SECURED BY CAMDEN AND PHILLY COLLATERAL VALUE, PROOF OF COLLATERAL VALUE, ANY DISPUTE RE COLLATERAL VALUE FRESNO, $800,000 CAMDEN AND PHILLY, $750,000


ADEQUATE PROTECTION: CODE §______ WHEN IS IT REQUIRED WHO IS ENTITLED TO RECEIVE IT WHY IS IT GIVEN WHAT INTEREST IS ENTITLED TO PROTECTION HOW IS IT THAT INTEREST ADEQUATELY PROTECTED


KICK AND FOAM KICK’S CLAIMS (AMOUNT, NATURE, TERMS) KICK’S COLLATERAL COLLATERAL VALUE, PROOF OF COLLATERAL VALUE, ANY DISPUTE RE COLLATERAL VALUE RELIEF FROM THE STAY: SECTION 362(D)


(D)(1) (D)(2) (D)(4)


KICK’S MOTION FOR RELIEF FROM THE STAY


OPPOSITION TO KICK’S MOTION


KICK’S MOTION: ADEQUATE PROTECTION


Fifth class, February 14: Module VI (Happy Valentine’s Day!) VI. Problem: How will Foam obtain funds to operate during the chapter 11 case? Use, sale and lease of property Cash collateral DIP financing Synopsis: We will examine the means by which the debtor obtains the funds needed to operate during its chapter 11 case. You should understand the rules governing the use, sale and lease of property in the ordinary course of business and out of the ordinary course of business, and the distinction between the use of cash collateral and obtaining DIP financing. The Moral: Money makes the world go round. The Golden Rule: Whoever has the gold makes the rules. Required Readings: TEXT, pages 171-180 (omit 3), 189-201, 207-219 Problems 4-1, 4-3, 4-4, 4-6 Bankruptcy Code §§ 363, 364, 361 Bankruptcy Rules 2002, 4001, 6004 Bankruptcy Forms, none Optional Reading: Gebbia & Oscar, Saybrook Manufacturing: Is Cross-Collateralization Moot?, 2 J. BANKR. L. & P. 163 (1993) (available on-line through Westlaw, Lexis) Project Assignment: none UNSECURED CREDITOR TEAM will lead the discussion of problem 4-3 and will consider what objections they might pose to the proposed use of cash collateral and DIP financing. SECURED CREDITOR TEAM will lead the discussion of problems 4-1, 4-6 and will consider what objections they will present if the debtor seeks to obtain DIP financing from another lender. DEBTOR TEAM will lead the discussion of problems 4-4 and will discuss its strategy to obtain operating funds.


ADEQUATE PROTECTION IN THREE CIRCUMSTANCES STAY USE, SALE, LEASE PRIMING LIEN


WHAT MIGHT FOAM DO WITH: FIRSTBANK’S COLLATERAL REAL ESTATE use KICK’S COLLATERAL AR cash use (use up) INVENTORY sell lease Receive: a.r. / cash / note Other payment rights EQUIPMENT use IP use license RAW MATERIAL use (up) CASH use (up)


WHAT WILL DIP DO WITH THE MONEY ? INVENTORY RAW MATERIALS SALARY UTILITIES SERVICES (OPERATING EXPENSES)


CASH: not subject to any lien subject to lien OCB: Out of OCB: OTHER PROPERTY: not subject to any lien subject to lien OCB: Out of OCB:


KICK Claim: $6 million Collateral: all assets, except real estate FOAM NEEDS: sell inventory collect accounts use cash from inventory sales and accounts collection new money up to $1 million


Will Foam And Kick Reach A Deal, Or Will Foam Approach A New Lender?

What Deal Will Be Acceptable To Kick & Foam? What Are Foam’s Goals? What Are Kick’s Goals? Will The Committee Object? What are the committee’s goals? Will The Court Approve? What criteria will the court apply? Will The Deal Affect Firstbank? What are First’s interests? Will Its Interests Be Protected?


THE DEAL: What Form of Financing: From Whom: What Protection For New Loan: What Protection For Old Collateral Being Used:

Saybrook Caveat and Caution, Separate Out Old And New Loans

What Terms Will You Agree To Or Demand In The Order:


Hierarchy of protections for post-petition extensions of credit:


Sixth class, February 22 NOTE THIS CLASS MEETS ON A TUESDAY! VII. Problem: Can Foam develop a viable business plan? Causes of business failure Turning the business around Developing a business plan Synopsis: We will consider whether Foam can restructure its business operations in order to continue as a viable enterprise after chapter 11. You should understand what caused Foam's financial troubles and determine what Foam should do to restructure its operations. Required Readings: TEXT, pages 220-242 (p 233-34 item 3, skim only; you do not need to know how to calculate Z-scores) Problems 5-1, 5-4 Bankruptcy Code §§, none Bankruptcy Rules, none Bankruptcy Forms, none Following 2 pages – supplement to text at page 222 Project Assignment: At the beginning of class DEBTOR TEAM will present (sufficient copies for each group) a proposed business plan. The plan should identify (i) the aspects of the business that the DEBTOR plans to retain, (ii) the aspects it plans to eliminate, (iii) ways in which it plans to cut costs, increase efficiency or increase income, (iv) other significant changes the DEBTOR plans to make to turnaround its financial troubles, (v) an explanation of steps the DEBTOR plans to take to implement these changes, and (vi) an explanation of how these changes will result in a viable, profitable ongoing business venture. DEBTOR TEAM will lead the discussion of the reasons for Foam's financial troubles and the prospects for restructuring the business. UNSECURED AND SECURED CREDITOR TEAMS will respond to DEBTOR’S assessment of its problems and its chances for a turnaround. DEBTOR, UNSECURED AND SECURED CREDITOR TEAMS will work on the business plan during class. Guidelines for Creating a Business Plan: *See page 241-42, 54, and the slides for this module *Identify the core business, the valuable assets, the strengths, weakness, the problems that led to insolvency, etc. *Specify in detail what you will change, why, how, and how this will lead to viability


Supplement to readings: page 222 Source: bankruptcydata.com Compilation and summary by: KMG 9 of the 20 largest public company bankruptcy filings from 1980 were filed in 2007-2009, after the text went to print, in just a 3-year period. The smallest of the top 20 listed assets in excess 26 million. The top 20 now include the following bold face names: Entity filing date assets listed (in millions) Lehman Bros. 9/15/08 691,063 Washington Mutual 9/26/08 327,913 GM 6/1/09 91,047 CIT 11/1/09 80,448 Chrysler 4/30/09 39,300 Although many sectors of the economy are represented in the top 20 public company filings each year from 2006 – 2010 (i.e., the largest 100 public company filings during this period), several trends stand out: 26 Bank, savings and loan, financial institution holding companies, or financial services providers 10 of the largest 20 in 2010 alone fell into this category 8 of the largest 20 in 2009 fell into this category 7 of the largest 20 in 2008 fell into this category 1 of the largest 20 in 2007 fell into this category 0 of the largest 20 in 2006 fell into this category 18 of the largest 100 were old economy manufacturers 16 Electronics, entertainment, and consumer goods 2 of the largest 20 in 2010 fell into this category 0 of the largest 20 in 2009 fell into this category 3 of the largest 20 in 2008 fell into this category 6 of the largest 20 in 2007 fell into this category 5 of the largest 20 in 2006 fell into this category 10 Real estate related Real estate investment companies or trusts, mortgage brokers 2 of the largest 20 in 2010 fell into this category 1 of the largest 20 in 2009 fell into this category 1 of the largest 20 in 2008 fell into this category 4 of the largest 20 in 2007 fell into this category 0 of the largest 20 in 2006 fell into this category Home builders


0 of the largest 20 in 2010 fell into this category 0 of the largest 20 in 2009 fell into this category 2 of the largest 20 in 2008 fell into this category 1 of the largest 20 in 2007 fell into this category 0 of the largest 20 in 2006 fell into this category 8 Old media and newspaper related – newspapers, newsprint, publishing, printing, forest products 2 of the largest 20 in 2010 fell into this category 2 of the largest 20 in 2009 fell into this category 1 of the largest 20 in 2008 fell into this category 3 of the largest 20 in 2007 fell into this category 0 of the largest 20 in 2006 fell into this category 6 Telecommunications, satellite services, networking 1 of the largest 20 in 2010 fell into this category 2 of the largest 20 in 2009 fell into this category 1 of the largest 20 in 2008 fell into this category 1 of the largest 20 in 2007 fell into this category 1of the largest 20 in 2006 fell into this category 5 Automotive: Manufacturers, Parts and manufacturers and suppliers 0 of the largest 20 in 2010 fell into this category 3 of the largest 20 in 2009 fell into this category 0 of the largest 20 in 2008 fell into this category 0 of the largest 20 in 2007 fell into this category 2 of the largest 20 in 2006 fell into this category 3 of the largest filings were casinos 2 were airlines

2 were insurance entities


__________________________________________ DEBTOR’S GOAL:

REORGANIZE AND CONTINUE IN BUSINESS four requirements: breathing spell turn the business around: business strategy financial strategy legal strategy


__________________________________________ CREDITORS’ DECISION:

LIQUIDATE OR REORGANIZE __________________________________________


PROBLEM 5-1, PAGE 231 Look At Balance Sheet, Statement Of Operations, Statement Of Cash Flows 1st -- What Are The Reasons For Foam's Financial Troubles 2d -- In Which Stage Of Financial Distress Is Foam 3d -- Why Did Foam Wait Too Long Support With Numbers From Financial Statements


POSSIBLE INTERNAL CAUSES: Foam? overextension of credit inefficient management inadequate sales improper pricing inadequate handling of receivables and

payables excessive overhead expenses, operating

costs, excessive interest late charges on long-term debt overinvestment in fixed assets, inventories insufficient working capital, including a

weak cash position unbalanced capital structure, unfavorable

debt / equity ratio inadequate insurance coverage inadequate accounting methods and records insufficient capital _________________________________________ Looking at the numbers on Foam’s financial statements, which if any of these are a problem?


