CCPUC 2019MCLE SEMINARJune 25, 2019“Basics of Bankruptcy Law for the Rest of Us”

CA. Public Utilities Commission

505 Van Ness Ave, San Francisco

CCPUC Speaker Roster – June 25, 2019

“Basics of Bankruptcy Law for the Rest of Us”

Geoffrey B. Dryvynsyde is an Assistant General Counsel at the California Public Utilities

Commission. He currently supervises the State/Federal and Special Projects Advisory

Section. The Section handles special projects that may arise, or be assigned by the

General Counsel, and provides advice to Commissioners and Staff on all state and federal

legal matters.

Geoff joined the Commission’s legal staff in 1992 after working as a banking and new

technology lawyer in San Francisco. From 1999-2002, he served as legal advisor in the

office of the Commission President, and he represented the Commission in the 2002

Department of Water Resources bond transaction. Before becoming an Assistant General

Counsel, Geoff focused on appellate court work, handling matters involving new generation,

transmission infrastructure and net metering.

https://www.cpuc.ca.gov/General.aspx?id=6442456877

__________________________________________________

Ellen A. Friedman is a partner at Friedman & Springwater LLP in San Francisco. Ellen

practices in the areas of commercial transactions, bankruptcy and insolvency and has

extensive experience representing both debtors and creditors. She has represented both

secured creditors and creditors serving on creditors' committees. Ellen has also

represented intellectual property licensees and licensors in bankruptcy cases. She has

also provided legal advice in connection with the wind down of many companies.

Ellen is a frequent speaker and lecturer, and she has written extensively on bankruptcy and

secured transactions (Article 9 of the Uniform Commercial Code). She is the author of

Secured Transactions in California Commercial Practice (CEB 2001), including Chapter 6

“The Secured Creditor and Bankruptcy,” and “Security Interests in Trade Secrets,” Trade

Secrets (CEB 1998). Ellen has also served as the chair of the Insolvency Law Committee

of the Business Law Section of the State Bar of California.

http://friedmanspring.com/attorneys-detail.php?profile=Summary&id=3

__________________________________________________

The Honorable M. Elaine Hammond is a bankruptcy judge for the Northern District of

California. She was appointed to the bench in February, 2012, sitting initially in Oakland

and currently in San Jose. Prior to her appointment, Judge Hammond was an attorney in

private practice, representing debtors and creditors in commercial bankruptcy cases and

out-of-court restructurings.

http://www.canb.uscourts.gov/judge/hammond

__________________________________________________

Robert G. Harris is a partner in the Silicon Valley bankruptcy boutique, Binder & Malter

LLP. He has been an active volunteer with the California State Bar for 18 years, twice

chairing the Insolvency Law Committee, as well as having chaired the Business Law

Section. He now serves as the chair of the Marketing & Communications Committee of the

California Lawyers Association. In recent years he has been conference co-chair and

educational co-chair of the California Bankruptcy Forum.

Rob frequently lectures and writes on bankruptcy topics and has authored numerous

articles, case analyses, and other material, including three state legislative proposals that

have become California law. He has also contributed to a book on the topic of small

business bankruptcy and has twice testified before the California State Senate as an expert

in the field of bankruptcy and insolvency.

Rob began his legal career in 1986 by serving as a Law Clerk to the Honorable Lloyd King,

Chief Judge of the United States Bankruptcy Court for the Northern District of California.

His practice focuses on representing businesses and individuals in Chapter 11, both as

debtors and creditors, and in bankruptcy litigation, state court assignments for the benefit of

creditors (ABCs), receiverships, execution sales and various other bankruptcy and

collection matters. He has substantial experience in real estate restructurings, sales and

reorganizations of high tech and general manufacturing companies, dealing with intellectual

property rights in bankruptcy, and handling alleged securities laws and Federal Trade Act

violations. Uniquely, he represents individuals in all these areas and, in particular, in

Chapter 11.

https://www.bindermalter.com/robert-g-harris.html

Basics of Bankruptcy Law for the Rest of Us

Conference of California Public Utility Counsel

June 25, 2019

ALL BANKRUPTCY IS FEDERAL

But bankruptcy often involves

interpretation of non-bankruptcy

federal and state law.

Bankruptcy Judges

■ Article I judges

■ Appointed by the Circuit to

a 14 year term

■ With the ability to be

reappointed

Jurisdiction 28 U.S.C. § 1334

Arising under

Arising in

Related to

Main Case vs. Adversary Proceeding

Main Case

■ Automatic stay issues

■ Plan for repayment of creditors

■ Sale of assets

■ Assumption, assignment, or

rejection of contracts

Adversary Proceeding

■ Lawsuit within the bankruptcy case

■ Whether debt should be excepted

from discharge

■ Determination of contract rights

■ Suits to recover assets transferred

by debtor prior to bankruptcy filing

AppealsCourt of Appeals

Bankruptcy Appellate

Panel

Bankruptcy Court

District Court

Types of Bankruptcy Cases

■ Bankruptcy

Reorganizations

– Chapter 11

– Chapter 13

■ Bankruptcy

Liquidations

– Chapter 7

– Chapter 11

Automatic stay

Claims

Proof of Claim

Bar Date

•Secured

•Unsecured

•Priority

•General

Type

Objections

Use, Sale or Lease of Assets

Assumption, Assignment or Rejection of Contracts

Geoffrey DryvynsydeCalifornia Public Utilities Commission

Ellen FriedmanFriedman & Springwater LLP

Honorable M. Elaine HammondUnited States Bankruptcy Judge for the Northern District of California

Robert HarrisBinder & Malter LLP

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THE CONFERENCE OF CALIFORNIA PUBLIC UTILITY COUNSEL:

“BASICS OF BANKRUPTCY LAW FOR THE REST OF US” 1

June 25, 2019

I. SOURCES OF LAW

A. Per Constitution, Article I, Section 8, Clause 4, Congress can make uniform bankruptcy law for the United States (and since Congress has done so, federal law governs per Article V)

