Chapter 11 Bkcy
Bkcy Ct J/D Basic j/d grant for bkcy cts is in 28 USC 1334: the
district courts shall have original but not exclusive j/d of all
civil proceedings arising under title 11, or arising in or related
to cases under title 11. Dist ct judges are Art III judges, bkcy
cts not Art III judges but Art I judges the district court in which
a case under title 11 is commenced or is pending shall have
exclusive j/d-- (1) of all the property, wherever located, of the
debtor as of the commencement of such case, and of property of the
estate; and (2) over all claims or causes of action that involve
construction of section 327 of title 11, United States Code, or
rules relating to disclosure requirements under section 327. Under
broad grant of j/d in 1334 is distinction b/w core matters &
related matters in 28 USC 157 Core matters - matters that arise
under the bkcy code & bkcy judge should rule on Related to
matters (non core) - parties can agree or object to bkcy judge
deciding on related matters Bkcy judge makes suggestion that goes
to dist ct for a determination on related matters General test for
related matter - matter has to have a conceivable effect on the
bkcy estate If not a core matter & not related matter, no bkcy
ct j/d to hear case Fed cts cts of limited j/d; have to trace their
authority to Art III of const Bkcy cts created pursuant to Art I of
const; 1st appeal from bkcy cts go up to dist ct Bkcy cts are units
of dist cts; bkcy petitions are, as a matter of law, filed in dist
cts & dist cts have general order of referral to send bkcy
cases to bkcy cts Bkcy judges appointed by circuit cts, but are a
division of dist cts Stern v. Marshall Facts - ANS filed bkcy in
CA, son in law sued her for defamation in bkcy ct & she filed
counterclaim against him Issue - does bkcy judge have power to sign
final order in this situation or only the power to make a
recommendation to dist ct for proposed judgment, which signs final
order Holding - bkcy ct's entry of final judgment on debtor's
counterclaim against creditor, though valid under 28 U.S.C. 157,
violated Art III of Fed Const Bkcy ct had statutory authority to
enter final judgment on counterclaim, but not const authority Bkcy
ct didnt have authority to enter a final judgment on a state law
counterclaim that is not resolved in the process of ruling on a
creditors proof of claim Rationale - While 157 purported to extend
bkcy j/d to any counterclaim by the debtor, the bkcy ct was not
established under art. III and was not subject to the const
assurances of independence which would allow adjudication of the
debtor's state common law claim. Resolving creditors claim wouldnt
necessarily resolve debtors counter claim & debtors claim was
otherwise unrelated to the claim-allowance process b/c of this,
bkcy ct lacked authority to enter final judgment on the
counterclaim; only Art III judge could Counterclaim to proof of
claim is a core matter thats supposed to be heard & decided by
bkcy ct SCOTUS said that even though its a core matter, bkcy ct
didnt have const authority to sign final judgment Doesnt matter if
something is inconvenient if it doesnt pass const
musterAlternatives to Chpt 11 Chpt 7 Biz Liquidation Biz get no
exemptions; all of its prop is subject to liquidation Biz get no
discharges; end of chpt 7 isnt that biz keeps going on after chpt
7, instead biz winds up under state law For biz, filing for chpt 7
means end of that biz/death of that biz Chpt 7 a lot more rare for
biz Sec 507 still governs payments to unsecured creditors; Priority
rules still apply in biz liquidation Involuntary Bkcy - Sec 303 -
If debtor has 3 or more creditors who have unsecured,
non-contingent, & non-disputed debt & over 14,425, those
creditors can force biz into bkcy If debtor has fewer than 12
creditors, than 1 creditor w/more than 14,425 claim can force
involuntary bkcy Would force debtor into bkcy if the situation is
getting worse & creditors are trying to stop the bleeding Bkcy
gets a better return than foreclosure b/c you can sell the entire
biz, which might be worth more than the value of the assets
individually; Can also wait a bit to sell assets, possibly getting
a higher return If someone has an unperfected security interest,
you could force a bkcy to prevent other party from perfecting the
security interest, making it a bigger pie for the unsecured
creditors If creditors file for involuntary bkcy, debtor can resist
bkcy, convert it to chpt 11, or go along w/bkcy If debtor opposes
bkcy, creditors have to prove that debtor isnt paying undisputed
debts as they come due Risk is that if creditor files involuntary
bkcy & ct decides it wasnt legit under 303(i), ct can require
creditor filing for involuntary bkcy to pay debtor's attny fees
& there could be sanctions if it was brought in bad faith While
involuntary bkcy is rare, it is important in negotiations Creditors
have leverage of credit default swaps; loans have provision that
something occurs if debtor files for bkcy, itll trigger econ
consequences Possible meanings for generally not paying debts as
they come due Bkcy code doesnt look at the balance sheet to see if
there are net positive assets, but whether you have the cash flow
to pay debts as they come due, not the ability to pay debts in the
future Could look at % of creditors not being paid on time or % of
total debt not being paid on time Could be that debtor is paying
all his debts, but making all the payments late If debtor is only
making partial payments on time, could not fall w/in paying debts
as they come due Does not paying critical vendors fall w/in not
paying debts as they become due? Once you figure out proper test
for j/d, how do you determine if they meet the standard for
involuntary bkcy? Credit report could be helpful, but might not
capture most up to date info; could be under inclusive Could ask to
see corps books to see what payments theyre making/what they owe,
but corp might say no Could try to contact other creditors to see
what debtor owes/what debtor is paying Could google debtor to find
out info about what debts it owes/what debts its paying Could sue
debtor/file for involuntary bkcy & conduct discovery to see if
theyre paying bills; high risk Sec 303(a) - can only bring
involuntary case under Chpt 11 or 7 & only against a person,
except a farmer, family farmer, or a corp that isnt a moneyed biz
or commercial corp, that may be a debtor under the chpt under which
such case is commenced; Person has to be an eligible debtor under
the chpt creditor uses Sec 101(20) -farmer someone who operated a
farming operation & got 80% of their income from that operation
Sec 101(21) - farming operation includes production or raising of
livestock & production of livestock products in an
unmanufactured state Sec 303(i) - permissive for ct to awards
costs/reasonable attny fees if improper involuntary bkcy filedIntro
to Chpt 11 Bkcy ct driven process Bkcy cases started w/petition
filed in fed bkcy ct; has basic info: entity name, rep, where HQ is
located, etc Difference b/w Chpt 11 & Chpt 7/13 While biz in
chpt 7 are not granted any discharge, biz can get a discharge after
chpt 11 In chpt 13, plan pays secured & preferred unsecure
debts in full & remaining unsecured creditors get % of their
claims paid over 3-5 yrs In chpt 13, if plan conforms to statutes,
then plan gets confirmed; dont need creditor approval In chpt 11,
creditors have to approve plan & no set time to make payments
In addition to creditors voting on plan, ct scrutinizes debtor's
conduct during course of bkcy No trustee appointed typically in
chpt 11, debtor in possession, DIP, continues operating biz under
watch of ct Price of chpt 11 much higher than price of chpt 13
bkcy; chpt 11 sufficiently complicated & worth it to litigate
issues in chpt 11 to preserve value of corp/claims that offsets
huge costs Debtors use chpt 11 to maximize value of assets &
get breathing room from creditors so they can trim bad assets,
employees, etc. to become a leaner, more efficient corp At end of
day, goal of chpt 11 filing is to get a reorg approved by ct &
creditors Venue for Chpt 11: (1) district where biz is incorporated
(most often delaware); (2) Principal place of biz, nerve center
(where are corp decisions made); (3) Principal place of assets; (4)
If affiliate entity is in the j/d, bkcy can be filed there (enron)
Over 80% of chpt 11 bkcy cases filed in Delaware & SD NY;
preferred venues for large chpt 11 filings 99% of the time, bkcy
dealing w/entities in financial distress Entities that file for
chpt 11 file for bkcy for 2 reasons causing financial distress
Operating problems - problems w/basic biz (ie biz model becomes
obsolete) Financial problems - biz model working, but corp takes
out too much debt or theres a credit crunch which causes corp to
run out of cash Could have, 1 the other or both Petition date -
date on which chpt 11 petition is filed to start the case (work
done well b/f petition date) Several motions have to be prepped to
be filed on 1st day Interim cash collateral, Interim debtor in
possession, Etc. Confirmation date - goal in chpt 11 is to get plan
confirmed Some debtors attnys try to get plan on file that they
know other parties will object to w/o negotiations w/other parties
Other parties will object, leading to negotiations & filing of
amended plan 1 Could lead to another creditor negotiating a deal
& amended plan 2 Last creditor could ask for a better deal than
other creditors got Depending on if law says creditors have to be
treated the same or one can be treated more favorably, could lead
to debtor deciding to go to ct or agreeing to favorable terms for
last creditor Rarely is the original plan thats filed the final one
that gets approved Plans can have most favored nation status;
debtor cant cut more favorable deal for other creditors unless most
favored creditor also gets that deal or most favored creditor will
object to new plan that benefits 2nd creditor more If plan is
confirmed over creditor objections, previous obligations are gone
& new plan acts as debtor's new Ks w/all of its creditors
Rejecting offer could lead to worse deal in a confirmed plan than
what was offered Types of reorg Balance sheet - reorg done on paper
as opposed to shifting operations; reorg purely financial, biz
operations remain the same Done by writing down debts or
eliminating them; might have good revenue stream, but not enough to
meet debt burden can be done by changing ownership of sections of
biz, selling off divisions/manufacturing lines so reorg'd biz is
smaller even if pieces survive under other corp names Change of
operations - wholesale reshuffling of debtor; use AS to
