secured transactions assignment 6

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Secured TransactionsAssignment 6

Bankruptcy and

the Automatic Stay

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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

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§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.

Article 9 Terminology

Security interest

Lien

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§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.

Article 9 Terminology

Mortgage Security interest

Lien Statutory lien

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§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

Bankruptcy Code Terminology

Security interest

Judicial Lien

Mortgage Article 9 security interest

Statutory Lien

Lien

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Specialized courts: Bankruptcy is a separate court system

Bankruptcy Courts

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a. Federal

Bankruptcy Courts

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a. Federal

b. Fully electronic, 1997-2005

Bankruptcy Courts

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a. Federal


c. 200 locations in the US

Bankruptcy Courts

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a. Federal


c. 200 locations in the US

Purpose: Coordinated resolution of debt problems

a. Consumers

b. Businesses

Bankruptcy Courts

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Bankruptcy Concepts1. Petition: Document that commences a bankruptcy case

2. Schedules: Lists of assets and debts, filed with petition

3. Proof of claim: Creditor’s statement of debt owing

4. Automatic stay: An “injunction” that takes effect on the filing of a bankruptcy case

5. Discharge: An injunction against future efforts to collect the debt from the debtor.

6. 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.

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More Bankruptcy Concepts8. Reaffirmation: Debtor’s election not to discharge a debt

9. 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

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Liquidations: Chapter 7Deal: "Fresh start"

1. Debtor surrenders all property to trustee

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(Except exempt)

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(Except exempt)

2. Court discharges all debt

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(Except exempt)


(Except nondischargeable and reaffirmed debt)

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(Except exempt)



3. Trustee sells the surrendered property and distributes proceed pro rata

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(Except exempt)



3. Trustee sells the surrendered property and distributes proceed pro rata

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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

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Debt Adjustment: Chapter 13Eligibility: 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

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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?

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Bankruptcy Code §362(a)(a) [A bankruptcy] petition operates as a stay, applicable to all entities,

of --

(1) The commencement or continuation . . . of [an] action . . . against the debtor . . . to recover a claim . . . that arose before the commencement of the [bankruptcy] case

(2) The enforcement , against the debtor or against property of the estate, of a judgment obtained before [bankruptcy]

(3) 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.

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Bankruptcy Code §362(a)(a) [A bankruptcy] petition operates as a stay, applicable to all entities,

of --

(1) The commencement or continuation . . . of [an] action . . . against the debtor . . . to recover a claim . . . that arose before the commencement of the [bankruptcy] case


(3) 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.

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1. Kansas Savings has a judgment for possession of some equipment.

2. Kansas Savings and the sheriff go to get the equipment

3. 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?

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Bankruptcy Code provisions§362 (a) [A bankruptcy] petition operates as a stay, applicable to all

entities, of --


§ 101(15) The term “entity” includes . . . governmental unit . . . .”

(27) The term “governmental unit” means . . . state . . . or instrumentality of . . . a state . . . .”

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1. Kansas Savings has a judgment for possession of some equipment.

2. Kansas Savings and the sheriff go to get the equipment

3. 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)

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

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$250KLien

Prime CutsClosed restaurant


Value $250K or less

We represent secured creditor Bank. The debtor just filed under Chapter 11.

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$250KLien


Can the bank foreclose?


Value $250K or less


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$250KLien



Not without lifting the stay


Value $250K or less


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Bankruptcy Code §362(d)

(d) [T]he court shall grant relief from the [automatic] stay:

(1) For cause, including the lack of adequate protection of an interest in property of such party in interest [or]

(2) With respect to a stay of an act against property . . . if

(a) The debtor does not have an equity in theproperty; and

(b) Such property is not necessary to an effectivereorganization

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Can the bank lift the stay?

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What happens if the stay is lifted?

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$210KLien

Sprouts Up head-quarters building



Value $600K

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Can the bank lift the stay? No.

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$350KLien

Paradise Boat LeasingCommercial yacht


Value $700KBoat is uninsured. Bank is afraid it will go out and not come back.

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$350KLien

Paradise Boat LeasingCommercial yacht



Value $700KBoat is uninsured. Bank is afraid it will go out and not come back.

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Can the bank lift the stay? Yes. “adequate protection” is protection against decline in the value of the collateral.

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We represent the bankrupt. Angry creditors are calling• How do we deal with Watson Investment, unsecured for $126K?

What can Watson do?

a. 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.

Petition

3 months

Now

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We represent the bankrupt. Angry creditors are calling

a. How do we deal with Watson Investment, unsecured for $126K? What can Watson do?

a. How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(e)


Petition

3 months

Now

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b. How do we deal with Macklin Mortgage, secured by sterilization equipment for $50K? What could Macklin do? §362(d).


Petition

3 months

Now

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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.


Petition

3 months

Now

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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).


Petition

3 months

Now Motion Hearing

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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).


Petition

3 months

Now Motion Hearing

60 days

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Petition

3 months

Now Motion Hearing


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?


60 days

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Petition

3 months

Now Motion Hearing



Macklin gets adequate protection against decline in the value of the collateral (Timbers) or the stay is lifted.


60 days

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Petition

3 months

Now

$50K $40K

Motion Hearing

$35K $30K $25K



Macklin gets adequate protection against decline in the value of the collateral (Timbers) or the stay is lifted. What decline?

Caseend

60 days

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Petition

3 months

Now

$50K $40K

Motion Hearing

$35K $30K $25K

Caseend



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.

60 days

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Petition

3 months

Now

$50K $40K

Motion Hearing

$35K $30K $25K



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. Ninth Circuit, when creditor would have received money by state procedure

Caseend

60 days

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Petition

3 months

Now

$50K $40K

Motion Hearing

$35K $30K $25K



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. What kind of protection here?

Caseend

60 days

secured transactions assignment 6

Documents

lien creditor

specialized courts

bankruptcy casedischarge

bankruptcy caseschedules

bankruptcy conceptspetition

usbankruptcy courts

businessesbankruptcy

security agreement