B. Substantive Law

1. Bankruptcy Code (the “Code”), 11 U.S.C. §§ 101-15322

2. Non-bankruptcy law (federal and state)

3. Basically, for bankruptcy purposes, non-bankruptcy law defines property rights, and bankruptcy law governs how those rights are treated in bankruptcy; bankruptcy law also creates certain substantive rights (e.g., avoiding and strong-arm powers mentioned below)

C. Procedure

1. Courts, jurisdiction and the like governed principally by various provisions of 28 U.S.C.3

a. There are other scattered provisions (e.g., some provisions of 18 U.S.C. relate to bankruptcy crimes and similar matters

2. Federal Rules of Bankruptcy Procedure (“FRBP”)

3. Federal Rules of Civil Procedure (“FRCP”), as and to the extent adopted by FRBP

4. Some FRCP are incorporated in whole, in part or in modified form by some FRBP cognates

1 Prepared by Adam Lewis, Senior Counsel. © Adam Lewis, Morrison & Foerster LLP 2018-2019. All rights reserved. Updates for this program by Robert G. Harris, Binder & Malter, LLP, with contributions by Geoffrey B. Dryvynsyde, CPUC and Ellen A. Friedman, Friedman & Springwater LLP. 2 Hereafter, sections of the Code will be referred to simply by the section number in normal typographical format (e.g., Code § 101 would be simply “Code 101”. 3 Hereafter, sections from Title 28 will be referred to by “28/___” (e.g., 28/1332).

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a. Most FRCP cognates are in the FRBP 7000s (which govern “adversary proceedings” – see below), but some FRCP are in the FRBP 9000s because the latter concern matters such as final orders and judgments, which arise in bankruptcy, not only in adversary proceedings, but also in “contested matters” (see below), so matters such as motions for relief from judgment (FRCP 60) are found in the FRBP 9000s

5. Local bankruptcy rules, standing orders and guidelines of each federal district

6. Individual judges’ procedures found on court websites

7. Format for bankruptcy court websites is http://___b.uscourts.gov; e.g., http://casb.uscourts.gov for the Bankruptcy Court for the Southern District of California; ECF sites use the format https://ecf.___b.uscourts.gov) (the general pattern is state (e.g., “ca” for California), district (e.g., “s” for southern) and “b” for bankruptcy)

D. Case law principally found in

1. West Bankruptcy Reporter (bankruptcy courts, district courts, circuit courts and Supreme Court)

2. Federal Reporter, Supreme Court Reports, S.Ct. and L.Ed.

3. Other reporting services Westlaw

4. See also U.S.C.A., LEXIS, and Ravel

E. Main treatise is Collier on Bankruptcy

II. TYPES OF CASES

A. Most common for business lawyers are

1. Chapter 11 (reorganization); debtor remains in charge and tries to confirm plan of reorganization

a. Normally, debtor remains in charge of business and case but has fiduciary duty to creditors (called “debtor in possession”)

b. Plan does not have to pay unsecured creditors in full, but if it does not, equity ordinarily is wiped out per the Absolute Priority Rule (see below)

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c. Liquidating entities do not get discharge

d. If formed (sometimes no one willing to serve), creditors’ committee may appear and be heard on practically any issue or proceeding; other kinds of committees sometimes formed with court’s approval.

2. Chapter 7 (liquidation); trustee appointed, takes over debtor’s affairs and property, liquidates assets and administers claims

a. Because trustee effectively becomes owner of debtor’s property rights, trustee also becomes owner of and can waive attorney/client privilege of debtor

b. Entities do not get a discharge

c. Creditors paid in order of priority (see Absolute Priority Rule below) to the extent possible

d. Generally, moves quickly compared to Chapter 11 cases

B. Others

1. Chapter 13; like a Chapter 11 for individuals who have small (consumer) debts (moves faster than Chapter 11, debtor remains in general charge of affairs but trustee is appointed with more limited duties than in a Chapter 7)

2. Chapter 12; like a chapter 13 for “family farmers”

3. Chapter 9; like a Chapter 11 for non-federal government entities (e.g., cities, districts); very specialized because Code provision reflects limits on federal intrusion into state government affairs

4. Can object to discharge of individuals in Chapter 7 (Code 727) or dischargeability of specific debts (Code 523) in all nonentity cases on specified grounds in certain circumstances; some require decision by bankruptcy court and have deadlines to raise issue, others are subject to concurrent jurisdiction with non-bankruptcy courts (see below)

5. Chapter 15; for proceedings related to foreign insolvency proceedings (also very specialized)

C. Conversion/Dismissal: cases can be converted to a different Chapter or dismissed upon motion by debtor, trustee, United States Trustee or creditors on statutory or doctrinal grounds

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1. Various Code sections govern such proceedings in each Chapter; in addition, judicial doctrine of “bad-faith filing” can justify dismissal in addition to statutory grounds

D. Discharge/Dischargeability of debts

1. Discharge

a. Order does not identify specific debts, but simply says all dischargeable debts are discharged

b. Effect of confirmation of plans in chapters 9 and 11; completion of confirmed plans in chapters 12 and 13

c. Not available to Chapter 7 entities and liquidating plan Chapter 11 debtors

d. Can object to discharge altogether under certain circumstances in Chapter 7; deadline to raise issue; must be decided by court exercising bankruptcy jurisdiction (Code 727)

e. Normally does not affect co-debtors or those jointly liable

2. Dischargeability of debts (Code 523)

a. Can object to discharge of specific debts of individuals on specified grounds

b. Deadlines to raise certain grounds that can only be decided by court exercising bankruptcy jurisdiction

3. Both kinds of objections must be by adversary proceeding (see below)

E. Major Constituents in Bankruptcy Cases

1. Debtor-the person or entity about which the bankruptcy case is commenced. (Code 101(13)).

2. Trustee-A trustee is appointed in Chapter 7 and Chapter 13 cases (Code 704 and 1302) and may be appointed in a Chapter 11 case (Code 1106). The trustee is the representative of the estate in a bankruptcy case. (Code 323).

