Chapter 11 Bkcy

Bkcy Ct J/D Basic j/d grant for bkcy cts is in 28 USC 1334: the district courts shall have original but not exclusive j/d of all civil proceedings arising under title 11, or arising in or related to cases under title 11. Dist ct judges are Art III judges, bkcy cts not Art III judges but Art I judges the district court in which a case under title 11 is commenced or is pending shall have exclusive j/d-- (1) of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate; and (2) over all claims or causes of action that involve construction of section 327 of title 11, United States Code, or rules relating to disclosure requirements under section 327. Under broad grant of j/d in 1334 is distinction b/w core matters & related matters in 28 USC 157 Core matters - matters that arise under the bkcy code & bkcy judge should rule on Related to matters (non core) - parties can agree or object to bkcy judge deciding on related matters Bkcy judge makes suggestion that goes to dist ct for a determination on related matters General test for related matter - matter has to have a conceivable effect on the bkcy estate If not a core matter & not related matter, no bkcy ct j/d to hear case Fed cts cts of limited j/d; have to trace their authority to Art III of const Bkcy cts created pursuant to Art I of const; 1st appeal from bkcy cts go up to dist ct Bkcy cts are units of dist cts; bkcy petitions are, as a matter of law, filed in dist cts & dist cts have general order of referral to send bkcy cases to bkcy cts Bkcy judges appointed by circuit cts, but are a division of dist cts Stern v. Marshall Facts - ANS filed bkcy in CA, son in law sued her for defamation in bkcy ct & she filed counterclaim against him Issue - does bkcy judge have power to sign final order in this situation or only the power to make a recommendation to dist ct for proposed judgment, which signs final order Holding - bkcy ct's entry of final judgment on debtor's counterclaim against creditor, though valid under 28 U.S.C. 157, violated Art III of Fed Const Bkcy ct had statutory authority to enter final judgment on counterclaim, but not const authority Bkcy ct didnt have authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditors proof of claim Rationale - While 157 purported to extend bkcy j/d to any counterclaim by the debtor, the bkcy ct was not established under art. III and was not subject to the const assurances of independence which would allow adjudication of the debtor's state common law claim. Resolving creditors claim wouldnt necessarily resolve debtors counter claim & debtors claim was otherwise unrelated to the claim-allowance process b/c of this, bkcy ct lacked authority to enter final judgment on the counterclaim; only Art III judge could Counterclaim to proof of claim is a core matter thats supposed to be heard & decided by bkcy ct SCOTUS said that even though its a core matter, bkcy ct didnt have const authority to sign final judgment Doesnt matter if something is inconvenient if it doesnt pass const musterAlternatives to Chpt 11 Chpt 7 Biz Liquidation Biz get no exemptions; all of its prop is subject to liquidation Biz get no discharges; end of chpt 7 isnt that biz keeps going on after chpt 7, instead biz winds up under state law For biz, filing for chpt 7 means end of that biz/death of that biz Chpt 7 a lot more rare for biz Sec 507 still governs payments to unsecured creditors; Priority rules still apply in biz liquidation Involuntary Bkcy - Sec 303 - If debtor has 3 or more creditors who have unsecured, non-contingent, & non-disputed debt & over 14,425, those creditors can force biz into bkcy If debtor has fewer than 12 creditors, than 1 creditor w/more than 14,425 claim can force involuntary bkcy Would force debtor into bkcy if the situation is getting worse & creditors are trying to stop the bleeding Bkcy gets a better return than foreclosure b/c you can sell the entire biz, which might be worth more than the value of the assets individually; Can also wait a bit to sell assets, possibly getting a higher return If someone has an unperfected security interest, you could force a bkcy to prevent other party from perfecting the security interest, making it a bigger pie for the unsecured creditors If creditors file for involuntary bkcy, debtor can resist bkcy, convert it to chpt 11, or go along w/bkcy If debtor opposes bkcy, creditors have to prove that debtor isnt paying undisputed debts as they come due Risk is that if creditor files involuntary bkcy & ct decides it wasnt legit under 303(i), ct can require creditor filing for involuntary bkcy to pay debtor's attny fees & there could be sanctions if it was brought in bad faith While involuntary bkcy is rare, it is important in negotiations Creditors have leverage of credit default