determining a reasonable way to dispose of the particular kind of collateral. 2. Illustrative case: Chavers v. Frazier
a. Failure to procure the best price for collateral does not in and of itself make a sale commercially unreasonable. § 9-627(a). However, (1) the hasty sale for this type of equipment wasn’t reasonable, (2) The
advertising was not adequate, (3) A distress sale auction was not
reasonable, (4) Aircraft maintenance was not properly addressed prior to the sale, and (5) the purchase price was not reasonable.
3. Contrast Chaverz between judicial sale issues
a. Chavers court says that sixty days was a grossly inadequate time ofr advertising and marketing the aircraft, but judicial sale rarely allows that much time, even for complex collateral worth millions of dollars
b. Chavers court is disappointed in advertising that ran only briefly in the Wall Street Journal and Trade-a-Plane, but under judicial sale procedures,
the aircraft could have been sold in exactly the condition in which it was repossessed.
c. Chavers says that a “distress auction” was not reasonable, yet nearly every judicial sale is precisely that.
d. Chavers complains about the maintenance of the aircraft, but in a judicial sale, the aircraft could have been sold in exactly the condition in which it was repossessed.
e. Chavers court sets aside a sale for almost sixty percent of the fair market value, a price that would easily pass muster in most judicial sale
procedures.
4. The appropriate remedy for failure to five notice of sale or failure to conduct the sale in a commercially reasonable manner
a. Majority hold that there is a a rebuttable presumption that the value of the collateral was at least equal to the amount of the debt, with the
consequence that, if the consumer debtor objects, the court ends up determining what the sale price should have been.
b. Minority holds that any significant irregularity in the sale procedure is sufficient to deny the deficiency altogether – a view that relieves the court of the necessity to guess what the price would have been absent the defect.
XVII. Bankruptcy and the Automatic Stay a. Filing a Bankruptcy Case
i. You file a form
1. Chapter 7 – liquidation 2. Chapter 11 – Reorganization
3. Chapter 12 – Reorganization only for owners of family farms 4. Chapter 13 – Reorganization for individuals
ii. Bankruptcy Clerk stamps it: Two things happen
1. A bankruptcy estate is created (all of the property of the debtor)
2. Stay against any collection activities is automatically imposed. BC § 362(a), 541(a)
iii. Who is in control after the filing? 1. Under Chapter 7
a. The US Trustee appoints a trustee to administer the estate b. Trustee liquidates the estate
c. If the debtor is an individual, he can exempt certain property from the estate. Every individual debtor is entitled to keep the property of the bankruptcy estate that would have been exempt from creditors’ remedies on a judgment under state law. BC § 522(b)
d. After liquidation, trustee distributes money pro rata to general creditors i. If an individual, debts are discharged
ii. If a corporation, it is a corporate shell w/no assets that still owes its debts
2. Chapter 11, 12, or 13
a. Debtors are left in control of their own estates
b. Trustees are appointed (don’t take possession of property) to examine the debtors, review their repayment plans, receive payments from the debtors after their plans are confirmed by the court, distribute the money they receive to the appropriate creditors, and collect their fees.
c. Under Chapter 13
i. the debtor files a proposed budget, with a plan to devote all “disposable income” to the payment of the debt for at least three years. BC § 1325(b).
ii. The plan must also promise to pay creditors at least as much as they would have received in a Chapter 7 liquidation. BC § 1325(a)(5)
iii. Trustee examines the budget and appears at the court hearing to consider the confirmation of the plan. BC § 1302
iv. If the plan is confirmed, the trustee receives the payments form the debtor and distributes them pro rata to the general creditors over the life of the plan. The plan lasts from 3 to 5 years, and the debtor is discharged from most remaining debt when the last payment is made. BC § 1328
d. Under Chapter 12
i. Basically the same pattern e. Under Chapter 11
i. See p. 791 b. Stopping Creditor’s Collection Actions
i. Once the case is filed, the claims against the debtor are stayed, and you cannot violate the rules of a stay. You cannot pursue your debt.
ii. Court’s take stay violations VERY seriously. Thy usually hold deliberate violators in contempt of court and impose a fine sufficient to make them regret their transgression. In some circumstances, a party injured by the stay violation can sue for damages. BC § 362(h)
iii. While the stay is broad, it is not unlimited.