close/reduce money losing divisions, trim excess staff, refocus
product lines, etc In retail biz, often involves closing
unprofitable stores while improving those that remain In
manufacturing, could involve closing most out of date plants &
dropping peripheral lines Biz reorg in chpt 11 produces smaller,
leaner corp w/reduced debt burden able to concentrate on type of
biz it does well Key point - in either type of reorg, all or some
large part of biz is preserved as a going concern, not sold off
asset by asset Whole is greater than the sum of its parts
Liquidation - provides no advantage to debtor; basically death of
biz org No exemptions & no discharge from debt Advantages of
Chpt 11 Reorg Managers have commitment to keeping as many jobs for
employees as possible & avoid liquidation May feel theres a
good chance in the long run to save something for equity SH
Manager, who face termination of jobs in liquidation, have hope of
keeping jobs after chpt 11 reorg Also retain control of biz as long
as they can hold on, giving a chance to show they can manage
successfully Turn Around Mgmt Firms - if managers/officers are ones
who drove biz into chpt 11, can hire outside firms to come in &
manage biz to get it back on its feet Costs of Chpt 11 - Unlike
consumer bkcys, biz bkcys are often tailor made to individual biz
& are profoundly complex; means chpt 11 bkcy cost $ Need
attnys, accountants, appraisers, etc., all of which cost Also have
indirect cost in lost value in biz due to filing for bkcyMechanics
of Chpt 11 Debtor files chpt 11, 362(a) imposes AS & prop of
debtor becomes prop of BE DIP - after filing, debtor takes on new
legal persona of Debtor in possession - 1101 DIP retains
possession/control of BE prop & admins BE prop; DIP has many of
the same rights/obligations as TIB - 1107 Like TIB, DIP acts on
behalf of all creditors, not merely for itself (can attack
fraudulent conveyance that debtor couldnt) First Day Orders -
usually entered w/o notice or opportunity to be heard for many
stakeholders; can be obtained ex parte Often temporary orders, but
often difficult to alter rights/practices established in 1st day
orders later on Additional injunctive relief beyond AS Requirements
for operating reports Authorization to buy/sell outside ordinary
course of biz, authorization to pay employees wages due, &
other operating items Use of cash collateral & other matters
related to cash mgmt 364 - Approval of DIP financing arrangement
Employment of counsel for debtor & UCC Biz continues to operate
in ordinary course, 363(c), under DIP control DIP can operate biz
in ordinary course w/o ct approval of all routine transactions DIP
limited in use of its assets that are subject to security
agreements - 363(e) For big biz, usually turn around firms are
hired to get biz back on track Possibility secured creditors will
seek ct approval to lift AS as to their collateral unless DIP
provides adequate protection - 361, 362(d) Avoiding powers - DIP
has same powers as TIB to avoid pre petition trans Preferences 547
- payments/transfer of prop to favored creditors w/in 90 days of
filing Executory Ks/unexpired leases 365 - can assume/reject/assign
outstanding executory Ks or unexpired leases Fraudulent conveyances
544(b), 548 - can void fraudulent transfers 544(a), 547 - set aside
unperfected/late perfected security interests in debtors prop 542,
543 - require turnover of prop of debtor being held by another
entity Important powers, but threat of using them often helps DIP
in negotiating plan w/creditors UCC 1102 - unsecured creditors
committee; appointed to scrutinize debtors activities on behalf of
all creditors & negotiate w/debtor Plan - debtor will propose
plan of reorg in which itll offer to pay each class of creditors a
certain % of their claims over a stated period of time Payment can
be made in cash, prop, or securities issued by reorg'd debtor (ie
new stock) Disclosure Statement - plan accompanied by DS, which
provides info to creditors about prop, finances, etc of debtor so
that they can make an informed vote on whether to approve/reject
plan Plan & DS sent to creditors, after DS approved by ct after
notice & hearing, so that they can vote on plan 1129(a) -
requirements for plan confirmation; (a)(8) need all impaired
classes to vote to approve plan (a)(7) - every creditor who votes
against plan will get at least as much under plan as they would in
chpt 7 1141(d) - upon confirmation of plan, debtor is discharged
from all pre-petition debts, except as provided in plan In chpt 13,
dont receive discharge until payments under the plan are complete
& chpt 7 doesnt give biz any dischargeTools Chpt 11 Gives
Debtor creditors can file involuntary chpt 11 petition, 303(a),
which could lead to liquidation, 1123(b)(4), debtors have tools
that make creditors want to work things out AS provides debtor
breathing room to get affairs in order & cut unprofitable areas
of biz Debtor can propose a plan, which if adopted would legally
bind all creditors even if a minority reject it Debtor has
exclusive right to propose such a plan for 6 months or more
Turnover & Avoiding powers - can greatly augment assets
available & provide leverage over certain creditorsAnalysis of
Chpt 11 Negotiation Litigation delay - debtors want to get plan in
w/in 120 day exclusivity period, 1121(b) (can be extended) b/c
litigation is lengthy/costly process, debtors often willing to
negotiate to settle any outstanding lawsuits it might have or that
creditors have against it Litigation trust - Plan might call for
establishing escrow account of money/prop pending resolution of
litigation Plan might say that if case is won, prop goes to
creditor X, but if it loses, those proceeds go to the gen unsecured
pool Born of effort to confirm reorg plan quickly while continuing
litigation that might eventually yield assets for creditors Leaves
creditors w/o bottom line saying what they can expect to get in
bkcy; plan/DS will often say that if litigation is successful,
class X will receive Zc/$ but if the litigation fails, then they
only get Yc/$ DIP - exercising control over biz on behalf of the
biz itself, SH, creditors, employees, the community, etc. Cong has
indicated that DIP should be concerned about protecting interests
of a number of different constituencies of a biz following a
defaultNontraditional Chpt 11 Cases Auctions - sale of entire biz
through auction process; sales negotiated by attnys &
investment bankers Auctions almost always mean that SH get nothing
from plan Auction can be held pursuant to a confirmed plan, but
often isnt If not done under a confirmed plan, 363 allows sale
prior to any creditor vote & plan is simply mechanism for
authorizing the auction & distributing the proceeds Prepackaged
Plans - debtor negotiated b/f bkcy w/its creditors, but needs help
of BC to close the deal Eg - one large creditor refuses to accept
proposal; in bkcy it can be outvoted by other creditors & have
plan crammed down Under some local rules, these cases can proceed
w/far less public disclosure of info than in traditional chpt 11
plans May or may not be liquidating plansOther Types of Chpt 11
Cases Single Asset Real Estate (SARE) Cases - SARE defined in
101(51B); biz whose only real asset is a single piece of real
estate & income comes from that asset; no other substantial biz
operations done on prop Eg - running a apt complex/office building;
money comes from just collecting rent Typically 2 party fight b/w
debtor & main creditor (mortgage lender) Liquidation in Chpt 11
- often associated w/auction or prepackaged plans Chpt 11 provides
highly flexible approach to maximizing sale value of debtors
assets, especially if sold as a going concern b/c chpt 11 is a
negotiated resolution of debtors bkcy case, it allows more
flexibility in realizing & distributing value than fixed rules
of chpt 7 subject to TIB supervision
Players in Chpt 11 Bkcy Bkcy Code treats different types of
creditors differently; waterfall ranking Debtor in Possession 1101
- After filing for bkcy, its the entity that was a debtor that
holds the assets. 1107(a) - DIP for the most part performs same
functions as TIB; DIP both enjoys rights and must fulfill duties of
TIB Unsecured Creditors Committee 1102 - Made up of, generally, of
unsecured creditors & its appointed by US Trustee; most chpt 11
cases have a UCC. As a general rule, UST likes to appoint largest
unsecured creditor thats not an insider to the debtor to UCC1.
Reason to be on UCC is to look after interests of unsecured
creditors. As an official committee, UCC can engage its own counsel
& other professionals (paid for by bkcy estate)2. Allows for
unsecured creditors to have adequate rep in case w/o any individual
creditor having to pay for it. Being on UCC gives creditor
influence over the case; can be heard by bkcy judge. 1103(c)(5) a
comm appointed under 1102 may perform such other services as are in
the interest of those rep'd United States Trustee - Basic function
is to prevent fraud in the system; ensure that bkcy system works
the way its supposed to work. Function: Chooses UCC members; acts
like attny gen in bkcy; has right to be heard on any issue in bkcy
ct (can object/support motions, fees, etc.). BE has to pay
quarterly fees that go to pay for UST operation (based on revenue
being generated); judge cant approve plan unless debtor is current
on UST fees Equity Committee - when it is appointed, formed to look
after interests of owners/shareholders. NOT appointed in every
case; someone has to file motion to ask judge to create equity
committee. Judge looks to whether theres enough value above
unsecured debt so that equity shareholders would recover something.
Most cases, biz clearly insolvent (debts larger than asset values),
no good rational to have equity comm. Could have other types of
comms like bondholder comm or groups of types of creditors; Not
appointed in every case4. Purpose to have BE pay for professionals
(attnys & accountants). Have to show judge theres a special
need to have separate rep for this specific group Chpt 11 Trustee
1104 - Not appointed unless bkcy judge orders that a chpt 11
trustee be appointed. In most cases no chpt 11 trustee; debtor
remains in possession of its assets & has management rights. In
cases where theres evidence of fraud, mismanagement, depleting
assets, etc. & a motion is brought to bkcy ct, ct may appoint
chpt 11 trustee2. UST appoints chpt 11 trustee after ct directs
chpt 11 trustee be appointed. Essentially displaces management of
DIP; runs reorg of biz. Paid pursuant to statute out of BE; Chpt 11
trustee can hire attny, accountants, etc. that are paid out of BE.