3. United States Trustee- The US Trustee Program is part of the Department of Justice that oversees the administration of bankruptcy cases. The US Trustee may raise, be heard and appear on any issues in a bankruptcy case, but cannot file a plan of reorganization. (Code 307).

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4. Debtor in Possession-In a chapter 11 case, the debtor may also serve as the trustee. A trustee may be appointed for fraud, dishonesty or gross mismanagement. (Code 1104).

5. Creditor-A person or entity that has a claim against the debtor. The claim can be secured or unsecured. The Bankruptcy Code deals primarily with claims that arose prepetition. (Treatment of claims discussed below.)

6. Creditors Committee-In a chapter 11 case, the US Trustee appoints a creditors committee to represent the interests of creditors. At the request of a party in interest, other committees such as an equity committee may be appointed. (Code 1102).

F. Types of Matters in a Bankruptcy Case

1. Bankruptcy Case (the “Main Case”)

2. “Adversary proceedings”

a. Name for a lawsuit within a bankruptcy case (complaint, answer, discovery, etc.)

b. Governed principally by the FRBP 7000s and some of the FRBP 9000s

c. Types of matters listed in FRBP 7001

3. Contested matters

a. Essentially, any proceeding in an adversary proceeding (there are motions in an adversary proceeding)

b. Applicable rules identified in FRBP 9014; timelines may differ than on motions in adversary proceedings

c. Includes some FRCP cognates; allows court to add others as appropriate to tailor procedure to needs of proceeding at hand

d. Essentially like motion practice, but can include live testimony, discovery and adversary proceeding rules apply automatically.

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III. COURTS

A. Bankruptcy Courts in each federal district 28 U.S.C. 151

1. Presided over by bankruptcy judges

2. Bankruptcy judges are Article I judges, not Article III judges

3. In contrast to Article III judges, appointed by the Circuit for 14-year terms rather than lifetime on good behavior, no prohibition on reducing compensation

B. Bankruptcy court jurisdiction derivative of district court jurisdiction

1. 28 U.S.C. 1334(a), (b) vest bankruptcy jurisdiction in district judges, then 28 U.S.C. 157(a) allows each district to “refer” that jurisdiction in whole or in part to bankruptcy courts/judges

2. All districts have referred all bankruptcy jurisdiction to bankruptcy courts by rule or standing order

3. On application to district court, district court may “withdraw the reference” of any bankruptcy case or any proceeding in a bankruptcy case back to itself (sometimes by specific order or by local rule; bankruptcy judges are asked to make recommendations to district judge on such motions) (28 U.S.C. 157(d))

a. In some instances, withdrawal is mandated (e.g., where bankruptcy court would lack subject matter jurisdiction to decide case as Article I judge (see below), though withdrawal sometimes takes place only just before trial, with bankruptcy court pre-trying case through discovery

C. Subject matter jurisdiction of bankruptcy courts specifically defined (are “courts of limited jurisdiction,” as are district courts)

1. Four kinds of basic jurisdiction

a. Main Case 1334(a), (b)

(i) Original and exclusive jurisdiction in federal courts; all other bankruptcy jurisdiction original but concurrent with state courts (with some exceptions, e.g., certain kinds of dischargeability actions must be tried only in bankruptcy court and must be commenced by specified deadlines)

b. Arising under

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(i) Test is it invokes a “substantive right created by the Bankruptcy Code.” See, e.g., Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir. 1987); Krasnoff v. Marshack (In re General Carriers Corp), 258 B.R. 181, 189 (BAP 9th Cir. 2001)

(ii) E.g., asset sales, plan confirmation proceedings, strong arm and avoidance actions, stay relief, use of cash collateral

c. Arising in

(i) Proceedings “arising in” a case under title 11 are those that “are not based on any right expressly created by title 11, but nevertheless would have no existence outside of bankruptcy.” See, e.g., In re A.H. Robins Co., 86 F.3d 984, 994 (4th Cir. 1996); General Carriers Corp.,

(ii) E.g., claim objections

d. Related to

(i) Proceedings are related to a case when “‘the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy . . . .’” Fietz v. Great W. Savs. (In re Fietz), 852 F.2d 455, 457 (9th Cir. 1988) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984))

(ii) E.g., suits on guarantees if the outcome might establish claims against the estate

D. Limits on bankruptcy court’s ability to issue final judgment

1. In several cases going back some years, the Supreme Court has held that because bankruptcy courts are Article I courts, not Article III courts, the Seventh Amendment limits matters in which bankruptcy courts can enter a final judgment absent consent of the parties

(i) The jurisprudence of this doctrine is complex and confusing, in part because the Supreme Court decisions are ill thought out

(ii) The terms “core” and “noncore” built into the jurisdiction statute (157(b)) passed to deal with that; the leading cases on the jurisdiction issue were designed to reflect this jurisdictional distinction (“core” being

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classic bankruptcy jurisdiction), but subsequent Supreme Court decisions make it clear that the bankruptcy court lacks jurisdiction to enter a final order in some matters statutorily denoted as “core”

2. Speaking very generally, bankruptcy judges can issue final orders without consent in matters that are fundamentally bankruptcy (e.g., confirming plans, considering proposed use, sale or lease of assets, deciding claim objections, stay relief motions)

3. But they cannot issue final judgments that involve the award and payment of money or property without consent (e.g., preferences, fraudulent conveyances, claims or counterclaims against creditors), unless their resolution is inextricably bound up with resolution of a classic bankruptcy matter

4. Where a bankruptcy court cannot issue a final order, it issues proposed findings and conclusions and a proposed judgment or order, but that must be reviewed de novo by the district court (this is not an appeal) unless the district court has withdrawn the reference, in which the case the bankruptcy court will not be reaching the merits at all

a. No statutory standard for de novo review; in practice, can be anything from rubber stamping the decision de novo to a full new trial

b. Where jurisdiction to issue a final order is not clear, some courts will render both a judgment and proposed findings and conclusions, letting the district court decide the issue of jurisdiction if raised by a party on appeal and then depending on its analysis in either resolving the matter as an appeal from a final judgment or engaging in de novo review

5. Sometimes, a matter may involve issues both that a bankruptcy judge can decide and issues the judge cannot decide (withdraw the reference?)

