1. The University of Chicago
9/22/2018
Class 25 Secured Transactions, Fall, 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 © Randal C. Picker. All Rights Reserved.

2. Exchange Offers I Hypo Bonds with face amount of $1000
Current market price is $500
Exchange Offer: Swap old bonds for new bonds if at least 75% of old bonds accept
September 22, 2018

3. Exchange Offers I
Hypo
If offer is completed, expect new bonds to trade for $600, any remaining old bonds will trade at $900; if offer fails, market price drops to $450
What do we want? What happens?
September 22, 2018

4. Individual Decision Decision Table Not Pivotal Fails Succeeds Vote For
$450
$600
Vote Against
$900

5. Answer
Answer
If offer will fail, indifferent; if offer will succeed, holdout, so vote against
If all do so, offer fails even though in group’s interest
September 22, 2018

6. Exchange Offers II Hypo Bonds with face amount of $1000
Current market price is $500
Exchange Offer: Swap old bonds for new bonds if at least 75% of old bonds accept
September 22, 2018

7. Exchange Offers II Hypo
If offer is completed, expect new bonds to trade for $400, any remaining old bonds will trade at $300; if fails, price stays at $500
What do we want? What happens?
September 22, 2018

8. Individual Decision Decision Table Not Pivotal Fails Succeeds Vote For
$500
$400
Vote Against
$300

9. Answer
Answer
If offer will fail, indifferent; if offer will succeed, vote for
If all do so, offer succeeds even though not in group’s interest
September 22, 2018

10. Exchange Offers: Majority Binds Dissenters
Hypo
Bonds with face amount of $1000
Current market price is $500
Exchange Offer: Swap old bonds for new bonds if at least 75% of old bonds accept
September 22, 2018

11. Exchange Offers: Majority Binds Dissenters
Hypo
If offer is completed, all bonds swapped and expect new bonds to trade for $600; if fails, price goes to $450
What do we want? What happens?
September 22, 2018

12. Individual Decision Decision Table Not Pivotal Fails Succeeds Vote For
$450
$600
Vote Against
September 22, 2018

13. Answer
Answer
If offer will fail, indifferent; if offer will succeed, indifferent
How do you vote?
September 22, 2018

14. Exchange Offers: Unanimity Clauses
Hypo
Bonds with face amount of $1000
Current market price is $500
Exchange Offer: Swap old bonds for new bonds if 100% of old bonds accept
September 22, 2018

15. Exchange Offers: Unanimity Clauses
Hypo
If offer is completed, all bonds swapped and expect new bonds to trade for $600; if fails, goes to $450
What do we want? What happens?
September 22, 2018

16. Individual Decision Decision Table Pivotal Fails Succeeds Vote For
$450
$600
Vote Against
xxx
September 22, 2018

17. Answer
Answer
Vote against: fails and get $450; vote in favor, chance at $600
Vote in favor
September 22, 2018

18. Summary of Results
If your vote doesn’t affect the outcome (not pivotal)
Coercive exchange offer possible
Creditor group prefers status quo but faces collective action problem and offer is accepted
Welfare-enhancing offers may fail
September 22, 2018

19. How To Deal With This? Solutions? Majority binds dissenters
Your vote can’t control whether your bond is exchanged, unless you are pivotal
If not pivotal, vote doesn’t matter; if pivotal, vote interest correctly
September 22, 2018

20. How To Deal With This? Solutions? Unanimity clauses
Makes everyone pivotal but with risks
September 22, 2018

21. September 22, 2018
Senate Report on Trust Indenture Act of 1939, 4 Apr 1939

22. How Do Many Secured Creditors Act Together?
September 22, 2018
Senate Report on Trust Indenture Act of 1939, 4 Apr 1939

23. How Do Many Secured Creditors Act Together?
September 22, 2018
Senate Report on Trust Indenture Act of 1939, 4 Apr 1939

24. Barriers to Collective Action by Bondholders
September 22, 2018
Senate Report on Trust Indenture Act of 1939, 4 Apr 1939

