08/26/20 Notes
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Make it Stick: The Science of Learning
When a debtor files for bankruptcy state law takes creditor law position into account.
State law determines what priority level a creditor is at and whether there is a claim in
bankruptcy claim at all.
How do we decide which creditor gets paid first?
o Before bankruptcy, creditors are all racing to get assets
 Secured>unsecured
 Unsecured race each other to levy debtors assets not already going to
secured creditor.
Consensual creditor leansbargained in advance
Non-consensual leansstarted as unsecured creditor and now is seeking some special
right in property of debtor.
Problem 2.3 Page 49
o A writing by itself does not make Sean a secured creditor unless it is a secured
creditor interest.
o Sean is an unsecured creditor because no written secured agreement. If he was
secured then he would use self-help repossession of computer to satisfy debt.
He would have to send a no-objection notice and she has to not object.
o Here Sean is an unsecured creditor so he can’t take laptop.
o Exemptions don’t help debtors who received consensual secured loan from
creditor who takes interest in collateral.
o Unsecured creditor Sean would need to get a formal judgmentwritten
levydelivered to sheriff otherwise. Sean would need to help Sherriff recognize
non-exempt property.
o In order for creditor to become securedArticle 9
 Besides a signature, need collateral description, formal granting language
in the writing where debtor says that he grants security interest.
 IOU does not satisfy this.
o If there is no notification of taking property then that is conversion.
o Secured creditor is not bound by state law exemption if property is collateral.
Debtor in this case waived their exemption.
o In a security agreement: need to have specific description of the collateral.
o Wall to wall: Security agreement could put everything someone has as collateral.
Multiple unsecured creditors
o First to file or “perfect” has right to property.
o Secured creditors always have first priority.
Problem 2.4
o There might have been a breach of peace but a court also might hold that Bruno
was acting under his authority for a secured creditor and did not breach the
peace in the normal way.
Problem 2.6
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o Feb 1: Cash2U delivers a garnishment writ to sheriff for 30k judgment (account=$10)
o Feb 5: WS gets 5k direct deposit (account 4990)
o Feb 9: Sherriff serves garnishment writ on ASB; WS writes $500 check to phone
company (account = 4990)
o Feb 10: ASB pays $500 check and takes the money from WS account (account
4990)
o Feb 15: ASB answers garnishment (account=4990)
o Feb 16: WS gets $300 direct deposit (5290)
o Feb 20: ASB is due
Whenever a garnishment writ served on garnishee, most states require that the
garnishment debtor be informed as well.
o The debtor is entitled to notice so debtor does not write check that could lead to
criminal charges
o So that judgment debtor does not add funds between bank receiving writ and
having to pay up.
o Maybe the debtor could claim exemption through garnishee bank.
Majority of states use spear approach: right to whatever is in account. The minority of
states say that temporal net is way. Most states say that when answer is due is the way.
Minority of the states say when answer is given is when temporal net ends.
08/28/2020 NotesState Debtor or Creditor Law
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Bankruptcy law freezes state law race but still defines creditor priority established prior
to bankruptcy
o State debtor or creditor law is a race of the swiftest and the key is knowing the
particular act that you need to take as a creditor in order to win the race to the
debtor’s assets.
Rights of creditors to debtor property
o Personal Property Collateral vs. Real Estate Collateral
What is the act that each of these creditors has to take to win the race to the collateral?
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o UCC Article 9 says that consensual creditor with personal property as collateral
needs to file or perfect.
o Mortgagee needs to file mortgage in county land records in state (Consensual
creditor with real estate collateral)
o Nonconsensual creditor with security interest in personal property
 Majority says levy is enough to get judgement lien
 Minority says delivering the writ to the sheriff is what creates judgement
lien
o Nonconsensual creditor with security interest in real estate
 Needs to get judgment and then file that judgement in county land
records
Secured creditors can use self-help repossession under UCC 9-609
o Must happen without breach of peace
o Unsecured creditor does not have this right
Unsecured creditors must get the sheriff to levy.
o If unsecured creditor wants to collect from a debtor by seizing property of the
debtor to sell then the unsecured creditor must first get a formal judgment on its
claim, then has to get a writ of levy from the court delivered to the sheriff and
then help the sheriff look for the non-exempt property of the debtor to seize and
sell.
Exemptions only work against unsecured creditors
o Secured creditors have interest in exempt property still and can recover
o Exemptions only protect debtors from unsecured creditors who are trying to levy
on the exempt property.
Two common garnishments are wages and bank accounts.
o Very common remedy used by unsecured creditors is garnishment
 Common garnishee is bank or employer of debtor.
 Judgement debtor is entitled to notice from the garnishor that is served
on garnishee
 Helps judgment debtor from adding more funds to account that
may aid in creditor’s recovery.
 Also helps the debtor to claim any exemptions through the
garnishee
 Prevents debtor from writing checks with bank accounts without
funds in it.
A bank’s unexercised setoff right defeats the garnishor’s rights
o The bank’s setoff right against customer must already exist when garnishment is
served.
 This means that bank can take what it is owed from debtor to the bank
before garnishor gets his hands on the funds.
A garnishor’s rights can increase during the net period.
o Net Period begins with service of the writ on the garnishee in all states that have
garnishment net
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o End point of the net is the time when the garnishee’s answer is due in majority
of states
 The net approach is the majority approach and the end point stated
above is the majority approach in those states.
 Minority of states in net approach, the net ends when garnishee actually
answers writ.
A garnishee has a duty to protect the garnishor’s rights once the garnishee is served
with the writ.
o The garnishor’s rights cannot be reduced from what they were at the point when
the write of garnishment was served on the garnishee.
o If the bank mistakenly pays a check during the “net period” bank with be liable
for that amount to the garnishee.
Minority of states use spear approach, instead of net approach, that entitles garnishor
only to funds in bank on date writ of garnishment is served.
Problem 3.1
o Parakeet toto is part of estate
o Offspring is involved
Any Arisa plan must have valid anti-alienation clause. This is for retirement account. See
Patterson case.
Spendthrift trust
521 (a)(2)Creditors duty to respect a stay after bankruptcy is entered into
362 will lift stay if debtor misses deadlines
o Staying acts of property of estate
o 362(a) has a lot of overlapping provisions
541who is entitled to paycheck
366cancellation of service
362 deals with wages
o Makes exception from automatic stay
08/31/2020 NotesAutomatic Stay/Spendthrift Trust
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Spendthrift trusts stop future interests from being part of the bankruptcy estate
o Any interest at the point of filing will not come into estate because 541(c)(2)
o Any income already in hands before the filing the bankruptcy will become
property of estate because it has lost its character as a spendthrift
o Only spendthrift when it is still owing from trust
o Prevents creditors from garnishing the trust to collect future payments owed to
the debtor
541(a)(5) supersedes 541(c)(2) in a case where a spendthrift trust is established in such
a way that it gives the beneficiary the right to the entire corpus upon the death of the
settler of the trust.
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o State would be entitled to corpus that otherwise would have been owed to
debtor
o Debtor gets to keep any post filing payments after trustee dies
Automatic stay has wide scope
o Protections of 362(a) are wide and overlapping
 Protect debtor, property of estate, and property of the debtor under
certain circumstances
 362(a)(6)prevents any act to collect pre-petition debt
 Broadest provision of the automatic stay
Section 366 and the utility compromise
o Cannot disconnect debtor for debtor’s failure to pay pre-petition utility bills
o But can disconnect debtor for failure to provide adequate assurance as to post
petition service.
 Specifically, the utilities can ultimately disconnect that debtor’s service
for the failure of the debtor to provide adequate assurance of payment
for any post-petition service within 20 days after the debtor files for
bankruptcy.
