1. The University of Chicago
2/22/2019
Class 26 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. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. February 22, 2019
Boston Generating Intercreditor Agreement

42. Table of Contents February 22, 2019
Boston Generating Intercreditor Agreement

43. Table of Contents February 22, 2019
Boston Generating Intercreditor Agreement

44. Table of Contents February 22, 2019
Boston Generating Intercreditor Agreement

45. Table of Contents February 22, 2019
Boston Generating Intercreditor Agreement

46. Table of Contents February 22, 2019
Boston Generating Intercreditor Agreement

47. Table of Contents February 22, 2019
Boston Generating Intercreditor Agreement

48. Collateral Agents February 22, 2019
Boston Generating Intercreditor Agreement

49. Layers of Debt February 22, 2019
Boston Generating Intercreditor Agreement

50. Creation of SIs February 22, 2019
Boston Generating Intercreditor Agreement

51. Creation of SIs February 22, 2019
Boston Generating Intercreditor Agreement

52. Lien Priorities: Two Liens
February 22, 2019
Boston Generating Intercreditor Agreement

53. Lien Priorities: Separate Bankruptcy Classification
February 22, 2019
Boston Generating Intercreditor Agreement

54. Lien Priorities: Notwithstanding Everything
February 22, 2019
Boston Generating Intercreditor Agreement

55. Lien Priorities: First is Senior
February 22, 2019
Boston Generating Intercreditor Agreement

56. Lien Priorities: Second is Junior
February 22, 2019
Boston Generating Intercreditor Agreement

57. 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

58. 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

59. 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

60. Enforcement: Seconds Blocked
February 22, 2019
Boston Generating Intercreditor Agreement

61. Firsts Rights to Act as to Collateral Without Consultation or Consent of Seconds
February 22, 2019
Boston Generating Intercreditor Agreement

62. Seconds Can’t Get Collateral
February 22, 2019
Boston Generating Intercreditor Agreement

63. Seconds Can’t Interfere With Exercise of Remedies by Firsts
February 22, 2019
Boston Generating Intercreditor Agreement

64. Nonetheless … February 22, 2019
Boston Generating Intercreditor Agreement

65. Nonetheless … February 22, 2019
Boston Generating Intercreditor Agreement

66. Nonetheless … February 22, 2019
Boston Generating Intercreditor Agreement

67. Boston Generating (Bankr. SDNY 2010)
Key Questions
Is this an exercise of remedies by the Firsts?
They say no.
????
February 22, 2019

68. 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

69. 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