25. Trustee Actions After Default
September 22, 2018
Senate Report on Trust Indenture Act of 1939, 4 Apr 1939

26. Trustee Actions After Default
September 22, 2018
Senate Report on Trust Indenture Act of 1939, 4 Apr 1939

27. September 22, 2018
Trust Indenture Act of 1939, 1 Aug 1939

28. “Indenture” Definition
September 22, 2018
Trust Indenture Act of 1939, 1 Aug 1939

29. Reports re Releases of Collateral
September 22, 2018
Trust Indenture Act of 1939, 1 Aug 1939

30. Trustee Duties on Default
September 22, 2018
Trust Indenture Act of 1939, 1 Aug 1939

31. Waivers by Bondholders: Majority Action
September 22, 2018
Trust Indenture Act of 1939, 1 Aug 1939

32. Waivers by Bondholders: Super-Majority Action
September 22, 2018
Trust Indenture Act of 1939, 1 Aug 1939

33. Limits on Waivers September 22, 2018
Trust Indenture Act of 1939, 1 Aug 1939

34. 10-xx: Whose on First? Debtor Trustee SP1A SP1B SP1C
9/22/2018
10-xx: Whose on First?
1/1: Files All Assets FS with Trustee as Collateral Agent
Debtor
Trustee
2/1: $10K
SA: All Assets
3/1: $10K
SA: All Assets
4/1: $10K
SA: All Assets
4/1 Describe priority as of this date.
SP1A
SP1B
SP1C
September 22, 2018

35. Answer
Answer
All three secured creditors are dating priority under the 1/1 financing statement
Three secured creditors with identical priority
September 22, 2018

36. 10-xx: Whose on First? Debtor Trustee SP1A SP1B SP1C SP2
9/22/2018
10-xx: Whose on First?
1/1: Files All Assets FS with Trustee as Collateral Agent
Debtor
Trustee
2/1: $10K
SA: All Assets
3/1: $10K
SA: All Assets
4/1: $10K
SA: All Assets
8/1: $10K
FS, SA: All Assets
SP1A
SP1B
SP1C
SP2
8/1 Describe priority as of this date.
September 22, 2018

37. Answer Answer SP2 is clearly junior to SP1A, SP2B and SP2C
September 22, 2018

38. 10-xx: Whose on First? Next Step
Debtor defaults. Assets worth $15K
SP1A wants to exercise its rights against the collateral
What are its options? What happens if it does that? What if SP1B also wants to act?
September 22, 2018

39. Marblegate (CA2 2017) Notes Parent Sub1 SP 2013: “Guarantee”
9/22/2018
Marblegate (CA2 2017)
Notes
Parent
2013: “Guarantee”
2013: USC: $217M
2014: Guarantee
Sub1 SP
2010: $1.3B
SA: All Assets
September 22, 2018

40. The Guarantees Oddities
Original Notes guarantee subject to being released if senior guarantee was released
True even for subsequently-granted guarantee (meaning the 2014 guarantee)
September 22, 2018

41. Exchange Offer If Unanimous Acceptance
Secured debt  $400M in secured debt + 77% of equity in parent (45% haircut)
Notes  19% of equity in parent (67% haircut)
September 22, 2018

42. Exchange Offer If Not Unanimous
Create new sub and sell assets to that sub after Article 9 foreclosure sale by consenting secured creditors
Wipe out both guarantees
Create new capital structure for new sub
September 22, 2018

43. UCC-9 asset foreclosure
9/22/2018
Restructuring EDMC
Notes NN NY
Parent
2013: “Guarantee”
2013: USC: $217M
2014: Guarantee
Sub1
SPY SP
SPN
UCC-9 asset foreclosure
2010: $1.3B
SA: All Assets
SPY: Senior debt
SPN: Junior debt
Asset Sale
NewSub
September 22, 2018

44. EDMC After Intercompany Sale
9/22/2018
EDMC After Intercompany Sale NN NY
Parent
USC: $14M
Sub1
SPY
SPN
SPY: Senior debt
SPN: Junior debt
NewSub
September 22, 2018

45. The Legal Question Applying TIA 316(b)
Does the anti-impairment provision prevent this type of restructuring?
September 22, 2018

46. BC 544: Trustee as Lien Creditor
9/22/2018
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 –
September 22, 2018

47. 9/22/2018
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;
September 22, 2018

48. 9/22/2018
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.
September 22, 2018