Landlords and lienholders
o Their rights are delayed but not denied in exercising their rights
 The automatic stay delays them but they are not ultimately prevented
from realizing their special rights in the end.
 Landlords should be able to evict the debtor who fails to pay pre-petition
rent and secured creditors should ultimately be able to realize the value
of their security interest on their collateral.
Domestic support Obligation (DSO) creditors gets special rights under 363(b)(2)’s
exception
o Exception says that these creditors can collect against any property of the debtor
 Post-petition income is property of debtor
 Anything that is purchased with post-petition income is property of the
estate
 Can collect against pre-petition paycheck that is paid post-petition, but
not against other property of the estate.
o Exception says that these DSO creditors can collect against pre-petition paycheck
that is paid post-petition but not against other property of the estate.
Problem 4.1
o They can exempt $60,000. Single person only gets $30,000 but as a couple they
can get more
o They can’t take advantage of homestead exemption
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o Is a car on blocks considered a vehicle? Think about the bus case where it was a
vehicle.
o Some people say that wages already paid are not exempt.
o Wilkinson casethe guns were not home furnishings; 2 firearms per debtor. If
canon not firearm maybe keep it under home furnishings or family heirlooms.
 Maybe more of an artifact than antique handguns
 Unlike in the Wilkinson case, this would be their only firearm so the
couple doesn’t really need to care if its categorized as family heirloom or
handgun.
o Harv and Lois get to take their own exemptions because of 522
Problem 4.3
o Original cost of home = 150k
o Debtor’s current mortgage = 130k
o Market value of home = 180k (minus 6% broker’s fee)
o Liquidation value of home = 135 k (minus 1k costs of sale)
o Home exemption (30k)
09/02/2020 NotesExemptions Under State and Federal Bankruptcy Law
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General limits to a debtor’s exemptions whether under state or bankruptcy law
o By category or type of property
o By total dollar amount per category
o Sometimes by dollar per item. Example is bankruptcy code.
Bankruptcy Code exemptions under 522(d)
o Only an option in 15 states that have not opted out.
 35 states have opted out so debtor can only use state exemption
amounts
 In 15 opt-in states, debtor can choose and plan tactfully.
o Debtors get to use more than $12K of unused homestead exemption for
522(d)(5) wildcard category under bankruptcy code
Exempt property does come into the estate as property of the estate. Then the debtor
can exempt debtor’s “interest in” the property out of the estate.
o 522(b)(1)Only part of estate that can be exempted out of estate is the debtor’s
interest in the exempt property
 When talking about PMSI in a car or consensual mortgage on house, the
debtor’s interest is going to be the debtor’s equity in their property
(whatever amount they have paid).
 The equity is what the debtor can potentially exempt out.
Basic order of priority in forced sale of collateral
o Costs of sale
o Consensual secured creditors
o Debtor’s exemption
o Judgement liens
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If we have a joint filing of a husband and a wife, they get to stack their exemptions
under 522(d)
o 522(b)(1) tell us this.
o Applies to state law exemptions or federal law bankruptcy exemptions.
09/09/2020 Notes Exemptions Continued
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Section 522(b)(3)(A) tries to stop eve of bankruptcy changes of domicile from being
effective for homestead exemptions.
o Whenever debtor files for bankruptcy, we need to know in what state the
debtors domiciled for purposes of determining the debtors eligible state law
exemptions.
 Section 522(b)(3)(A) gives us the test for determining that.
 Key goal of that test is to disallow the debtors attempt to change
domicile on the eve of bankruptcy as a way to try to take advantage of a
more favorable set of State law exemptions in a different state, especially
the homestead exemption.
o Requires debtor to live in the same place for two years prior before filing for
bankruptcy
o If debtor as not lived in the same domicile for two years prior to the bankruptcy
filing, the Court can look at the 180-day period between the 2 year and 2.5 year
period before the debtor filed for bankruptcy.
Section 522(b)(3)(B) allows the effectiveness of tenancy by the entirety in states that
use that doctrine.
o Can enable the debtor in certain states to protect a homestead that is owned in
the entirety by both spouses from any creditor that has just one spouse.
o In order for this device to work for the debtor even in the states that have it, the
debt must be owed only by the spouse who was filing bankruptcy rather than be
owed jointly by both spouses. If the debt in question is a joint debt of both
spouses then the creditor can levy on the home despite the tenancy by the
entirety doctrine.
o Half of the states offer tenancy by the entirety
Four signs that suggest fraud in conversions of nonexempt to exempt property
o High dollar amount is involved in the exemption transfer
o Last-minute (eve of bankruptcy); timing issue
o Transfer is done with a specific, already-existing judgement in mind
o Debtor borrows new cash for the purpose of purchasing exempt property.
 Suggests that debtor had no intention of paying back old creditor/lender
Five statutes that might invalidate a debtor’s attempt to convert non-exempt into
exempt assets
o State exemption definitions
o UFTA state law, especially 4(a)(1)
 4(a)(1) actual fraudulent transfers protects even future creditors who are
adversely affected by the actual fraudulent transfer
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With constructive fraudulent transfer under UFTA, the only creditors who
have a cause of action under the UFTA are creditors existing at the time
of the constructive fraudulent transfer.
o Bankruptcy Code 548 generally and especially 548(e)(1)
 Generally, is the fraudulent transfer section of the Bankruptcy Code that
defines actual fraudulent transfers as well as constructive fraudulent
transfers.
 10-year statute of limitations to any self-settled trust with actual
fraudulent intent
 2-year statute of limitations for most section 54 fraudulent transfers
o Bankruptcy Code 522(o), (p), and (q)
 522(o) creates 10-year statute of limitations for allowing transfers to
homesteads with actual fraudulent intent from qualifying as exempt
homesteads in bankruptcy.
 522(p) places a $170,000 limit on last minute acquisitions of exempt
homesteads even with no actual fraudulent intent if it takes place within
a 1215-day period before filing. (3.3 years)
 522(q)
 These are triggered by 522(b)(3) election by the debtor of their state law
exemptions
 If debtor picks federal exemptions then you don’t have to worry
about these. Only if they pick state law exemptions.
o Section 727(a)(2) of the Bankruptcy Code and its possible denial of the
Bankruptcy discharge.
 Whenever you make an actual fraudulent transfer within one year of
filing then you lose the bankruptcy discharge altogether.
09/12/20 NotesReview Class
09/14/20 NotesClaims and Priorities Under 507(a)
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Pre-petition interest is allowed for all claims.
Post-petition interest is allowed only for over secured creditors under 506(b)
o Post-petition interest is not allowed for undersecured creditors.
o True even if the contract did not provide for interest
 Interest will be computed at state judgement rate
o If contract did provide for interest then oversecured creditor will get postpetition interest at that contract rate.
Are attorney’s fees of a creditor allowed as claims?
o Pre-petition attorney’s fees are allowed for all creditors if provided in the loan
contract.
o Post-petition attorney’s fees are only allowed for over secured creditors under
506(b) (majority view)
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 Creates exception to 502(b)’s timing requirement.
 We measure claims for bankruptcy in general at the time of the filing
o If creditor is unsecured or undersecured most courts will say no post-petition
attorney’s fees for that creditor.
506(a) says that we bifurcate an undersecured claim into a secured claim and an
unsecured claim
506(c) says that the trustee can make a priority claim for any necessary costs of
preserving or disposing of property even ahead of a secured creditor who has a security
interest in that property.
o If you’re not a trustee, just a creditor, you cannot make a 506(c) claim.
