Secured Transactions
Assignment 6
Bankruptcy and
the Automatic Stay
1
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
2
Article 9 Terminology
§9-102(a)(52). “Lien creditor” means . . . a creditor that has
acquired a lien on the property involved by attachment,
levy, or the like . . . .
§9-102(a)(72). “Secured party” means . . . a person in whose
favor a security interest is created . . . under a security
agreement. (Excludes mortgages)
Security interests are contractual; liens are judicial.
The categories are mutually exclusive.
Security
interest
Lien
3
Article 9 Terminology
§9-102(a)(52). “Lien creditor” means . . . a creditor that has
acquired a lien on the property involved by attachment,
levy, or the like . . . .
§9-102(a)(72). “Secured party” means . . . a person in whose
favor a security interest is created . . . under a security
agreement. (Excludes mortgages)
Security interests are contractual; liens are judicial.
The categories are mutually exclusive.
Mortgage
Security
interest
Lien
Statutory
lien
4
Bankruptcy Code Terminology
§101(51): Security interest means a lien created by agreement.
(Includes mortgages)
§101 (36): Judicial lien means lien obtained by judgment, levy,
sequestration, or other legal or equitable process . . .
§101(53): Statutory lien means a lien arising by statute, but does
not include security interest or judicial lien
§101(37) Lien means charge against property to secure payment
Lien
Security interest
Mortgage
Article 9
security interest
Judicial
Lien
Statutory
Lien
5
Bankruptcy Courts
Specialized courts: Bankruptcy is a separate court system
6
Bankruptcy Courts
Specialized courts: Bankruptcy is a separate court system
a. Federal
7
Bankruptcy Courts
Specialized courts: Bankruptcy is a separate court system
a. Federal
b. Fully electronic, 1997-2005
8
Bankruptcy Courts
Specialized courts: Bankruptcy is a separate court system
a. Federal
b. Fully electronic, 1997-2005
c. 200 locations in the US
9
Bankruptcy Courts
Specialized courts: Bankruptcy is a separate court system
a. Federal
b. Fully electronic, 1997-2005
c. 200 locations in the US
Purpose: Coordinated resolution of debt problems
a. Consumers
b. Businesses
10
Bankruptcy Concepts
1.
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.
11
More Bankruptcy Concepts
8.
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
12
Liquidations: Chapter 7
Deal: "Fresh start"
1. Debtor surrenders all property to trustee
13
Liquidations: Chapter 7
Deal: "Fresh start"
1. Debtor surrenders all property to trustee
(Except exempt)
14
Liquidations: Chapter 7
Deal: "Fresh start"
1. Debtor surrenders all property to trustee
(Except exempt)
2. Court discharges all debt
15
Liquidations: Chapter 7
Deal: "Fresh start"
1. Debtor surrenders all property to trustee
(Except exempt)
2. Court discharges all debt
(Except nondischargeable and reaffirmed debt)
16
Liquidations: Chapter 7
Deal: "Fresh start"
1. Debtor surrenders all property to trustee
(Except exempt)
2. Court discharges all debt
(Except nondischargeable and reaffirmed debt)
3. Trustee sells the surrendered property and distributes proceed
pro rata
17
Liquidations: Chapter 7
Deal: "Fresh start"
1. Debtor surrenders all property to trustee
(Except exempt)
2. Court discharges all debt
(Except nondischargeable and reaffirmed debt)
3. Trustee sells the surrendered property and distributes proceed
pro rata
18
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
19
Debt Adjustment: Chapter 13
Eligibility: Individuals (humans) with unsecured debt less than
$337K and secured debt less than $1 million, §109(e)
Deal:
1. Debtor keeps all of debtor’s property
2. Debtor proposes plan to pay
Secured creditors to the value of their collateral
Unsecured creditors all “disposable income” for three years
(five years for debtors with above median incomes)
3. No voting; court confirms plan (“cramdown”) if it meets
statutory requirements
4. If debtor performs plan, remaining debt is discharged
20
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?
21
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.
22
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.
23
Problem 6.2, page 109
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?
24
Bankruptcy Code provisions
§362 (a) [A bankruptcy] petition operates as a stay, applicable to all
entities, of --
(2) The enforcement , against the debtor or against property of
the estate, of a judgment obtained before [bankruptcy]
§ 101(15) The term “entity” includes . . . governmental unit . . . .”
(27) The term “governmental unit” means . . . state . . . or
instrumentality of . . . a state . . . .”
25
Problem 6.2, page 109
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)
26
Problem 6.3, page 110
We represent secured creditor Bank. The debtor just filed
under Chapter 11.
27
Problem 6.3, page 110
We represent secured creditor Bank. The debtor just filed
under Chapter 11.
Value $250K or less
$250K
Lien
Prime Cuts
Closed restaurant
28
Problem 6.3, page 110
We represent secured creditor Bank. The debtor just filed
under Chapter 11.
Value $250K or less
Can the bank foreclose?
$250K
Lien
Prime Cuts
Closed restaurant
29
Problem 6.3, page 110
We represent secured creditor Bank. The debtor just filed
under Chapter 11.
Value $250K or less
Can the bank foreclose?
Not without lifting the stay
$250K
Lien
Prime Cuts
Closed restaurant
30
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 the
property; and
(b) Such property is not necessary to an effective
reorganization
31
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 the
property; and
(b) Such property is not necessary to an effective
reorganization
Can the bank lift the stay?
32
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 the
property; and
(b) Such property is not necessary to an effective
reorganization
Can the bank lift the stay?
What happens if the stay is lifted?
33
Problem 6.4, page 110
Value $600K
Can the bank foreclose?
