Corporate Practice Series Portfolio No. 80-2nd, Protecting the Corporate Creditor Under the Bankruptcy Code, discusses the legal issues that corporate creditors must deal with when doing business with debtors who are in bankruptcy, or debtors who are considering filing for bankruptcy

Portfolio 80-2nd: Protecting the Corporate Creditor Under the Bankruptcy Code

I. Introduction

II. Overview of Federal Bankruptcy Law
    A. Introduction
    B. Parties in a Bankruptcy Case
         1. The debtor
         2. Creditors
         3. The bankruptcy court
         4. The U.S. trustee
         5. Committees
         6. The trustee
         7. Examiner or auditor
         8. Equity shareholders
    C. Jurisdiction of the Bankruptcy Courts
    D. Layout of the Bankruptcy Code and Forms of Relief
         1. Chapter 7
         2. Chapter 11
         3. Chapter 13
         4. Chapter 15
         5. Chapters 9 and 12
    E. The Bankruptcy Discharge and the Dischargeability of Claims
        1. Debtors eligible to receive a discharge
             a. Chapter 7 cases
              b. Chapter 11 cases
              c. Chapter 13 cases
         2. Debts eligible to be discharged
              a. Chapter 7 cases
              b. Chapter 11 cases
              c. Chapter 13 cases
         3. The real effect of a discharge
         4. Reaffirmation agreements
         5. Objections to discharge
    F. Who May Be a Debtor
    G. Commencement of a Bankruptcy Case
         1. The petition
         2. Voluntary cases
         3. Involuntary cases
         4. The good faith requirement
         5. Cases ancillary to a foreign proceeding
    H. Consolidation and Joint Administration
         1. Procedural consolidation
         2. Joint administration
         3. Substantive consolidation
         4. Effects of substantive consolidation on the rights of creditors
    I. The Estate and Property of the Estate
    J. The Automatic Stay
         1. Termination of the stay
         2. Relief from the stay
    K. Pre-Bankruptcy Transfers
         1. Preferences
              a. Definition of transfer
              b. Interest of the debtor in property
              c. To or for the benefit of a creditor
              d. For or on account of an antecedent debt
              e. Made while debtor was insolvent
              f. Presumption of insolvency
              g. Within the reach-back period
              h. Resulting in greater distribution than a hypothetical Chapter 7 distribution
         2. Practical considerations
         3. Statutory exemptions under §547(c)
         4. Fraudulent transfers and obligations
      L. Claims
         1. Attachment of a security interest
         2. Perfection of a security interest
         3. Priority of secured claims
         4. Satisfaction of secured claims
              a. Recovery of collateral
              b. Payment
    M. Jury Trials
    N. Conclusion
    
III. The Automatic Stay—§362     
    A. An Overview
    B. Scope of the Automatic Stay
         1. Who is protected by the stay?
         2. What actions are stayed?
              a. Litigation
              b. Enforcement of a judgment
              c. Acts to obtain possession of property of the estate
              d. Acts to create, perfect, or enforce a lien against property of the estate and against property of the debtor
              e. Acts to collect, assess, or recover claims against the debtor
              f. The setoff of debt
              g. Tax court proceedings
    C. Limitations on the Automatic Stay
         1. Criminal proceedings
              a. Bad check prosecutions
              b. Criminal sanctions
         2. Alimony, maintenance, or support
         3. Perfection of interest in property
         4. Actions under a governmental unit’s policy of regulatory power
         5. Setoffs in certain financial contracts
         6. Actions by securities self-regulatory organization
         7. Commencement of Housing and Urban Development foreclosures
         8. Issuance of tax deficiency notices, audits, demands for returns, and assessments
         9. Actions to obtain possession of nonresidential real property after lease terminates
         10. Actions to obtain possession of residential property
         11. Actions to enforce lien against real property
         12. Setoff by a governmental unit of an income tax refund
         13. Presentment and notice of dishonor of a negotiable instrument
         14. Actions respecting status, licensing, and participation in government funded loan programs of educational institutions
         15. Creation or perfection of statutory liens for ad valorem property taxes
         16. Other exceptions
    D. Pursuing and Protecting the Rights of the Secured Creditor—§362(d)
         1. Adequate protection
         2. Other means of relief
    E. Consequences of Violating the Automatic Stay—§ 362(k) 128
         1. Relief for the debtor
         2. Retroactive relief for the creditor who violated the stay
    F. Stay Under §105 of the Bankruptcy Code
    G. Conclusion
    H. Practitioner's Checklist