507(a) is not the final word on priorities in bankruptcy. Use this list instead:
o 506(c)expenses come ahead of secured creditors
o Perfected secured creditors (but there is no Bankruptcy Code cite for this!)
o 364(c)(1) “super-duper-priority” unsecured (to certain post-petition lenders)
 For business bankruptcies (chapter 11)
 Post-petition lenders lend to a DIP in a business case when that’s the only
way that they can get lenders. They offer up a higher priority to
encourage funding.
o 507(b) “super-priority” unsecured (adequate protection that proves to be
inadequate)
 Business case case when adequate protection under 362(b) lift of stay
when adequate protection proves to be inadequate.
o 507(a) priorities in order (but note (a)(1) vs. (a)(2) trick)
 (a)(1) is the domestic support orders. (a)(2) administrative expense claims
will come ahead of domestic support claims.
 Look at (a)(c)
 (a)(2) really is number one
o Pre-petition general unsecured creditors
o 726(a)(3), (4), and (5) (subordinated pre-petition creditors: late filed claims,
punitive damages, post-petition interest of unsecured creditors)
What is “three years before the date of filing?”
o April 7, 2010
o The taxes for any taxable year for which returns are due “after” April 7, 2010, are
priority under 507(a)(8)
o Which taxable years qualify: 2012, 2011, 2010, but also 2009 as well, because
the return for the 2009 taxable years is not “due” until April 15, 2010, which is
“after” April 7, 2010.
o Note how the result would be different if this debtor filed two weeks later on
April 21, 2013. Then only taxes for 2012, 2011, and 2010 would qualify for
priority.
Question 1
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o Know 521(i)(1)
Question 2
09/16/2020 NotesExceptions to Discharge
 Two kinds of discharge denials: global under 727(a) and individual debts under 523(a).
 Some important 727(a) global discharge denials.
o 727(a)(3)failure to keep good records
o 727(a)(2)(A)if the debtor engages in actual fraudulent transfer within one year
of bankruptcy
 Does not apply if debtor involved with constructive fraudulent transfer
which instead is avoidable under 548
 Which kind of discharge denial is better for creditor?
o Sometimes creditor will have choice between global and individual.
o Individual usually makes more sense because it reduces competition among
creditors.
 Some important 523(a) individual debt exceptions to discharge
o 523(a)(2)(B)requires certain misrepresentations of the debtor in writing that
caused a creditor to loan money to a debtor.
 It’s not clear if it applies when a debtor’s writing misrepresents in a way
that gets a creditor from forbearing on collecting a loan
 Not clear if writing requirement applies to forbearance
o 523(a)(2)(C) deals with eve of bankruptcy purchases of luxury goods on credit.
 Creates a presumption of fraud that relate back to 523(a)(2)(A) regarding
debtor’s intent at the time to repay at the time they incur the debt or at
the time they use a credit card.
 Help credit card issuer to prove a debtor’s intent at the time they charged
the credit card and makes the debt non-dischargeable.
o 523(a)(6)willful and malicious injury
o 523(a)(7)true penalties assessed by a governmental unit
 True penalties in contrast to interest that is disguised as penalty which is
seen in IRS lost time value
o 523(a)(8)student loans not dischargeable unless failure to discharge would
cause debtor undue hardship.
 Two most commonly used tests for undue hardship with student loans
o Jesperson test from the 8th circuit (minority approach)totality of circumstances
test. Considers:
 (1) Considers debtors past, present, and reasonably reliable future
resources
 (2) The debtor’s reasonably and necessary living expenses, and
 (3) any other relevant facts and circumstances
 Debtor has burden of proving undue hardship. Rigorous burden.
o Brunner test from the 2nd circuit (majority approach) (three-factor test that gives
less discretion to the judge than Jesperson test) Requires:
 The debtor cannot maintain, based on current income and expenses, a
minimal standards of living if forced to pay back the student loans
 the state of affairs is likely to persist for a significant portion of the loan
repayment period, and
 That the debtor has made good faith efforts to repay the loans.
 Debtor must prove all three of these things to be successful
o Both tests are more than likely to produce same results. Few exceptions where
test is going to be outcome determinative. Brunner test requires good faith test
to make payments. Jesperson never did have that requirement.
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524(a)Post injunction life
Retention, Reaffirmation. Redemption, Ride Through
Implicit act to collect debt after bankruptcy is filed is a violation of 524(a)(2)
o In question 9.1 the bank can’t do what they did to Peter because they would be
violating this rule.
o Conditional refusal to deal. I’ll give you something debtor, but I’ll only give it to
you if you pay debt. This is considered an implicit act to collect pre-discharge
debt.
524(c)
o Problem 9.2Kevin’s agreement would not be enforceable for all the reasons in
this rule. Besides the obvious rule that the reaffirmation must be entered into
before the discharge, it must also be filed in court.
What would make me, as a lawyer, more willing to advise a client to enter into a
reaffirmation agreement?
o Where the debt is secured and the secured creditor is oversecured.
o If I have a house valued at $500,000 and I owe $700,000, all I need to do is pay
off the value of the house.
362(a)(6)
o Utilities cannot condition future service of on payment of pre-stay debts.
722Redemption
o What is a “no undue hardship” affidavit
o Not available for Bull in 9.3. Not available for real property but is available for
personal property.
o Code writers scared of people taking advantage of real estate market and
bankruptcy.
What was congress’ intent in being paternalistic by requiring the “no undue hardship”
affidavit in reaffirmation cases but not in redemption cases under 722?
o Because in a redemption case, the debtor will never pay more than the fair
market value of the collateral in order to redeem it. The debtor will only pay the
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collateral value if it is less than the actual value of the secured collateral. If actual
value is less than that is what is paid.
o In 722 cases you pay the value of the collateral, or actual collateral if less than
actual value, to the lien holder.
o In 722 cases, the bank would still have a $5K unsecured claim against the estate
even after Bull used redemption to buy the property for $5K. The $5K unsecured
claim would probably never be paid and would probably get discharged.
Ride through is allowed in some jurisdictions is like non-recourse reaffirmation
o No need for attorney affidavit for undue hardship
o Non-recourseafter discharge, if the debtor stops paying, the creditor can only
recover against the property and if there is a deficiency the creditor cannot go
after debtor
o Doesn’t require creditor to agree as long as debtor keeps making payments.
o 521(a)(2) and (a)(6)says that debtor must declare intention and carry it out or
else automatic stay is lifted. Majority of courts now offer ride through only for
personal property.
o BAPCPAamendment to bankruptcy code.
09/21/ 2020 NotesPost Discharge Injunctions
 524(a)(2) post-charge injunction stops any attempt to collect discharged debts
 A post discharge refusal to deal with a debtor by a pre-petition creditor might violate
524(a)(2)
o Might be a veiled act to collect if creditor says “I will only deal with you if you
pay off debt” or something like that
 Redemption per 722
o Available to consumer debtors who want to retain personal (not real) property
on which there is a security interest
o Debtor must pay the secured creditor in cash now
o Debtor must either exempt the property or the trustee must abandon the
property.
 Is secured creditor over or undersecured
 If oversecured then that means that the debtor has equity in that
property that gets inherited in the estate and so the debtor has to buy
that back from the estate through an exemption and if the exemption
that the debtor has to use is not enough to cover the debtor’s equity
then the debtor would need to use its exemption and in addition pay the
rest in cash to the estate to buy back the estate’s interest.
 If secured creditor undersecured then that means debtor has no equity
for estate to inherit and trustee would just abandon that property under
554.
o If debtor meets the 722 requirements, then secured creditor cannot stop the
redemption
 Unlike reaffirmation where the secured creditor has to agree to the
reaffirmation
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Why would secured creditor ever block redemption?
 As long as 722 met doesn’t matter.