1104(a)(1) - can appoint TIB for cause based on showing of fraud,
dishonestly, incompetence, gross mismgmt, or similar conduct by
DIP. 1104(a)(2) - bkcy ct can appoint TIB in the interests of BE or
its creditors based on factual assessment of whether doing so is in
the best interests of creditors6. Appointing TIB/other fiduciary to
each debtor would result in balkanization of decisionmaking for all
debtors, increasing costs & causing inefficiency - Adelphia
Chief Restructuring Officer (CRO) - Can be an individual or
entity/co.. Trend has been to appoint CROs for DIP to lead
restructuring efforts & negotiate w/creditors; acts as a buffer
b/w biz & legal teams1. Biz people who are skilled &
experienced at chpt 11; takes burden off management at chpt 11
debtor. Paid for by BE. CRO doesnt appear in BC; attny created
concept that judges accepted. For the most part selected by DIP's
board or on recommendation from DIP's counsel; sometimes creditors
demand having a CRO & will give DIP a list of candidates BE 541
- When bkcy is filed, mythical estate (legal fiction) is created;
BE takes possession of all applicable prop. 541(d) - BE comprised
of all legal or equitable interests of debtor in prop as of
commencement of case; Prop rights defined by state law1. In re
Scotia Pacific Co - commissions owed by debtor were prop of BE b/c
of debtor/creditor relationship & Scopac's interest in prop1.
Commissions paid to Scopac, who would then pay agent his share. BE
created to allow corps to reorganize, instead of liquidate, &
keep it running2. Lets management who ruined corp get 1st shot at
trying to fix corp & make it profitable again. Dont
automatically appoint a trustee whose sole job is to shut down corp
& liquidate3. Chpt 7 bkcy is pure liquidation bkcy; trustee
would be appointed. 1108 - Trustee or DIP is authorized to manage
prop of BE. 542(b) - Have to pay debts owed to debtor to TIB unless
debt can be offset under 553 Secured Creditors - At top of food
chain in bkcy; Not representing estate or unsecured creditors; rep
themselves. Pitted/adverse to UCC; secured creditors want
collateral for itself that UCC is trying to get for its
constituents. 506 - only have allowed secured claims to the extent
of the value of the collateral securing the loan; any deficiency is
treated as an unsecured claim2. Security interest can include
provision which says secured claim includes attny fees, would be
included in claim at confirmation meeting1. Can only get interest
& fees + value of debt up to value of prop at time of filing
for bkcy2. As a general rule, secured creditors get most of the
payments in bkcy & unsecured creditors get less cents on the
dollar & shareholders get next to nothing2. Bkcy judge makes
judicial determination (finding of fact) on value of collateral3.
Experts come in to testify about value of collateral; each of the
litigating parties can have its own expert Estate Professionals -
all paid out of BE. Counsel for debtor, Counsel for UCC, Counsel
for Chpt 11 Trustee, CRO, Accountants, Investment bankers, Counsel
for equity/other comms (if the judge approves the comms)
Compensation of professionals 330: In determining amount of
reasonable compensation to professionals, ct shall consider the
nautre, extent, and value of such services taking into account all
relevant factors including. Time spent on services. Rates charged
for services. Whether services were necessary to admin of, or
beneficial at the time services was rendered toward completion of
bkcy case. Whether services were performed w/in reasonable amount
of time, considering complexity, importance, & nature of
problem. Whether compensation is reasonable based on usual
compensation of similarly skilled professionals in other cases. 11
USC 102 authorizes award of compensation from BE to officers
(including attnys) who help administer BE. 11 USC 104 gives costs
incurred in connection w/admin of BE priority over other debts of
debtor. Compensation of Attnys in Bkcy - 12 Factors - In re First
Colonial Corp8. Time & labor required8. Novelty &
difficulty of the questions8. Skill required to perform the legal
service properly8. Preclusion of other employment by the attny b/c
he accepted the case8. Customary fee8. Whether the fee is fixed or
contingent8. Time limitations imposed by client/other
circumstances8. Amount involved & results obtained8. Attnys
dont get credit for what a case couldve gotten at trial if its
settled for less b/f hand1. Would force clients to pay for a
benefit they never receive8. Experience, rep, & ability of
attny8. Undesirability of the case8. Nature & length of
professional relationship w/client8. Awards in similar cases. Two
additional considerations in bkcy context - First Colonial9. Strong
policy of bkcy act that BE be administered as efficiently as
possible9. Peculiarities of bkcy practice which could lead to award
of duplicative fees or compensation for non legal services if
overlooked2. Ie award of ad interim allowances & possibility
that some officers of ct may be providing services to BE in more
than one capacity. Three step process to determining reasonable
attny fee - First Colonia10. Bkcy judge/dist ct ascertains nature
& extent of services provided by attny1. Each attny required to
file statement laying out # of hrs worked & how time was
spent10. Bkcy judge/dist ct assesses value of services2. No expert
opinion required, but can be allowed10. Determine amount of
compensation based on value of services & services provided3.
Bkcy judge has to explain his findings & reasons for granting
fees, including how factors were considered. 3 stages of attny in
chpt 11 - Universal Building Products11. Get employed by
debtor/UCC/etc,11. Get plan confirmed11. Get fees paid by applying
to ct to have it approve fees & then go to reorgd debtor to get
paid. Objecting to fees - In re Interlogic Trace Inc12. Facts - TIB
brought suit against accountant in state ct for neg, &
malpractice in connection w/Debtors chpt 11 case12. Holding -
granting attny fees & malpractice claims for same services
involve common nucleus of operative facts2. IT had enough general
awareness of claims to be brought against accountant that it
shouldve brought objections at fee hearing1. b/c it didnt, res
judicata will apply & TIB cant pursue malpractice claim12.
Rationale - central issue in both fee application & present CoA
was provision of accounting services during chpt 113. By granting
fees, bkcy ct implied it found that the services had quality &
provided value to BE3. TIBs malpractice claim involves the nature
of the services provided to BE that bkcy ct had granted fees for3.
IT had some questions about whether it go its moneys worth for some
of accountants services; sufficient to put them on notice to bring
objection/claim against accountant when it requested ct approval of
fees3. Fee hearing provided an opportunity for IT to present its
malpractice claims12. Nielsen Transactional Test - for res judicata
to apply, need4. Identical parties in both suits1. Res judicata
doesnt apply unless P could & should have brought malpractice
claim in earlier proceeding1. Factors: whether earlier proceeding
was adversary proceeding/contested matter, nexus b/w earlier
proceeding & claims now asserted, amount of time elapsed since
case began4. Prior judgment rendered by ct of competent j/d4. Final
judgment on the merits4. Same CoA must be involved in both cases.
Pro-snax (5th Cir) - rejected attnys fees b/c there was no benefit
to BE13. Some interpret this case to say attnys dont get paid
unless plan gets confirmed b/c if theres no approved plan, then
theres no benefit to the BE13. Pro-snax only 5th cir, other
circuits look at what attnys have done to see if at the time they
were providing services, was it reasonable to provide those
services at that time Disqualification of Professionals. 327(a) -
attny rep'ing BE in bkcy action must not hold or rep an interest
adverse to BE and must be disinterested1. doesnt indicate per se
ban or gen rule, but needs fact specific inquiry into parties'
interests & alignments1. Simply b/c potential for CoI exists
doesnt render appointment of counsel nugatory, but makes it
voidable as facts warrant. Disinterested 11 USC 103(13)(E): an
party is disinterested when he doesnt have an interest materially
adverse oto interest of BE or to any class of creditors or equity
security holders by reason any direct or indirect relationship to
debtor or for any other reason. 1103(b) - Comm counsel may not rep
an entity w/interest adverse to comm; Rep of a creditor in the case
isnt a per se disqualifying factor. In re WF Development Corp -
Where one attny reps both a ltd p & gen ps in bkcy, there will
ALWAYS be the potential for conflict & disqualification is
proper4. Rationale - in bkcy proceeding, limited & gen ps hold
interests adverse to each other b/c gen p's assets are at risk to
pay debtor's liabilities, where as ltd ps have limited liability
for pship obligations1. Dont need to hold full hearing on whether
theres a CoI in rep'ing ltd p & gen p in bkcy b/c potential for
conflict always exists in case like this. BR 2014(a) application of
any professional seeking retention by debtor or comm shall include
a verified statement of the persons to be employed5. Has to include
persons connections w/debtor, creditors, any other party in
interest, their attnys, accountants, the UST or any other person
employed by UST5. Inadequate disclosure can disqualify professional
from rep'ing BE, UCC, etc. - In re Universal Building Products2.
Defective disclose not a minor issue; goes to heart of bkcy
system2. Attnys violated professional codes of conduct soliciting
creditors for their proxies & then failed to disclose the
connections2. Failure to disclose connections under BR 2014 is
enough to warrant disqualification of counsel from employment3.