6. Many districts require parties to state in their initial pleading what their position is on whether the judge can issue a final judgment (order), and, if not, whether they will consent anyway

a. Consent of both parties needed

b. Consent can be implied as well as express

7. When getting involved in a bankruptcy proceeding, it is important to decide whether the bankruptcy court can issue a final order, and, if

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not, whether you want to consent to its doing so anyway; as noted above, many districts now require parties to declare at the outset whether there is jurisdiction to enter a final order, and, if not, whether they consent

a. This may be important because some parties and counsel never want a bankruptcy judge to decide a matter finally if they represent a creditor interest because they think all bankruptcy judges are debtor-oriented or they think that bankruptcy judges cannot give them meaningful proceedings

b. For the same reasons, many parties will try to withdraw the reference of proceedings in a bankruptcy to the district court

c. In either event, the district court judge has discretion over when to withdraw a proceeding, sometimes waiting until it is near trial in order to have the bankruptcy judge save time and trouble by acting like a magistrate or to apply its bankruptcy expertise in the pretrial phase

d. In fact, staying in the bankruptcy court can be attractive because many bankruptcy judges are essentially neutral and are quite capable as judges; moreover, bankruptcy litigation can be much faster and less expensive, while still being thorough

8. In essence, for jurisdictional reasons based on the Article I status of bankruptcy judges and the Seventh Amendment, there are no jury trials in bankruptcy courts, though there could be a jury trial in a bankruptcy matter withdrawn to the district court in a timely fashion

E. Removal, Transfer

1. Removal (28 U.S.C. 1452; FRBP 9027): either party to litigation pending when or commenced after case is filed may remove litigation to bankruptcy court

a. Technically to District Court where litigation is pending, then automatically by rule or standing order referred to Bankruptcy Court for that district, but, in practice, most courts presume the middle step and allow removal directly to bankruptcy court

b. Process is similar to district court removal (e.g., file petition with bankruptcy court, then notice with prior court)

c. Certain deadlines for seeking to remove per FRBP 9027

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d. Can then move to transfer venue to debtor’s “home court” if not in that district where removal occurred (see transfer below)

e. As with federal court, remand available

2. Transfer (28 U.S.C. 1412): either party may move to transfer case, adversary proceeding or contested matter to another venue

a. Standard is interests of justice and convenience of parties

F. Appeals (28 USC 158)

1. First level of appeal is to bankruptcy appellate panel (“BAP”) of the circuit or district court of the district where the decision was rendered

a. Because BAP panels are bankruptcy judges, the Article I jurisdictional issues that constrain bankruptcy judges apply

(i) Hence, any party has absolute right to have appeal heard by district court by so electing at commencement of appeal

b. Not all circuits have BAPs

2. Next level is Circuit Court of Appeals (“CCA”)

a. Statute allows for direct appeals from bankruptcy court to CCA under limited circumstances

3. Final level is Supreme Court

4. Separate set of rules at first level (FRBP 8000s) some special rules at CCA in respective Circuit’s rules

IV. COMMENCEMENT OF CASE

A. Voluntary Petition (Code 109, 301, 302)

1. Any individual

2. Entities

3. Some kinds cannot file at all (e.g., banks, family trusts)

4. Must qualify for chapter

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5. NO financial test (but good-faith judicial doctrine)

6. Debtor who files cannot dismiss at will

7. Creditors can move to dismiss on various statutory grounds and also on non-statutory ground of bad-faith filing

8. “Emergency” or “first day” motions quite common in Chapter 11 cases

a. Though often resulting only in “temporary” orders, effect of such orders sometimes effectively determines course of case

B. Involuntary (Code 109, 303)

1. Creditor requirement (unsecured, claim status, amount, number)

2. Basic test not generally paying debts as they come due (“equity” test of insolvency) but there also are other alternate tests for granting petition

3. Not available for certain kinds of potential debtors (e.g., family farmers – Chapter 12)

4. Certain provisions apply immediately (e.g., automatic stay)

5. Gap period transactions (Code 549)

6. Downsides

a. Risks if petitioning creditors lose (thus, IV petitions rare)

b. Cannot use just to extract payment

c. Invites all creditors to the party (like a reverse class action)

C. Proper venues: domicile (for entities, where incorporated), principal assets or principal place of business

D. Order for relief occurs when voluntary petition filed or involuntary petition granted

1. Only some of the Code applies during the “gap” period between filing and granting of an involuntary petition (e.g., automatic stay), but although debtor can continue to operate its business without constraint in the gap period, non-ordinary course transactions that occur then can be set aside if the petition is granted (see Code 549) so counter parties to potential transactions or transfers during gap should be thoughtful about whether to participate

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E. Petition divides world into pre and post-petition (see “Claims” below)

F. Bankruptcy estate code (541)

1. Very broad

a. Chapter 7 v. Chapter 11

b. Ipso facto clauses overridden

c. Excludes, e.g., property held in trust, no equitable interest

d. Court has exclusive jurisdiction over estate property (28 U.S.C. 157(e)(1))

G. Cases generally judicially intensive, in part because virtually any transaction that is not ordinary course requires court approval; especially true of Chapter 11 (see Code 363(b)(1), (c)(1); 549

V. USE, SALE OR LEASE OF ASSETS

A. Per Code 363(b) (and 549), debtor may use sell or lease assets out of the ordinary course of business only with court approval

B. Subject to certain conditions, debtor can sell assets free and clear of other interests (such as liens, claims, or encumbrances, or along with the interest of others such as co-tenancies per Code 363(e)-(h)