Reaffirmation per 524(c)
o Requires a written agreement (creditor must agree)
o Must be filed with the court
o Must include a “no hardship” affidavit signed by the debtor’s attorney
 If debtor pro se then court steps in to that role and say it is not undue
hardship to debtor
o Can be for secured or unsecured debt, but usually it’s secured.
Retention or Ride-Through under the common law
o Debtor must be current on the loan payments before and during the bankruptcy
 We have this because if debtor defaulted pre-petition or during
bankruptcy then loan agreement with secured creditor would accelerate
debt collection and creditor would have right to foreclose.
o Creates a non-recourse loan for the debtor
 Secured loan but if the debtor defaults later on, the secured creditor can
accelerate the debt and foreclose. Creditor can only look to the collateral
not to the debtor individually.
 Recourse loan allows creditor to look at collateral and debtor personally.
o No undue hardship affidavit is required
o No need for secured creditor to agree as long as debtor is current on payments
o 2005 amendments removed this option for personal property (majority view)
 See 521(a)(6)
Chapter 13Rights of secured creditors
Problem 10.1
o Radden case is important for Chapter 13 payment plans and determining value
and interest payments.
Does an oversecured interest have an easier or harder time showing they have
adequate protection?
o Sudden lossWon’t affect in this case
o Decline in valueIf secured creditor has equity cushion shouldn’t they be
unaffected? Could an oversecured creditor argue that they have the right to
preserve their equity cushion because that is what they bargained for?
o 506(b)allows secured creditors interest to increase even post-petition.
o 362(d)(1)Creditor could argue this when equity cushion is gone
Problem 10.2
o Combine Balance of the loan and add past due interest and then bifurcate the
total. Value is secured. Rest is unsecured.
o Stripdown vs. cramdown
 Both have to do with rights against secured creditors in Chapter 13
o Cramdown happens when creditor does not want to let debtor retain collateral
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1325(a)(5)(b)
Secured creditor can demand that they can retain lien on property
Secured creditors want interest during course of claim
Can demand equal payments each month. This is to combat the debtor
negotiating a giant balloon payment at the end in which debtor pays
pennies on the dollar.
o 1322(b)(1)
1325(a)(5)(b) for the third period. Secured creditors collect interest at the market rate. Look at
Till case
09/23/2020 NotesRights of Secured Creditors Under Chapter 13
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There are two ways for a creditor to get a lift of stay
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o 362(d)(1) for cause, including lack of adequate protection (2 types of collateral
related risks)
 Sudden loss or destruction of collateral
 Gradual use related decline of collateral
 Adequate protection is defined under 361 as periodic payments,
replacement liens, or any other protection that is equivalent of secured
creditor’s liens.
 Equity cushion is not listed but courts have found that this is adequate
protection where the creditor is oversecured.
o 362(d)(2) where the debtor has no equity in the property and the property is not
necessary for an effective reorganization
Oversecured creditors have a harder time getting lift of stay
o 362(d)(2) can never work for an oversecured creditordebtor does have equity
in property
 One of the two requirements for 362(d)(2) is that debtor have no equity
in collateral.
o Case is also weakened with respect to gradual decline of property or sudden loss
of property. Oversecured interests will cushion creditor at least in short term.
 Equity cushion will cover decline at least in short term.
If the 1325(a)-hanging paragraph applies, then there is no 506(a) bifurcation of an
undersecured creditor’s claim and therefore there is no Chapter 13 stripdown.
o Entire amount still owing creditor still gets secured creditor treatment even if
the creditor is under secured.
o Hanging paragraph applies if collateral of any kind was purchased with PMSI in
the year before filing or if vehicle was purchased with PMSI within 910 days of
filing.
Secured creditors are entitled to one of three things under 1325(a):
o Surrender by the debtor of the collateral
o Secured creditor agrees to its treatment in the debtor’s plan
o Cramdown treatment (most common) (creditor does not want to surrender
collateral or agree to debtor plan). Creditor entitled to three things
 Lien retention
 If debtor’s chapter 13 plan falls apart the secured creditor still has
access to collateral.
 Period 3 market-rate interest
 The secured creditor is entitled to present value of the amount of
their secured claim over the life of the debtor’s plan
 Period 3 is period after post-confirmation hearing
 Equal payments each month
 If you did not have this requirement, craft debtor lawyers could
propose five-year plans that had 5-year plans with $10 payments
with balloon payment in the final month. This is bad because if
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debtor’s plan collapses halfway through and creditor repossesses
it just is not worth as much.
 Another requirement that only applies when the collateral is
personal property is that if the secured creditors collateral is
personal property then the debtor’s plan payments in addition to
being equal must reduce the principal on the loan at a rate that is
equal to or faster than the rate of depreciation over the life of the
plan.
o If this were not the case then the value of secured
creditor’s secured claim would be reduced over the life of
the plan.
Valuing a secured creditor’s claim in a Chapter 13 case requires calculating the prepetition debt that is owed, valuing the collateral, and adding interest where appropriate
o Only oversecured creditors get Period 2 contract-rate interest under 506(b)
 Period 2Post filing, pre-confirmation, period
o 506(a)(2) says to use replacement cost to value all personal property collateral
and to use retail value for all consumer good collateral.
 Replacement cost was somewhere between wholesale and retail value
(Rash Case)
 506(a)(2) use retail value for consumer goods. Take into account nature
of goods. Old v. new
o Three steps to figuring out secured creditors claim
 Figuring out the amount of the total claim that exists at the time of the
debtor’s bankruptcy filing
 Valuing the creditor’s collateral and then doing a 506(a) bifurcation into a
secured and unsecured claim if the creditor is undersecured.
 If creditor is oversecured figuring out the post-petition interest rate for
period 2 which is contract rate and then adding the total amount of
period 2 post-petition interest that’s owed to secured creditor in order to
determine the final size of secured claim that will get paid in debtor’s
claim during period 3
1322(b)(2) generally allows modification of claims in Chapter 13 plans, but not for home
mortgages
o Home mortgage cannot be stripped down when it’s undersecured
1322(b)(5) is an “exception to the exception” of 1322(b)(2) and does allow one kind of
home mortgage modification: cure and deacceleration of the mortgage debt.
o Where the debtor has paid payments pre-petition and mortgage holder has
accelerated the mortgage as a result. The debtor can cure missed payments and
deaccelerate the payments to what they were.
o Regular mortgage payments under the original payment schedule can be
reinstated and paid by the debtor outside the plan, both during and after the
chapter 13 plan.
1322(b)(5) “cure” means to pay in full and 1322(e)requires that the cure be with interest
in Periods 2 and 3 even when the mortgage lender is undersecured
o In order for debtor to qualify for the deacceleration rights, the debtor has to
cure any missed pre-petition mortgage payments within a reasonable time and
certainly no later than the end of the chapter 13 plan itself.
o Even if the mortgage holder is undersecured, curing those missed pre-petition
payments means paying them in full during the life of the plan rather than
paying them at the discounted rate of the other unsecured creditors.
o 1322(e) indicates that even an undersecured creditor should get paid postpetition interest in both period 2 and 3 for the debtors cure as the mortgage
contract or applicable non-bankruptcy law would provide for that interest.
09/28/2020 NotesChapter 13 Plan Continued
 Why would you ever propose a 5-year Chapter 13 plan over a 3-year plan?
o Above-median debtor under 1325(b)(4)(A)
 You have to file 5-year plan if this is the case
o 1325(a)(4)’s best interests of creditors test
 This test says that you have to give your creditors at least as much as they
would have gotten had the debtor filed Chapter 7 liquidation.
o 1322(b)(2) stripdown to pay off the secured portion of undersecured creditor’s
claim
 You can do stripdown in chapter 13 which is pretty big advantage over
chapter 7
 You still have to take care of secured portion of claim and this might
require the 5-year plan.
o 729(a)(9) preservation of future Chapter 7 discharge rights with 70% payment
 Says that if you got a chapter 13 discharge in last 6 years you are
ineligible to get a chapter 7 liquidation
 Exception is that if you paid at least 70% of unsecured creditors and it
was made in good faith, then six-year bar waived.
o 1322(a)(2) to pay 507 priority claims in full
 Needing more time to fulfill chapter 13 obligations. 1st reason is just
being above median debtor.