POSSIBLE EXTERNAL INFLUENCES: Foam? Government regulations pollution standards other regulatory requirements Acts of god Fraud and dishonesty _________________________________________ Looking at the numbers on Foam’s financial statements, which if any of these are a problem? Keep in mind that these may become problems

due to bad management (i.e., failure to plan for or inability to deal with these issues) and may not inherently be problematic.


TOOLS FOR DETERMINING STAGE OF FINANCIAL FAILURE

_________________________________________ Trend analysis very helpful, but we do not have the historical

statements actual vs forecast, very helpful to assess

current projections industry comparison Accounting analysis [don’t panic at the formulas! perhaps ask accountants for their assessment

of ratios, etc. -- in simple terms as if you were explaining to management or committee or client

Analysis of management particularly expert in product, not in business Other factors


STAGES OF FINANCIAL FAILURE

________________________________________ INCUBATION CASH SHORTAGE FINANCIAL INSOLVENCY TOTAL INSOLVENCY ________________________________________ In which stage is Foam? Why did Foam wait too long?


TURNING THE BUSINESS AROUND __________________________________________ What is the major business problem? Was this the only problem? What is necessary to turn the business around? What do you plan to change? How will that solve the problems? Are there underlying reasons these problems arose? (e.g., bad management decision-making)


Seventh class, February 28 IX. Problem: Can Foam retain property it leases and rights it enjoys under valuable leases and

contracts? Can Foam avoid burdensome contractual obligations? Assumption, rejection and assignment of executory contracts and leases Synopsis: We will examine the rules and strategy concerning the assumption, rejection and assignment of executory contracts and unexpired leases. You should understand what type of contracts and leases the debtor will seek to assume, reject and assign. You should understand the debtor’s and non-debtor party’s rights and strategy. Required Readings: TEXT, pages 299-379 Problems 7-3, 7-4, 7-5 (In Problem 7-5 assume it is a “true lease” and ignore the issues raised regarding security interests and the UCC.) Bankruptcy Code § 365 (Note: This Code section is long and convoluted; break it down, take it one sub-section at a time, identify the principal rules, identify the exceptions and exceptions to exceptions, and chart how each sub-sections relates to the others. The readings and attached slides will help you to do this.) Bankruptcy Rule 6006 Bankruptcy Forms, none Project Assignment: At the beginning of class, the UNSECURED CREDITOR TEAM will present (sufficient copies for each group) the outline of a motion to compel Foam to assume or reject the lease discussed in problem 7-5 (assume it is a lease, not a security device). The DEBTOR TEAM and SECURED CREDITOR TEAM should be prepared to respond. UNSECURED CREDITOR TEAM will lead the discussion of assumption, rejection and assignment, including problem 7-3, 7-4 and 7-5, and will discuss their motion. DEBTOR TEAM will lead the discussion of objections to the motion and of the requirements for assumption of the two leases it desires to assume in problem 7-3. SECURED CREDITOR TEAM will discuss how the assumption and rejection of leases and contracts may affect the secured creditors, in general. Also consider your position if the debtor rejects, or fails to assume in a timely fashion, a ground lease under which the DEBTOR is the lessee of property on which the DEBTOR built a building and granted the secured creditor a mortgage. Does the property revert to the lessor? Is the secured creditor's interest eliminated? (Consider Andrew / Westbrook views.)


DEBTOR NON-DEBTOR CONTRACT RIGHTS / DUTIES RIGHTS / DUTIES CONTRACT RIGHTS / DUTIES RIGHTS / DUTIES CONTRACT RIGHTS / DUTIES RIGHTS / DUTIES


DEBTOR NON-DEBTOR CONTRACT RIGHTS / DUTIES RIGHTS / DUTIES CONTRACT RIGHTS / DUTIES RIGHTS / DUTIES


Bankruptcy Code Section 365 A basic options B requirements for assumption if default exists C limits on assumption & assignment D time limits E effect of ipso facto clauses F, K, L assignment / anti-assignment clauses / effect of

assignment G rejection as breach H rejection - debtor as lessor of real property I, J rejection - debtor as seller of real property or

timeshare M real property lease includes . . . N rejection - debtor as IP licensor O federal depository obligations


ASSUME REJECT ASSIGN


Eighth class, March 7 PART FOUR: CLAIMS BY AND AGAINST THE ESTATE IX. Problem: Pre-bankruptcy property transfers have diminished the estate, can the property be

recovered? Property of the estate Fraudulent transfers under bankruptcy law and state law Synopsis: We will overview the trustee’s avoiding powers, concentrating on the power to avoid fraudulent pre-petition transfers (the strong-arm power and preferences are covered in other courses). You should understand property of the estate, the implications of fraudulent transfers, the elements of a fraudulent transfer, and the process for recovering a fraudulent transfer. Required Readings: TEXT, pages 380-438 (omit D), 472-479 (omit F) Problem 8-1 Bankruptcy Code §§ 544, 548, 546, 550 Bankruptcy Rules 7001 - 7005 Bankruptcy Forms, none Project Assignment: none UNSECURED CREDITOR TEAM will lead the discussion of fraudulent transfers in general, and of problem 8-1 parts 1a, d, g, j, m and part 2, and will respond to the other parts DEBTOR TEAM will lead the discussion of problem 8-1 part 1 b, e, h, k and will respond to the other parts SECURED CREDITOR TEAM will lead the discussion of problem 8-1 part 1c, f, i, l, and will respond to the other parts Handout: Proof of claim forms – due at the beginning of next class.