49. BC 550: Liability of Transferee of Avoided Transfer
9/22/2018
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 –
September 22, 2018

50. 9/22/2018
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.
September 22, 2018

51. BC 551: Automatic Preservation
9/22/2018
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.
September 22, 2018

52. 10-1: The Hypothetical Lien Creditor Power
9/22/2018
10-1: The Hypothetical Lien Creditor Power
Debtor
Finco
3/1: $5,000
SA: Machine FS
8/1 How should the proceeds be divided?
1/1: $10,000
Machine = $10,000
Debtor owes suppliers $10,000
Bank
8/1 Debtor files for bankruptcy
Finco SA set aside
September 22, 2018

53. 9/22/2018
10-1: 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, $4K; Supplier, $4K; Finco, $2K
September 22, 2018

54. 9/22/2018
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;
September 22, 2018

55. 9/22/2018
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
September 22, 2018

56. 9/22/2018
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.
September 22, 2018

57. 10-2: No Antecedent Debt, No Preference
9/22/2018
10-2: 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
September 22, 2018

58. 10-2: Answer No antecedent debt, so no preference September 22, 2018
9/22/2018
10-2: Answer
No antecedent debt, so no preference
September 22, 2018

59. 10-3: Antecedent Debt, Preference
9/22/2018
10-3: Antecedent Debt, Preference
Debtor
Finco
2/1: $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)?
September 22, 2018

60. 10-3: Answer b(1): transfer to or for the benefit of a creditor
9/22/2018
10-3: Answer
b(1): transfer to or for the benefit of a creditor
Yes
b(2): on account of an antecedent debt
The 2/1 debt of $10K
b(3): made while the debtor was insolvent
Presumed insolvent for 90 days prior under 547(f)
September 22, 2018

61. 10-3: Answer b(4): for non-insiders, made within 90 days of filing
9/22/2018
10-3: 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
September 22, 2018

62. BC 547(e): Timing Transfers
9/22/2018
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

63. 9/22/2018
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.
September 22, 2018

64. 9/22/2018
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);
September 22, 2018

65. 9/22/2018
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.
September 22, 2018

66. 9/22/2018
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.
September 22, 2018

67. 10-6: Late Filings and Secured Creditors
9/22/2018
10-6: 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
September 22, 2018

68. 9/22/2018
10-6: 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
September 22, 2018

69. Late Filings, 551 and Junior Secured Creditors
9/22/2018
Late Filings, 551 and Junior Secured Creditors
Debtor
Finco
3/1: $5,000
SA, FS: Machine
1/1: $10,000
SA: Machine
3/10 Debtor files for bankruptcy
USC owed $10,000
2/15
FS: Machine
3/10 How should we divide the assets?
Machine: $10,000
Bank
September 22, 2018

70. Answer The Importance of 551 This is an avoidable senior lien case
9/22/2018
Answer
The Importance of 551
This is an avoidable senior lien case
Outside of bankruptcy, Bank would have priority over Finco
Avoided security interest isn’t destroyed; instead it is preserved for the benefit of the estate under 551
September 22, 2018

71. 9/22/2018
Answer
Result
Trustee takes security interest and can assert it to the full amount of Bank’s claim ($10,000)
Bank will be treated as an unsecured creditor
Finco’s junior security interest is out of the money
September 22, 2018

72. Answer Final Numbers Pro rata calculation under BC 726(b)
9/22/2018
Answer
Final Numbers
Pro rata calculation under BC 726(b)
Bank gets 2/5ths of $10,000, or $4,000
USC get the same
Finco gets 1/5th of $10,000, or $2,000
September 22, 2018

73. Don’t Do Absent 551 If avoidance of lien meant that it was destroyed …
9/22/2018
Don’t Do
Absent 551
If avoidance of lien meant that it was destroyed …
Finco would get first $5,000
We would do pro rata on remaining $5,000 with Bank as 10K usc, general USC at 10K, for $2,500 to the Bank and $2,500 to the USCs
September 22, 2018