Highlights from last class
 A debtor must use all of their projected disposable income to fund payments under the
plan (Disposable income test)
o 1325(b)(1)(B) is one of the most important protections for the unsecured
creditor in the Chapter 13 plan
o That requirement for confirmation is only triggered if the trustee or unsecured
creditor objects to the plan.
o The disposable income requirement is not included in the automatic list of
confirmation requirements in 1325(a)
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The bankruptcy judge cannot question whether the plan meets the
disposable income test on their own.
 An above-median debtor has a longer minimum plan period, but the best-interest test
applies to all Chapter 13 debtors.
o If you’re above median debtor 1325(b)(4)(a) requires that you give a full five
years’ worth of disposable income to fund your plan.
o If you’re a below median debtor, then you need to only do 3-year plan
o Need to comply with best interest test
 Your plan needs to pay unsecured creditors at least as much as they
would have received in chapter 7 liquidation.
 This means that debtor will pay them the present value of whatever nonexempt assets that debtor has at the time of filing.
 Above-median debtors calculate their disposable income during the IRS guidelines for
delinquent taxpayers.
o Above median debtor’s disposable income will be defined by 1325(b)(3) which
references back to means test of 707(b)(2)(A)
o Your allowable expenses will track IRS guidelines plus whatever expenses
707(b)(10) lists
 Below-median debtors calculate their disposable income with a more flexible judgedependent test.
o Disposable income will be debtor’s monthly income minus any reasonably
necessary expenses for debtor and his dependents plus any tithing expenses and
Domestic Support Order expenses.
o Lot more discretion to bankruptcy judge whenever creditor or trustee objects
o Not tied to means test of IRS guideline.
 A debtor’s chapter 13 plan can be modified in either direction if circumstances change
post-confirmation
o If the Court, US Trustee, or any party in interest requests it, Section 521(f)(4)
requires debtor in chapter 13 to file sworn annual statements of income and
expenditures.
o If debtor’s income goes up, creditor might seek a modification asking for a higher
return plan under 1329(a)(1)
o If income goes down then debtor can seek plan modification to try to lower
original proposed plan payments.
 If a debtor’s income has changed right before filing, that change should be taken into
account for disposable income purposes.
o Supra says we should use lower income figure for projected disposable income.
Today’s Class
 Mean’s Test
 The law school seemed perfect for me, with the English and History degree, but the
“means test has shown, what I’ve always known, I should not have dropped Calculus 3.
 Summary of Means Test
o Suggests a distrust of judicial discretion
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o Attempts to determine if you can pay substantial amount of debt with current
income.
o Fixed equation. 707(b)(2)
o First have to fail median equation. Only fail median test if you have above
median for your state.
12.1
o 707(b)(6)Does not allow creditor, only US Trustee, to bring action against
median or below median debtor.
o How to count someone in household
 Heads on beds approach
 Census test does not require familial relationship
 Counts son completely or do some average
 IRS dependents test
 Can this person be claimed as a dependent for tax purposes?
 Economic Unit Test
 Court in Johnson uses this test.
o How is median income from Michigan defined and found?
 In the code of course 139 or something.
o Advantages of median test
 Eligible for Chapter 7
 Can use 3-year plan instead of 5 year plan
 Judge decides guidelines
o Note Section 707(b)(3) for abuse and court’s discretion
o Could totality test look at recent rise in income that is not captured by projected
income standard.
12.2
o 707(b)(2)(i) says that abuse of Chapter 7 is presumed (and thus you can’t file
Chapter 7) if:
 MDI=Debtor’s Monthly Disposable Income
 X=60 timed MDI= Total plan payments with a 5-year plan
o Absolute standards: If x<8,175, then you pass the means test. You can file
Chapter 7.
o If x>13,650, then you fail the means test. A 5-year Chapter 13 is your only
bankruptcy.
o Relative Standard: If x is within the range of 8,175 to 13,50, then you pass the
means test ONLY IF x <0.25*(total nonpriority debt)
10/30/2020Review Class
10/05/2020 Notes Means Test
 You are not subject to the means test of 707(b)(2) unless you first fail the median test of
707(b)(6) and (b)(7)
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o You fail the median test only if you have an annual income that is greater than
the median for your state
The means test tries to determine in a mechanical way whether you have enough
disposable income to pay your creditors a reasonable amount over 5 years in a Chapter
13 plan
If you fail the means test, your chapter 7 case will be dismissed and your only
bankruptcy option will be a 5-year Chapter 13
o If you do have a lot of disposable income relative to unsecured debt and
therefore end up failing the means test, the result is that you are presumed to
be abusing the chapter 7 process and absent special circumstances, like serious
medical condition, the chapter 7 case will be dismissed and the only choice will
be 5 year chapter 13 if you want to stay in bankruptcy.
Under 707(b)(1) and (b)(3), a judge can still find non-means-test abuse for bad faith or
under the totality of the circumstances test.
o Even if you don’t fail means test because you pass the median test, or you still
take the means test and pass it, a bankruptcy judge can find abuse if you filed
chapter 7 under bad faith or totality of circumstances.
o Passing the median or means test usually means you’re good to go. Rare for
judge to find abuse.
Annual income for the median and means test is determined in a backwards-looking
way
o Determine annual income by taking last full 6 months of annual income and
doubling it to determine annual income.
Disposable monthly income under the means test equals your monthly income less
certain qualifying expenses.
o Expenses for determining disposable monthly income under the means tests are
calculated with reference to IRS published guidelines used for delinquent
taxpayers and these guidelines give allowed amounts of expenses by category of
expense.
 Certain categories give you a set amount of expenses even if your actual
expenses in that category are higher or lower than a set amount
 Certain other IRS categories look to your actual expenses
o Bankruptcy code includes additional categories of allowable expenses, including
any payments you have to make secured debts that you owe.
o Higher expenses mean that you have a better chance of passing the means test
because you’ll have less disposable income
o Higher overall unsecured debt can also help oyu pass means test under 707(b)(2)
formula
o As a lawyer I cannot advise my client to load up on debt to pass means test
707(b) only applies to consumer debtors
o All three of abuse sections in 707(b) apply only to a debtor whose debts are
primarily consumer debts.
 Means test presumption of abuse in (b)(2)
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Rarely used totality of circumstances and bad faith test in (b1) and (b3)
Today we are moving from consumer bankruptcy to business context
First to levy gets proceeds from sheriff’s sale. Majority Approach. First party to get
sheriff to levy upon debtor’s property wins.
Poll 2 is answer D.
Apparent lien problem=secret lien problem=detrimental reliance by prospective creditor
of debtor and debtor appears to own property. If you possess property then you appear
to own it.
Under 303 we should look at different factor when determining whether to force
bankruptcy. Number of debts, those not being paid on time, how much debt, the type of
debt, number of creditors.
10/07/2020 Notes Business Bankruptcy
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Which act wins the race to the debtor’s assets in the context of business bankruptcy?
o Majority: first to levy on debtor’s assets
o Minority: first to deliver writ of levy to sheriff
The minority approach to priority involves the concept of the “inchoate priority”
o Idea here is that you set your place in line with one act, in this case the delivery
of the writ to the sheriff and then complete your priority with a second act which
is the actual levy by the sheriff on the property in question.
o Then your priority relates back to the timing of the first act which is delivery of
the writ to the sheriff.
o If you complete first act but fail to complete second act prior to the earlier of the
foreclosure sale of the goods by somebody else or by the debtors bankruptcy,
whichever comes first, then your inchoate priority will never become choate.