IV. Use, Sale, or Lease of Property
    A. Overview
         1. Summary of §363
         2. History of §363
    B. Use, Sale, or Lease of Property of the Estate Outside the Ordinary Course of Business
         1. Ordinary course of business
         2. Standard for court approval
         3. Other considerations
              a. Notice and opportunity for a hearing
              b. Notice: Procedural requirements
              c. Section 363 and antitrust review
              d. Sale or lease of personally identifiable information
    C. Cash Collateral
         1. Hearing procedure
         2. After-acquired property
         3. Profits from real property
         4. Equity considerations
    D. Sale Free and Clear of Interest in Property
         1. Permissible under applicable non-bankruptcy law
         2. Consent
         3. Sale price greater than aggregate value of liens
         4. Interest in bona fide dispute
         5. Entity could be compelled to accept money satisfaction
         6. Creditor protections
         7. Allocation of expenses
    E. Creditor’s Protections
    F. Conclusion
    G. Practitioner's Checklist

V. Obtaining Credit After Commencement of a Case
    A. Overview
         1. What is post-petition financing?
         2. Economic reasons for extending post-petition credit
              a. Financing by a pre-existing lender
              b. Financing by a new lender
              c. Introduction to §364
    B. Forms of Post-Petition Financing
         1. Section 364(a): Unsecured credit or indebtedness arising in the ordinary course of business
              a. Ordinary course of business
                   (1). Two-pronged test
                   (2). Actual and necessary test
              b. Priority
         2. Section 364(b): Unsecured credit or indebtedness arising outside the ordinary course of business
              a. Court approval required
              b. Financing must be for an appropriate purpose
              c. Priority
         3. Section 364(c): Special administrative expense status and secured credit
              a. Court approval required
              b. Terms of loan
                   (1). Section 364(c)(1)—unsecured credit with super- priority
                   (2). Section 364(c)(2) and (3)—financing secured by liens on unencumbered assets or junior liens on property subject to pre-petition liens
         4. Section 364(d): Credit secured by a superlien on previously encumbered property
              a. Adequate protection
                   (1). What constitutes adequate protection
                   (2). What is protected
                   (3). Who is entitled to adequate protection
         5. Procedure: ‘Notice and a hearing’
    C. Special Protections for and Risks to the Post-Petition Lender
         1. Financing order
         2. Effectiveness of financing orders and the safe harbor of §364(e)
         3. Exemption from securities laws in §364(f)
    D. Procedural and Other Considerations
         1. Court approval
         2. Cross-collateralization
         3. Conversion to a Chapter 7 case
    E. Conclusion
    F. Practitioner's Checklist
    
VI. Executory Contracts and Unexpired Leases
    . Introductory Material
    A. How Do Creditors Find Themselves Facing a §365 Situation?
    B. What Is an Executory Contract?
    C. True Lease or Financing Transaction
    D. Assumption or Rejection of an Executory Contract or Unexpired Lease
         1. Timing
         2. Standards governing the assumption-rejection choice
         3. Assumption
         4. Rejection
         5. Limitations on certain rejections of damage claims
    E. Assignment of an Assumed Executory Contract or Unexpired Lease
    F. Nonresidential Real Property Leases
         1. Timing
         2. Assumption
         3. Termination
    G. Special Topics on Executory Contracts
         1. Intellectual property licenses
         2. Another possible approach to assignment
         3. Multiple intertwined executory contracts and unexpired leases
    H. Conclusion
    I. Practitioner's Checklist

