Class 12 Bankruptcy, Spring, 2009 Pre-Confirmation Distributions 11/7/2018 Class 12 Bankruptcy, Spring, 2009 Pre-Confirmation Distributions Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2005-09 Randal C. Picker. All Rights Reserved.

Copyright © 2005 Randal C. Picker 11/7/2018 Sec. 554 Abandonment of property of the estate (a) After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate. November 7, 2018 Copyright © 2005 Randal C. Picker

Copyright © 2005 Randal C. Picker 11/7/2018 725 Disposition of certain property After the commencement of a case under this chapter, but before final distribution of property of the estate under section 726 of this title, the trustee, after notice and a hearing, shall dispose of any property in which an entity other than the estate has an interest, such as a lien, and that has not been disposed of under another section of this title. November 7, 2018 Copyright © 2005 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Sec. 1171. Priority Claims Applicable Only in Railroad Reorganizations (a) There shall be paid as an administrative expense any claim of an individual or of the personal representative of a deceased individual against the debtor or the estate, for personal injury to or death of such individual arising out of the operation of the debtor or the estate, whether such claim arose before or after the commencement of the case. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Sec. 1171. Priority Claims (b) Any unsecured claim against the debtor that would have been entitled to priority if a receiver in equity of the property of the debtor had been appointed by a Federal court on the date of the order for relief under this title shall be entitled to the same priority in the case under this chapter. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005 Randal C. Picker 11/7/2018 363 Use, sale, or lease of property (b)(1) The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate … . November 7, 2018 Copyright © 2005 Randal C. Picker

Copyright © 2005 Randal C. Picker 11/7/2018 363 (cont.) Use, sale, or lease of property (cont.) (c)(1) If the business of the debtor is authorized to be operated under section 721, 1108, 1203, 1204, or 1304 of this title and unless the court orders otherwise, the trustee may enter into transactions, including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing, and may use property of the estate in the ordinary course of business without notice or a hearing. November 7, 2018 Copyright © 2005 Randal C. Picker

Harm Mitigation Incentives I 11/7/2018 Harm Mitigation Incentives I Hypo: Solvent Firm Owes creditor $100 today Tomorrow: Coin Flip With probability 1-p, will continue to owe $100 With prob p, further harm will accrue and will owe $1100 (increase in harm of $1000) Firm can spend $10 to avoid coin flip When should it do so? November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Answer Answer Firm should compare 1000p and 10 Spend the money if 1000p > 10 Meaning if p > .01 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Harm Mitigation Incentives II 11/7/2018 Harm Mitigation Incentives II Hypo with Insolvent Firm Firm has $110 in assets Two claims $100 claim fixed $100 claim subject to coin flip process as before Equity holders beneath creditors November 7, 2018 Copyright © 2005-09 Randal C. Picker

Harm Mitigation Incentives II 11/7/2018 Harm Mitigation Incentives II Firm could spend $10 and has three choices available to it 1. Do nothing 2. Spend $10 to avoid the coin flip 3. Spend $10 on lottery ticket Very very low probability of winning but will make the firm solvent if the ticket is a winner What will the firm do? What should it do? November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Answer Will Once insolvent, equity holders will get nothing New claims irrelevant; equity still will get nothing Lottery ticket is only way to get something Should Lottery ticket constructed to be bad bet; avoiding the coin flip still socially valuable November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Mabey Core Facts Effort to create $15 million fund prior to confirmation of plan of reorganization to pay during the case for emergency treatment of women injured by the Dalkon Shield Payments would be made before claims were allowed; would count against ultimate payments on allowed claims but overpayments would not be recovered November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Mabey Is this different from my hypos? November 7, 2018 Copyright © 2005-09 Randal C. Picker

Critical Vender Orders 11/7/2018 Critical Vender Orders Key Questions Under what circumstances, if any, can prepetition claims be paid before the date of general distribution to prepetition claims? What does that do? November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Kmart Core Facts Files; first day orders Pay critical vendors to induce more delivery Pays $300 million in prepetition debts in full for 2,330 supplies Case eventually pays other prepetition claims—45,000 creditors—at 10 cents per dollar November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Kmart Key Questions Is pre-confirmation payment valid? Under what circumstances? Using what as statutory authority? November 7, 2018 Copyright © 2005-09 Randal C. Picker

Sec. 1129(a)(7): Best Interests of Creditors Test 11/7/2018 Sec. 1129(a)(7): Best Interests of Creditors Test 1129(a) The court shall confirm a plan only if all of the following requirements are met: (7) With respect to each impaired class of claims or interests - (A) each holder of a claim or interest of such class - (i) has accepted the plan; or (ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Types of Claims Customer Claims Product warranty claims Frequent flyer program obligations? Employee Claims Critical Vendor Claims November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Kmart Test Debtor must prove two items: “But for immediate full payment, vendors would cease dealing” “business will gain enough from continued transactions with the favored vendors to provide some residual benefit to the remaining, disfavored creditors, or at least leave them no worse off.” November 7, 2018 Copyright © 2005-09 Randal C. Picker