The University of Chicago 2/22/2019 Class 26 Secured Transactions, Fall, 2018 Security Interests Near and In Bankruptcy Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2001-18 Randal C. Picker. All Rights Reserved.
BC 544: Trustee as Lien Creditor 2/22/2019 BC 544: Trustee as Lien Creditor (a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by – February 22, 2019
2/22/2019 BC 544(a) Cont. (1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists; February 22, 2019
2/22/2019 BC 544 Cont. (b)(1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title. February 22, 2019
BC 550: Liability of Transferee of Avoided Transfer 2/22/2019 BC 550: Liability of Transferee of Avoided Transfer (a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from – February 22, 2019
2/22/2019 BC 550(a) Cont. (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee. February 22, 2019
BC 551: Automatic Preservation 2/22/2019 BC 551: Automatic Preservation Any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or any lien void under section 506(d) of this title, is preserved for the benefit of the estate but only with respect to property of the estate. February 22, 2019
10-4: The Hypothetical Lien Creditor Power 2/22/2019 TTYN 10-4: The Hypothetical Lien Creditor Power Debtor Finco 3/1: $5,000 SA: Machine FS 8/1 How should the proceeds be divided? 1/1: $5,000 Machine = $10,000 Debtor owes suppliers $10,000 Bank 8/1 Debtor files for bankruptcy Finco SA set aside February 22, 2019
2/22/2019 10-4: Answer Answer Under Sec. 550, SI is preserved for benefit of the estate In this example, treat all as unsecured and do pro rata distribution under Sec. 726(b) Bank, $2.5K; Suppliers, $5K; Finco, $2.5K February 22, 2019
10-5: The Hypothetical Lien Creditor Power 2/22/2019 TTYN 10-5: The Hypothetical Lien Creditor Power Debtor Finco 3/1: $5,000 SA: Machine FS 8/1 How should the proceeds be divided? 4/1: $5,000 SA/FS: Machine Machine = $10,000 Debtor owes suppliers $10,000 Bank 8/1 Debtor files for bankruptcy Finco SA set aside February 22, 2019
2/22/2019 10-5: Answer Answer Under Sec. 550, SI is preserved for benefit of the estate, but here we are avoiding a junior lien Bank gets $5K via senior lien Remaining $5K split pro rata under Sec. 726(b) by Finco (1666) and Suppliers (3333) February 22, 2019
2/22/2019 BC 547: Preferences (b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property – (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; February 22, 2019
2/22/2019 BC 547(b) Cont. (4) made – (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and February 22, 2019
2/22/2019 BC 547(b) Cont. (5) that enables such creditor to receive more than such creditor would receive if – (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title. February 22, 2019
10-6: No Antecedent Debt, No Preference 2/22/2019 10-6: No Antecedent Debt, No Preference Debtor Finco 2/1 SA: Machine FS: Machine $10,000 4/1 Has Finco received a preference under BC 547(b)? Machine = $10,000 4/1 Debtor files for bankruptcy February 22, 2019
10-6: Answer No antecedent debt, so no preference February 22, 2019 2/22/2019 10-6: Answer No antecedent debt, so no preference February 22, 2019
10-7: Antecedent Debt, Preference 2/22/2019 10-7: Antecedent Debt, Preference Debtor Finco 1/15: $10,000 3/1 SA & FS Machine Machine = $10,000 5/1 Debtor files for bankruptcy 5/1 Has Finco received a preference under BC 547(b)? February 22, 2019
10-7: Answer b(1): transfer to or for the benefit of a creditor 2/22/2019 10-7: Answer b(1): transfer to or for the benefit of a creditor Yes b(2): on account of an antecedent debt The 1/15 debt of $10K b(3): made while the debtor was insolvent Presumed insolvent for 90 days prior under 547(f) February 22, 2019
10-7: Answer b(4): for non-insiders, made within 90 days of filing 2/22/2019 10-7: Answer b(4): for non-insiders, made within 90 days of filing Yes b(5): does better with transfer than without in hypo Chap 7 With transfer: collect in full Without: pro rata February 22, 2019