Subsequent disclosures not enough to cure original deficiencies. In
re Adelphia Communications Corp - as long as attny never acts
adversely to interest of any individual debtor, theres no problem
w/one attny rep'ing multiple debtors6. Facts - debtors filed for
chpt 11& rep'd by same attny & share some mgmt pros;
Creditor group opposed joint rep of debtors6. Holding - affirm bkcy
ct ruling on motions b/c debtors attnys have maintained lvl playing
field & relief requested by creditors would make matters worse
for all debtors2. Bkcy ct didnt abuse its discretion in finding
that, given lack of meaningful alternatives & dire consequences
associated w/imperiling the plan & sale, a balancing test tilts
in favor of continuing exclusivity6. Rationale - Attnys could
continue to provide info & attempt to facilitate settlement of
interdebtor/intercreditor disputes w/o publicly acting as an
advocate for any debtor3. Just b/c attny took actions creditors
oppose doesnt mean attny favored parent debtors over subsidiary
debtors; bkcy ct found that attny never acted adversely to interest
of any individual debtor1. Presence of intercorp claims b/w debtors
rep'd by same attny doesnt automatically warrant disqualification
of attny1. b/c of costs of hiring extra attnys/professionals, cts
take wait & see fact driven approach to determine if other
counsel is needed; if all debtors had to have their own counsel,
itd burden BEs w/unjustified & insurmountable costs Who can
bring motions/object 1109(b): a party in interest, include debtor,
T, or creditor comm, etc. may raise & may appear & be heard
on any issue in a case under this chpt Comm had standing under
1103(c)(5) &/or 1109(b) to sue on behalf of DIP/TIB - Louisiana
World Expo v. Fed Ins Co. Where TIB/DIP doesnt pursue CoA of BE,
comm may assert CoA on behalf & in name of DIP w/permission of
bkcy ct. Refusal to bring claim was unjust b/c it impaired
interests of BE & creditors. Since DIP has duties of TIB, it
must collect prop of BE & is accountable for all prop
received3. 11 USC 704(2), 1106(a)(1) - TIB/DIP has duty to maximize
the value of BE3. DIP/TIB has authority to bring action for dmgs on
behalf of debtor corp against corp principles for gross neg,
mismgmt, or breach of fiduciary duty where such action couldve been
asserted by debtor corp (or SH in derivative action) prior to
bkcy2. Under 704(1), DIP required to pursue CoA if itd be
beneficial to BE, but b/c of CoI on part of officers/directors of
corp, the DIP refused to bring CoA (basically wouldve been suing
themselves). Comm's CoA was prop of BE, so DIP was duty bound to
assert CoA if doing so would maximize value of BE. If DIP has CoI
in bringing CoA owned by BE, allowing creditor comm to bring claim
on DIPs behalf often beneficial to BE5. Less expensive & time
consuming than getting TIB to bring claims against DIP insiders
Requirements for creditor comm to sue: (1) Claim is colorable; (2)
DIP refused unjustifiably to pursue claim; & (3) Comm got
permission to sue from bkcy ct - LA World Expo. Creditors interests
in chpt 11 not protected when DIP fails to collect prop of BE
AS & Adequate Protection AS 362(a) - most immediate
advantage of bkcy to debtor; stops collection efforts against
debtor Threat of AS acts as strong incentive for secured creditors
to hold off foreclosure/repossession Stay lifting is difficult,
time consuming & expensive & unlikely to be accomplished in
early days of chpt 11 Debtor knows stay litigation will be filed
early on; ct must act on motion to lift AS w/in 30 days or its
deemed to be approved as to the requesting creditors collateral,
362(e) When creditor moves to lift AS, burden on DIP to prove
theres adequate protection - 362(g)Scope of the AS Comes into
effect automatically and instantly upon filing of chpt 11 petition,
362(a), and applies to large number of people who had no prior
notice/opportunity to contest AS Even actions taken in innocent
violation of AS, w/o notice of bkcy filing, are void/voidable
Secured creditors cant foreclose on collateral until end of case or
ct lifts the stay under 362(d) AS gives everyone a chance to review
assets/debts of debtor b/f reorg of biz; puts everyone on equal
playing field, no rush to take debtors assets If debtor has
arguable claim to an interest in prop, creditor has to stay action
against that prop - Chestnut v. Brown Facts - Cs wife bought prop
& made payments for a while, but stopped C filed for bkcy &
sent notice to mortgagee of bkcy, but mortgagee foreclosed on Cs
wifes prop anyways; They were in community prop state Holding -
mortgagee violated AS by foreclosing on prop b/c it was arguable
that C had interest in the prop Rationale - Since it was a
community prop state & prop mightve been bought w/community
assets, it was arguable that C had an interest in the prop even
though Cs wife bought it in her name & filed all the paper
work/made all the payments Determination of whether something is
prop of the BE is a legal issue for the ct to determine If theres
any question at all about whether prop is prop of BE, should go to
the judge to have him make a ruling Whether its prop of BE is
determined solely as a matter of state law 362(b) - exceptions to
AS that are narrowly construed P couldnt have unilaterally waived
AS against interest of creditors - Farm Credit of Central FL v.
Polk Prepetition agreements providing for the lifting of the AS
arent per se binding on the debtor AS protects BE prop, provide
temporary relief from creditors, & promote equality of
distribution among creditors Rationale - cts that have held
prepetition waivers of AS valid dealt w/single asset bkcy cases
where there was evidence of bad faith filing & no prospect for
successful reorg; not the case here Relief from AS MUST be
authorized by bkcy ct No other creditors were involved in
prepetition agreement nor did bkcy ct approve agreement In re Sky
Group Intl - granting a creditor relief from AS jst b/c debtor
elected to waive protection of AS ignores fact that AS is designed
to protect ALL creditors & treat them equally Primary
considerations for determining when non-debtor co-D may be granted
stay under 105 - Seitles (a) Irreparable harm and Interference
w/rehabilitative process; met when action against non-debtor co-D
is inextricably interwoven w/affairs of debtor that it would
substantially hinder debtors reorg effort (b) either (1) likelihood
of success on merits or (2) sufficiently serious questions going to
merits to make them a fair ground for litigation & balance of
hardships tipping toward party requesting prelim reliefLifting the
AS - 362(d) 11 USC 362(d) (362(a) imposes AS) - gives secured
creditor the ability to remove or modify AS Secured creditor filing
motion w/bkcy ct to remove/modify AS so it can foreclose/take other
action in regards to the collateral Two prongs of 362(d) Can seek
to lift AS for cause (cause not defined) Often creditor alleges
that its not adequately protected; can be as direct an argument
that the prop is not insured Could be argument that value is
decreasing b/c of physical harm/deterioration or mkt conditions;
should get compensation for decreasing value Alternative means to
lift the stay is to prove that there is no equity in the prop (debt
greater than value of prop, under collateralized) AND the prop is
not necessary for an effective reorg Just being under
collateralized alone wouldnt be enough Hard hurdle to overcome b/c
assets often necessary for reorg Adequate protection not an element
of 362(d)(2) analysis If you can prove debtor cant successfully
reorg, can get AS lifted Key to many stay lifting provisions is the
valuation of the asset In re Scotia Pacific Co - about single asset
real estate debtor, which have special rules for lifting AS Ct said
b/c Scopac conducted substantial biz on its prop, it wasnt a SARE
w/in meaning of 101(51B) 101(51B) - reqs for SARE Debtor must have
real prop constituting a single prop/project Prop generates
substantially all of GI of debtor To be SARE, revenues received by
owner must be passive in nature (ie receiving rent) No substantial
biz is conducted on prop other than biz of operating real prop
& activities incidental thereto Merima - SCOTUS said bkcy ct
had equitable power under sec 105 to prevent debtor from
transferring from chpt 13 when he was acting in bad faith, even
though plain language of the statute gave debtor power to make
transfer In re Rogers Development Corp Facts - R & B corps
developing real estate together; took out 520k loan & 360k line
of credit from H; went into default on both & filed for chpt 11
(had completed the construction) Owed H 548k at time of filing;
interest accruing at 63k/yr; prop appraised at b/w 700k & 800k
Holding - debtor may provide adequate protection through an equity
cushion as 361 is not an exclusive list Valuation approximating FMV
is the commercially reasonable standard required H adequately
protected by equity cushion even if prop is worth as little as 700
b/c their claim is only for 548k 362(d)(2) not available b/c ct
cant say that its not feasible for debtor to reorg & prop is
necessary for reog Rationale - Maintaining status quo isnt the
indubitable equivalent nor granting such other relief Equity
cushion can constitute adequate protection w/o moreAdequate
Protection - 361 3 nonexclusive means of providing adequate
protection: (1) periodic payments; (2) additional or replacement
lien; (3) catch all, allowing other means of adequate protection as
will result in the realization by such entity of the indubitable
equivalent of its interest in prop Equity cushion can, on its own,
serve as adequate protection as indubitable equivalent (In re
Rogers Development Corp) Problem when collateral depreciates at a
rate higher than principal is being paid off; at some point therell
no longer be an equity cushion & creditor would no longer be
adequately protected United Savings v. Timbers of Inwood - Pivotal
case about whats included w/in adequate protection Facts - apt
project being built; lender owed 4.3mil In hearing, lender was
trying to ask for adequate protection of collateral, bkcy judge
determined value of collateral didnt exceed 4.2mil Value of
collateral judicially determined to be less than amount of debt;
under secured debt, underwater debt SCOTUS - undersecured creditor
is not entitled to interest on collateral during the stay to assure
adequate protection under 11 USC 362(d)(1) opportunity costs
shouldnt be compensated under bkcy code Undersecured creditor
couldnt get interest payments for value of collateral for starting
after 6 month period b/f foreclosure could be completed Bkcy judge
judicially determined that value of prop was expected to increase
during pendency of bkcy Important determination w/regards to
whether theres adequate protection & what protection creditor
can get If value of prop is increasing, the undersecured creditor