$210K
Lien
Sprouts Up headquarters building
34
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 the
property; and
(b) Such property is not necessary to an effective
reorganization
Can the bank lift the stay?
35
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 the
property; and
(b) Such property is not necessary to an effective
reorganization
Can the bank lift the stay? No.
36
Problem 6.5, page 110
Value $700K
Boat is uninsured. Bank
is afraid it will go out and
not come back.
$350K
Lien
Paradise Boat Leasing
Commercial yacht
37
Problem 6.5, page 110
Value $700K
Boat is uninsured. Bank
is afraid it will go out and
not come back.
Can the bank foreclose?
$350K
Lien
Paradise Boat Leasing
Commercial yacht
38
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 the
property; and
(b) Such property is not necessary to an effective
reorganization
Can the bank lift the stay?
39
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 the
property; and
(b) Such property is not necessary to an effective
reorganization
Can the bank lift the stay? Yes. “adequate protection” is protection
against decline in the value of the collateral.
40
Problem 6.6, page 110
Petition
Now
3 months
We represent the bankrupt. Angry creditors are calling
•
How do we deal with Watson Investment, unsecured for $126K?
What can Watson do?
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.
41
Problem 6.6, page 110
Petition
Now
3 months
We represent the bankrupt. Angry creditors are calling
a.
How do we deal with Watson Investment, unsecured for $126K?
What can Watson do?
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.
42
Problem 6.6, page 110
Petition
Now
3 months
We represent the bankrupt. Angry creditors are calling
b.
How do we deal with Macklin Mortgage, secured by sterilization
equipment for $50K? What could Macklin do? §362(d).
How would we come out? Three views.
43
Problem 6.6, page 110
Petition
Now
3 months
We represent the bankrupt. Angry creditors are calling
b.
How do we deal with Macklin Mortgage, secured by sterilization
equipment for $50K? What could Macklin do? §362(d). Move
to lift the stay.
How would we come out? Three views.
44
Problem 6.6, page 110
Petition
Now Motion
Hearing
3 months
We represent the bankrupt. Angry creditors are calling
b.
How do we deal with Macklin Mortgage, secured by sterilization
equipment for $50K? What could Macklin do? §362(d). Move
to lift the stay. How long would that take? §362(e).
How would we come out? Three views.
45
Problem 6.6, page 110
Petition
Now Motion
3 months
Hearing
60 days
We represent the bankrupt. Angry creditors are calling
b.
How do we deal with Macklin Mortgage, secured by sterilization
equipment for $50K? What could Macklin do? §362(d). Move
to lift the stay. How long would that take? §362(e).
How would we come out? Three views.
46
Problem 6.6, page 110
Petition
Now Motion
3 months
Hearing
60 days
We represent the bankrupt. Angry creditors are calling
b.
How do we deal with Macklin Mortgage, secured by sterilization
equipment for $50K? What could Macklin do? §362(d). Move
to lift the stay. How long would that take? §362(e). What will
happen at the hearing?
How would we come out? Three views.
47
Problem 6.6, page 110
Petition
Now Motion
3 months
Hearing
60 days
We represent the bankrupt. Angry creditors are calling
b.
How do we deal with Macklin Mortgage, secured by sterilization
equipment for $50K? What could Macklin do? §362(d). Move
to lift the stay. How long would that take? §362(e). What will
happen at the hearing?
Macklin gets adequate protection against decline in the value of
the collateral (Timbers) or the stay is lifted.
How would we come out? Three views.
48
Problem 6.6, page 110
Petition
Now Motion
3 months
$50K
Hearing
Case
end
60 days
$40K $35K
$30K
$25K
We represent the bankrupt. Angry creditors are calling
b.
How do we deal with Macklin Mortgage, secured by sterilization
equipment for $50K? What could Macklin do? §362(d). Move
to lift the stay. How long would that take? §362(e). What will
happen at the hearing?
Macklin gets adequate protection against decline in the value of
the collateral (Timbers) or the stay is lifted. What decline?
49
Problem 6.6, page 110
Petition
Now Motion
3 months
$50K
Hearing
Case
end
60 days
$40K $35K
$30K
$25K
We represent the bankrupt. Angry creditors are calling
b.
How do we deal with Macklin Mortgage, secured by sterilization
equipment for $50K? What could Macklin do? §362(d). Move
to lift the stay. How long would that take? §362(e). What will
happen at the hearing?
Macklin gets adequate protection against decline in the value of
the collateral (Timbers) or the stay is lifted. What decline?
Three views: from petition, motion, or hearing.
50
Problem 6.6, page 110
Petition
Now Motion
3 months
$50K
Hearing
Case
end
60 days
$40K $35K
$30K
$25K
We represent the bankrupt. Angry creditors are calling
b.
How do we deal with Macklin Mortgage, secured by sterilization
equipment for $50K? What could Macklin do? §362(d). Move
to lift the stay. How long would that take? §362(e). What will
happen at the hearing?
Macklin gets adequate protection against decline in the value of
the collateral (Timbers) or the stay is lifted. What decline?
Three views: from petition, motion, or hearing. Ninth Circuit,
51
when creditor would have received money by state procedure
Problem 6.6, page 110
Petition
Now Motion
3 months
$50K
Hearing
Case
end
60 days
$40K $35K
$30K
$25K
We represent the bankrupt. Angry creditors are calling
b.
How do we deal with Macklin Mortgage, secured by sterilization
equipment for $50K? What could Macklin do? §362(d). Move
to lift the stay. How long would that take? §362(e). What will
happen at the hearing?
Macklin gets adequate protection against decline in the value of
the collateral (Timbers) or the stay is lifted. What decline?
Three views: from petition, motion, or hearing.
52
What kind of protection here?