Some cases say that a levy is possible without physical interference with the personal
property
o Not a universally followed rule
o Even jurisdictions where it is followed a creditor can invalidate its levy
 Passively through inaction for an unreasonable period of time while the
goods are still in debtors possession
 The creditor can also invalidate its levy actively by bargaining away its
priority position for some special treatment by the debtor in exchange.
 If you’re going to bargain away your priority position that gained
through a state law levy, you should at least demand an Article 9
consensual security interest from the debtor and perfect it.
 Pledge to get faster payments in future will not guarantee
creditor’s place in priority line if the debtor should file bankruptcy
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or if the debtor grants an Article 9 security interest to some other
creditor who comes on to the scene.
Section 303(h) factors for the “generally not paying” standard
o Relative number of debts not being paid on time
o Relative amount of debts not being paid on time
 Most significant of three factors
o Degree of lateness of the late payments
Section 303(h) does not count disputed claims or unmatured debts in the “generally not
paying” test
o Whenever claim is the subject of a bona fide dispute by the debtor, whether as
to existence or even just as to amount we don’t count that claim at all against
the debtor in our generally not paying calculus.
o In considering the relative number or amount of debts that are not being paid on
time remember to calculate your relativity percentages on these factors based
only on the debts that were actually due by the time of the petition.
 We should not consider unmatured debts in our 303(h) generally not
paying test because we don’t know if debtor will pay or not because they
are not due yet.
Halfway Point-This is midsemester
10/12/2020 NotesAutomatic Stay in Business Cases
 Depending on their goals in a given case, secured creditors may wish to argue that their
collateral has either a high or low value
o If the secured creditor wants an immediate lift of stay and a quick liquidation of
their collateral, they’re better off arguing for a low collateral value for purposes
of 362(b)(1) and (b)(2)
 Arguing for high value of collateral might make them over secured and
that would give them an equity cushion and that would make it
extremely difficult to get a lift of stay motion granted
o If secured creditor wants highest secured claim possible in the debtor’s chapter
11 plan as well as the possibility of 506(b) post-petition interest, then they
should argue for high value for the collateral.
o Which way the secured creditor goes will depend on the creditors predictions
both about the debtors prospects for a successful reorganization and for the
likelihood that the Court would grant a lift of stay motion should the creditor
seek one.
 Adequate protection under 361 can take a number of forms
o Periodic payments by the debtor
o Replacement liens
o Any other form of value that would be the total equivalent of the indubitable
equivalent of the secured creditor’s property right
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Under 362(g), the debtor has the burden of proof on most issues surrounding lift of stay
motions.
o The secured creditor has the burden of proof on the debtor’s lack of equity in
the property for purpose of a 362(d) lift of stay of motion.
o Other issues are debtor’s burden of proof:
 Showing the sufficiency of the debtor’s proposed adequate protection
under 362(b)(1) and
 that property is necessary for effective reorganization under 362(b)(2)
 The debtor will need to prove two things: (1) that particular
collateral is necessary for the debtors reorganization and (2) that
even with the necessary collateral there is reasonable prospect of
reorganization for the debtor.
The valuation standard for collateral in Chapter 11 bankruptcies is found in 506(a)(1)
o Says that the value of a secured creditors collateral should be determined in light
of the proposed disposition or use of such property.
o That would suggest a going concern value when the debtor expects to keep the
collateral as part of a reorganization and it would suggest a liquidation value if
the debtor expects to liquidate the collateral.
The Timbers case said that undersecured creditors are not entitled to post-petition
interest on their secured claim as a form of adequate protection.
o Not even secured creditors really receive the full benefit of their state law
bargain and that’s because under the state law and undersecured creditor
whose debtor was in default could immediately foreclose on their collateral then
reinvest the proceeds and get a return at least on the secured portion of their
claim without the automatic stay to stop them.
How should we handle multiple secured creditors on the same collateral in the context
of 362(d)(2) lift of stay motion?
o If a junior lien holder asked for a lift of stay every court agrees that we should
also count the claims of senior lien holders in deciding whether the debtor has
equity in the property for the purposed of 362(d)(2)
o If it’s the senior lien holder asking for lift of stay then courts are split on how to
calculate debtor’s equity
 Majority says that we should count the junior lien holders claims in
calculating the debtor’s equity under 362(d)(2)
 Existence of junior lien holder on collateral only becomes issue on
362(d)(2) because that requires that the debtor have no equity in the
property.
 The existence of junior lien holders has no effect on the status on an
oversecured creditor that has junior lien holders behind it on the same
collateral for purposes of lift of stay motions 362(d)(1) or 506(b) postpetition interest for oversecured creditors.
Section 362(d)(3) responds to the special challenges created by single-asset real estate
cases in Chapter 11.
o The debtor’s main motivation in filing a single asset real estate case in chapter 7
is often to delay the secured creditor’s foreclosure in the hopes of some market
change in the value of the single asset real estate collateral
o Section 362(d)(3) says that if such a debtor wants to avoid a lift of stay motion by
the secured creditor the debtor must either
 propose a confirmable plan with 90 days of filing bankruptcy or
 pay the secured creditor its contract rate of interest on the value of its
secured claim during the pendency of the case
 This would apply even if the creditor were undersecured
o Limited exception to rule in Timber that would otherwise deny an undersecured
creditor any right to period 2 post-petition interest even on just the value of its
secured claim.
o Does allow a debtor to use rents to make these interest payments even where
the rents represent cash collateral.
o The ability of a debtor under 362(d)930 to use rents, which are cash collateral,
without secured creditor approval or court authorization is an exception to the
usual rules governing use of cash collateral under Section 363
o Note that in a case where a court determines that the secured creditor’s
collateral is also depreciating an undersecured creditor in a single asset real
estate case ends up with two independent rights to post-petition period 2
payment
 362(d)(1) adequate protection right for payments due to the depreciation
 362(d)(3) right to interest payments for the delay
o The whole point of 362(d)(3) is to reverse the rule of Timbers for single asset real
estate cases only
o 362(d)(3) right to post petition interest is actually better than the 506(b) right to
post petition interest for an oversecured creditor.
 362(d)(3) requires that payments be made monthly
 506(b) has no such requirement. It says that oversecured creditor has
claim but does not say exactly when debtor have to pay.
Class Notes
10/14/2020 NotesPowers of Debtor In Possessions (DIP) for Chapter 11 Bankruptcy
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The DIP has all of the powers and duties of a trustee in bankruptcy
o Bankruptcy Code Section 1107
o One of the key powers of DIP under Section 363 is to use sell or lease property of
the estate, either in the ordinary course of business or outside the ordinary
course of business.
The DIP’s ability to use, sell, or lease property of the estate depends on whether it’s in
the ordinary course and whether the property is cash collateral.
o 363(c)(1)The debtor can use, sell, or lease property in the ordinary course of
business without notice and hearing.
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o 363(b)(1)If the use, sale, or lease is outside the ordinary course of business
then DIP can only use, sell, or lease property after notice and a hearing.
o 363(c)(3)If the property in question is cash collateral the DIP can only use it
with consent of the secured creditor or after court authorization even when the
use of cash collateral would be in the ordinary course of business.