74. Late Filings, 551 and Junior Secured Creditors
9/22/2018
Late Filings, 551 and Junior Secured Creditors
Debtor
Finco
3/1: $5,000
SA, FS: Machine
1/1: $10,000
SA: Machine
3/10 Debtor files for bankruptcy
USC owed $10,000
2/15
FS: Machine
3/10 How should we divide the assets?
Machine: $12,000
Bank
September 22, 2018

75. 9/22/2018
Answer
Result
Trustee takes security interest and can assert it to the full amount of Bank’s claim ($10,000)
Bank will be treated as an unsecured creditor
Finco’s junior security interest is in the money for $2,000
September 22, 2018

76. Answer Final Numbers Finco gets $2,000 as secured creditor
9/22/2018
Answer
Final Numbers
Finco gets $2,000 as secured creditor
Pro rata calculation under BC 726(b) as to $10,000 as unsecured creditors
Bank gets 10/23rds of $10,000, or $4,347.83
USC get the same
Finco gets 3/23rds of $10,000, or $1,304.38
September 22, 2018

77. Answer Final Numbers Finco total is then $3,304.38. September 22, 2018
9/22/2018
Answer
Final Numbers
Finco total is then $3,
September 22, 2018

78. 10-4: Payments to Fully Secured Creditors
9/22/2018
10-4: Payments to Fully Secured Creditors
Debtor
Finco
2/1: $10,000
SA: Machine
FS: Machine
4/2 Has Finco received a preference under 547(b)?
2/2
$10,000
Machine = $10,000
4/1: Debtor sells machine for $10,000
Gives money to Finco
Bank
4/2 Debtor files for bankruptcy
Assets = $5,000
September 22, 2018

79. 10-4: Answer Two transfers to Finco within preference period
9/22/2018
10-4: Answer
Two transfers to Finco within preference period
2/1 Transfer
This is 10-2, no problem
September 22, 2018

80. 10-4: Answer 4/1 Transfer b(1) to b(4): yes b(5)
9/22/2018
10-4: Answer
4/1 Transfer
b(1) to b(4): yes
b(5)
Prior security interest fully protects this payment
Would have collected $10K in bankruptcy
Better off?
September 22, 2018

81. 10-5: Synergies and Fully Secured Creditors
9/22/2018
10-5: Synergies and Fully Secured Creditors
Debtor
Finco
2/1: $10,000
SA: Machine 1
FS: Machine 1
4/2 Has Finco received a preference under 547(b)?
2/2
$10,000
Machine 1 = $10,000
Machine 2 = $5,000
Both = $17,000
4/2 Debtor files
for bankruptcy
Assets = Machine 2
Bank
4/1: Debtor sells Machine 1 for $10,000
Gives money to Finco
September 22, 2018

82. 9/22/2018
10-5: Answer
Answer
No preference issue, but note harm done to other creditors from sale of first machine
September 22, 2018

83. 10-7: New Property and Secured Creditors
9/22/2018
10-7: 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)?
September 22, 2018

84. 10-7: Answer Two Transfers 2/1 2/1 Transfer 2/12 Purchase of Equipment
9/22/2018
10-7: Answer
Two Transfers
2/1 Transfer
2/12 Purchase of Equipment
2/1
Fine
September 22, 2018

85. 9/22/2018
10-7: Answer
2/12
Under 547(e)(3), transfer takes place at time debtor acquires equipment
Problem ala 10-3
September 22, 2018

86. BC 547(c)(5): Two Point Net Improvement Test
9/22/2018
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,
September 22, 2018

87. BC 547(c)(5): Two Point Net Improvement Test
9/22/2018
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
September 22, 2018

88. BC 547(c)(5): Two Point Net Improvement Test
9/22/2018
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;
September 22, 2018

89. 10-8: Floating Collateral and Secured Creditors
9/22/2018
10-8: 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)?
September 22, 2018

90. 10-8: Answer Bottom Line Step by Step
9/22/2018
10-8: Answer
Bottom Line
No improvement in position, so one hopes no preference
547(c)(5) protects this
Step by Step
September 22, 2018

91. 10-8: Floating Collateral and Secured Creditors
9/22/2018
10-8: 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?
September 22, 2018

92. 10-8: Answer Bottom Line Step by Step
9/22/2018
10-8: Answer
Bottom Line
$2K improvement in position, so should be preference
Step by Step
September 22, 2018