swaps; loans have provision that something occurs if debtor files for bkcy, itll trigger econ consequences Possible meanings for generally not paying debts as they come due Bkcy code doesnt look at the balance sheet to see if there are net positive assets, but whether you have the cash flow to pay debts as they come due, not the ability to pay debts in the future Could look at % of creditors not being paid on time or % of total debt not being paid on time Could be that debtor is paying all his debts, but making all the payments late If debtor is only making partial payments on time, could not fall w/in paying debts as they come due Does not paying critical vendors fall w/in not paying debts as they become due? Once you figure out proper test for j/d, how do you determine if they meet the standard for involuntary bkcy? Credit report could be helpful, but might not capture most up to date info; could be under inclusive Could ask to see corps books to see what payments theyre making/what they owe, but corp might say no Could try to contact other creditors to see what debtor owes/what debtor is paying Could google debtor to find out info about what debts it owes/what debts its paying Could sue debtor/file for involuntary bkcy & conduct discovery to see if theyre paying bills; high risk Sec 303(a) - can only bring involuntary case under Chpt 11 or 7 & only against a person, except a farmer, family farmer, or a corp that isnt a moneyed biz or commercial corp, that may be a debtor under the chpt under which such case is commenced; Person has to be an eligible debtor under the chpt creditor uses Sec 101(20) -farmer someone who operated a farming operation & got 80% of their income from that operation Sec 101(21) - farming operation includes production or raising of livestock & production of livestock products in an unmanufactured state Sec 303(i) - permissive for ct to awards costs/reasonable attny fees if improper involuntary bkcy filedIntro to Chpt 11 Bkcy ct driven process Bkcy cases started w/petition filed in fed bkcy ct; has basic info: entity name, rep, where HQ is located, etc Difference b/w Chpt 11 & Chpt 7/13 While biz in chpt 7 are not granted any discharge, biz can get a discharge after chpt 11 In chpt 13, plan pays secured & preferred unsecure debts in full & remaining unsecured creditors get % of their claims paid over 3-5 yrs In chpt 13, if plan conforms to statutes, then plan gets confirmed; dont need creditor approval In chpt 11, creditors have to approve plan & no set time to make payments In addition to creditors voting on plan, ct scrutinizes debtor's conduct during course of bkcy No trustee appointed typically in chpt 11, debtor in possession, DIP, continues operating biz under watch of ct Price of chpt 11 much higher than price of chpt 13 bkcy; chpt 11 sufficiently complicated & worth it to litigate issues in chpt 11 to preserve value of corp/claims that offsets huge costs Debtors use chpt 11 to maximize value of assets & get breathing room from creditors so they can trim bad assets, employees, etc. to become a leaner, more efficient corp At end of day, goal of chpt 11 filing is to get a reorg approved by ct & creditors Venue for Chpt 11: (1) district where biz is incorporated (most often delaware); (2) Principal place of biz, nerve center (where are corp decisions made); (3) Principal place of assets; (4) If affiliate entity is in the j/d, bkcy can be filed there (enron) Over 80% of chpt 11 bkcy cases filed in Delaware & SD NY; preferred venues for large chpt 11 filings 99% of the time, bkcy dealing w/entities in financial distress Entities that file for chpt 11 file for bkcy for 2 reasons causing financial distress Operating problems - problems w/basic biz (ie biz model becomes obsolete) Financial problems - biz model working, but corp takes out too much debt or theres a credit crunch which causes corp to run out of cash Could have, 1 the other or both Petition date - date on which chpt 11 petition is filed to start the case (work done well b/f petition date) Several motions have to be prepped to be filed on 1st day Interim cash collateral, Interim debtor in possession, Etc. Confirmation date - goal in chpt 11 is to get plan confirmed Some debtors attnys try to get plan on file that they know other parties will object to w/o negotiations w/other parties Other parties will object, leading to negotiations & filing of amended plan 1 Could lead to another creditor negotiating a deal & amended plan 2 Last creditor could ask for a better deal than other creditors got Depending on if law says creditors have to be treated the same or one can be treated more favorably, could lead to debtor deciding to go to ct or agreeing to favorable terms for last creditor Rarely is the original plan thats filed the final one that