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Secured TransactionsAssignment 27
Priority Under Bankruptcy Law
2
The Big Picture
Part Two: The Creditor Third Party Relationship
Chapter 6-7: Perfection
Chapter 8: Concept of Priority
Assignment 26: Priority Under State Law
Assignment 27: Priority Under Bankruptcy Law
Chapter 9: Specific Priority Rules
3
State vs. Bankruptcy Protections
State Protections (26) Bankruptcy Protections (27)
4
State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
Bankruptcy Protections (27)
5
State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
6
State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
2. Debtor can’t dislodge secured creditor without payment in full
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
7
State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
2. Debtor can’t dislodge secured creditor without payment in full
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
2. DIP can force sale under §363(f)
8
State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
2. Debtor can’t dislodge secured creditor without payment in full
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
2. DIP can force sale under §363(f) and DIP can grant prior lien under §364(d)
9
State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
2. Debtor can’t dislodge secured creditor without payment in full
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
2. DIP can force sale under §363(f) and DIP can grant prior lien under §364(d)
10
State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
2. Debtor can’t dislodge secured creditor without payment in full
3. Prior perfected secured creditor is entitled to possession, Grocers Supply.
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
2. DIP can force sale under §363(f) and DIP can grant prior lien under §364(d)
11
State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
2. Debtor can’t dislodge secured creditor without payment in full
3. Prior perfected secured creditor is entitled to possession, Grocers Supply.
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
2. DIP can force sale under §363(f) and DIP can grant prior lien under §364(d)
3. DIP may use the collateral, §363
12
Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
13
Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
14
Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
15
Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
16
Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
17
Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
18
Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
19
Bankruptcy Code §364(d)
(d)(1) The court . . . may authorize the obtaining of credit or the incurring of debt secured by a senior . . . lien on property of the estate that is subject to a lien
20
Bankruptcy Code §364(d)
(d)(1) The court . . . may authorize the obtaining of credit or the incurring of debt secured by a senior . . . lien on property of the estate that is subject to a lien only if –
(A) The trustee is unable to obtain such credit otherwise; and
21
Bankruptcy Code §364(d)
(d)(1) The court . . . may authorize the obtaining of credit or the incurring of debt secured by a senior . . . lien on property of the estate that is subject to a lien only if –
(A) The trustee is unable to obtain such credit otherwise; and
22
Bankruptcy Code §364(d)
(d)(1) The court . . . may authorize the obtaining of credit or the incurring of debt secured by a senior . . . lien on property of the estate that is subject to a lien only if –
(A) The trustee is unable to obtain such credit otherwise; and
(B) There is adequate protection of the interest of the holder of the [already existing] lien
23
Problem 27.1, page 460
The Chapter 7 trustee is selling problem 26.1 property free and clear of liens
17K
10K
29K
25K
$200 sale expense
24
Problem 27.1, page 460
The Chapter 7 trustee is selling problem 26.1 property free and clear of liens
How much should Kinski bid?
17K
10K
29K
25K
$200 sale expense
25
Problem 27.1, page 460
17K
10K
29K
Before After
25K 25K
$200 sale expense
The Chapter 7 trustee is selling problem 26.1 property free and clear of liens
How much should Kinski bid? $25K
26
Problem 27.1, page 460
17K
10K
29K
Before After
25K 25K
$200 sale expense
The Chapter 7 trustee is selling problem 26.1 property free and clear of liens
How much should Kinski bid? $25K
Expenses of sale?
27
Problem 27.1, page 460
17K
10K
29K
Before After
25K 25K
$200 sale expense
The Chapter 7 trustee is selling problem 26.1 property free and clear of liens
How much should Kinski bid? $25K
Expenses of sale? Paid from proceeds
28
Problem 27.2, page 460
First lien, $1.1 million; second lien $800,000
1.1M
800K
29
Problem 27.2, page 460
First lien, $1.1 million; second lien $800,000
Former value $3 million.
1.1M
800K
30
Problem 27.2, page 460
1.1M1M
800K
First lien, $1.1 million; second lien $800,000
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
31
Problem 27.2, page 460
First lien, $1.1 million; second lien $800,000
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First. 1.1M1M
800K
32
Problem 27.2, page 460
First lien, $1.1 million; second lien $800,000
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First. Both liens are extinguished.
1M
33
Problem 27.2, page 460
First lien, $1.1 million; second lien $800,000
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First. Both liens are extinguished.
Can Bank prevent the sale?