1. Only actions to collect pre-filing obligations are stayed. 2. Does not halt criminal proceedings against the debtor 3. Does not halt regulations from agencies
c. Lifting the stay for secured creditors
i. Bankruptcy proceedings permit each secured creditor the right to participate individually in the bankruptcy case rather tna forcing on them the collective treatment forced on the unsecured creditors.
ii. Grounds for lifting the stay are in BC § 362(d):
1. The stay must always be lifted if the trustee or the debtor does not provide the creditor with adequate protection. BC § 362(d)(1)
a. Adequate Protection is defined in § 361
b. A secured creditor’s interest is adequately protected when provisions that the court considers adequate have been made to protect the secured creditor from loss as a result of a decline tin the value of the secured creditor’s collateral during the time the creditor is immobilized by the automatic stay.
c. The court recognizes that a cushion of equity of sufficient size may alone adequately protect the secured creditor against loss
i. How large, depends on:
1. The nature of the factors that might change the value of the collateral
2. The volatitlity of the market in which the creditor might have to sell it, and
3. The rate at which the secured debt is likely to increase in amount
2. Or, the stay must be lifted if:
a. There is not equity in the collateral that the trustee or debtor might realize for unsecured creditors; and
b. The collateral is not necessary to an effective reorganization iii. Illustrative Case: In re Craddock-Terry Shoe Corp.
iv. Motions to lift the stay receive high priority: the stay is automatically terminated, unless within 30 days after a secured creditor moves to lift it, the court enters an order
XVIII. The treatment of Secured Creditors in Bankruptcy a. The vocabulary (the important ones at least)
i. Debts can be discharged in bankruptcy. A discharged debt still exists, but the discharge permanently enjoins the creditor from attempting to collect it. BC § 524(a)(2)
1. The discharged debt is then referred to as nonrecourse, meaning that it cannot be enforced against the debtor
2. Note the problems with not paying a nonrecourse secured debt on 807
ii. Under Article 9, Secured creditors have security interests, and unsecured creditors have liens. People with realty have mortgages.
iii. Bankruptcy Code groups Article 9 security interests together with real estate mortgages and deeds of trust under the term security interest. Then, the Code lumps security interests together with all other secured statuses, including judicial and statutory liens, under the term lien. §101(51),(37)
iv. A creditor’s claim is the amount of the debt owed to the creditor under nonbankruptcy law at the time the bankruptcy case is filed. BC § 101(5) and (12)
1. It is nearly always the amount of the claim that is important during bankruptcy, and afterwards it is the amount of the debt that is important
b. The Claims Process i. General
1. The bankruptcy system determines the § 502 amounts of all creditors’ claims – the amounts those creditors were owed under non-bankruptcy law as of the date of bankruptcy
2. Chapter 7: amounts are determined by selling the assets 3. Chapter 11: determined by negotiations or by the court ii. Early Process
1. Once bankruptcy is filed, the creditor files a proof of claim, describing the debt and stating that it remains outstanding. If nobody objects to the claim, it is deemed “allowed”
a. Claim is for the full amount of debt and fees if allowed. They are accelerated as a result of the bankruptcy filing. BC § 502(b)(1)
2. Chapter 11: Debtor must file a list of its creditors with the amounts owing to each. If the debtor schedules the debt correctly and doesn’t dispute it, the creditor
doesn’t even need to file a proof of claim.
3. If claim is questioned, it may go to dispute resolution process. If the ultimate resolution of a claim threatens to delay the bankruptcy case or distribution, the court can estimate the amount of a claim, allow it in the estimated amount, and proceed. BC § 502(c).
4. If the debtor outside bankruptcy had a legal defense to payment, the bankruptcy estate will have the same defense. BC § 558.
5. The BC gives some groups of unsecured creditor’s priority over others. SEE § 507(a).
iii. Calculating the amount of an unsecured claim
1. The amount of an unsecured claim in bankruptcy is essentially the amount owed on the debt under nonbankruptcy law as of the moment the bankruptcy petition is filed. BC § 502(b)
a. If the creditor’s contract provides for the debtor to pay the attorney’s fees of the creditor or to reimburse for other fees, those amounts are included in § 502(b), provided that they were incurred prior to the time the
bankruptcy was filed. § 502(b)(1). 2. Unsecured claims
a. Do not grow with interest
b. Traditionally, courts haven’t allowed unsecured creditorst to include postpetition attorneys’ fees in the amounts of their claims. However, some recent cases have if the contract originally provided for it. iv. Payment on Unsecured claims
1. The data from certain studies leads to two conclusions:
a. The fate of most unsecured creditors in bankruptcy is not a happy one. b. However, there are many cases in which unsecured creditors manage a
substantial if not full, recovery.
c. Sometimes, debtors with substantial assets, an allowed claim can yield substantial dividends.
v. Calculating the Amount of Secured Claims
1. First, you must bifurcate the claim as require under BC § 506(a)
a. The claim of a secured creditor can be a secured claim only to the extent of the value of the collateral. The remainder of the creditor’s claim is an unsecured claim.