gets approved Plans can have most favored nation status; debtor cant cut more favorable deal for other creditors unless most favored creditor also gets that deal or most favored creditor will object to new plan that benefits 2nd creditor more If plan is confirmed over creditor objections, previous obligations are gone & new plan acts as debtor's new Ks w/all of its creditors Rejecting offer could lead to worse deal in a confirmed plan than what was offered Types of reorg Balance sheet - reorg done on paper as opposed to shifting operations; reorg purely financial, biz operations remain the same Done by writing down debts or eliminating them; might have good revenue stream, but not enough to meet debt burden can be done by changing ownership of sections of biz, selling off divisions/manufacturing lines so reorg'd biz is smaller even if pieces survive under other corp names Change of operations - wholesale reshuffling of debtor; use AS to close/reduce money losing divisions, trim excess staff, refocus product lines, etc In retail biz, often involves closing unprofitable stores while improving those that remain In manufacturing, could involve closing most out of date plants & dropping peripheral lines Biz reorg in chpt 11 produces smaller, leaner corp w/reduced debt burden able to concentrate on type of biz it does well Key point - in either type of reorg, all or some large part of biz is preserved as a going concern, not sold off asset by asset Whole is greater than the sum of its parts Liquidation - provides no advantage to debtor; basically death of biz org No exemptions & no discharge from debt Advantages of Chpt 11 Reorg Managers have commitment to keeping as many jobs for employees as possible & avoid liquidation May feel theres a good chance in the long run to save something for equity SH Manager, who face termination of jobs in liquidation, have hope of keeping jobs after chpt 11 reorg Also retain control of biz as long as they can hold on, giving a chance to show they can manage successfully Turn Around Mgmt Firms - if managers/officers are ones who drove biz into chpt 11, can hire outside firms to come in & manage biz to get it back on its feet Costs of Chpt 11 - Unlike consumer bkcys, biz bkcys are often tailor made to individual biz & are profoundly complex; means chpt 11 bkcy cost $ Need attnys, accountants, appraisers, etc., all of which cost Also have indirect cost in lost value in biz due to filing for bkcyMechanics of Chpt 11 Debtor files chpt 11, 362(a) imposes AS & prop of debtor becomes prop of BE DIP - after filing, debtor takes on new legal persona of Debtor in possession - 1101 DIP retains possession/control of BE prop & admins BE prop; DIP has many of the same rights/obligations as TIB - 1107 Like TIB, DIP acts on behalf of all creditors, not merely for itself (can attack fraudulent conveyance that debtor couldnt) First Day Orders - usually entered w/o notice or opportunity to be heard for many stakeholders; can be obtained ex parte Often temporary orders, but often difficult to alter rights/practices established in 1st day orders later on Additional injunctive relief beyond AS Requirements for operating reports Authorization to buy/sell outside ordinary course of biz, authorization to pay employees wages due, & other operating items Use of cash collateral & other matters related to cash mgmt 364 - Approval of DIP financing arrangement Employment of counsel for debtor & UCC Biz continues to operate in ordinary course, 363(c), under DIP control DIP can operate biz in ordinary course w/o ct approval of all routine transactions DIP limited in use of its assets that are subject to security agreements - 363(e) For big biz, usually turn around firms are hired to get biz back on track Possibility secured creditors will seek ct approval to lift AS as to their collateral unless DIP provides adequate protection - 361, 362(d) Avoiding powers - DIP has same powers as TIB to avoid pre petition trans Preferences 547 - payments/transfer of prop to favored creditors w/in 90 days of filing Executory Ks/unexpired leases 365 - can assume/reject/assign outstanding executory Ks or unexpired leases Fraudulent conveyances 544(b), 548 - can void fraudulent transfers 544(a), 547 - set aside unperfected/late perfected security interests in debtors prop 542, 543 - require turnover of prop of debtor being held by another entity Important powers, but threat of using them often helps DIP in negotiating plan w/creditors UCC 1102 - unsecured creditors committee; appointed to scrutinize debtors activities on behalf of all creditors & negotiate w/debtor Plan - debtor will propose plan of reorg in which itll offer to pay each class of creditors a certain % of their claims over a stated period of time Payment can be made in cash, prop, or