SECTION 548(A)(2) CONSTRUCTIVE FRAUD Transfer / obligation incurred Interest of debtor / by debtor Within one year before bankruptcy Debtor received less than “reasonably equivalent

value” Debtor was in financial trouble:

Insolvent or rendered insolvent Unreasonably small capital Equitable insolvency (could not pay debts as they matured) (intent or belief)


SECTION 548(A)(1) ACTUAL FRAUD Transfer / obligation incurred Interest of debtor / by debtor Within one year before bankruptcy Actual intent to Hinder, delay, or defraud Present or future creditor Badges of fraud: Transfer to insider Shortly before judgment or suit Concealed transfer Debtor retained use or benefit of property

transferred


Mellon / RML (Intershoe), page 397

MELLON Rec’d $515,000 commitment fees

| | | | | | |

INTERSHOE

Rec’d commitment letter Loan of $53 mm never closed

Issues: Insolvency (yes) Reasonably equivalent value (no)


Abatement Environmental Resources, page 410

IRS Rec’d $ from Abatement to satisfy

Tax obligations of principal owner | | | | | |

ABATEMENT

Rec’d ?? Issues: Insolvency (yes) Did Abatement receive ANY consideration? Held: trustee failed to show that Abatement received no consideration under applicable state law


TUG, page 416 Issue: extent of trustee’s powers to assert claims


PROBLEM 8-1, PAGE 389: apply the elements A Foam: home to gruff gift for years of service B Foam license to Swenson sale nominal compared to $200,000 price

More Foam paid, below market C Foam real estate to First Bank foreclosure 65% of market value


Problem 8-1, page 389 D Foam assets to Ufoam transfer to sub (solvent? insolvent?) free! E Foam surety, si to Commercial Surety, security interest in Foam assets for loan by Commercial to Gruff F Foam Guaranty to Commerce Future loans to Gruff


Problem 8-1, page 390 G Gruff stock to Tina and Swenson Foam security interest to Commerce to secure loans to Tina, Swenson, Foam

loan by Commerce to Tina and Swenson

loan by Commerce to refinance Kick H Foam collateral to Kick new collateral new loans I Foam collateral to Kick new collateral old debt, unsecured [do not consider the preference question]


Problem 8-1, page 390 J Foam $20,000 to consultant for future work K Foam retainer to lawyer retainer services to be performed L Gruff retainer to lawyer retainer

services possibly to be rendered M Gruff Richmond plant to Trust


Ninth class, March 21 XI. Problem: Before Foam can develop a plan of reorganization, it must determine who is

entitled to a share. What must creditors do to assert their claims? How is the amount of each claim determined? Is interest added? What happens to post-petition claims?

Claim allowance and disallowance Administrative claims, other priority claims Secured claims, inadequate protection claims Synopsis: We will examine claims and distributions, the basic rules for carving up the pie. You should understand the distinction between general unsecured, priority and secured claims. You should understand the process by which claims are asserted and allowed or disallowed. You should understand when secured creditors are entitled to interest, what protection they receive if their adequate protection fails, and when the estate may charge fees against the secured creditors’ collateral. Required Readings: TEXT, pages 486-508, 531-563 Bankruptcy Code §§ 501, 502, 503, 506, 507, 101(5, 10, 12 only), 726(a)(1) Bankruptcy Rules 3001 - 3003, 3007 Bankruptcy Form 10 (handed out last class) Project Assignment: EACH TEAM must fill in one or more separate proofs of claim form for each of the following creditors: TC, First Bank, Gruff, Consumer and Victim. Use more than one form for each if they have different types of claims. DUE AT 9 am at THE BEGINNING OF CLASS. SECURED CREDITOR TEAM will lead the discussion of claims allowance and disallowance in general, and of the allowance of interest to secured creditors, surcharge against the collateral and inadequate protection priority claims, and the questions (not the problems) in the TEXT. DEBTOR TEAM will lead the discussion of problem 9-1 (part 1 through 4) UNSECURED CREDITOR TEAM will lead the discussion of priority claims


Secured Unsecured Admin. Claim claim expense | | | | | General unsecured ------------ priority unsecured

Assets of the estate Collateral equity Collateral equity Collateral equity Unencumbered assets

Distribution scheme. . . Who stands first in line . . . next . . . next. . . . next. . .