Section 363(a) defines cash collateral as cash equivalents in which the debtor and some
third party each have an interest
o Typically, the third party’s interest is a lien or a right to setoff.
o 506(a)creditor’s right to setoff is the same as a secured claim.
o Even if court authorizes the DIP’s use of cash collateral 363(e) says that secured
party is entitled to adequate protection of its interests, but only if the creditor
requests it.
Section 553(a) generally recognizes a creditor’s state-law right to set off with a few
exceptions:
o 553(a)(3) says a creditor’s demand for a compensating balance will reduce the
setoff right to that extent
 Reduces the creditor setoff right to the extent that the creditor’s
obligation was incurred within 90 days prior to filing for the purposes of
obtaining a right of setoff.
 Example is where bank demands that debtor keep a compensating
balance in the debtor’s bank account and the bank’s demand is made
within 90 days prior to the debtor’s bankruptcy.
o 553(a)(2)(B) disallows setoffs that were artificially created with claims purchased
by a creditor on the eve of bankruptcy.
 Reduces a creditor’s setoff right to the extent that the creditor purchased
it’s claim against the debtor from other creditor of the debtor within 90
days before the debtor’s filing
o 553(a) generally respects creditor’s nonbankruptcy setoff rights subject to those
exceptions. Under nonbankruptcy law a valid setoff requires mutuality of
obligations, maturity of obligations, and some act of setoff by creditor.
Any creditor wishing to exercise a post-petition setoff must first get lift of the automatic
stay362(a)(7)
o But a temporary freeze by a bank of a debtor’s account is okay under Stumpf
case as long as bank is seeking lift of stay to exercise an otherwise valid right of
setoff against the account.
o Even if the Court refuses to grant the bank’s lift of stay motion to allow the postpetition setoff, the bank can at least ask the court for adequate protection of its
interest in cash collateral.
 Bank’s cash collateral will consist of the funds in the debtors bank
account, against which the bank has a valid setoff right.
 Without lift of stay, debtor might just remove all the money and spend it
before the bank can give adequate protection for its cash collateral
interest.
10/19/2020 NotesLook over this Stuff
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Parties for post-petition lenders under 364
o 364(a)ordinary course, no court approval, 507(a)(2)
o 364(b)outside of ordinary course, court approval, 507(a)(2)
o 364©(1)super-duper priority unsecured
o 364©(2)lien on unencumbered collateral
o 364©(3)junior lien on already encumbered collateral
o 364(d)(1)priming lien if that’s the only way for the DIP to get credit AND the
existing lienholder gets adequate protection
Final order of priorities:
o Perfected liens, subject to 506© expenses of sale or maintenance
o 726(b) burial expenses
o 364©(1)super-duper priority
o 507(b)super priority (inadequate protection shortfall)
o 507(a) priorities in order
o 502(b) pre-petition unsecured claim
o 726(a) subordinated claims
 Late filed claims
 Purely punitive fines and penalties
Cross-collateralization is disfavored form of post-petition lender that is nevertheless
often allowed as a “least worst” option for the DIP.
10/21/2020Review Class
10/26/2020 Notes Trustee’s Avoiding Powers Under 544(a)
 Under nonbankruptcy law a judicial lien creditor under UCC 9-317(a)(2) will generally
defeat the rights of an unperfected secured creditor
o One kind of unprotected secured creditor that can defeat a judicial lean creditor
is a creditor that files its article 9 financing statement and has the debtor sign a
security agreement.
 Gives secured creditor inchoate priority against the judicial lien creditor
and will become complete once a secured creditor gives value and
thereby perfects its security interest.
 The trustee’s avoiding powers under 544(a) enable the trustee to turn unperfected
secured creditors into general unsecured creditors in bankruptcy
o An unperfected secured creditor is a secured creditor whose interest is attached
but who has not filed the financing statement or taken possession of the
collateral. Therefore, the creditor loses its security interest but keeps its general
unsecured non-priority claim in bankruptcy.
 Even though 362(a)(4) generally prevents unperfected secured creditors from doing
post-petition perfections, 362(b)(3) in combination with 546(b) and UCC 9-317(e)
creates an exception for PMSI creditors
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UCC 9-317(e) says that if a PMSI creditor files a financing statement within 20 days after
the debtor receives delivery of the collateral, then its priority vs. lessees, buyers or
judicial lien creditors relates back to the date of attachment.
UCC 9-301(b)(1) defines a PMSI as a security interest that arises from a loan that enables
the debtor to purchase the goods that will serve as collateral for the loan.
o Non-PMSI loan is where debtor already owns the goods that will service as
collateral for the creditor’s loan.
The DIP or trustee must use 544(a)(1) to strike down unperfected interests in personal
property and 544(a)(3) to strike down unperfected interests in real property.
o As against unprotected security interests in personal property, the trustee only
gets the powers of the judicial lien creditor under 544(a)(1)
o As against unprotected interests in real estate, the trustee gets the stronger
avoidance power of a hypothetical bona fide purchaser of real property under
544(a)(3)
The trustee’s power against interests in fixtures is only its 544(a)(1) JLC (judicial lien
creditor) power rather than its more powerful 544(a)(3) BFP (bona fide purchaser)
power.
o That fact becomes outcome determinative in a case where the secured creditor
does a UCC Article 9 filing against the fixture collateral but not a fixture filing that
would require a fixture filing in the appropriate county land records.
E=the extension of credit by the creditor to the debtor
A=when the security interest attaches (1. C has given value 2. SA signed by D; 3. D has rights in
collateral)
P=Perfection (attachment plus either filing or possession by C)
C = Commencement of D’s bankruptcy
T = the time of transfer of security interest for preference purposes
T = A,P, or C?
(b)(2) – requires that E come before T
(b)(3) – D’s insolvency measured at T
(b)(4) – requires T to be within 90 days before C
“T is key”
((e))(2)(A) – if P occurs within 30 days after A, then T = A
10/28/2020 Notes Preferences under 547
 There are actually 7 elements of a preference, not just 5 even though 547(b) only has
five subparts
o That’s because there are two important elements of a preference that are
contained in the introductory clause to section 547(b) and that’s transfer and
property of the debtor.
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The (b)(5) element is met unless the allegedly preferred creditor would have received
100% in a Chapter 7 liquidation of the debtor even absent the transfer
o This might be true because this creditor was fully secured or
o Unsecured creditors generally are receiving 100 cents on the dollar in chapter 7
o Or because this is a priority unsecured creditor that would have received 1005 in
the bankruptcy distribution in chapter 7.
o A 100% recovery by the creditor from a third-party guarantor would not count
for purposes of the (b)(5) liquidation test which looks solely to what the
preferred creditor would have received from the bankruptcy distribution in a
chapter 7 liquidation and not from the third-party sources outside the
bankruptcy process.
Sugar hypo: If you pre-pay for goods, later delivery of the goods can be a preference as
to you if you haven’t gotten a security interest in those goods at the time you paid for
them in advance of delivery.
o If you haven’t gotten a perfected security interest in those goods at the time you
paid for them in advance of delivery it is not enough to say that you have a
greater right to the sugar than the debtor does because you prepaid for them.
All preferred creditors can say this.
o The key question is: did I have a special right in the sugar relative to the other
creditors of the sugar manufacturer at the time I received the sugar.
Section 547(e)(2) defines transfer timing in the case of transfer of security interest and
includes a 30-day grace period between attachment and perfection.
o The general rule with transfers of security interest is that the time of transfer
equals the time of perfection
o Unless perfection occurs within 30 days following attachment, in which case
then the time of transfer will relate back to the time of attachment and that is
called grace period of 547(e)(2)(A)
11/02/2020 Notes Preferences Continued
 Section 547(e) defines the timing of transfers when the transfer is of a security interest
o You can have some transfers of security interests that are avoidable either under
547 the trustees preference avoiding powers
o Or under 544 the trustees strong arm powers
o Those cases would be situations in which the security interest is still unprotected
at the time of the debtors bankruptcy filing
o Section 547(e) grace period saves the creditor from a 547(b)-preference attack
but then the trustee can still avoid the security interest by using its section
544(a) strong arm powers.