VII. Discharge and Dischargeability in Bankruptcy
    .Introductory Material
    A. Discharge and the Effect of Discharge
         1. Discharge under Chapter 7
              a. Debtor is not an ‘individual’
              b. Debtor has fraudulently transferred or concealed property
              c. Debtor has concealed or failed to maintain books and records
              d. Debtor committed a bankruptcy crime
              e. Debtor failed to explain a loss or deficiency
              f. Debtor refused to obey a lawful order, to answer a material question, or to testify
              g. Debtor committed misconduct with an insider
              h. Debtor had a previous discharge within applicable time period
              i. Debtor has waived discharge
              j. Debtor has failed to complete personal financial management course
              k. Debtor is subject to certain felony proceedings or may be liable for certain debts related to a violation of laws
         2. Discharge under Chapter 9
         3. Discharge under Chapter 11
         4. Discharge under Chapter 12
              a. Types of discharge under Chapter 12
              b. Effect of discharge under Chapter 12
              c. Confirmation of a Chapter 12 plan
         5. Discharge under Chapter 13
              a. Types of discharge under Chapter 13
              b. Effect of discharge under Chapter 13
              c. Confirmation of a Chapter 13 plan
    B. Objecting to the Dischargeability of Particular Debts
         1. What is a ‘debt’?
         2. Exceptions to the discharge
         3. Applying the §523 exceptions to discharge
    C. Procedure for Objecting to Discharge
         1. Objecting to a Chapter 7 discharge
         2. Revoking a Chapter 11 discharge
         3. Revoking a Chapter 12 discharge
         4. Revoking a Chapter 13 discharge
         5. Proceeding on the dischargeability of a debt
         6. The discharge hearing for an individual debtor
         7. Sanctions for unsuccessful prosecution of non-dischargeability claims
    D. Effects of a Discharge
         1. Personal liability
         2. Anti-discrimination effects
         3. Reaffirmation agreements
         4. Rights NOT affected by a discharge
    E. Conclusion
    F. Practitioner's Checklist

VIII. Creditors’ Claims in Bankruptcy and Related Topics
    A. What Is a Claim in a Bankruptcy Proceeding?
         1. Unliquidated, contingent, unmatured, and disputed claims
         2. Estimation of claims
         3. Pre-petition and post-petition debts
         4. Secured claims
         5. Unsecured claims
    B. Proof of Claim
         1. Time to file
              a. Excusable neglect
              b. Filing by debtor
              c. Amendments after the deadline to a timely filed proof of claim
              d. Conversion to Chapter 7
              e. Governmental claims
              f. Pre-petition claims
         2. Who should file a proof of claim?
    C. Allowance and Objection to Claims
    D. Order of Distribution
         1. Generally
         2. Priority claims
    E. Reclamation Claims
    F. Setoff and Recoupment
    G. Rights of a Utility
    H. Subordination of Claims
         1. Contractual subordination
         2. Subordination arising from sale or purchase of a security
         3. Equitable subordination
    I. Subrogation of Claims
    J. Trading in Claims
    K. Conclusion
    L. Practitioner's Checklist
    
IX. Substantive Consolidation
    . Introductory Material
    A. What Is Substantive Consolidation?
    B. Substantive Consolidation vs. Piercing of Corporate Veil
    C. Substantive Consolidation vs. Joint Administration
    D. Substantive Consolidation vs. Turnover
    E. Statutory Basis and Purpose of Substantive Consolidation
    F. Parties to Substantive Consolidation
    G. Effects of Substantive Consolidation on the Rights of the Creditors
    H. When Substantive Consolidation Is Appropriate
         1. The legal standard
              a. Substantial identity between the entities to be consolidated
              b. Whether the consolidation is necessary to avoid some harm or realize some benefit
         2. Substantive consolidation of debtor and non-debtor
    I. Litigating Substantive Consolidation
    J. Alternatives to Substantive Consolidation
        1. Intercompany settlements
        2. Stipulated asset allocations
    K. Conclusion
    L. Practitioner's Checklist