Free assets? What is left after paying secured creditor


506(A) SECURED STATUS *allowed claim *secured by property of the estate secured: to the extent of the creditors’ interest in the estate’s interest unsecured: for the deficiency creditor total claim $8,000 secured by property worth $10,000

VALUE $10,000 [debtor owns 100%] Secured: Unsecured: ______________________ [debtor owns 50%] Secured: Unsecured:


DEBTOR IN BANKRUPTCY Bank claim secured claim $18,000 pre-petition interest $1,400 broker’s fee $275

secured claim $18,000 pre-petition interest $1,400 broker’s fee $275

stock $22,500 ________________ assets debts

stock $16,500 ________________ assets debts


CHAPTER 7 claim $38,000 principal pre-petition interest $2,200 attorneys’ fees for collection per contract $750 loan officers’ fees for collection $500

COLLATERAL SOLD FOR $51,500 ___________________________ ASSETS LIABILITIES


CHAPTER 7 finance co claim claim $14,600 principal and pre-petition interest post-petition interest $300 post-petition attorneys’ fees $300

CAR $15,000 BLUEBOOK $13,800 TRUSTEE SALE ____________________________ ASSETS LIABILITIES


ASSETS: SUBJECT TO SECURED CLAIMS LIABILITIES 726(A)(1) PRIORITY: 507(A) PRIORITIES 1 support (was 8th priority), trustee 2 administrative, 503(b), and title 28 fees (was 1) 3 502(f) gap period claims 4 individual wages up to 11,725 for services

within 180 days (was $4,000 for services within 90 days) before filing or cessation

5 certain employee benefits up to 11,725

(was $4,000) per individual for services within 180 days before filing or cessation

6 certain claims of grain producers and

fishers up to 5775 (was $4,000) 7 consumer goods deposits up to 2,600 (was

$1800) 8 certain tax claims 9 certain FDIC and RTC claims 10 personal injury from DUI *italics = changed in 2005


726(a)(1) priority claims under 507 726(a)(2) timely filed general unsecured 726(a)(3) tardily filed general unsecured 726(a)(4) fines and penalties 726(a)(5) interest on 1 - 4 726(a)(6) equity - debtor 726(B) PRO-RATA CAVEAT: SUBORDINATION


ASSETS real property $200,000 mortgage $175,000 $25,000 other property $5,000 total $30,000 total claims $54,634 if pro rata ? under priority scheme . . . ?


TRADE CREDITOR FIRST BANK


GRUFF, INSIDER GRUFF, EMPLOYEE GRUFF, GUARANTOR GRUFF, LESSOR


CONSUMER VICTIM


Tenth class, March 28 XII. The realities of chapter 11 in California The business climate and economy in California Guest speaker on the economy Business plans, valuation, and viability

Guest speaker from business Business reorganization in California

Guest speaker(s) from legal practice Assignment:

Index cards with questions for speakers


Eleventh class, April 4

PART FIVE: THE PLAN OF REORGANIZATION RESTRUCTURING THE FINANCIAL AFFAIRS IN CHAPTER 11; NEGOTIATING AND CONFIRMING A PLAN OF REORGANIZATION XIII. Problem: Foam needs to determine who should get what under a plan and wants to prevent

others from filing a plan. Exclusivity and filing a plan Classification of claims and interests Impairment Synopsis: We will determine when the debtor and others have a right to file a plan, and we will consider the rules governing how the plan must and may classify and impair claims and interests, and the implications of classification and impairment. You should understand the rules governing classification, the concept of impairment, the minimum votes required for acceptance and, how mis-classification and gerrymandering can skew voting. Required Readings: TEXT, pages 634-682 Problems 11-1, 11-3, 11-4, 11-5 Bankruptcy Code §§ 1121, 1122, 1123, 1126, skim 1129(a) Project Assignment: none DEBTOR TEAM will lead the discussion of exclusivity, including problems 11-1 and 11-3 SECURED CREDITOR TEAM will comment on how secured creditors’ interests might be affected by the problems presented UNSECURED CREDITOR TEAM will lead the discussion of classification of unsecured claims, including problem 11-4 and 11-5


1121 EXCLUSIVITY -debtor may file a plan at any time -first 120 days, only debtor may file -any party in interest note the definition! may file if trustee is appointed

or if debtor has not filed w/in 120 days or if debtor’s plan is not accepted w/in 180

days -court may reduce /increase periods for cause -special small business rules


CONFIRMATION 1121 - 1129 1121 plan filing, exclusivity 1122, 1123 classification, gerrymandering 1124 impairment 1125 disclosure 1126 voting 1127 plan modification 1128 confirmation hearing 1129 requirements for confirmation a) basic minimums b) cramdown


1129a CONFIRM ONLY IF **1 plan complies with title 11 (see 1121-1128) **2 proponent complies with title 11 (ditto, 1125) 3 good faith, not by means forbidden by law 4 payments approved or subject to approval 5 disclosure: directors, officers, voting trustee,

insiders 6 regulatory rate approval 7 the “best interests” test **8 each class has accepted or is unimpaired 9 minimum treatment of priority claims **10 acceptance by at least one impaired class

of claims 11 12 the “feasibility test” 12 bankruptcy fees paid 13 continuation of retiree benefits 1129(a) minimum requirement added in 2005: 14 individual debtor, support order compliance 15 chapter 13 comparison 16 eleemosynary transfers


