Secured Transactions Assignment 27 Priority Under Bankruptcy Law

The Big Picture Part Two: The Creditor Third Party Relationship Chapter 6-7: Perfection Chapter 8: Concept of Priority Assignment 26: Priority Under State Law Assignment 27: Priority Under Bankruptcy Law Chapter 9: Specific Priority Rules

State vs. Bankruptcy Protections State Protections (26) Bankruptcy Protections (27)

State vs. Bankruptcy Protections State Protections (26) 1. The secured creditor can foreclose at any time after default Bankruptcy Protections (27)

State vs. Bankruptcy Protections State Protections (26) 1. The secured creditor can foreclose at any time after default Bankruptcy Protections (27) 1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose

State vs. Bankruptcy Protections State Protections (26) 1. The secured creditor can foreclose at any time after default 2. Debtor can’t dislodge secured creditor without payment in full Bankruptcy Protections (27) 1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose

State vs. Bankruptcy Protections State Protections (26) 1. The secured creditor can foreclose at any time after default 2. Debtor can’t dislodge secured creditor without payment in full Bankruptcy Protections (27) 1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose 2. DIP can force sale under §363(f)

State vs. Bankruptcy Protections State Protections (26) 1. The secured creditor can foreclose at any time after default 2. Debtor can’t dislodge secured creditor without payment in full Bankruptcy Protections (27) 1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose 2. DIP can force sale under §363(f) and DIP can grant prior lien under §364(d)

State vs. Bankruptcy Protections State Protections (26) 1. The secured creditor can foreclose at any time after default 2. Debtor can’t dislodge secured creditor without payment in full Bankruptcy Protections (27) 1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose 2. DIP can force sale under §363(f) and DIP can grant prior lien under §364(d)

State vs. Bankruptcy Protections State Protections (26) 1. The secured creditor can foreclose at any time after default Debtor can’t dislodge secured creditor without payment in full Prior perfected secured creditor is entitled to possession, Grocers Supply. Bankruptcy Protections (27) 1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose DIP can force sale under §363(f) and DIP can grant prior lien under §364(d)

State vs. Bankruptcy Protections State Protections (26) 1. The secured creditor can foreclose at any time after default Debtor can’t dislodge secured creditor without payment in full Prior perfected secured creditor is entitled to possession, Grocers Supply. Bankruptcy Protections (27) 1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose DIP can force sale under §363(f) and DIP can grant prior lien under §364(d) DIP may use the collateral, §363

Bankruptcy Code §363(f) (f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if – applicable nonbankruptcy law permits sale of such property free and clear of such interest; such entity consents; such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; such interest is in bona fide dispute; or such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

Bankruptcy Code §363(f) (f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if – applicable nonbankruptcy law permits sale of such property free and clear of such interest; such entity consents; such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; such interest is in bona fide dispute; or such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

Bankruptcy Code §363(f) (f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if – applicable nonbankruptcy law permits sale of such property free and clear of such interest; such entity consents; such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; such interest is in bona fide dispute; or such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

Bankruptcy Code §363(f) (f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if – applicable nonbankruptcy law permits sale of such property free and clear of such interest; such entity consents; such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; such interest is in bona fide dispute; or such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

Bankruptcy Code §363(f) (f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if – applicable nonbankruptcy law permits sale of such property free and clear of such interest; such entity consents; such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; such interest is in bona fide dispute; or such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

Bankruptcy Code §363(f) (f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if – applicable nonbankruptcy law permits sale of such property free and clear of such interest; such entity consents; such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; such interest is in bona fide dispute; or such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

Bankruptcy Code §363(f) (f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if – applicable nonbankruptcy law permits sale of such property free and clear of such interest; such entity consents; such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; such interest is in bona fide dispute; or such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

Bankruptcy Code §364(d) (d)(1) The court . . . may authorize the obtaining of credit or the incurring of debt secured by a senior . . . lien on property of the estate that is subject to a lien