X. Preferences, Fraudulent Conveyances, and Other Avoidable Transfers
    . Introductory Material
    A. Preferences
         1. Overview
         2. The purpose of preference avoidance in bankruptcy
         3. The basic elements of a preference under §547(b)
              a. Intent is irrelevant
              b. Transfer of an interest of the debtor's property
                   (1). Definition of transfer
                   (2). Indirect and involuntary transfers
              c. Interest of the debtor in property
                   (1). Definition of property
                   (2). Property must belong to debtor
                   (3). Transfers by third parties
              d. To or for the benefit of a creditor
                   (1). Definition of creditor
                   (2). Guarantors, sureties, and endorsers
              e. For or on account of an antecedent debt
                   (1). Definition of antecedent debt
              f. Made while debtor was insolvent
                   (1). Definition of insolvent
                   (2). Presumption of insolvency
              g. Within the reach-back period
                   (1). 90 days prior to filing
                   (2). Insider creditor
              h. Resulting in greater distribution than a hypothetical Chapter 7 distribution
                   (1). ‘Greater percentage’ test
         4. Statutory exemptions under §547(c)
              a. Contemporaneous exchanges for new value
                   (1). Parties must have requisite intent
                   (2). Exchange must in fact be contemporaneous
              b. Payments in the ordinary course of business
                   (1). Elements of ‘ordinary course’ payments
                   (2). Payments on long-term debt
                   (3). ‘Ordinary business terms'
              c. Purchase money security interests
              d. Transfer for subsequent new value
              e. Perfected security interests in inventory and receivables
                   (1). Improvement in position test
              f. Statutory liens
              g. Alimony, maintenance, or support
              h. Consumer debtors
              i. Non-consumer debts
         5. Timing of transfer and perfection under §547(e)
              a. Date when transfer perfected against third parties
              b. ‘Perfection rule’ and transfers outside the 90-day period
                   (1). Checks
         6. Other essential statutory issues in preference avoidance
              a. Proper forum
              b. Standing to bring action to avoid a preference
    B. Fraudulent Transfers and Obligations
         1. Overview
              a. Relationship of UFCA and UFTA to the Bankruptcy Code
         2. Purpose and effect of fraudulent transfers in bankruptcy
         3. Elements of a fraudulent transfer under §548(a)
              a. Transfer of interest of the debtor in property
              b. Timing of the transfer
         4. Transfers made with actual fraudulent intent under §548(a)(1)(A)
              a. Requirement of actual intent
              b. Proving actual intent
              c. Insolvency irrelevant
         5. Constructively fraudulent intent under §548(a)(1)(B)
              a. Elements of constructively fraudulent conveyances
                   (1). Reasonably equivalent value
                   (2). Fair consideration
              b. Transfers by insolvents
              c. Transfers by debtors in business
              d. Transfers by debtors about to incur debt
              e. Transfers to insiders
                   (1). Under an employment contract
                   (2). Applicable under UFTA
         6. Liability of transferees
              a. Good-faith purchasers for value
                   (1). Generally protected
                   (2). Transferees giving less than a reasonable equivalent
              b. Initial and subsequent transferees
         7. Other essential statutory issues in fraudulent transfers
             a. Standing
              b. Statutory reach-back periods
    C. Other Avoidable Actions
         1. Pre-bankruptcy transfers
              a. Setoffs
              b. Transfers not timely recorded or perfected
              c. Landlords' liens
              d. Seller's reclamation and return rights 145
         2. Post-bankruptcy transfers
              a. Transfers unauthorized by the Bankruptcy Code or the bankruptcy court
              b. Transfers authorized by §303(f)
              c. Transfers authorized by §542(c)
    D. Conclusion
    E. Practitioner's Checklist