1122 classification of claims *place claims and interests only with substantially similar claims and interests

in terms of rights vis-a-vis debtor *administrative convenience class exception


1123a treatment of classes the plan MUST *designate classes *specify unimpaired classes *specify the treatment of impaired classes *provide the same treatment of each claim or

interest in a particular class, unless otherwise agreed

*provide adequate means of implementation

*prohibit issuance of nonvoting stock *include only provisions consistent with

creditors, equity security holders, and public policy concerning selection of officers, directors, trustees


1123b treatment of classes the plan MAY *impair or leave unimpaired *assume, reject and assign, subject to 365 *settle, adjust, retain and enforce claims of

the debtor *provide for sale and distribution of proceeds *modify the rights of secured creditors *include provisions not inconsistent with title

11


1124 impairment impaired UNLESS *does not alter the legal, equitable and

contractual rights *cures, reinstates, compensates, but otherwise

does not alter the legal, equitable and contractual rights


1126 acceptance a holder of claim or interest may accept, reject b pre-petition acceptance, rejection (pre-packaged plan, pre-negotiated plan)


1126 acceptance c class of claims: 2/3 in amount more than 1/2 in number of allowed claims that actually vote d class of interests: 2/3 in amount of allowed interests that actually vote e designation of votes, not in good faith, not solicited in good faith


Twelfth class, 4/11 XIV. Problem: Creditors need adequate information about Foam’s history, finances, operations,

future prospects, and proposed treatment of all creditors in order to vote on the plan. Disclosure statement, adequate information Disclosure hearing and objections Soliciting votes Voting Synopsis: We will consider the requirements for disclosure and solicitation of votes. You should understand the requirement of “adequate information” and its purpose, and you should understand the process of solicitation and voting. Required Readings: TEXT, pages 752-796 Problems 13-1, 13-3, 13-4 Bankruptcy Code §§ 1125, 1126, skim 1129(a, b) Bankruptcy Rules 3016, 3017 Bankruptcy Form 12, 13 Project Assignment: none DEBTOR TEAM will lead the discussion of disclosure in general and of problem 13-1, 13-3, 13-4 SECURED CREDITOR TEAM and UNSECURED CREDITOR TEAM will respond


SOLICITATION AND DISCLOSURE: *PURPOSE OF DISCLOSURE *WHAT MUST BE DISCLOSED *FORMAT FOR DISCLOSURE *PROCESS OF SOLICITATION *VOTING


1125 B cannot solicit acceptances or rejections

until after a written disclosure statement

containing adequate information and the plan or a summary have been transmitted to each holder of a

claim or interest (but cases do not require transmission

to unimpaired nonvoting classes) C same disclosure to each claim in same

class; can be different to different classes


1125A adequate information information of a kind and in sufficient

detail as far as is reasonably practical in

light of the nature and history of the debtor and condition of books and records

to enable a hypothetical reasonable

investor typical of holders of claims in the relevant class

to make an informed decision about the plan

need not include such information re

other possible or proposed plans D adequate information not governed by non-

bankruptcy law (but see G re pre-petition solicitation)


1125 E persons who solicit in good faith and in

compliance with Code, or participate in sale (etc.) of security under plan, excused from liability for violation of solicitation rules or security sale rules

F special rules for small business bky 1121e, added 1994


1126 VOTING A HOLDER OF ALLOWED CLAIM OF

INTEREST MAY VOTE B SOLICITATION BEFORE CASE WAS

COMMENCED “PRE-PACKAGED PLAN”


CREDITORS’ AND INTEREST HOLDERS’ INQUIRY: Is the plan feasible ? How much value does the plan provide the creditor, interest holder ? Is this a fair share of the available value ? Is the form of the value acceptable ?


Thirteenth class, 4/18 XII. Problem: Foam hopes that each group will accept the plan. What is required for a

consensual confirmation? Confirmation requirements and negotiation The confirmation hearing and objections to confirmation Counting votes Synopsis: We will examine the requirements for consensual confirmation. You should understand these requirements and the minimum distribution required under chapter 11 to each class of priority, general unsecured and secured creditors. You should also understand the “1111(b) election.” You should re-consider the rules governing classification and impairment and the minimum votes required for acceptance and, consider how mis-classification and gerrymandering can skew voting. Required Readings: TEXT, pages 797-818 Bankruptcy Code §§ 1129(a), 1111, 1122, 1123, 1124, 1126, 1128, Bankruptcy Rules 3018 Bankruptcy Forms, none Project Assignment: none UNSECURED CREDITOR TEAM will lead the discussion of the treatment of priority and general unsecured claims, including classification and gerrymandering SECURED CREDITOR TEAM will discuss the classification of secured claims, including of the unsecured deficiency claim and the 1111(b) election DEBTOR TEAM will lead the discussion of the financial requirements for confirmation