1. Some courts have held that Code 363(f) regarding sale free and clear allows a landlord debtor to sell real property free and clear of the lease to a non-debtor tenant, thereby depriving the tenant of the right to remain in possession upon a rejection of the lease under Code 365(h) (see below under Executory Contracts); authority is split, with courts disallowing such sales holding that 365 (including 365(h)) is the exclusive treatment of leases (the so-called majority rule and contrary cases permitting sale free and clear by trying to harmonize 365(h) and 363(f), see generally Pinnacle Restaurant at Big Sky, LLC v. CH SP Acquisitions, LLC (In re Matter of Spanish Peaks Holdings II, LLC) 872 F,3d 892, 898 (9th Cir. 2017) (permitting sale free and clear); see also, Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 548-49 (7th Cir. 2003) (sale free and clear permissible; tenant would have been entitled to adequate protection compensation, but did not ask for it; but see In re Patriot Place, Inc., 486 B.R. 773, (Bankr. W.D. Tex. 2013) (debtor could not sell free and clear because could not meeting any of the five criteria for such a sale in Code 363(f)) (notes Qualitech failed to review the 363(f) criteria))

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2. Per Code 363(k), a lien creditor generally has the right to credit bid at such a sale

a. The Supreme Court has held that this rule applies to sales under a plan of reorganization, as well. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 132 S. Ct. 2065, 182 L. Ed.2d 967 (2012)

3. Per Code 363(i), the non-debtor party to a community interest property has the right to match the sale prior to its consummation

4. Per Code 363(j), the debtor must pay over to any co-interest holder that party’s share of the proceeds of a sale under 363(g) or (h)

5. Payment of a lienholder of property sold free and clear can be wrapped up into a plan or by conveyance of an equivalent value of other property of any kind

C. The debtor may use cash collateral only with the creditor’s consent or upon an order of the court finding that the secured creditor is “adequately protected” (meaning that, in theory, the creditor will still recover on account of the secured claim as much as it would have had the cash collateral not been used)

1. Stipulated or contested orders for the use of cash collateral are a common way of financing a case, especially early on

D. Another common method of financing is a post-petition loan approved by the court, usually involving terms that are specific to a company in Chapter 11 rather than general commercial terms,

E. Under Code 363(e), a party can ask that the court condition the use of property in which he has an interest on provision of “adequate protection”

1. Careful creditors will often give notice at the outset of the case that they claim certain property as cash collateral, that the debtor cannot use it without their consent, which they do not presently give, or an order of the court upon a finding that they are adequately protected.

VI. SPECIAL TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES

A. Code 365

B. Concept: balance burdens and benefits of completing performance

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1. No statutory definition; Countryman Definition (both parties have material obligations still to perform) most common judicial formulation

C. Assumption/assignment/rejection

1. Assumption means debtor will complete performance, must promptly cure defaults and provide adequate assurance of future performance if there are defaults; creditors must also accept future performance; also assumption turns agreement into post-petition contract, which makes claims for post-assumption breach first priority unsecured expense of administration claims entitled to dollar-for-dollar payment (or pro rata payment if estate is “administratively insolvent”)

a. Unless the counterparty agrees otherwise, the debtor must assume the contract as it is; it cannot cherry pick or uniformly modify provisions

2. Debtor may assign assumed contract (again, must provide adequate assurance of future performance); doing this relives estate of further liability

3. Rejection means debtor will not complete performance and is a breach of contract even if no existing breach; creditor has a claim for damages measured by otherwise applicable law that is paid per usual bankruptcy priority (note: rejection is not rescission)

4. Deadlines; parties can seek advance or postponement by motion

D. In most cases, bankruptcy law overrides anti-bankruptcy (ipso facto) and anti-assignment clauses

1. Important exceptions include personal services contracts, some franchise agreements and some IP licenses

E. Special rules for rejection by IP licensor, landlord and real property sales (Code 365(h), (n))

1. E.g., tenant whose lease is rejected by landlord debtor may elect to treat lease as terminated and make claim for damages to remain under lease (subject to certain limitations) for its balance and all rights of renewal; similar, though not identical rules for licensee of IP license rejected by debtor/licensor

2. Statutory limit on tenant’s damage claim

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F. Court approval of assumption or rejection required (although in some cases (e.g., leases), rejection is deemed to take place absent assumption within the specified periods)

1. General standard for decision to assume or reject is “business judgment”

a. Decisions to reject rarely denied; assumption decided more carefully because of potential dollar-for-dollar burdens on estate of cure and post-assumption breach unless agreement also being assigned

G. Some agreements cannot be assumed or rejected without additional approval of other authorities under certain circumstances, most often authorities administering governmental police or regulatory powers (e.g., California Public Utilities Commission, Federal Energy Regulatory Commission, Nuclear Regulatory Commission (see also stay relief exceptions below)

H. Treatment in gap period between petition and assumption or rejection

1. Non-debtor generally must continue to perform if debtor demands

2. Counterparty entitled to payment for mandated post-petition performance (not required to perform for free)

a. Make sure debtor knows you expect performance and get its confirmation

b. When in doubt, ask court promptly for adequate protection by motion

VII. AUTOMATIC STAY

A. Code 11 U.S.C 362

B. Purpose is to freeze race to courthouse, allow for orderly administration of assets and liabilities

1. Only protects debtor and estate property from attempts or actions to establish or collect on prepetition debts (see generally Code 362(a))

a. Thus, generally, does not, e.g., protect guarantors, co-debtors, 3p discovery

b. Does at least temporarily protect co-debtors in limited circumstances

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2. Some disagreement about scope, but good rule of thumb is that if you think it will help you and it involves the debtor or estate assets, it probably violates the stay (if it tastes good, it’s probably bad for you)

a. E.g., payment demands, suits, foreclosure, pressure, refusal to deal tied to payment, termination of agreement

b. Cannot demand payment of prepetition debt in order to do business with debtor post-petition

(i) But you do not have to continue to do business with the debtor post-petition if you do not want to (but see executory contracts above), or you can demand different terms (but see executory contracts above)