Bankruptcy Code §364(d) (d)(1) The court . . . may authorize the obtaining of credit or the incurring of debt secured by a senior . . . lien on property of the estate that is subject to a lien only if – The trustee is unable to obtain such credit otherwise; and

Bankruptcy Code §364(d) (d)(1) The court . . . may authorize the obtaining of credit or the incurring of debt secured by a senior . . . lien on property of the estate that is subject to a lien only if – The trustee is unable to obtain such credit otherwise; and

Bankruptcy Code §364(d) (d)(1) The court . . . may authorize the obtaining of credit or the incurring of debt secured by a senior . . . lien on property of the estate that is subject to a lien only if – The trustee is unable to obtain such credit otherwise; and There is adequate protection of the interest of the holder of the [already existing] lien

Problem 27.1, page 460 $200 sale expense The Chapter 7 trustee is selling problem 26.1 property free and clear of liens 29K 25K 10K 17K

Problem 27.1, page 460 $200 sale expense The Chapter 7 trustee is selling problem 26.1 property free and clear of liens How much should Kinski bid? 29K 25K 10K 17K

Problem 27.1, page 460 $200 sale expense The Chapter 7 trustee is selling problem 26.1 property free and clear of liens How much should Kinski bid? $25K 29K 25K 25K 10K 17K Before After

Problem 27.1, page 460 $200 sale expense The Chapter 7 trustee is selling problem 26.1 property free and clear of liens How much should Kinski bid? $25K Expenses of sale? 29K 25K 25K 10K 17K Before After

Problem 27.1, page 460 $200 sale expense The Chapter 7 trustee is selling problem 26.1 property free and clear of liens How much should Kinski bid? $25K Expenses of sale? Paid from proceeds 29K 25K 25K 10K 17K Before After

Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000 800K 1.1M

Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000 Former value $3 million. 800K 1.1M

Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000 Former value $3 million. If the cars are sold for $1 million during bankruptcy, who gets the money? 800K 1.1M 1M

Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000 Former value $3 million. If the cars are sold for $1 million during bankruptcy, who gets the money? First. 800K 1.1M 1M

Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000 Former value $3 million. If the cars are sold for $1 million during bankruptcy, who gets the money? First. Both liens are extinguished. 1M

Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000 Former value $3 million. If the cars are sold for $1 million during bankruptcy, who gets the money? First. Both liens are extinguished. Can Bank prevent the sale? 800K 1.1M 1M

Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000 Former value $3 million. If the cars are sold for $1 million during bankruptcy, who gets the money? First. Both liens are extinguished. Can Bank prevent the sale? Objection: “No grounds under §363(f)” 800K 1.1M 1M

What are the grounds for this sale? (f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if – applicable nonbankruptcy law permits sale of such property free and clear of such interest; such entity consents; such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; such interest is in bona fide dispute; or such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

What are the grounds for this sale? (f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if – applicable nonbankruptcy law permits sale of such property free and clear of such interest; such entity consents; such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; such interest is in bona fide dispute; or such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

What are the grounds for this sale? (f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if . . . (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property

What are the grounds for this sale? (f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if – (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property 800K 1.1M 1M

What are the grounds for this sale? (f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if – (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property What is the “aggregate value of all liens” on this property? 800K 1.1M 1M

What are the grounds for this sale? (f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if – (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property What is the “aggregate value of all liens” on this property? $1.9 million? 800K 1.1M 1M

What are the grounds for this sale? (f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if – (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property What is the “aggregate value of all liens” on this property? $1.9 million? $1 million? Oneida Lake 800K 1.1M 1M

Problem 27.2, page 460 First lien, $1.1 million; second lien $800 thousand Former value $3 million. If the cars are sold for $1 million during bankruptcy, who gets the money? First Can Bank prevent the sale? Objection: “No grounds under §363(f)” Assume the objection fails. Bank expects a future value of $3 million. What should Bank do if the sale goes forward? Bid at the sale, §363(k) 800K 1.1M 1M

Problem 27.2, page 460 First lien, $1.1 million; second lien $800 thousand Former value $3 million. If the cars are sold for $1 million during bankruptcy, who gets the money? First Can Bank prevent the sale? Objection: “No grounds under §363(f)” Assume the objection fails. Bank expects a future value of $3 million. What should Bank do if the sale goes forward? Bid at the sale, §363(k) 800K 1.1M 1M