securities issued by reorg'd debtor (ie new stock) Disclosure Statement - plan accompanied by DS, which provides info to creditors about prop, finances, etc of debtor so that they can make an informed vote on whether to approve/reject plan Plan & DS sent to creditors, after DS approved by ct after notice & hearing, so that they can vote on plan 1129(a) - requirements for plan confirmation; (a)(8) need all impaired classes to vote to approve plan (a)(7) - every creditor who votes against plan will get at least as much under plan as they would in chpt 7 1141(d) - upon confirmation of plan, debtor is discharged from all pre-petition debts, except as provided in plan In chpt 13, dont receive discharge until payments under the plan are complete & chpt 7 doesnt give biz any dischargeTools Chpt 11 Gives Debtor creditors can file involuntary chpt 11 petition, 303(a), which could lead to liquidation, 1123(b)(4), debtors have tools that make creditors want to work things out AS provides debtor breathing room to get affairs in order & cut unprofitable areas of biz Debtor can propose a plan, which if adopted would legally bind all creditors even if a minority reject it Debtor has exclusive right to propose such a plan for 6 months or more Turnover & Avoiding powers - can greatly augment assets available & provide leverage over certain creditorsAnalysis of Chpt 11 Negotiation Litigation delay - debtors want to get plan in w/in 120 day exclusivity period, 1121(b) (can be extended) b/c litigation is lengthy/costly process, debtors often willing to negotiate to settle any outstanding lawsuits it might have or that creditors have against it Litigation trust - Plan might call for establishing escrow account of money/prop pending resolution of litigation Plan might say that if case is won, prop goes to creditor X, but if it loses, those proceeds go to the gen unsecured pool Born of effort to confirm reorg plan quickly while continuing litigation that might eventually yield assets for creditors Leaves creditors w/o bottom line saying what they can expect to get in bkcy; plan/DS will often say that if litigation is successful, class X will receive Zc/$ but if the litigation fails, then they only get Yc/$ DIP - exercising control over biz on behalf of the biz itself, SH, creditors, employees, the community, etc. Cong has indicated that DIP should be concerned about protecting interests of a number of different constituencies of a biz following a defaultNontraditional Chpt 11 Cases Auctions - sale of entire biz through auction process; sales negotiated by attnys & investment bankers Auctions almost always mean that SH get nothing from plan Auction can be held pursuant to a confirmed plan, but often isnt If not done under a confirmed plan, 363 allows sale prior to any creditor vote & plan is simply mechanism for authorizing the auction & distributing the proceeds Prepackaged Plans - debtor negotiated b/f bkcy w/its creditors, but needs help of BC to close the deal Eg - one large creditor refuses to accept proposal; in bkcy it can be outvoted by other creditors & have plan crammed down Under some local rules, these cases can proceed w/far less public disclosure of info than in traditional chpt 11 plans May or may not be liquidating plansOther Types of Chpt 11 Cases Single Asset Real Estate (SARE) Cases - SARE defined in 101(51B); biz whose only real asset is a single piece of real estate & income comes from that asset; no other substantial biz operations done on prop Eg - running a apt complex/office building; money comes from just collecting rent Typically 2 party fight b/w debtor & main creditor (mortgage lender) Liquidation in Chpt 11 - often associated w/auction or prepackaged plans Chpt 11 provides highly flexible approach to maximizing sale value of debtors assets, especially if sold as a going concern b/c chpt 11 is a negotiated resolution of debtors bkcy case, it allows more flexibility in realizing & distributing value than fixed rules of chpt 7 subject to TIB supervision

Players in Chpt 11 Bkcy Bkcy Code treats different types of creditors differently; waterfall ranking Debtor in Possession 1101 - After filing for bkcy, its the entity that was a debtor that holds the assets. 1107(a) - DIP for the most part performs same functions as TIB; DIP both enjoys rights and must fulfill duties of TIB Unsecured Creditors Committee 1102 - Made up of, generally, of unsecured creditors & its appointed by US Trustee; most chpt 11 cases have a UCC. As a general rule, UST likes to appoint largest unsecured creditor thats not an insider to the debtor to UCC1. Reason to be on UCC is to look after interests of unsecured creditors. As an official committee, UCC can engage its own counsel & other professionals (paid for by bkcy estate)2. Allows for unsecured creditors to have adequate rep in case w/o any individual creditor having to pay for it. Being on UCC gives creditor influence over the case; can be heard by bkcy judge. 