3. Code 546(b) permits post-petition perfection of liens that relate back to prepetition events (even though stay generally prohibit post-petition acts to perfect prepetition liens)

a. Must act within time limits set by non-bankruptcy law for relation back

b. If something more than a filing is required (e.g., the filing of a lawsuit), the creditor serves and files a notice of perfection

c. A classic example is perfection of mechanics liens

4. Can ask court whether stay applies (either separately or joined with stay relief request in the alternative), sometimes a prudent strategy

5. Code 105(a) (court’s general equitable powers) injunction can broaden protections, but must be affirmatively sought

C. Exceptions

1. Statutory (Code 362(b)) (e.g., police and regulatory powers); see Pacific Gas and Electric Co. v. California ex rel California Department of Toxic Substance Control, 350 F.3d 922 (9th Cir. 2003) (Code provisions with respect to confirmation of a plan only preempt non-bankruptcy law regarding financial matters); see also City and County of San Francisco v. PG&E Corp., 433 F.3d 1115 (9th Cir. 2006) (debtor cannot remove action concern police and regulatory powers to bankruptcy court)

2. As the preceding implies, a debtor in possession is not free to operate without regard to governmental regulation of various kinds

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3. Some post-petition acts (remedy may be limited) (really a function of the scope of the stay as only protecting debtor estate property with regard to claims (prepetition debts)), e.g., infringement, post-petition car accident

D. Actions taken in violation void or voidable (jurisdictions differ) even if creditor was ignorant of bankruptcy at the time, but courts sometimes sanitize the act after the fact

E. Statute specifies duration unless terminated sooner by court (362(c), 362(d))

F. Stay relief (Code 362(d))

1. By motion

2. Accelerated schedule by statute, but can be waived by conduct as well as expressly

3. Various grounds

a. For foreclosure or other realization on collateral, debtor has no equity in property and property not necessary for an effective reorganization

b. For “cause”, including lack of adequate protection

(i) Most common re adequate protection is to foreclose on theory that secured creditor will realize less than currently if foreclosure delayed or other protection not forthcoming (see also discussion of sale free and clear of leases

4. Sometimes to liquidate claim in another forum, most commonly when one or more of the following (another form of “cause”)

a. Specialized expertise

b. Location of witnesses, records, etc. if more convenient to forum

c. Prospect of lengthy trial

d. Advanced stage of proceedings in another forum

5. When in doubt whether stay applies, ask court for guidance (sometimes coupled with stay relief motion if it does apply)

G. Penalties for violation can include:

1. Contempt

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2. Compensatory damages

3. Punitive damages in case of individual debtors

VIII. CLAIMS

A. Bankruptcy deals with prepetition claims (but see administrative expense claims below) (see Code 101(5))

1. Test still a bit unsettled, but most courts use: if facts and events giving rise to claim occurred prepetition (rather than more technically when cause of action arose)

2. Can be contingent, disputed or unliquidated

3. Well-advised debtor schedules every conceivable claim even if disputed or speculative whether there is a claim at all; that way, every potential creditor is on notice of proceedings and can be bound by them

B. Secured (Code 506)

1. Value of collateral to creditor is amount of secured claim; difference is deficiency unsecure claim (some exceptions)

2. Post-petition interest, attorneys’ fees, etc. only to extent value left for creditor in collateral after consideration of any senior claims in collateral

3. Must be paid in full either in bulk or over time with interest for delay

C. Unsecured

1. Priority (Code 507)

a. Expenses of administration first priority unsecured (often a secured creditor will agree to a “carve out” from his collateral for some or all of such claims if unencumbered funds insufficient)

b. Other lower priorities include such items as certain kinds of taxes, certain wages and salaries

2. General unsecured

3. Post-petition interest generally no allowed

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D. Equity

E. Subordination (Code 510)

1. Per agreement

2. Involuntary

F. Bar date for filing proofs of claim; creditors given notice of it

G. Administrative claims (Code 503)

H. Claim objections

1. Usually filed by bankruptcy trustee or debtor in possession

2. Claim objections normally resolved in bankruptcy case in contested matter, but courts sometimes grant stay relief to liquidate in another forum to bring result back to bankruptcy court, particularly if matter is already at advanced stage elsewhere or other forum is especially qualified to deal with issues

3. No right to jury trial

I. Basic payment priority; “Absolute Priority Rule” (each level must be paid in full either up front or over time before (logical, not temporal) next priority can receive anything (see Code 726, 1129(b)(2))

1. Secured

2. Priority unsecured

3. General unsecured

4. Equity

IX. OBJECTIONS TO DISCHARGE, DISCHARGEABILITY

A. Discharge concept: order says all dischargeable debts discharged but does not specify the debts

1. Discharge of all debts can be denied for specific reasons (e.g., bankruptcy fraud) specified in Code

2. Must be by adversary proceeding brought in bankruptcy court by specified deadline

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B. Dischargeability concept: discharge of specific debts

1. On grounds specified in Code (e.g., fraud)

2. Certain grounds must be decided by bankruptcy court, others can be raised later in other fora

3. By adversary proceeding when in bankruptcy court; some deadlines

X. FINANCING CASE

A. Debtor normally does not have to and cannot pay prepetition debts along the way

B. But must pay debts incurred post-petition as they come due

1. Especially important in Chapter 11 and like case since their ongoing expenses are likely to be material

2. Special treatment for payment of professionals (see below)

C. Cannot use cash or other collateral for that purpose absent secured creditor’s consent or court order upon finding that creditor won’t be prejudiced in recovering what he could have recovered had the collateral not been used

XI. AVOIDANCE ACTIONS / STRONG ARM POWERS

A. Avoiding powers

1. Methods of augmenting bankruptcy estate

2. Preferences (Code 547)

a. Paying or transferring other property (including, e.g., liens) on preexisting unsecured (or undersecured) debt within 90 days (or one year for insiders) of filing of bankruptcy when debtor was insolvent on balance sheet (but not GAAP) test (equity test sometimes used as a proxy)