Problem 27.3, page 461 We represent debtor seeking to finance completion of office complex

Problem 27.3, page 461 We represent debtor seeking to finance completion of office complex 1M 4M 2M Now

Problem 27.3, page 461 We represent debtor seeking to finance completion of office complex First is $4M; second is mechanics liens for $1M; value is $2M 1M 4M 2M Now

Problem 27.3, page 461 We represent debtor seeking to finance completion of office complex First is $4M; second is mechanics liens for $1M; value is $2M Cost to complete is $1.5M, value complete is $4M 1M 4M 2M Now

Problem 27.3, page 461 We represent debtor seeking to finance completion of office complex First is $4M; second is mechanics liens for $1M; value is $2M Cost to complete is $1.5M, value complete is $4M 1M 1M 4M 4M 4M 2M Now Complete

Problem 27.3, page 461 We represent debtor seeking to finance completion of office complex First is $4M; second is mechanics liens for $1M; value is $2M Cost to complete is $1.5M, value complete is $4M 1M 1M 4M 4M 4M 2M Now Complete How do we get the money to finish it?

Problem 27.3, page 461 We represent debtor seeking to finance completion of office complex First is $4M; second is mechanics liens for $1M; value is $2M Cost to complete is $1.5M, value complete is $4M 1M 1M 4M 4M 4M 2M Now Complete How do we get the money to finish it? File bankruptcy.

Problem 27.3, page 461 We represent debtor seeking to finance completion of office complex First is $4M; second is mechanics liens for $1M; value is $2M Cost to complete is $1.5M, value complete is $4M 1M 4M 2M 2M 2M 2M Bky Complete How do we get the money to finish it? File bankruptcy. Bifurcate $4M claim.

Problem 27.3, page 461 We represent debtor seeking to finance completion of office complex First is $4M; second is mechanics liens for $1M; value is $2M Cost to complete is $1.5M, value complete is $4M 1M 4M 2M 2M 2M 2M 1.5M Bky Complete How do we get the money to finish it? File bankruptcy. Bifurcate $4M claim. Borrow $1.5 million; grant a first lien under §364(d)

Problem 27.3, page 461 We represent debtor seeking to finance completion of office complex First is $4M; second is mechanics liens for $1M; value is $2M Cost to complete is $1.5M, value complete is $4M 1M 4M 2M 2M 2M 2M 1.5M Bky Complete How do we get the money to finish it? File bankruptcy. Bifurcate $4M claim. Borrow $1.5 million; grant a first lien under §364(d) Is anyone injured by that borrowing?

Problem 27.4, page 461 120K In Problem 26.4 we loaned $10K on a second mortgage 10K 80K

Problem 27.4, page 461 120K In Problem 26.4 we loaned $10K on a second mortgage Now the first forecloses. Where do we stand? 10K 80K

Problem 27.4, page 461 120K 120K In Problem 26.4 we loaned $10K on a second mortgage Now the first forecloses. Where do we stand? We need $80K cash to protect our position. 10K 80K Before After

Problem 27.4, page 461 120K 120K In Problem 26.4 we loaned $10K on a second mortgage Now the first forecloses. Where do we stand? We need $80K cash to protect our position. 10K 80K Before After Where do we stand if our friend files for bankruptcy?

Problem 27.4, page 461 120K 120K In Problem 26.4 we loaned $10K on a second mortgage Now the first forecloses. Where do we stand? We need $80K cash to protect our position. 10K 80K Before After Where do we stand if our friend files for bankruptcy? Automatic stay; first can’t force sale

Problem 27.4, page 461 120K 120K In Problem 26.4 we loaned $10K on a second mortgage Now the first forecloses. Where do we stand? We need $80K cash to protect our position. 10K 80K Before After Where do we stand if our friend files for bankruptcy? Automatic stay; first can’t force sale Payment in full under Chapter 13 plan (cure and reinstate)