is not entitled to any additional protection If value of prop had
been judicially determined to be decreasing, then undersecured
creditor would be entitled to compensation for difference b/w
present value as of date of petition & value at end of bkcy
Done to maintain undersecured creditors position throughout
pendency of bkcy If undersecured creditor cant be compensated at
end of bkcy for decrease in value of asset during bkcy, likely that
the plan wont be confirmedPayments while Chpt 11 is pending
Adequate protection challenges often look at how much debtor must
pay creditor during bkcy case If ct orders too high of a payment,
it might be more than debtor can handle, making reorg impossible
Nature of AP - can be equity cushion, additional liens, cash
payments, etc. AP payments sometimes confused w/interest payments
Under BC, ALL creditors add prepetition interest to their claims
based on the terms of their Ks - 502 Oversecured creditors are
entitled to postpetition interest while case is ongoing, 506(b),
but not undersecured/unsecured creditors, 502, 506(b) Oversecured
can get postpetition interest to extent of equity cushion Interest
to oversecured creditor doesnt necessarily have to be paid in cash
to creditor; bkcy ct can let interest accrue, but creditor still
entitled to include interest in his secured claim TH New Orleans LP
- if cash collateral payments reduce creditors claim so he becomes
oversecured b/f confirmation, valuation of collateral & claim
should be flexible & not limited to single point in time Party
who thinks its entitled to 506(b) post petition interest must
motion bkcy ct to make such determination & bears burden of
proving its entitled to post petition interest (ie its oversecured,
extent of equity cushion, & for how long its been oversecured)
If FSA thought it was entitled to postpetition interest, it had to
make a motion & bear burden of proof Secured creditors right to
post petition interest under 506(b) matures at point in time when
claim is oversecured Accrued interest under 506(b) isnt paid until
confirmation date or effective date of plan, whichever is later K
interest rate often an appropriate rate that adequately compensates
for risk & is a good estimate as to appropriate discount rate
Present Value of Claim - when plan is confirmed, secured creditors
are entitled to present value of their claim, unsecured claims
entitled to present value of what they wouldve gotten in chpt 7,
1129(a)(7) Creditor must be no worse off than hed have been in chpt
7 Undersecured - get value of total collateral at time of filing +
post confirmation interest (ie present value) on that amount +
payment for unsecured part of claim at rate unsecureds paid under
the plan; no post petition interest In re Oxford Mgmt - ct cant use
105 equitable powers to authorize payments of pre petition debts
from post petition funds w/o lifting AS or confirmation of plan
Bcky ct set up special scheme to pay pre petition debtors from post
petition funds based on sec 105 Ct said sec 105 did not give bkcy
ct roving equitable powers; 105 powers have to be exercised in
manner consistent w/BC, bkcy cts cant create substantive rights
that are otherwise unavailable under applicable law Need statutory
powers to do anything under bkcy code; ct cant just rely on
equitable powers from sec 105Good Faith for the most part, only
secured can seek lifting of AS Unsecureds best chance to get out of
chpt 11 is to get case converted to chpt 7; argue bkcy was filed in
bad faith 1112(b), can file motion to dismiss case for cause, ie
bad faith filing of chpt 11 petition, if its in best interests of
creditors & the estate 1112(b)(4) - for cause can include bad
faith filing SLG Carbon - filing just to get away from
litigation/force a settlement is not filing in good faith Need more
details to say that filing was in good faith; if corp is in good
financial situation but filing just to stop litigation, then thats
bad faith filing US is unusual in allowing solvent corps to file
for bkcy allowed b/c its difficult/expensive to prove insolvency
& requires valuing assets/liabilities Theres a benefit to
filing early b/f problems get out of hand Filing early preserves
value for benefit of equity owners In re SGL Carbon Corp Facts -
SGL investigated for price fixing w/potential liability of 240mil
& filed for chpt 11 Antitrust Ps only ones not to paid in full
under plan; would be barred from bringing claims against
SGL/affiliates based on CoAs against SGL Holding - biz doesnt have
to wait to file chpt 11 until after a massive tort judgment has
been entered against it Bkcy was filed in bad faith b/c SGLs
petition lacked a valid reorg purpose; it is subject to dismissal
for cause under 1112(b) Rationale - attenuated possibility that
corp might have to file bkcy in future not enough to establish good
faith SGL had 124mil in assets over liabilities & no evidence
it had difficulty in meeting its obligations as they came due nor
did it have trouble raising/borrowing money No customers terminated
their Ks w/SGL based on tort case In re PPI Enterprises - Filing
chpt 11 just to take advantage of rent cap in 502(b)(6) is not per
se bad faith filing
Right to Setoff - 553 553(a) - Except as otherwise provided in
362 & 363, bkcy code doesnt affect right to setoff a debt
arising b/f bkcy, except to the extent that Claim of creditor
against debtor is disallowed Claim was transferred by an entity
other than the debtor to creditor (1) After commencement of the
case OR (2) after 90 days b/f the filing of the petition &
while debtor was insolvent Debt owed to debtor by creditor was
incurred by creditor (1) After 90 days b/f filing; (2) while debtor
was insolvent; AND (3) for the purposes of obtaining a right of
setoff against the debtor BC recognizes right of any creditor to
offset a debt it owes to the debtor against a debt owed to the
creditor by the debtor, subject to some qualifications/limitations;
limits debtors access to its cash Enables creditor to obtain, in
effect, full payment of its claim up to amount of its debt to
debtor Especially important for banks; deposits w/bank
(checking/savings account) basically debts owed by bank to debtor
Not technically a security interest, although it has much the same
effect & is treated as one for most purposes under BC 506(a) -
creditor w/right to setoff is treated as secured for the amount of
its setoff right 363(c) - account subject to setoff is treated as
cash collateral & governed by rules for using cash collateral
362(a)(7) - creditor w/setoff right is subject to AS & may not
exercise setoff w/o permission of ct See Citizens Bank of MD v.
Strumpf - temporary admin hold pending application to lift AS to
exercise right to setoff didnt violate AS Still needed ct approval
to setoff w/o violating AS BC doesnt create right to setoff, merely
enforced rights that exist under nonbkcy law Nonbkcy law limits
right to setoff against special purpose accounts (ie escrow
account) If biz in trouble, bank cant reach into any special
purpose account to setoff debt owed by biz Citizens Bank of MD v.
Strumpf Facts - debtor filed for chpt 13 & MD bank, which
debtor had checking account w/, put admin hold on debtors account
b/c he was in default on prebkcy loan; setoff debt owed to bank by
placing hold on debtors checking account Bank refused to pay
withdrawals that would reduce account balance below amount needed
to pay back bank Bank filed motion for relief from AS & for
setoff; debtor filed motion to hold bank in contempt & for
violation of AS Holding - banks admin hold, refusing to pay
withdrawals from checking account that would reduce balance below
amount needed to pay back bank, didnt violate 362(a) AS Rationale -
(1) banks action wasnt a setoff w/in meaning of 362(a)(7) b/c:3.
(a) bank didnt purport permanently to reduce the checking account
balance by the loan amount3. (b) requirement of such intent was
implicit in the rule followed by a majority of j/ds addressing the
question & setoff hasnt occurred until theres2. A decision to
effectuate a setoff, some action accomplishing the setoff,
recording of the setoff3. (c) 542(b) & 553(a) generally allowed
the imposition of a setoff right that a creditor possessed b/f
filing3. Even if state law were different, whether a setoff has
occurred is a matter of fed law3. (d) reference in 553(a) to 362
was most naturally read as allowing 362(a)(7)s restriction upon
when an actual setoff might be effected3. (2) debtors contention
that admin hold violated AS rested on false premise that admin hold
had taken something from debtor or exercised dominion over debtors
prop3. Ct wont read 362(a)(3), (6) as proscribing what 542(b) and
553(a) were plainly intended to allow; temporary refusal of a
creditor to pay a debt thats subject to setoff against a debt owed
to debtor3. just b/c youre exercising control doesnt mean youre
exercising control for purposes of the AS7. Bank not holding
debtors money; bank account just represented a promise to pay the
debtor by the bank1. Refusal to pay was neither a taking of
possession of debtors prop nor exercising of control over it;
merely a refusal to perform its promise7. Dont interpret 362(a) to
proscribe what 542(b) & 553(a) are designed to allow; ie the
temporary refusal of a creditor to pay a debt that is subject ot
setoff against a debt owed by the debtor2. Cant setoff unless you
go to ct & file motion & get approval from ct. Strumpf
holding doesnt make sense b/c prop of BE expansive & doesnt
matter where its located or who holds it (11 USC 541)4. Would lead
banks to put admin freezes on accounts w/o calling it a
setoffOperating in Chpt 11Who's Running the Show? DIP retains
control of biz (BE) and continues running it; often creditors &
debtor focus on operation of biz as central concern of ongoing chpt
11 Amt paid to creditors in chpt 11 depends in large part on
success of biz in chpt 11 If disputes b/w debtor & creditors
get serious, creditors can try to convert case to chpt 7 or appoint
TIB to run biz In re Sharon Steel Corp Facts - SSC manufactures
steel; of 2 furnaces, most efficient one was shut down pending
18mil in repairs & the other was 3yrs overdue for relining
& was in trouble of imminent shutdown. SSC filed for chpt 11;
had 742mil in liabilities & 478mil in assets. UCC moved to
appoint TIB b/c debtor losing 2mil/month when steel prices were
rising & mgmt couldnt precisely measure losses as it had no
postpetition profit/loss statements2. Mgmt also didnt renegotiate
loan to more favorable interest rate which would save SSC 4mil/yr
Holding - b/c of mgmts mishandling of biz & potential CoIs, it
was appropriate to appoint TIB to run SSC Rationale - appointment
of TIB in chpt 11 the exception, not the rule. 1104(a)(2) - creates
flexible standard to appoint TIB when its for the interests of
creditors, equity security holders, & other interests of BE.