 Pre-petition payments to oversecured or fully secured creditors are generally not
preferences because the (b)(5) element will not be met in those cases.
o Pre-petition payments to undersecured creditors will be preferences.
o All or nothing approach to avoiding the transfer.
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Section 547(e)(3) rejects the Mississippi River Theory of Security interests in afteracquired collateral
o Whenever the debtor gets new collateral that’s covered by the after acquired
clause, Article 9 of UCC will measure the secured creditors priority retroactively
from the point when the financing statement was first filed.
o However, 547(e)(3) will measure the transfer of the security interest for
preference purposes as of the time when the debtor actually acquired rights in
the new collateral.
o Mississippi River Theory would say that timing of the transfer would be at the
point of filing the financing statement on the theory that the creditor gets its
security interest in the entire river at that point. Not bow bankruptcy code sees
it.
Most courts will measure the (b)(5) element at the point of bankruptcy filing rather than
at the point of transfer.
o Usually it does not matter because it’s going to be the same at either point, but
it could matter.
Grace Periods for Preference Transfers not to be avoidable by Trustee
o SI stands for security interest
11/04/2020 Notes Preferences Continued
 Section 547(c)(2) ordinary course exception requires 2 showings
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o Debt was incurred in the ordinary course of business and the transferee (intro to
(c)(2))
o Either that
 Transfer was made in the ordinary course of the debtor’s and creditor’s
business 547 (c)(2)(A); or
 Transfer was made according to ordinary business terms 547 (c)(2)(B)
o Both the incurring element and the first of the two alternatives for the second
elements take a subjective perspective that focuses on this debtor and creditor’s
dealings with each other.
o Second of the two alternatives look to an objective industry standard.
Ordinary doesn’t necessarily mean “this is how it happens most of the time”
o Ordinary could also mean often or that it is not extraordinary.
Repayment of long-term loans can qualify for the (c)(2) exception
The 547(c)(4) new value exception allows earlier preferences to be protected by the
subsequent advance of new value by the same creditor as long as the new value is
unsecured.
The 547(c)(9) “de minimis” exception protects creditors of business debtors when their
aggregate preference liability is less than $6,825.
o The transfers are in the aggregate amount not in the individual amount or else
debtors could just transfer $6,000 a bunch of times to pay off creditor debt.
o All or nothing exception. No automatic deduction from every preferred creditor’s
preference liability.
The 547(c)(5) exception only protects transfer of security interests in inventory,
accounts receivable or the proceeds of either from possible preference liability.
o When (c)(5) applies it uses a two-point net improvement test that simply looks at
the 90th day before bankruptcy filing and the date of the filing.
o The secured creditor’s preference liability is then defined as the extent to which
the secured creditor’s deficiency claim if any was reduced from 90 to day zero
and that in effect is the secured creditor’s net improvement and to that extent
the secured creditor gets no protection from (c)(5) for all of the preferential
transfers that occurred in between day 90 and day zero.
An increase in the value of the collateral alone will not be a preference at all even if it
improved the secured creditor’s secured position from Day 90 to Day 0.
o If there was an increase in the value of the collateral but no transfer or
transformation of the collateral then that’s not going to be a preference under
547(b) even if it did improve the secured creditor position from day 90 to day 0
because there would be no transfer to or for the benefit of a creditor under
547(b).
Note that there are two alternatives to Day as the first point in the (c)(5) two-point netimprovement test
o One year for insiders, or
o Whenever new value is first given if the inventory secured loan began later than
90 days before debtor filed bankruptcy
11/09/20 NotesFraudulent Transfers
 Under UFTA 5(b), a repayment of a loan to an insider creditor is avoidable under state
law as a constructive fraudulent transfer
o The debtor has to be insolvent at the time of transfer
o The insider transferee has to have reason to believe that the debtor is insolvent
at the time of the transfer
 The UFTA insider preference statute of limitations for avoidance is one year from the
date of the transfer.
o 544(b) makes UFTA 5(b) potentially available to the trustee or DIP but that does
not really help very much because 547(b) already gives the trustee a one-year
reach back period for insider preferences.
o UFTA 5(b) mostly has utility for creditors outside of bankruptcy where the debtor
still hasn’t filed bankruptcy to avoid certain preferential payments to insiders but
has very little value added for trustee or DIP once debtor has filed for
bankruptcy and that’s because 547(b) essentially gives trustee anything it needs
along these lines and just duplicates what the trustee could get under UFTA 5(b)
 The earmarking doctrine says that there is no 547(b) preference where a lender
conditions the making of a loan on the debtor repaying existing creditors that are
earmarked by the lender
o From a statutory perspective we say that there’s no preference in this
earmarking situation because these loan proceeds that were used to pay old
creditors were not really property of the debtor as is required for a preference
under 547(b) and the reason they’re not property of the debtor is that he debtor
in a true earmarking situation lacked control over the disposition of those new
funds.
 However, even in the earmarking situation, we still have a preference if the new lender
makes a secured loan and the creditors being paid off are unsecured creditors.
o This is because in the case of a new secured creditor being substituted for an old
unsecured creditor, the substitution results in a diminution of the estate from
the perspective of the remaining unsecured creditors.
 Section 553(b) uses a two-point net insufficiency test to determine how much of a
creditor’s pre-petition setoff within the 90 days before debtor’s bankruptcy will be
recoverable by the bankruptcy trustee.
o The test looks at creditors insufficiency as it existed 90 days before bankruptcy
or, if there’s no insufficiency, at the 90-day mark then it looks at the insufficiency
existing on the first date within the 90 days when there is an insufficiency.
o The test compares the bank’s insufficiency at that first point with the
insufficiency, which existed on the date of the actual pre-petition set off by the
bank.
o The trustee is allowed to recover from the creditor who did the pre-petition set
off whatever amount the creditor set off reduced its insufficiency from the
earlier date.
o Insufficiency=Look at How much bank is owed by the debtor and then you look
at the amount of funds that the debtor has in bank account at the bank that are
potentially subject to setoff and whatever the bank shortfall (whatever the funds
in the debtor’s account won’t cover as far as how much the bank is owed by the
debtor) that’s the insufficiency that we are talking about.
11/11/20 NotesEquitable Subordination
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The doctrine of equitable subordination is meant to be used sparingly
o Inventory lenders often have a lot of control over their debtor’s and inventory
lenders control over when and whether to do a foreclosure on their collateral.
o This translates into control over when a debtor might feel forced to file for
bankruptcy.
o That in turn gives an inventory lender indirect control over the parameters of the
section 547(b) preference and possible exception under 547(c)(5)
o So, this can raise issues as to whether secured lender therefore should qualify as
an insider as well as whether the inventory lender’s claim might be subject to
equitable subordination under 510(c).
When a court does apply equitable subordination, the court’s remedy can include
subordination of the creditor’s claim, recharacterization of the creditor’s claim from
debt to equity, or even complete disallowance of the creditor’s claim
o Subordination 
o RecharacterizationFrom debt to equity claim
o Disallowance
The 547(c)(3) “enabling loan” exception to preference liability provides PMSI creditors a
30-day grace period between the debtor’s possession of the collateral and the creditor’s
perfection of its security interest
Nonbankruptcy grace periods such as 9-317(e) or 9-324(a) will not work to save a
creditor from preference liability under 547, but only will work to save an unperfected
secured creditor from the trustee’s 544(a) strong-arm powers.