BC 547(e): Timing Transfers 2/22/2019 BC 547(e): Timing Transfers (e)(1) For the purposes of this section – (A) a transfer of real property other than fixtures, but including the interest of a seller or purchaser under a contract for the sale of real property, is perfected when a bona fide purchaser of such property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee; and
2/22/2019 BC 547(e)(1) Cont. (B) a transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee. February 22, 2019
2/22/2019 BC 547(e) Cont. (2) For the purposes of this section, except as provided in paragraph (3) of this subsection, a transfer is made – (A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 30 days after, such time except as provided in subsection (c)(3)(B); February 22, 2019
2/22/2019 BC 547(e)(2) Cont. (B) at the time such transfer is perfected, if such transfer is perfected after such 30 days; or (C) immediately before the date of the filing of the petition, if such transfer is not perfected at the later of – (i) the commencement of the case; or (ii) 30 days after such transfer takes effect between the transferor and the transferee. February 22, 2019
2/22/2019 BC 547(e) Cont. (3) For the purposes of this section, a transfer is not made until the debtor has acquired rights in the property transferred. February 22, 2019
10-10: Late Filings and Secured Creditors 2/22/2019 TTYN 10-10: Late Filings and Secured Creditors Debtor Finco 2/1: $10,000 SA: Machine 2/2 $10,000 3/15 FS: Machine 4/2 Has Finco received a preference under 547(b)? Bank 4/2 Debtor files for bankruptcy Assets = $5,000 February 22, 2019
2/22/2019 10-10: Answer The SI Under 547(e)(2)(B), the transfer of the SI took place on 3/15, the date it was perfected This creates antecedence, so avoidable February 22, 2019
10-12: New Property and Secured Creditors 2/22/2019 TTYN 10-12: New Property and Secured Creditors Debtor Bank 2/1: $10,000 SA: All Prop, TO & TA Article 9 filing 2/12: Debtor acquires machine 3/1 Debtor files for bankruptcy 4/2 Has Bank received a preference under 547(b)? February 22, 2019
10-12: Answer Two Transfers 2/1 2/1 Transfer 2/22/2019 10-12: Answer Two Transfers 2/1 Transfer 2/12 Purchase of Equipment 2/1 Fine February 22, 2019
2/22/2019 10-12: Answer 2/12 Under 547(e)(3), transfer takes place at time debtor acquires equipment Problem ala 10-3 February 22, 2019
BC 547(c)(5): Two Point Net Improvement Test 2/22/2019 BC 547(c)(5): Two Point Net Improvement Test (c) The trustee may not avoid under this section a transfer - (5) that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, February 22, 2019
BC 547(c)(5): Two Point Net Improvement Test 2/22/2019 BC 547(c)(5): Two Point Net Improvement Test of any amount by which the debt secured by such security interest exceeded the value of all security interests for such debt on the later of – (A)(i) with respect to a transfer to which subsection (b)(4)(A) of this section applies, 90 days before the date of the filing of the petition; or February 22, 2019
BC 547(c)(5): Two Point Net Improvement Test 2/22/2019 BC 547(c)(5): Two Point Net Improvement Test (ii) with respect to a transfer to which subsection (b)(4)(B) of this section applies, one year before the date of the filing of the petition; or (B) the date on which new value was first given under the security agreement creating such security interest; February 22, 2019
10-13: Floating Collateral and Secured Creditors 2/22/2019 TTYN 10-13: Floating Collateral and Secured Creditors Debtor Bank 2/1: $10,000 SA: INV, TO & TA Article 9 filing Debtor already has $10,000 in INV 3/1 Debtor files for bankruptcy 3/1 Debtor has $10,000 in INV all acquired after 2/1 3/1 Has Bank received a preference under 547(b)? February 22, 2019
10-13: Answer Bottom Line Step by Step 2/22/2019 10-13: Answer Bottom Line No improvement in position, so one hopes no preference 547(c)(5) protects this Step by Step February 22, 2019
10-13: Floating Collateral and Secured Creditors 2/22/2019 TTYN 10-13: Floating Collateral and Secured Creditors Debtor Bank 2/1: $10K SA: INV, TE & TA Article 9 filing Debtor already has $8,000 in INV 3/1 Debtor files for bankruptcy 3/1 Debtor has $10,000 in INV all acquired after 2/1 3/1 Does that change your answer? February 22, 2019