CONFIRMATION 1121 - 1129 1121 plan filing, exclusivity 1122, 1123 classification, gerrymandering 1124 impairment 1125 disclosure 1126 voting 1127 plan modification 1128 confirmation hearing 1129 requirements for confirmation a) basic minimums b) crandown


1129a CONFIRM ONLY IF 1 plan complies with title 11 (see 1121-1128) 2 proponent complies with title 11 (ditto, 1125) 3 good faith, not by means forbidden by law 4 payments approved or subject to approval 5 disclosure: directors, officers, voting trustee,

insiders 6 regulatory rate approval 7 the “best interests” test 8 each class has accepted or is unimpaired 9 minimum treatment of priority claims 10 acceptance by at least one impaired class of

claims 13 the “feasibility test” 12 bankruptcy fees paid 13 continuation of retiree benefits


1129(a) minimum requirement added in 2005: 14 individual debtor, support order compliance 15 chapter 13 comparison 16 eleemosynary transfers


RECALL: 1122: place claims and interests only with substantially similar claims and interests

in terms of rights vis-a-vis debtor administrative convenience class exception


RECALL: 1123a the plan MUST designate classes specify unimpaired classes specify the treatment of impaired classes provide the same treatment of each claim or

interest in a particular class, unless otherwise agreed provide adequate means of implementation

prohibit issuance of nonvoting stock contain only provisions consistent with

creditors, equity security holders, and public policy concerning selection of officers, directors, trustees

1123b the plan MAY impair or leave unimpaired assume, reject and assign, subject to 365 settle, adjust, retain and enforce claims of the

debtor provide for sale and distribution of proceeds modify the rights of secured creditors contain provisions not inconsistent with title

11


RECALL 1124 impaired unless --does not alter the legal, equitable and

contractual rights --cures, reinstates, compensates, but

otherwise does not alter the legal, equitable and contractual rights

1126 acceptance a holder of claim or interest may accept, reject b pre-petition acceptance, rejection (pre-packaged plan) c class of claims: 2/3 in amount more than 1/2 in number of allowed claims that actually vote d class of interests: 2/3 in amount of allowed interests that actually vote e designation of votes, not in good faith, not solicited in good faith


RECALL: 1128 court shall hold confirmation hearing, after notice “party in interest” may object Rule 3018 a accept, reject within time fixed by court temporary allowance for voting purposes b pre-petition acceptance, rejections (pre-packaged plans) c form signature d partially secured creditors


secured creditors and section 1111(b) (1) present value 100 today, worth less than 100 one year from now at 10% interest, worth 110 one year from now 110 one year from now, “present value” of 100 what is the minimum treatment if: the total allowed claim is 1.5 mm collateral is worth 1 mm


1111b 1a recourse and non-recourse secured claims

treated as recourse unless the holders make the 1111b2 election by

the requisite majorities, or non-recourse and property is to be sold 1b the 1111b election class may elect to be treated under 1111b2

unless the secured claim is of inconsequential

value, or the holder has recourse and the property

is to be sold b2 the claim is treated as secured to the full

extent of the allowed amount


1111b election -- example loan of 5 mm secured by real estate worth 6 mm non-recourse market decline in recession at its lowest point, value drops to 3 mm market begins to recover at the time of the plan real estate value is 4 mm claim is 5 mm without section 1111, what result ? with section 1111b1, what result ? with the section 1111b2 election, what result ?


Fourteenth class, 4/25 XVI. Problem: Some classes of creditors vote to reject the plan. Can the plan still be

confirmed? Can the creditors stop confirmation of a plan they dislike? Cramdown requirements in general Confirmation and cramdown in Foam’s case Synopsis: We will examine the cramdown requirements in general and as applied to Foam’s plan. You should understand cramdown, recognize the objections each group might assert to Foam’s plan and determine whether Foam’s plan will be confirmed. Project Assignment: none Required Readings: TEXT, pages 819-831, 861 (part 2) -902, 915-929, Appendix C Problems 15-5, 15-6, 15-7, 15-8, 15-9 Bankruptcy Code §§ 1129(a)(8), 1129(b), 1111 Bankruptcy Rules 3019 - 3022 Bankruptcy Forms 14, 15 DEBTOR TEAM will begin by asserting its grounds for confirmation and will later respond to objections (especially “new value”) SECURED CREDITOR TEAM will discuss valuation disputes and secured creditors’ objections to confirmation, and will lead the discussion of cramdown, focussing particularly on the minimum treatment of secured creditors and cramdown of secured creditors, including the discussion of the problems and section 1111 UNSECURED CREDITOR TEAM and DEBTOR TEAM will respond and will discuss how to confirm a plan over the secured creditor’s objection UNSECURED CREDITOR TEAM will discuss unsecured creditors’ objections to confirmation (especially absolute priority)

CONFIRMATION (or non-confirmation) PARTY AFTER CLASS! bring something good to eat to share; prof will bring beverages