XI. The Chapter 11 Plan
    A. Introduction
    B. The Exclusivity Period
         1. Generally
         2. The exclusivity period at work
         3. Impairment of claims
    C. The Role of Committees
         1. Formation
         2. Powers and duties
    D. Contents of the Plan
         1. Generally
         2. Mandatory plan provisions
              a. Identification of classes of claims
              b. Unimpaired classes
              c. Impaired classes
              d. Equal treatment
              e. Adequate means of implementation
              f. Non-voting equity securities
              g. Selection of officers, directors, and trustees
              h. Future income of individual debtors
         3. Optional plan provisions
              a. Executory contracts and unexpired leases
              b. Settlement of claims
              c. Retention of claims
              d. Liquidation
              e. Modification of rights
              f. Additional provisions
                   (1). Acceptable additional provisions
                   (2). Unacceptable additional provisions
                   (3). Questionable additional provisions
    E. Securities Law Exemptions for Solicitations and Offerings
         1. Generally
         2. When is a disclosure statement required?
         3. Disclosure statement approval; solicitation exemption
         4. The offering exemptions under §1145
              a. Initial issuances of securities under a plan
              b. Successor and affiliate status
              c. Resales of plan securities
              d. Issuance of warrants and convertible securities under plans
              e. Rights offerings under §1145
         5. The disclosure statement
         6. Requirements for acceptance
         7. ‘Prenegotiated’ and ‘prepackaged’ bankruptcy plans
    F. Confirmation of the Plan
    G. The ‘Cram Down’ Method
         1. Unfair discrimination
         2. Fair and equitable treatment
    H. Modification and Revocation
         1. Plan modification
         2. Revoking the order confirming the plan
    I. Conclusion
    J. Practitioner's Checklist

XII. Understanding Certain Issues in Loan Transactions
    . Introductory Material
    A. Evaluating Credit Risks
         1. The Credit Circle
         2. Parties within the Credit Circle
    B. Enforceability of Guaranties
         1. Tests of solvency
              a. Balance sheet test
              b. Cash flow test
              c. Capitalization test
         2. Methodology for documenting borrower's financial condition
    C. Subordination
    D. Contract Provisions
         1. Covenants
         2. Default and remedy provisions
         3. Setoff rights and the insolvent borrower
    E. Usury Considerations
         1. Generally
         2. Civil usury in New York
         3. Criminal usury in New York
              a. The criminal usury statute as a defense in civil litigation in New York
              b. Usury issues with ‘Equity Kickers'
    F. Conclusion
    G. Practitioner's Checklist

XIII. Dealing with a Debtor Approaching Bankruptcy
    . Introductory Material
    A. The Fiduciary Duties of a Board of Directors
         1. Generally
         2. Fiduciary duties in a solvent company
         3. Fiduciary duties in a financially troubled company
              a. Determination of insolvency and vicinity of insolvency
              b. Standard of care in the insolvency/vicinity of insolvency context
         4. Fiduciary duties in Chapter 11
         5. Conclusion
    B. Planning with Pre-Bankruptcy Preventive Measures
         1. Ipso facto clauses
         2. Pre-bankruptcy waivers and agreements
         3. Structuring to minimize the bankruptcy of the debtor
    C. Protective Measures Against a Debtor Approaching Insolvency
         1. Generally
         2. Reclamation claims
         3. Perfecting the rights of a creditor
         4. Managing the preference exposure
    D. The Proactive Creditor
         1. Right of a creditor to enforce rights and remedies
         2. The pitfalls of lender liability and equitable subordination
              a. Generally
              b. Minimizing a creditor's exposure
         3. Joining the creditors' committee in a Chapter 11 case
    E. Conclusion
    F. Practitioner's Checklist    
 

Portfolio 80-2nd: Protecting the Corporate Creditor Under the Bankruptcy Code

Wks. 1 Title 11, Bankruptcy Table of Contents

Wks. 2 Federal Rules of Bankruptcy Procedure Table of Contents

Wks. 3 Official Bankruptcy Forms

Wks. 4 Director's Procedural Forms

Wks. 5 Voluntary Petition Form

Wks. 6 Involuntary Petition Form

Wks. 7 Proof of Claim Form

Wks. 8 Ballot for Accepting or Rejecting a Plan

Wks. 9 Sample Bylaws of the Official Committee of Unsecured Creditors of [Name of Debtor]f
 

Michael A. Adelstein
Greenberg Traurig, LLP
New York, New York

Allen G. Kadish
Greenberg Traurig, LLP
New York, New York