3. Fraudulent Conveyances (Code 544(b), 548)

a. Intentional (actual intent to hinder, defraud or delay)

b. “Constructive”

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(i) Designed to undo transactions, unduly stripping debtor of net worth or ability to satisfy debts in due course

(ii) Lack of reasonably equivalent value plus one of three other tests, the most prominent of which is insolvency on a realistic (not GAAP) balance sheet test (though equity test sometimes used as a proxy)

c. Code has its own statutes and elsewhere in effect incorporates state fraudulent conveyance law by reference

d. Under latest version of Uniform Law adopted in some states, now called Avoidable Transfers Act (“avoidable transfers” because fraud is really only an element of intentional fraudulent transfers)

e. Target transfers take many inventive forms and courts can be inventive about what qualifies

4. Normally, bankruptcy court cannot issue final judgment because of Article I judge issues

a. Exceptions: consent, where resolution of matter in which bankruptcy court can issue final judgment inextricably intertwined with avoidance issues (see subject matter jurisdiction above)

5. Remedy for avoiding powers is either avoidance of transfer or recovery of its value in money (Code 550)

B. Strong arm powers (Code 544)

1. Essentially avoiding transfers (e.g., property or liens) that are unperfected at petition; this is where state fraudulent conveyance law is in effect incorporated

2. Another major target is unperfected liens or transfers (e.g., a recorded deed or UCC-1)

XII. BANKRUPTCY PLANNING

A. Bankruptcy generally not good for anyone (delay, expense, time/distraction, uncertainty, low value), but sometimes the right choice (see Manville, AH Robbins, first Continental Airlines, Chrysler, General Motors)

B. For creditors

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1. Move quickly

a. E.g., attachments, judgment liens

b. Time constraints

c. Judgment does not give creditor special rights, only liquidates claim

2. Court of last resort for debtor a potential advantage; nowhere else to go afterwards, prolonged chance to educate the judge, so likely will get to know the debtor’s warts well

3. Balance prospective burdens and benefits in deciding what to do (e.g., spend money only to face vagaries of bankruptcy, improve your position before bankruptcy if possible?)

C. For debtors

1. Usually best to move quickly rather so that can sustain case

2. Transferring assets generally a bad idea (intentional fraudulent conveyance?)

3. The closer to bankruptcy or a possible judgment, the more suspect a transaction

XIII. EMPLOYMENT OF PROFESSIONALS

A. General bankruptcy counsel, special counsel, counsel to creditors’ committee, other professionals such as investment bankers or real estate brokers working for debtor in possession, trustee or committee must obtain the court’s advance approval both to serve and of the terms of compensation; includes bankruptcy trustee’s professionals (Code 327, 328)

1. General bankruptcy professionals are those involved in the reorganization or bankruptcy process subject to stringent, bankruptcy-centric conflict requirements in addition to those imposed by otherwise applicable law

2. Special counsel or other professionals to be used only for specific purpose (e.g., piece of litigation not handled by general counsel) are subject to fewer requirements to be qualified to serve

3. Prepetition professionals need approval to continue (most often litigation counsel), not required to serve if they don’t want to but

{00818648 v2 } 23

should inquire of client or client’s bankruptcy counsel ASAP if services wanted and advise whether willing to serve and on what terms

a. If a client files during representation, suspend any work that is not urgent and notify client immediately you are doing so pending a decision whether you will continue and obtain any necessary approval by the court

4. If work urgent or pressing, okay to continue with client’s assurance of and follow through on prompt application for approval (under such circumstances, courts often will approve engagement nunc pro tunc if the application is made promptly)

5. “Ordinary course” professionals (e.g., eviction lawyer for apartment building owner) not subject to these requirements

B. Compensation of approved professionals (Code 330, 331)

1. Engagement and basic compensation terms must be approved by court in advance for professionals to be paid for post-petition work

a. Don’t wait to get approval

b. Remember, this applies even if you were working for the debtor prepetition

c. Debtor is not required to continue to use firm, and firm is not required to accept post-petition employment

2. Court approval of actual compensation required

a. Requires application subject to objection by any interested party

b. Interim payment upon interim application (maximum frequency quarterly unless special court order for more frequent review)

c. Final approval at end of engagement/case includes review and possible adjustment of interim awards

d. Subject to sometimes rigorous review and to local rules, guidelines and standards (you should review any such provisions before accepting employment)

e. Expense of administration status (first priority unsecured)/pro rate if case “administratively insolvent”

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f. Engagement with court approval for post-petition work does not entitle you and cannot be condition of being paid for any prepetition (billed or unbilled) work; for that, firm is treated like any other prepetition creditor

XIV. SOURCES OF INFORMATION ABOUT CASES

A. Schedules, etc.

1. Be skeptical of what’s in (or not in) them

B. 341 meeting

1. First meeting of creditors shortly after case begins at which trustee or U.S. Trustee examines a debtor or debtor representative under oath on general matters and at which creditors can then also examine the witness under oath

2. Not conducted before the judge

3. Usually a nonevent, in part because of limited time (usually half an hour or less on a full calendar) and because of scope of exam (see next point)

4. Can examine debtor about his assets, liabilities, causes of the bankruptcy and the like, but not supposed to be a forum for inquiring into claim or other disputes between the debtor and an examining creditor

C. 2004 exam (FRBP 2004(a))

1. Can be a “fishing expedition” that in some respects is broader than discovery that must focus on known issues, but does have limits

2. Can include production of documents

3. Court order required, but sometimes issued by the clerk or court; routinely subject to subsequent challenge by target (see local rules)