2. Second, you must determine whether the creditor is entitled to accrue postpetition interest, attorneys’ fees, or costs on its claim.
a. § 506 says that they creditor can do so if, and only if: i. Attorneys’ fees and costs must be reasonable
ii. Payment of the attorneys’ fees and costs by the debtor must be provided for under the agreement under which the claim arose iii. Interest, attorneys’ fees, and costs can be accrued only to the extent
that the value of the collateral exceeds the amount of the claim secured by it. (If the claim is oversecured)
vi. Selling the collateral
1. When the trustee liquidates the property of the estate, the trustee ordinarily sells only debtors equity in property subject to a security interest, b/c that is all the state has succeeded to under the Bankruptcy Code § 541(a). Therefore, if there is a $10,000, the buyer takes the boat subject to the creditor’s lien
a. This terminates the automatic stay with respect to that item.
2. § 554(a) of the BC authorizes the trustee to abandon property of the estate that is burdensome or of inconsequential value to the estate. When this happens, the property ceases to be property of the estate and reverts back to the debtor. This terminates the automatic stay with respect to this property
3. Finally, under some circumstances, the trustee can sell the collateral “free and clear of liens” under § 363(f).
vii. Who pays the expenses of sale by the trustee?
1. Bankruptcy Code § 506(c) authorisez a trustee who has incurred “reasonable, necessary costs and expenses of preserving, or disposing of” property securing an allowed security claim to recover from the property.
2. The language limits the trustees right to deduct the proceeds “to the extent of any benefit to [the secured creditor.]” Thus, absent benefit to the secured creditor from the trustee’s expenditures, the trustee cannot deduct anything from the proceeds of sale.
3. The result is that a trustee’s sale of an under-secured creditor’s collateral will ordinarily benefit that creditor and be deducted from its recovery, but the trustee’s sale of property when the debt is sufficiently over-secured will not. Read 817-818. c. Chapter 11 and 13 reorganizations
i. The confirmation of a Chapter 11 plan discharges the old secured debts and payment schedules and substitutes new ones. BC § 1141(d)(1)(A)
1. The plan must specify that the creditor retain its lien under BC §
1129(b)(2)(A)(i)(I), but after confirmation, the lien secures only the new debt. The confirmation plan to which the creditor has not agree is referred to as a cramdown
ii. The statutory standards of cramdown:
1. Practically the same under Chapter 11 and 13 (Compare § 1129(b)(2)(A) and § 1325(a)(5)
2. Unless the secured Creditor accepts (agrees to its treatment under) the plan, the debtor must either:
a. Surrender the collateral to the secured creditor in satisfaction of the secured claim; or
i. Most debtors want to avoid this
b. Distribute to the creditor, on account of the secured claim, property with a value as of the effective date of the plan that is not less than the amount of the allowed secured claim
i. Nearly always the property here is a promise of future payment iii. Valuing future payments
1. Think of the time value of money ($1 will not buy what it will today tomorrow) 2. So, establish the present value, and then add on the market rate of interest, which
must be determined (it is difficult, there are lots of markets). a. Illustrative Case: In Re E.I Parks (p. 821)
XIX. Creation of Security Interests a. Formalities for Attachment
i. A Prototypical Secured Transaction 1. See pages 827-829
2. Pablo signs a financing statement on the form set forth in UCC 9-521
3. Bank sent the financing statement to the Secretary of State for filing in the filing system
a. Provides Public Notice
4. Bank also ordered a search of the UCC filing system for other financing statements filed against the person Pablo’s buying from
a. The bank wanted a security interest in the assets prior to all others; only through such a search would the bank know whether there were already other security interests in those assets
5. At closing, previous owner delivered a bill of sale for the restaurant property, an assignment of her rights under the lease, and the keys to the restaurant
6. Bank walked to courthouse where it recorded the assignment of mortgage and checked the records to make sure Stella had not conveyed an interest in it to anyone else since the date of the bank’s title search.