Evidence of mismgmt2. Paid 294mil to secureds & 9.8mil &
970k to execs when SSC lacked money to reline furnace & had to
borrow 30mil at 28-30% interest2. Just b/f filing, paid 3.7mil to
financial mgmt services biz, transferred yacht, plane & stock
to other parties & mgmt didnt try to undo any of these
transfers2. Appears that SSC mgmt engaged in systematic syphoning
off of assets on eve of bkcy Why creditors move to have TIB
appointed Sometimes creditors explicitly seek liquidation in chpt
11, which goes faster/smoother when entrenched mgmt is ousted
Dealings b/w creditor & mgmt become source of debtors troubles
Bad acts by mgmt doesnt always lead to appointment of TIB if mgmt
is essential to success of biz In re Rush - professional engineer
had Ks w/gov; had engaged in suspicious trans b/f bkcy. Gov &
creditors opposed appointing trustee b/c engineer was vital to
continued operation of biz Why allow Chpt 11 Liquidation? w/mgmt
running liquidation in chpt 11, likely theyll get better prices for
the assets & it avoids chpt 7 trustee fees 2005 Amendments
1104(e) - say that UST shall move for appointment of TIB if there
are reasonable grounds to suspect that current mgmt participated in
actual fraud, dishonesty, or crim conduct as they managed debtor or
made financial reports 1104(a)(3) - If theres reason to dismiss
case, ct may replace DIP w/TIB if such a move is in best interests
of BE. Ct already had this power under gen trustee appointment
provisions of 1104(a)(2) Why let old mgmt run biz as DIP? Often
they know the most about the biz & have greatest incentive to
succeed If biz not in scandal w/old mgmt, appointing TIB
unattractive to most cts but if biz is going to be sold off dept by
dept, unclear how important knowledge of biz is as a factor to keep
DIP in charge Appointment of examiner 1104(c) - middle option b/w
allowing DIP to run biz & appointing TIB Examiner investigates
affairs of debtor to: (1) identify pre bkcy fraud & mismgmt;
(2) discover CoAs that should be brought by BE; (3) monitoring DIPs
performance Creditors like examiner b/c it allows experienced &
knowledgeable mgmt to keep running biz, but creditors will have
someone keeping an eye on things Cts have assumed they can appoint
examiners to do wide range of things; assume that they can define
& limit examiners power pretty much as they choose. In re
Gliatech - ct treated examiner like special counsel appointed for
specific discrete job rather than to do investigations & make
recommendations like a TIB would
Cash Collateral Biz need $ to keep operations going while long
term plan of reorg is developed, but cong worried about giving DIPs
control over cash as its a volatile/easily transferred asset
Creditors whos loans are secured by inventory/accounts also worry
about DIPs use of cash that secures their loans 363(c)(1) - cash
not subject to lien can be used in ordinary course of biz w/o much
constraint Cash Collateral 363 - Cash subject to a lien (often b/c
its proceeds from sale of secured inventory or collection of
accounts, UCC Art 9) cant be used by DIP w/o permission of bkcy ct
363(a) - cash collateral means cash, negotiable instruments,
documents of title, securities, deposit accounts, or other cash
equivalents whenever acquired in which the estate and an entity
other than the estate have an interest and includes the proceeds,
products, offspring, rents, or profits of property and the fees,
charges, accounts or other payments for the use or occupancy of
rooms and other public facilities in hotels, motels, or other
lodging properties subject to a security interest as provided in
section 552(b) of this title, whether existing b/f or after the
commencement of a case under this title. Sec 552(a) - secured
parties cant have security interest in prop acquired after filing
of bkcy; no security interests in after acquired prop even if K
says that such an interest would be granted Exception is that
secured parties would have an interest in the proceeds from the
prop they had a security interest in Use of cash collateral - under
363, DIP cant use one dollar of a lenders cash collateral w/o one
of two things: 1) the lenders consent or 2) authority of bkcy ct
Bkcy judges, as required by bkcy code, safeguard cash & secured
creditors interests in cash very strenuously Can be found in
contempt of ct if debtor uses creditors cash collateral w/o
creditors consent or cts approval Use of cash collateral is done
most of the time by consent through agreed cash collateral order.
Has attached budget by line item saying how cash collateral will be
used in coming months1. If DIP doesnt follow line item budget from
cash collateral order, creditors can object to use of cash DIP can
use prop of BE in ordinary course of biz w/o ct approval, but rules
for cash collateral superimposed on this rule. Cash earned in
ordinary course of biz after filing bkcy still cash collateral
Critical vendors paid under line item in cash collateral order
& through critical vendor order Both in cash collateral &
DIP financing, approval from ct comes in 2 steps (DIP financing in
11 USC 364, Bkcy R. P. 4001) Preliminary hearing 1st; usually very
quick, can be 1st or 2nd day. Ct should only approve use of cash or
borrowing of money necessary to avoid any irreparable harm to
debtor1. Allows use of cash/borrowing of money for expenses that
are necessary 2nd hearing no sooner than 14 days after preliminary
hearing; gives other creditors chance to see if use of cash/terms
of loan are satisfactory Orders on cash collateral & DIP
financing are critical to case Orders can have clauses w/far
reaching implications (eg debtor wont propose a plan of reorg that
is not approved by DIP lender) DIPs might agree to such
orders/terms b/c it might be only source of funding/cash to get
through bkcy Often only source of funding is existing lender; if
DIP has no cash & needs to make payroll & continue to
operate, DIP doesnt have a lot of leverage In re Earth Lite Facts -
SB sought relief from AS & wanted to prevent EL from using its
cash collateral; SB prepetition creditor who had provided DIP
financing secured by inventory; EL had stopped making payments
under agreement Holding - debtor must prove creditor is adequately
protected w/o using crutch of 3rd party guarantees SB is more than
adequately protected if debtor resumes Ktual monthly payments &
cures default SB not entitled to injunction & EL can keep using
cash collateral to operate biz Rationale - whenever noncash
collateral is liquidated (ie inventory sold) the proceeds are cash
collateral so long as theyre subject to the original lien; DIP has
to provide adequate protection when using cash collateral Debtor,
b/f using cash collateral, cant rest on equity cushion alone; must
offer more b/f it can use cash collateral Debtor should be making
periodic payments to creditor for use of cash collateral; debtor
should be given opportunity to cure default from missed payment
Post Petition Financing (DIP Financing) - 364 Important for DIP
to say to creditor, customers, suppliers that it has a source of
financing to keep them from running away from corp in chpt 11
Often, a big part of DIP loan is said to be earmarked for critical
vendors & other ongoing corp expenses as well as reorg costs
DIP loan in almost every case is secured by a senior lien &
will have a term, the earlier of confirmation or whatevers
negotiated When DIP loan is due, its due & has to be paid When
DIP loan matures, AS could be lifted to allow DIP lender to
foreclose on prop w/in 2 weeks of start of case: DIP lender can
secure all of the assets DIP lender can get provisions in DIP order
that require its approval of plan DIP lender can get provisions
favorable to DIP lender & unfavorable to unsecured creditors
DIP financing order its not reviewable on appeal unless the DIP
financing order is stayed DIP financing/cash collateral order would
likely say its secured by pre petition & post petition asset
even though post petition assets generally not part of BE (unless
theyre derived from a pre petition asset) DIP lenders charge large
interest rates; can price out risk of making loan Not bad time to
lend b/c all of DIP's conduct is being scrutinized by ct; Will get
huge payoff when debtor reorgs Sec 364 - allows DIP to entice
lender post bkcy Can offer admin priority to lender under sec 507;
get paid b/f unsecured debtors 364(b) If thats not sufficient for
lender can (364(c)): (1) give a lien on any unecumbered prop; (2)
Give priority admin claim; or (3) Give junior lien on secured prop
Possible to displace 1st lien on secured prop & take a
superpriority lien on that prop 364(d). Only if DIP cant get any
other lending. Theres adequate protection for lien that was sr
& is being made jr 364(d) & Adequate Protection - First
South Savings Assn Facts - FS pre petition creditor secured by
unfinished hotel. Debtor wanted 2mil loan secured by a lien that
was superior (super priority) over FS' existing lien on building
Cant give super priority liens anywhere else in law except under
bkcy code w/bkcy ct approval. Can only give approval if existing
lender is adequately protected1. Need sufficient equity cushion in
pre petition collateral to cover pre petition debt & post
petition DIP loan1. Here, DIP lenders own expert said collateral
would leave FS exposed by 1mil1. Judges hesitant to impose super
priority lien over pre petition lien if theyre not entirely certain
theres enough equity in collateral to cover both pre & post
petition debts 5th Cir reversed super priority lien b/c there wasnt
adequate protection/sufficient equity in collateral Debtor can
offer adequate protection by offering to make cash payments or by
offering other collateral. dont have to just look at value of
existing collateral to determine if theres adequate protection, but
thats the start point Most important protection DIP can offer DIP
lenders is security interest in assets Prepetition security
interests secured by after acquired prop cease to operate instant
bkcy is filed 552(a) - prepetition security interests dont attach
to prop acquired by DIP after filing Proceeds Argument/Tracing -
Doesnt apply to cash collateral (ie new inventory bought w/proceeds
from selling prepetition inventory subject to security interest).
Creditor must be able to trace value in unbroken chain directly
from prop in which it held security interest to new prop New prop
created/bought by BE after filing doesnt automatically get secured
by lien of creditor w/after acquired prop clause; instead prop goes
to BE & reps interests of all creditors DIP can offer DIP
financers security interest in unencumbered prepetition prop &
new prop it acquires post petition In re Garland Corp Facts - GC
filed for bkcy & sought DIP financing & got 1.4mil in post
petition loans that were deemed priority costs of admin under
507(b) & had 1st encumbrance on all assets of debtor UCC
opposed further DIP financing of 500k Holding - record supports
finding that debtor urgently needed the money & it was
otherwise unavailable Ct may allow use of unencumbered assets to
secure DIP financing so long as it complies w/364(c)(2) Rationale -
despite short term operating losses, bkcy ct didnt err in finding
that debtor could be successfully reorg'd Hearing for 500k loan
showed debtor had tried & failed to obtain unsecured credit
Needed money to keep operating; 1300 employees told to call ahead
to see if plant would be open. Essential raw materials only
available on a cash on delivery basis & other trade creditors
wouldnt product needed materials w/o assurances of payment No
express statutory requirement that unsecureds be given adequate
protection. 364(c)(2) - no requirement for adequate protection in
respect to credit obtained under this provision In re Hubbard Power
& Light Facts - DIP sought financing by providing super
priority admin claim and a priming lien on all of debtors assets
& assignment of & first priority security interest in all
revenue debtor receives to lender needed funds to clean up fire so
biz could resume operations Debtor had no valuable prop except for
raw land; investment of 300k-400k would increase value of prop
Secured lenders/county w/lien on prop objected to DIP financing
Holding - since clean up which would improve value of land & is
a condition precedent of loan, county is adequately protected Grant
debtors motion to obtain sr priority financing under 364(d)
Rationale - county has little to no secured claim in land, any
improvement to real prop by way of clean up would improve county's
position & provide adequate protection Debtor cant get secured
lien on unencumbered prop b/c all of its prop is encumbered Cross
Collateralization - undersecured prepetition creditor agrees to
provide post petition financing in exchange for security interest
that covers post petition loan & undersecured portion of pre
petition debts Shapiro v. Saybrook Manufacturing Facts - SMC owed
MH 34mil prepetition that was only secured to 10mil; MH provided
DIP secured financing of 3mil & also received security for
24mil of previously undersecured loans Holding - 364(e) only
applies if challenged lien/priority was allowed under 364; cant
determine if appeal is moot b/f determining whether lien/priority
was allowed. Cross collateralization isnt allowed by BC &
shouldnt be allowed based on equitable powers1. its not authorized
as a method of post petition financing under 3641. its beyond the
scope of bkcy cts inherent equity powers b/c its directly contrary
to fundamental priority scheme of BC Rationale - 364(c), (d) - by
their terms only apply to future, post petition, extensions of
credit; dont authorize granting liens to secure pre petition loans.