1129B CRAMDOWN ALL OF THE REQUIREMENTS OF 1129A ARE MET, EXCEPT 1129A8 PROPONENT REQUESTS CRAMDOWN COURT SHALL CONFIRM IF

PLAN DOES NOT DISCRIMINATE UNFAIRLY

PLAN IS FAIR AND EQUITABLE

WITH RESPECT TO EACH IMPAIRED REJECTING CLASS


FAIR AND EQUITABLE a secured claims i holders retain liens, and each holder receives deferred cash

payments totalling at least the allowed amount

of the claim with a present value as of the effective

date at least equal to the allowed secured claim, or

ii sale of property with liens to attach to the

proceeds, and treat lien on proceeds under i or iii, or iii indubitable equivalent cramdown, secured creditor


present value 100 today, worth less than 100 one year from now at 10% interest, worth 110 one year from now 110 one year from now, “present value” of 100 what is the minimum treatment if the total allowed claim is 1.5 mm collateral is worth 1 mm


1111b 1a recourse and nonrecourse secured claims

treated as recourse unless the holders make the 1111b2 election by

the requisite majorities, or nonrecourse and property is to be sold 1b the 1111b election class may elect to be treated under 1111b2

unless the secured claim is of inconsequential

value, or the holder has recourse and the property

is to be sold b2 the claim is treated as secured to the full

extent of the allowed amount


15.1, 15.2, 15.3 DEBCO -------------> OWES GALACTIC 100,000 COLLATERAL – GREENACRE 145,000 FIRST MORTGAGE DEBCO -------------> OWES WORLDBANK 85,000 COLLATERAL – GREENACRE 145,000 SECOND MORTGAGE GREENACRE VALUE 145,000 LIENS 185,000 CLASS 1 REJECTS GALACTIC 100,000 CLASS 2 REJECTS WORLDBANK 45,000 CLASS 3 ACCEPTS UNSECURED, INCLUDING WORLDBANK 40,000; 15% DISTRIBUTION


15.1A IF NO 1111B ELECTION, WHAT IS THE MINIMUM CRAMDOWN TREATMENT OF GREENACRE WORLDBANK 15.1C 1111B ELECTION AS TO WORLDBANK PERMISSIBLE ? TREATMENT IF WORLDBANK MAKES THE 1111B ELECTION


15.2A CLASS 2 WORLDBANK SECURED CLAIM 45,000 CASH ON CONFIRMATION SHOULD WORLDBANK MAKE THE 1111B ELECTION WHAT CONSEQUENCES IF IT DOES SECURED CLAIM UNSECURED CLAIM


15.2B CLASS 2 WORLDBANK SECURED CLAIM 4,500 CASH ON 1ST ANNIVERSARY 4,500 CASH ON 2D ANNIVERSARY 49,500 CASH ON 3D ANNIVERSARY 10% DISCOUNT RATE FAIR AND EQUITABLE ? SHOULD WORLDBANK MAKE THE 1111B ELECTION? WHAT CONSEQUENCES IF IT DOES SECURED CLAIM UNSECURED CLAIM IF IT DOES, WHAT MUST THE PLAN PROVIDE TO BE FAIR AND EQUITABLE?


FAIR AND EQUITABLE b unsecured claims i each holder receive or retain property

having a present value equal to the allowed amount of the claims, or

ii no holder of a junior claim or interest

receives or retains any property on account of such claim or interest


FAIR AND EQUITABLE c interests i each holder receive or retain property

having a present value equal to the fixed liquidation preference, fixed redemption price, or value of the interest, or

ii no holder of a junior interest receives or

retains any property on account of such interest


ABSOLUTE PRIORITY AND THE NEW VALUE “EXCEPTION” OR “COROLLARY” NEW SUBSTANTIAL MONEY OR MONEY’S WORTH NECESSARY TO THE REORGANIZATION VALUE: REASONABLY EQUIVALENT

TO THE VALUE OR INTEREST RETAINED

IN EXCHANGE FOR THE PROPERTY

RECEIVED OR RETAINED


15-7 UNSECUREDS -- NUMBER Tina, Imperial vote against First and Kick vote against Swenson votes in favor Unsecured (5) Tina Imperial First (part) Gruff Swenson Trade (60) Misc (10) Total 75 Minus Gruff = 74 15 trade who don’t vote = 59 2-3 misc who don’t vote = 56-57 > 1/2 = 29 Number of no votes Tina, First, Imperial, plus 15 trade = 18 Enough in number who vote in favor ?


UNSECURED CLAIMS -- AMOUNT .1 MM 3.2 MM .4 3.0 2.0 3.0 .050 11.75 1/3 in amount = 3.91666666 2/3 in amount = 7.8333332 11.75 MINUS INSIDER GRUFF 3.2 = 8.65 1/3 = 2.88333333 2/3 = 5.7666666 FAIRLY CERTAIN NO VOTES TINA 3 MM FIRST .1 IMPERIAL .4 1/3 TRADE .65 4.15 only need 2.8 to defeat plan

business reorganization in bankruptcy

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