10-13: Answer Bottom Line Step by Step 2/22/2019 10-13: Answer Bottom Line $2K improvement in position, so should be preference Step by Step February 22, 2019
BC 506: Determination of Secured Status 2/22/2019 BC 506: Determination of Secured Status (a)(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, February 22, 2019
2/22/2019 BC 506(a) Cont. and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. February 22, 2019
2/22/2019 BC 506(a) Cont. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest. February 22, 2019
Example Numbers Language Total Debt: $20,000 Collateral Value: $5,000 2/22/2019 Example Numbers Total Debt: $20,000 Collateral Value: $5,000 Secured Claim: $5,000 Unsecured Claim: $15,000 Language Called “bifurcation” of the claim February 22, 2019
February 22, 2019 Boston Generating Intercreditor Agreement
Table of Contents February 22, 2019 Boston Generating Intercreditor Agreement
Table of Contents February 22, 2019 Boston Generating Intercreditor Agreement
Table of Contents February 22, 2019 Boston Generating Intercreditor Agreement
Table of Contents February 22, 2019 Boston Generating Intercreditor Agreement
Table of Contents February 22, 2019 Boston Generating Intercreditor Agreement
Table of Contents February 22, 2019 Boston Generating Intercreditor Agreement
Collateral Agents February 22, 2019 Boston Generating Intercreditor Agreement
Layers of Debt February 22, 2019 Boston Generating Intercreditor Agreement
Creation of SIs February 22, 2019 Boston Generating Intercreditor Agreement
Creation of SIs February 22, 2019 Boston Generating Intercreditor Agreement
Lien Priorities: Two Liens February 22, 2019 Boston Generating Intercreditor Agreement
Lien Priorities: Separate Bankruptcy Classification February 22, 2019 Boston Generating Intercreditor Agreement
Lien Priorities: Notwithstanding Everything February 22, 2019 Boston Generating Intercreditor Agreement
Lien Priorities: First is Senior February 22, 2019 Boston Generating Intercreditor Agreement
Lien Priorities: Second is Junior February 22, 2019 Boston Generating Intercreditor Agreement
HLC Power Again Debtor Finco Bank 2/22/2019 TTYN HLC Power Again Debtor Finco 3/1: $5,000 SA: Machine FS 8/1 Debtor files for bankruptcy. How should the proceeds be divided? 4/1: $5,000 SA/FS: Machine 4/1: Intercreditor Agreement: F superior to B Bank Machine = $10,000 Debtor owes suppliers $10,000 February 22, 2019
Answer Answer IA provisions regarding priority don’t somehow change question as to whether Finco is perfected It isn’t and its SI is avoidable as before Bank should get $5K as before, Finco 1666 and Suppliers 3333 Bank should then pay Finco 3333 under IA February 22, 2019
Boston Generating (Bankr. SDNY 2010) Key Facts Debt structure as above Proposal to sell debtor assets under BC 363 sale for $1.1 billion; senior SPs owed $1.13 billion “SP2” and others want to object Can SP2 do so given IA? February 22, 2019
Enforcement: Seconds Blocked February 22, 2019 Boston Generating Intercreditor Agreement
Firsts Rights to Act as to Collateral Without Consultation or Consent of Seconds February 22, 2019 Boston Generating Intercreditor Agreement
Seconds Can’t Get Collateral February 22, 2019 Boston Generating Intercreditor Agreement
Seconds Can’t Interfere With Exercise of Remedies by Firsts February 22, 2019 Boston Generating Intercreditor Agreement
Nonetheless … February 22, 2019 Boston Generating Intercreditor Agreement
Nonetheless … February 22, 2019 Boston Generating Intercreditor Agreement
Nonetheless … February 22, 2019 Boston Generating Intercreditor Agreement
Boston Generating (Bankr. SDNY 2010) Key Questions Is this an exercise of remedies by the Firsts? They say no. ???? February 22, 2019
Boston Generating (Bankr. SDNY 2010) Key Questions Did the Seconds waive the right to challenge a BC 363 sale? No: (“If a secured lender seeks to waive its rights to object to a 363 sale, it must be clear beyond peradventure that it has done so.”) Cf. Sec. 6.2 of ABA Model IA on this February 22, 2019
Boston Generating (Bankr. SDNY 2010) Key Questions How does BC 363 apply in this circumstance? Not our issue today. Go see Baird/Casey February 22, 2019