Sec 105 equitable power isnt unlimited; 507 fixes priority of
claims & expenses against BE1. Creditors w/in given class are
to be treated equally & bkcy cts cant create their own rules of
super priority w/in a single class; cross collateralization does
exactly this. Rehab of debtor doesnt justify use of any means 11th
Cir rejected use of cross collateralization; There isnt a bright
line rule about cross collateralization in other circuits Saybrook
doesnt stand for idea that DIP lender cant secure loan for more
than its worth Case does stand for that DIP lender cant enhance its
position by making loan contingent on DIP increasing collateral to
secure pre-petition debt Mootness - stay of bkcy ct order is
required for certain orders (ie post petition financing) to be
appealed Moots the appeal of a DIP financing order; Saybrook crack
in 364(e) in 11th Cir b/c it said cross collateralization wasnt
allowed under 364(e) (extreme exception to 364(e) rule) If stay is
imposed, itll be hard for biz to operate; if its not imposed, then
itll be hard to undo the order if appeal is granted 364(e) -
designed to encourage post petition lenders by assuring them that
their rights will not be upset by an appeal of the order that gives
them security or priority unless it is stayed Helps prevent them
form being stuck w/high risk loan Party appealing financing order
must apply for a stay of the order & that party often required
to post a bond. Absent a stay, the lender is protected in its
security/priority even if app ct later decides the financing order
was ill advised/not allowed by BC Often means that action of bkcy
ct will never be subjected to an effective review In re First South
Savings - FSS showed likelihood of success on merits b/c its claim
on BE wasnt adequately protected; issued limited writ Rationale -
dont need to show probability of success on merits, just that youve
got a substantial case on the merits & balance of equities
weighs in favor of granting the stay. absent a stay pending appeal
the DIP financing would be allowed provided loan was made in good
faith & w/proper notice, thus thered be irreparable injury to
FSS if stay isnt granted. To get mandamus relief, SCOTUS requires
that moving party has no other adequate means to attain the relief
he seeks & must satisfy burden of showing that his right to
writ is clear & indisputable2. Standard for mandamus: remedy is
available only when theres clear & indisputable abuse of
discretion or usurpation of judicial power by trial ct criteria to
determine whether a stay pending appeal is appropriate (First South
Savings): whether movant has made a showing of likelihood of
success whether movant has made showing of irreparable injury if
stay isnt granted whether granting stay would substantially harm
other parties whether granting stay would serve public interest
Proper recourse for creditor opposed to use of DIP financing funds
is to get an order staying financing pending appeal - EDC Holding
Co Holding - where its evident from loan agreement itself that
trans has an intended effect that is improper under BC, the lender
is not in good faith. Lender acting in good faith isnt protected by
364(e); its irrelevant what the improper purpose is Facts - debtor
received DIP loan to pay wages (507(b)(3) priority claim) & UCC
objected to paying 77k in creditors attnys fees from loan Rationale
- bkcy ct order was never stayed under 364(e), thus if CMB was
acting in good faith when it lent 77k for attnys fees, its priority
couldnt be affected by the validity of the order & issue of
validity is moot. Union attnys fees not entitled to priority &
not entitled to be paid by BE prop; no allowance will be made to
creditors attny for proving his clients claim Owner Financing - old
equity holders can be a source of funds for debtor in chpt 11 In
return for investment, they often want ownership of post bkcy biz
APR - bkcy code follows rule that generally, equity interest
holders cant retain value unless all creditors have been paid in
full New value exception - when equity holders provide new value
that cant be obtained elsewhere to finance reorg, bkcy ct may
permit equity to retain ownership if its convinced that the bargain
is fair & creditors will benefit B of A v. LaSalle - old equity
holders cant just buy equity in biz as part of plan w/o giving
others a similar opportunity to bid In small biz, where owner is
basically the biz, creditors may accede to continued participation
by old equity as a practical matter Financing Goods/Services - BC
doesnt require suppliers to continue doing biz w/debtor after
filing, unless theres an enforceable executory K that debtor
assumes Normal supply Ks just series of orders, not a single
ongoing K Absent ongoing Ks, suppliers reluctant to extend further
credit despite fact that theyll have admin priority if they do -
503(b), 507(a)(1) Rule in bkcy that unsecured prepetition creditors
cant be paid except on pro rata basis Substantive consolidation -
Babcock v. Wilcox: having DIP financing w/multiple debtors doesnt
substantively consolidate the debtors bkcys even if theyre
procedurally consolidated
Critical Vendors Critical vendors get their pre petition debts
paid (not necessarily all at once) exception that says certain
unsecured suppliers, whos goods/services are crucial to debtors
biz, can be paid on prepetition debts as a condition of providing
future goods/services; typical critical vendor deal gets all of
their pre petition debt paid now & often is contingent of
providing trade credit Only debtor can ask for critical vendor
status If creditor sought critical vendor status, could be seen as
trying to collect AS b/c trying to collect pre petition debt
through critical vendor status Critical vendor status arises as a
corollary of the AS AS says no creditor/party can take action
against debtor after petition has filed & debtor cannot pay any
obligation that it owed as of the date of its petition Debtor
precluded from paying debtors that it owed money b/f petition b/c
bkcy wants creditors to be paid through reorg as equally as
possible under the rules. Dont want debtor favoring some creditors
over others. Also gives debtor breathing space b/c he wont have to
pay pre-petition debts No matter AS, can pay vendors for post
petition obligations (admin expense of BE); ie can pay vendors for
goods/services provided after the petition is filed If vendor tries
to condition delivery of post petition goods on payment of pre
petition debts, it would violate AS (unless approved as part of
bkcy plan/by judge) b/c creditor trying to collect on pre petition
debt; creditor could be sanctioned for violating AS If vendor tried
to charge more for post petition goods than pre petition goods
(assuming goods are unique/special), if no K b/w parties agreeing
on price from pre petition & higher price not going to offset
pre petition debt, then the creditor is likely not violating AS by
charging more Need linking conduct b/w post petition charges &
pre petition debts; if pre petition debt not being paid down, then
vendor likely ok if creditor uses part of higher price to reduce
pre petition debt, it would violate AS If debtor offers to pay for
post petition goods & additionally would ask ct to get approval
to pay pre petition debt owed to vendor, wouldnt violate AS If
creditor made same offer, could be seen as trying to collect on pre
petition debt & violation of AS 2005 Amendments 546(c) -
expanded trade creditors right of reclamation; if debtor receives
goods while insolvent & its w/in 45 days fo filing, seller may
have right to get goods back if it makes timely written demand
506(c) - reclamation works against debtor but not against secured
lender who claims the newly delivered prop as inventory. Blanket
security interest that covers inventory/after acquired prop will
continue to trump supplier, negating any right to reclaim goods
503(b)(9) - seller of goods received by debtor w/in 20 days b/f
filing gets automatic admin priority; right to 100% payment Could
cause admin chaos in figuring out who is entitled to what goods
& may operate to prejudice other creditors Make debtor even
more dependent on DIP loans as its soul source of financing b/c
they have to pay suppliers or lose inventory Increase risk that
fewer companies will be able to reorg 7th Cir - CV doctrine must be
narrowly limited to vendors who were demonstrated to be critical,
otherwise theyd have to wait to get paid on prepetition debts like
all other unsecureds In re Kmart - CRITICAL VENDORS Facts - Kmart
filed for bkcy & on 1st day sought permission to pay
immediately & in full pre petition claims of all critical
vendors; bkcy ct gave approval to pay 2300 CVs 300mil+ out of DIP
financing Other unsecured paid 10c/$ (mostly in stock of reorgd
Kmart); one creditor objected to CV order & dist ct reversed
order after payments had been made Holding - dont decide whether
363(b)(1) could be used to pay prepetition debts b/c CV order here
was unsound no matter how 363(b)(1) is read Record wasnt proper to
show preferential payment to CV creditors had a prospect of benefit
to other creditors CV order cant stand & preferential payments
can be recovered for benefit of all creditors Rationale - reversing
preferential payments is done by bkcy ct all the time & if
order to pay CVs was invalid, then CVs have received preferences
that Kmart is entitled to recoup for benefit of all creditors
Confirmation of plan doesnt stop admin of BE (except to extent plan
so provides) Equitable doctrines that prevent rescission of
transfers from DIP dont apply here; no detrimental reliance (ie in
providing DIP financing). Continuing to do biz w/debtor b/c of CV
payments may or may not be reliance, but it is not detrimental.
Might be different if debtor becomes insolvent during bkcy; then
CVs might be allowed to retain payments under CV order to extent of
post petition deficiencies No const obligation to make every
creditor a party to every contested matter in bkcy; since all CV
order said was Kmart could pay creditors it deemed CVs, only had to
name Kmart as a party in this action 363(b)(1) - TIB/DIP after
notice & hearing may use, sell, or lease, other than in
ordinary course of biz, prop of BE; paying CVs for pre petition
debts is a use of prop other than in ordinary course of biz.