D. Other discovery in adversary proceedings or contested matters

E. Request for notice

F. ECF (see above)

G. Bankruptcy court websites (see above)

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H. Other parties

I. Creditors’ Committee

J. District U.S. Trustee

XV. SPECIFIC CONCERNS IN BANKRUPTCY CASES WITH A REGULATED UTILTY

A. Some Areas of Company Operations Will be Regulated by the CPUC and Addressed in Bankruptcy:

1. Issuance of Debt (in Administration)

2. Transfer of Assets

3. Change of Control

4. Issuance of Debt or Securities in Connection With a Plan Of Reorganization

5. Change in Capital Structure

6. Changes in Utility Operations Requiring Regulatory Review

7. Change in Business Relations/Contracts

8. Cumulative Effect of Changes on Rate Structure, Usually in Connection with a Plan of Reorganization

B. Policy Issues Raised When A Regulated Firm is in Bankruptcy

1. Ability of Company to Continue to Serve

2. Safe and Reliable Service Within Chapter 11

3. Maintenance and Preservation of Assets Necessary to Provide Utility Service

4. Retention of Employees/ Fair Treatment of Employees

5. Offshoring and Out-of-State Control

6. Continuation of Service in the Event of Chapter 7 Liquidation

C. CPUC Enforcement Programs are Affected

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1. Automatic Stay and the Exercise of Police Power to Enforce Statutes and Rules

2. Formal CPUC Complaints (by Third Parties) for Failure to Comply with Statute or CPUC Orders: Third Parties do not Exercise Police Power

3. Status of Fines and Penalties as Pre-Petition Obligations

D. These Issues Arise in Many Different Fact Patterns, Across Industries

1. Small Water Insolvencies

a. Issues of Reliability and Going Concern

b. Preservation of Essential Utility Property

c. Retention/Employee Issues and Family Firms

d. Third Party Contracts – Key Vendors and Water Rights

e. Maintenance and Safety in Administration

f. The Threat of Liquidation

g. Family (“S”) Corporations, Comingling of Assets and Preferences

2. Telco Consumer Protection Enforcement

a. Police Power to Regulate and Enforce

b. Collection of Monetary Penalty for Pre-Petition Conduct

c. Cramming, Slamming and Repeated Bad Conduct (History of Telco Enforcement)

3. Large Utility Bankruptcy -- PG&E One

a. Complex Review of Financial Issues

b. Corporate Structure and the POR

c. Ratepayer Impact

d. High Profile and Breaks New Ground

e. Process for CPUC Review of POR

PROVIDER: Conference of California Public Utility Counsel (“CCPUC”)

SUBJECT MATTER/TITLE: 2019 CCPUC MCLE: “Basics of Bankruptcy Law for the Rest of Us”

Speakers: Geoffrey Dryvynsyde, Assistant General Counsel (CPUC); Ellen Friedman, Partner (Friedman & Springwater, LLP);

Honorable M. Elaine Hammond, Bankruptcy Judge, ( N. District of CA); and Robert Harris, Partner (Silicon Valley Bankruptcy firm,

Binder & Malter).

DATE/TIME OF ACTIVITY June 25, 2019

LOCATION CA. Public Utilities Commission, San Francisco, CA.

LENGTH OF ACTIVITY 1.0 hours___(3:30-4:30 p.m.)_______________

ELIGIBLE CALIFORNIA MCLE CREDIT

TOTAL HOURS: 1.0

PREVENTION, DETECTION

LEGAL ETHICS: _ AND TREATMENT OF

SUBSTANCE ABUSE: ______

ELIMINATION OF BIAS IN THE LEGAL PROFESSION: ____ GENERAL: _1.0____

To Be Completed By Attorney After Participation In Activity

By signing below, I certify that I participated in the activity described above and

am entitled to claim the following California MCLE hours, including:

TOTAL HOURS: 1.0

PREVENTION, DETECTION

AND TREATMENT OF

LEGAL ETHICS: ______ SUBSTANCE ABUSE: ________

ELIMINATION OF BIAS IN THE LEGAL PROFESSION:____ GENERAL: _1.0_

__________________________________________

Signature Date June 25, 2019

Please complete and return to Provider Please Print

Provider Name Conference of California Public Utility Counsel (“CCPUC”)

Provider Address 2244 Walnut Grove Avenue, Rosemead, CA 91770_ (Socal address)

Title of Activity - 2019 CCPUC MCLE: “Basics of Bankruptcy Law for the Rest of Us”

(Speakers: Geoffrey Dryvynsyde, Assistant General Counsel (CPUC); Ellen Friedman, Partner (Friedman & Springwater, LLP);

Honorable M. Elaine Hammond, Bankruptcy Judge, ( N. District of CA); and Robert Harris, Partner (Silicon Valley Bankruptcy firm,

Binder & Malter).

Date of Offering: 6/25/19 Site: CA. Public Utilities Commission, San Francisco, CA.

Name of Participant (optional)

___________________________________________________________

First Last

Directions: On a scale of 1-5 (5 being the highest, best or most and 1 being the least, lowest or worst) rate by circling the

number reflecting your opinion.

To what extent were your personal objectives satisfied 5 4 3 2 1

Comments:

_____________________________________________________________________________________________

_____________________________________________________________________________________________

To what extent did the environment contribute to the learning experience? 5 4 3 2 1

Comments:

___________________________________________________________________________________________

_____________________________________________________________________________________________

To what extent did the written materials contribute to the learning experience? 5 4 3 2 1

Comments:

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To what extent were the objectives stated in the promotional literature or those

stated at the beginning of the activity satisfied? 5 4 3 2 1

Comments:

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or practical content? 5 4 3 2 1

Comments:

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Please rate the faculty on the same scale. [Type the document title]

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Instructor's Name: _Geoffrey Dryvynsyde____________________ 5 4 3 2 1 5 4 3 2 1 5 4 3 2 1

Subj/Topic ____________________________________________

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Instructor's Name: _Ellen Friedman_________________________ 5 4 3 2 1 5 4 3 2 1 5 4 3 2 1

Subj/Topic ____________________________________________

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________________________________________________________

Instructor's Name: Honorable M. Elaine Hammond 5 4 3 2 1 5 4 3 2 1 5 4 3 2 1

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________________________________________________________

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Moderator's Name: _Robert Harris_______________________ 5 4 3 2 1 5 4 3 2 1 5 4 3 2 1

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