1.1M1M
800K
34
Problem 27.2, page 460
First lien, $1.1 million; second lien $800,000
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First. Both liens are extinguished.
Can Bank prevent the sale?
Objection: “No grounds under §363(f)”
1.1M1M
800K
35
What are the grounds for this sale?
(f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
36
What are the grounds for this sale?
(f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
37
What are the grounds for this sale?
(f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if . . .
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property
38
What are the grounds for this sale?
(f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property
1.1M1M
800K
39
What are the grounds for this sale?
(f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property
What is the “aggregate value of all liens”on this property?
1.1M1M
800K
40
What are the grounds for this sale?
(f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property
What is the “aggregate value of all liens”on this property?
$1.9 million?
1.1M1M
800K
41
What are the grounds for this sale?
(f) The trustee may sell property . . . free and clear of any interest in such property of an entity . . . only if –
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property
What is the “aggregate value of all liens”on this property?
$1.9 million?
$1 million? Oneida Lake 1.1M1M
800K
42
Problem 27.2, page 460
First lien, $1.1 million; second lien $800 thousand
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First
Can Bank prevent the sale?
Objection: “No grounds under §363(f)”
Assume the objection fails. Bank expects a future value of $3 million. What should Bank do if the sale goes forward? Bid at the sale, §363(k)
1.1M1M
800K
43
Problem 27.2, page 460
First lien, $1.1 million; second lien $800 thousand
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First
Can Bank prevent the sale?
Objection: “No grounds under §363(f)”
Assume the objection fails. Bank expects a future value of $3 million. What should Bank do if the sale goes forward? Bid at the sale, §363(k)
1.1M1M
800K
44
Problem 27.3, page 461
We represent debtor seeking to finance completion of office complex
45
Problem 27.3, page 461
Now
4M
1M
2M
We represent debtor seeking to finance completion of office complex
46
Problem 27.3, page 461
Now
4M
1M
2M
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
47
Problem 27.3, page 461
Now
4M
1M
2M
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M
48
Problem 27.3, page 461
Now Complete
4M
1M
2M
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M
4M
1M4M
49
Problem 27.3, page 461
Now Complete
4M
1M
2M
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M
4M
1M4M
How do we get the money to finish it?
50
Problem 27.3, page 461
Now Complete
4M
1M
2M
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M
4M
1M4M
How do we get the money to finish it?
File bankruptcy.
51
Problem 27.3, page 461
Bky Complete
2M
1M
2M
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M
4M
How do we get the money to finish it?
File bankruptcy. Bifurcate $4M claim.
2M
2M
52
Problem 27.3, page 461
Bky Complete
2M
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M
4M
1.5M
How do we get the money to finish it?
File bankruptcy. Bifurcate $4M claim.
Borrow $1.5 million; grant a first lien under §364(d)
1M
2M
2M
2M
53
Problem 27.3, page 461
Complete
1M
2M
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M
4M
1.5M
How do we get the money to finish it?
File bankruptcy. Bifurcate $4M claim.
Borrow $1.5 million; grant a first lien under §364(d)
Is anyone injured by that borrowing?
2M
2M
2M
Bky
54
Problem 27.4, page 461
In Problem 26.4 we loaned $10K on a second mortgage
80K
10K
120K
55
Problem 27.4, page 461
In Problem 26.4 we loaned $10K on a second mortgage
Now the first forecloses. Where do we stand?
80K
10K
120K
56
Problem 27.4, page 461
In Problem 26.4 we loaned $10K on a second mortgage
Now the first forecloses. Where do we stand?
We need $80K cash to protect our position.
80K
10K
120K
After
120K
Before
57
Where do we stand if our friend files for bankruptcy?
Problem 27.4, page 461
In Problem 26.4 we loaned $10K on a second mortgage
Now the first forecloses. Where do we stand?
We need $80K cash to protect our position.
80K
10K
Before After
120K 120K
58
Where do we stand if our friend files for bankruptcy?
Automatic stay; first can’t force sale
Problem 27.4, page 461
In Problem 26.4 we loaned $10K on a second mortgage
Now the first forecloses. Where do we stand?
We need $80K cash to protect our position.
80K
10K
Before After
120K 120K
59
Where do we stand if our friend files for bankruptcy?
Automatic stay; first can’t force sale
Payment in full under Chapter 13 plan (cure and reinstate)
Problem 27.4, page 461
In Problem 26.4 we loaned $10K on a second mortgage
Now the first forecloses. Where do we stand?
We need $80K cash to protect our position.
80K
10K
Before After
120K 120K