Priorities dont change unless a statute allows for it Paying CVs
based on idea that theyll stop doing biz w/debtor if not paid for
pre petition debts. Some will keep doing biz w/debtor b/c they need
the biz or b/c theyre bound by long term Ks. makes it unnecessary
to compensate them preferentially for prepetition debts Dont need
to pay pre petition debts to assure creditors that debtor will pay
for new obligations. Can require payment of cash or its equivalent
for new deliveriesUse, Sale & Lease of BE Prop Sales from
Chapter 11 - more and more bizes are coming out of Chapter 11 in
sales; outside the ordinary course of biz 363(b) - TIB, after
notice/hearing, can sell/use/lease BE prop, other than in ordinary
course of biz To use/sell/lease prop outside ordinary course of
biz, file motion under 363 to all creditors who have secured
interest in the prop; once ct approves, can close the transaction
Two ends of the spectrum; a lot of room in between in determining
what is and is not ordinary course of biz. the 363 sale is located
in the early stage of the bkcy w/end goal of confirmation;
Stabilizing biz Which contracts to reject Claims are being filed
Negotiate w/the creditors. Hard to do a 363 sale outside of the
plan, especially when its essentially all of the debtors assets;
sale as a going concern b/f filing plan Can file a plan that
includes 363 sales of assets as part of the distribution of prop
try to figure out which assets to sell to get money in, which you
will need at confirmation date Build up as much a cash reserve so
theres enough cash to pay the administrative claims, making plan
feasible Sometimes selling the assets not b/c debtor wants to but
b/c it needs cash to build up the reserves. Proposed Sale of all of
the Assets in 363 subject to more ct scrutiny than sale of a few
assets 363(c) - if biz of debtor is authorized to be operated, TIB
may enter into trans, including sale/lease/use of BE prop, in
ordinary course of biz w/o notice/hearing Cant use/sell lease cash
collateral unless: gets consent of secured parites or gets ct
approval, after notice/hearing 363(k) - secured parties can credit
bid on sales of their collateral up to extent of allowed secured
claim (value of prop) Sales from Chapter 11 -more and more bizes
are coming out of Chapter 11 in sales. Outside the ordinary course
of biz. General rule, a company is authorized to operate the
ordinary course of biz w/o ct authority. File motion under section
363 to all creditors and those who have secured interest in the
property. Only then could you close the transaction. Two ends of
the spectrum. A lot of room in between in determining what is and
is not ordinary course of biz. Ordinary Course - whether the BoD
need to approve trans is one factor in deciding in whether it is in
the ordinary course Horizontal and vertical view of the transaction
- Take the view of the creditor's view secured creditor; must tell
them that you are going to use the secured collateral Want a ct
order b/c UCC/TIB (if there is one) could challenge the ordinary
course of biz & have ct say trans is invalid b/c there is no
authority to do so Make sure what authority you rely upon is good
authority to determine ordinary course of biz; look to what biz has
done day in and day out. Remember - Every time the debtor goes to
ct for approval, the BE is paying the UCC's pro fees as well as its
own out of BE prop (admin priority claims paid in full) In re Gulf
Coast Facts - debtor proposed selling essentially all BE prop in
363 sale outside ordinary course of biz Unsecureds would get
nothing from sale b/c secured credit bidding; no cash coming into
BE Holding - ct rejected proposed sale b/c it would deprive
creditors of protections that chpt 11 process provides File chpt 11
& try to sell biz in 363 sale instead of filing chpt 7 to
negotiate own deal/control asset/get best price 363(k) - generally,
in a 363 sale, secured creditor has the right to credit bid on
collateral securing claim to extent of allowed secured claim (ie
collaterals value, 506) 363 sale allows the secured creditor to
credit bid and there would be nothing left for the other liens to
attach to. Nothing would be coming into BE from sale except release
from liability for the secured claim. The biz would be sold free
and clear of all liens, claims and encumbrances, etc. Rule - the AS
is terminated when there is an agreed cash collateral order (as to
the BE prop subject to order) Different parties concerns in 363
sales UCC - was there adequate notice/marketing/fair value of sale
Were there competing bids/auction for sale; large auctions can help
drive up price for assets Debtor - gets cash now; mkt for asset
might be declining; buyer might impose time constraints &
revoke offer if its not accepted; sale could help biz continue by
providing cash for payroll; it could cost more to get asset through
a plan Couldve already tried to sell it to other people and failed
Secured creditor - get chance to credit bid up to allowed claim;
faster than foreclosure; decrease their risk by getting their claim
out of bkcy & get the asset; can take the asset, sell it, and
move on 363 sale Process debtor files the 363 motion creditors and
equity committee could file objections and then there is a hearing
b/f the judge and the debtor has the burden to establish the
reasons for the sale the biz justification Why it should proceed in
a 363 and not a plan or reorg if debtor can establish that it is
fair value and it has done some marketing, then they can take into
the account all of the factors in ruling on the motion for the
bkcy. Debtor file a motion to establish bid procedures in order to
conduct an auction for the sale of assets the bidders will submit a
memorandum and the bidders will have to provide a 5 percent cash
deposit and evidence of financial capabilities. Will have to show
the different procedures that they will use in making the 363 sale.
It has become fairly standard practice for large cases; not of it
is in the Code; motion for bid procedures and motion to sell the
second procedure. if the ct approves the bid procedures, it
alleviates the motion to sell bc you have had the auction and bid
and established market value and there is not much more to say at
the motion to sell hearing Emergency 363 sales - example was
immediate sale of GM no plan GM has helped change the perception of
the perception of the 363 salel If we can have a 363 sale of GM in
two weeks, then why not allow it in other cases. Chapter 11 plan of
liquidation -larger cases 363 sale and plan of liquidation and how
to distribute the proceeds and have voting on it and disclosure
statements and how to wind up the case Sometimes you sell the
assets and then move to dismiss the case and move to convert the
case to Chapter 7; move to convert the case is an automatic process
Section 363 sale denied - move to foreclose; secured creditors can
seek to foreclose if they can get bkcy ct to lift AS **RiverRoad
--1129 context; says you cant confirm a plan through cramdown on
secured creditor if it denies them the right to credit bid in
auction of collateral; just giving proceeds not enough to be
indubitable equivalent in this situation Where the plan is selling
prop through cramdown plan on secured, has to allow for them to
credit bid in 7th cir 5th cir - allowed plan to be confirmed that
crammed down w/o allowing credit bid when secured got proceeds of
sale b/c it was the indubitable equivalent of the secured claim
(money from sale = indubitable equivalent) while 363 is broad,
certain claims will not be shed; claims for personal injury from a
successor buyer, environmental claims, make it difficult to shed
these interest on these theories Two ways to sell property of BE:
Sale - transfer of assets for value, including provisions for
adequate protection. Rule - when the sale short circuits the
requirements of Chapter 11 by establishing the terms of the plan
secretly, when it includes unauthorized releases the transaction
cannot be authorized under section 363(b). It would alter
creditors' rights, dispose of assets, and release claims and
therefore cannot dispose of the crown jewel asset that might
restrict a future organization. Section 363 - Must be justified by
a Debtor - When an objector to a proposed transaction under 363(b)
claims that it is being denied certain protection bc approval is
sought pursuant to 363(b) instead of part of a reorg plan, the
objector must specify the protection sought. Factors that would
invalidate a 363(a) sale Will it dispose of all the claims against
the debtor? Will the transaction restrict the creditors' rights to
vote? The transaction did not dispose of virtually all of the
Cajun's assets, leaving little prospect or occasion for further
reorg. General Rule - A ct will authorize a sale of all or
substantially all of the debtor's assets under the Code and w/o a
plan or disclosure statement when the debtor can show that not
selling the assets would amount to a wasting of those assets. When
the debtor can establish that the assets were fairly marketed,
parties in interest were provided notice and the sale is in the
debtor's best interest. Those who like procedure/efficiencysee
363(b) sale as desirable bc they view them as maximizing creditor
recovery Traditionalists -see the dangers in the developments which
are driven by creditors in possession. Section 1123 - contents of
plan has to say how secured interests, BE prop, etc are going to be
dealt w/under the plan In re Trans World Airlines - 3d Cir. Issue -
whether or not the Ct can sell the assets or the property of the
estate free and clear of an interest in such property and b/c the
claims against TWA were connected to or arise from the assets sold.
Holding - Interests are not limited to in rem interest suggests
that they are interest in property w/in the meaning of 363(f) in
the sense that they arise form the property being sold Or else the
section would not deal w/situations in which there were things
other than the lien. Rationale - 363(f) - interest in property -
the trend seems to be toward a more expansive reading of interest
in property which encompasses other obligations that may flow from
ownership of the property. some cts have narrowly interpreted
interest in proeprty to mean in rem interests such as liens. Any
interest - is intended to refer to obligations that are connceted
to or arise from the property being sold. Monetary Satisfaction -
if the debtor had liquidated, then the claims at issue would have
received the distribution provided to other general unsecured
creditors on account of their claims. In the Matter of River Road
Hotel Partners, LLC It sets forth the criteria that a debtor's
Chapter 11 reorg plan must satisfy to be confirmed by a BC. Rule -
must be fair and equitable to have a cramdown plan, therefore sales
propose selling an encumbered asset free and clear of liens could
be confirmed so long as the debtor's asset sales complies w/section
363(k). Indubitable equivalent - what constitutes the indubitable
equivalent depends on the amount of the creditor's lein and the
current value of the secured asset Philadelphia Newspapers Issue -
what rights does a secured lender have when its collateral is sold
pursuant to section 1123(a)(5)(d). Cramdown1129(b) - provides
circumstances under which reorg plan can be confirmed over the
objection of secured creditors process referred to as a cramdown bc
the secured claims are reduced to the present value of the
collateral While the remainder of the debt becomes unsecured,
forcing the secured creditor to accept less than the full value of
its claim and thereby allowing the plan to be crammed down.
Transfer of assets w/the liens intact and deferred cash payments
equal to the present value of the lender's secured interest in the
collateral