ii. Formalities for Article 9 Security Interests
1. UCC 9-203(b) lists three formalities for the creation of a security interest enforceable against the debtor:
a. Either the collateral must be in the possession of the secured creditor or the debtor must have “authenticated a security agreement which contains a description of the collateral”
b. Value must have been given
c. The debtor must have rights in the collateral
2. Only when these are accomplished does the security interest “attach” to the collateral and become enforceable against the debtor. UCC 9-203(a) & (b) iii. Possession or Authenticated Security Agreement
1. Article 9 ratifies two different kinds of security agreements
a. A Security agreement can be made effective by possession of the collateral
i. E.g. Pawnshops
ii. However, the most common arrangement is to rely on a written security arrangement and leave the debtor in possession of the collateral
b. Prototypical security transaction is based on a writing: i. Security Agreement, which contains:
1. Description of the Collateral
2. Description of the obligations secured 3. Provisions defining default
4. Specifying the rights of the secured creditor on default 5. Requires that the debtor care for the collateral and keep it
insured
ii. When the debtor has signed such an agreement, UCC 9-
203(b)(3)(A) requirement of an authenticated security agreement is fulfilled. UCC 9-102(a)(7)
c. Neither oral or written arrangement can also fulfill the requirement of UCC 9-203(b)(3)
i. This must be inscribed on a tangible medium in which it can be stored and from which it can be retrieved
1. Computer disk.
2. This is referred to as a record. 9-102(a)(69)
ii. To constitute a security agreement of the third kind, that record must be “authenticated” by “processing it” with the intention to identify the authenticator and “adopt or accept” the record. 9- 102(a)(7)(b)
2. In re Ace Lumber Supply, Inc.
a. The debtor signed a financing statement to be filed in the public records to put other creditors on notice, but the parties did not otherwise document the transaction. When the debtor later filed for bankruptcy, the secured creditor needed to prove that it had a valid security interest in order to have an allowed security claim. Held, under Montana Law the composite document rule is available to provide evidentiary support to create a security interest in collateral. That rule, however, does not allow only a financing statement signed by the debtor to satisfy 9-203(b)(3)(A) 3. Justification for the requirement of an authenticated security agreement:
a. Preventing Fraud b. Minimizing Litigation c. Cautioning Debtors d. Channeling Transactions e. Discouraging Secured Credit
4. The competing policy is expressed in the doctrine of equitable mortgages. Under that doctrine, the courts can enforce an oral security agreements where to do so would be “equitable.”
a. This is impliedly repudiated in the text of 9-203(b)(3)
5. Cases in which the security agreement did not contain a description of the collateral at the time it was authenticated have divided the courts.
iv. Value has been given
1. The drafters of the UCC defined “value” in 1-201(44) so broadly that the requirement is virtually always met in a commercial transaction
2. The definition of “value” used in Article 9 not only encompasses all forms of consideration that would support an ordinary contract, it even includes one form of consideration that does not pass muster in common law contracts: past
consideration.
a. 1-201(44)(b) provides that “a person gives value for rights if he acquires them . . . as security for . . . a pre-existing debt.”
v. Debtor has rights in the collateral
1. You can’t grant a security interest in someone else’s property. Three significant subtexts:
a. First, it is read to mean that if the debtor owns a limited interest in
property and grants a security interest in the property, the security interest will generally attach to only that limited interest.
b. Second, “owners” who acquired their rights in property by fraud have the power to transfer to bona fide purchasers ownership rights they themselves do not have.
c. Finally, you can transfer property to someone which you don’t have rights, and then if you eventually have rights in the collateral, then the security interest (only then) becomes enforceable.
vi. Formalities of Real Estate Mortgages 1. Differs from State to State
a. Most states require the mortgage be in writing and signed by the debtor in the presence of one or more witnesses
b. Some require acknowledgment as well, although most require that step only as a prerequisite to recording the mortgage
XX. Proceeds, Products, and other Value Tracing Concepts a. General
i. One way to assure that a security interest will follow the value is to include express language in the description of the collateral in the security agreement that covers all forms the value is likely to take
ii. A more practical solution is to employ value-tracing concepts – terms of art that indicate that in certain kinds of transformations of the collateral the security interest should follow