SECURED TRANSACTIONS
Fall Semester 2015
PROBLEM SET 19
Bankruptcy: The Trustee’s Avoiding Powers
Carefully read the following:
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§§ 16.04[A], [B], [C], [D], [E], and [F] of UNDERSTANDING SECURED TRANSACTIONS
§§ 9-317 and Bankruptcy Code §§ 362, 544, 546, 547, 548, 550, and 551
1.
Your day starts with an e-mail from Kelly Smith at Putnam County Bank:
I handle all of the loans for the Bank where the borrower files for bankruptcy. I’ve got
several questions for you about possible application of the strong-arm provision to several
of the Bank’s loans where the borrower has filed for bankruptcy.
The first one involves a Chapter 7 debtor named Bart Carr. Last year, we financed Carr’s
purchase of a pipe organ, taking a security interest in the organ. At the time of the
transaction, Bubba prepared a financing statement, but it was never filed due to an oversight.
We discovered the oversight last week, the day after the Bank received notice of Carr’s
bankruptcy filing. I asked Bubba to send me the loan file, and when he reviewed the file and
realized he’d never filed the financing statement, he immediately sent someone over to the
Secretary of State’s office and it was filed. I’m pretty sure we’re in trouble here, but wanted
to check with you just in case.
The second one involves a Chapter 11 debtor named Tanya’s Treats, LLC. Two weeks ago,
we loaned the company $10,000 to finance the purchase of new candy-making equipment.
The debtor signed a security agreement granting us a security interest in the new equipment.
The financing statement was filed at the Secretary of State’s office about six hours after the
debtor filed its Chapter 11 petition. I think we’re OK on this one, though, because we didn’t
know about the bankruptcy at the time we filed.
The third one involves a Chapter 7 debtor named Lisa Simpson. Two years ago, we made
her a $12,000 student loan and took a security interest in her collection of saxophones (six
of them altogether). We filed a financing statement in Missouri, where she lived at the time.
When we got notice of her Chapter 7 petition, we noticed that she had filed for bankruptcy
in Wisconsin; turns out she’s moved there. Can we file a UCC-1 in Wisconsin at this point,
and would it do us any good?
The last one involves a Chapter 7 debtor named Herman Moore. On October 1, 2015, we
loaned him $20,000 to purchase a gently-used BMW. He granted us a security interest in
the car to secure repayment in installments over the next three years. On October 25, 2015,
we submitted an application for a title certificate to the Missouri Department of Revenue,
with instructions that our lien be noted on the title certificate. The certificate was issued on
October 31; however, it turns out that Moore filed a bankruptcy petition on October 23. So
I’m not sure whether we were properly perfected in time.
In which of these circumstances is Putnam County Bank’s security interest subject to avoidance
under the Bankruptcy Code’s strong-arm provision, and why?
2.
Later in the morning, you get another e-mail from Kelly Smith:
I’m still working through the bankruptcy notices for this week. One of the notices was about
a Chapter 7 petition filed yesterday by Daddy Day Care, Inc. (DDC). This was a day-care
center started by a couple of Bubba’s college friends and it has been a financial disaster.
Originally, Bank loaned them $100,000 on an unsecured basis (which it never should have
done), and when DDC defaulted earlier this year, Bank agreed to extend the due date of the
loan if DDC would grant Bank a security interest in all of its playground equipment. Is that
security interest at risk in the bankruptcy case?
Also, the Bank loaned DDC $10,000 to purchase a giant screen TV and stereo-theater system
that DDC installed to show DVDs, videos, and TV shows to the kids. Bubba sent a UCC-1
to the Secretary of State to be filed, and it was returned because he forgot the filing fee.
Eventually, it was filed the following month. Is that security interest at risk?
What’s your advice to Kelly Smith? What additional information, if any, do you need to advise her?
3.
At lunch, you run into Dan Arthur of Atlantic Commercial Finance, who tells you
the following information about one of its borrowers, Carter’s Cafe, which has just filed a Chapter
7 bankruptcy petition. According to Arthur, ACF had taken a security interest in the kitchen
equipment of Carter’s Cafe in order to secure repayment of a $50,000 loan. The security interest
was properly perfected by a filed UCC-1 on the same date the security agreement was signed. Two
weeks before Carter’s Cafe filed for bankruptcy, Carter’s Cafe made a $10,000 payment on the loan
(reducing the balance to $40,000). ACF believes that the equipment would bring $60,000 in a
private sale, but Arthur says that the Trustee is claiming that the equipment is worth at most
$30,000. To what extent, if any, could the Trustee recover the $10,000 payment to ACF as a
preferential transfer? What additional information, if any, would you need to answer the question
fully?
4.
After returning to the office, you get a phone call from Dan Arthur:
I just found out more information about Carter’s Cafe. Turns out our security interest also
covered after-acquired kitchen equipment, and the week before filing bankruptcy, Carter’s
Cafe bought a new dishwasher for $5,000 cash. The trustee is claiming that she can set aside
our security interest in the new dishwasher. Is that right?
What’s your advice? What additional information, if any, do you need to advise Dan Arthur fully?
5.
Late in the day, you get an e-mail from Sara Jones at First Bank:
One of our borrowers, Austin’s Auto Parts, has filed for Chapter 11 bankruptcy. We have
a properly perfected security interest in all of its inventory, to secure repayment of a line of
credit. This line of credit has been in place for several years.
The petition date was November 1, and on that date, Austin’s Auto Parts owed us $100,000,
and they had inventory worth $150,000. We got a demand letter from Austin’s, threatening
to sue us to set aside the Bank’s security interest in the inventory as an avoidable preference.
Based on our records, it appears that the loan balance and the inventory value was as follows
over the previous three months:
Date
Balance Due
Inventory Value
October 1
September 1
August 1
$120,000
$100,000
$140,000
$80,000
$120,000
$120,000
Is the debtor just making an idle threat, or is our security interest in the inventory actually
at risk?
What’s your advice?
6.
Just before leaving for the day, you got a call from Lisa Shreves, the President of
BankGroup Industrial Credit (BIC). She told you that six months ago, Northeast Airlines defaulted
on its line of credit from BIC, and that BIC repossessed and sold ten planes that served as collateral
for the line of credit. The planes sold in a private Article 9 foreclosure sale for $25 million.
Northeast Airlines has now filed for bankruptcy, and has filed a lawsuit in the bankruptcy court
arguing that the foreclosure sale was a fraudulent transfer because the fair market value of the planes
at the time of the sale was actually $40 million. Lisa asked you whether Northeast Airlines could
invalidate the foreclosure sale and recover possession of the planes from the buyers and, if so, the
implications for BIC. What additional information would you need in order to advise Lisa?