1103(c)(5) a comm appointed under 1102 may perform such other services as are in the interest of those rep'd United States Trustee - Basic function is to prevent fraud in the system; ensure that bkcy system works the way its supposed to work. Function: Chooses UCC members; acts like attny gen in bkcy; has right to be heard on any issue in bkcy ct (can object/support motions, fees, etc.). BE has to pay quarterly fees that go to pay for UST operation (based on revenue being generated); judge cant approve plan unless debtor is current on UST fees Equity Committee - when it is appointed, formed to look after interests of owners/shareholders. NOT appointed in every case; someone has to file motion to ask judge to create equity committee. Judge looks to whether theres enough value above unsecured debt so that equity shareholders would recover something. Most cases, biz clearly insolvent (debts larger than asset values), no good rational to have equity comm. Could have other types of comms like bondholder comm or groups of types of creditors; Not appointed in every case4. Purpose to have BE pay for professionals (attnys & accountants). Have to show judge theres a special need to have separate rep for this specific group Chpt 11 Trustee 1104 - Not appointed unless bkcy judge orders that a chpt 11 trustee be appointed. In most cases no chpt 11 trustee; debtor remains in possession of its assets & has management rights. In cases where theres evidence of fraud, mismanagement, depleting assets, etc. & a motion is brought to bkcy ct, ct may appoint chpt 11 trustee2. UST appoints chpt 11 trustee after ct directs chpt 11 trustee be appointed. Essentially displaces management of DIP; runs reorg of biz. Paid pursuant to statute out of BE; Chpt 11 trustee can hire attny, accountants, etc. that are paid out of BE. 1104(a)(1) - can appoint TIB for cause based on showing of fraud, dishonestly, incompetence, gross mismgmt, or similar conduct by DIP. 1104(a)(2) - bkcy ct can appoint TIB in the interests of BE or its creditors based on factual assessment of whether doing so is in the best interests of creditors6. Appointing TIB/other fiduciary to each debtor would result in balkanization of decisionmaking for all debtors, increasing costs & causing inefficiency - Adelphia Chief Restructuring Officer (CRO) - Can be an individual or entity/co.. Trend has been to appoint CROs for DIP to lead restructuring efforts & negotiate w/creditors; acts as a buffer b/w biz & legal teams1. Biz people who are skilled & experienced at chpt 11; takes burden off management at chpt 11 debtor. Paid for by BE. CRO doesnt appear in BC; attny created concept that judges accepted. For the most part selected by DIP's board or on recommendation from DIP's counsel; sometimes creditors demand having a CRO & will give DIP a list of candidates BE 541 - When bkcy is filed, mythical estate (legal fiction) is created; BE takes possession of all applicable prop. 541(d) - BE comprised of all legal or equitable interests of debtor in prop as of commencement of case; Prop rights defined by state law1. In re Scotia Pacific Co - commissions owed by debtor were prop of BE b/c of debtor/creditor relationship & Scopac's interest in prop1. Commissions paid to Scopac, who would then pay agent his share. BE created to allow corps to reorganize, instead of liquidate, & keep it running2. Lets management who ruined corp get 1st shot at trying to fix corp & make it profitable again. Dont automatically appoint a trustee whose sole job is to shut down corp & liquidate3. Chpt 7 bkcy is pure liquidation bkcy; trustee would be appointed. 1108 - Trustee or DIP is authorized to manage prop of BE. 542(b) - Have to pay debts owed to debtor to TIB unless debt can be offset under 553 Secured Creditors - At top of food chain in bkcy; Not representing estate or unsecured creditors; rep themselves. Pitted/adverse to UCC; secured creditors want collateral for itself that UCC is trying to get for its constituents. 506 - only have allowed secured claims to the extent of the value of the collateral securing the loan; any deficiency is treated as an unsecured claim2. Security interest can include provision which says secured claim includes attny fees, would be included in claim at confirmation meeting1. Can only get interest & fees + value of debt up to value of prop at time of filing for bkcy2. As a general rule, secured creditors get most of the payments in bkcy & unsecured creditors get less cents on the dollar & shareholders get next to nothing2. Bkcy judge makes judicial determination (finding of fact) on value of collateral3. Experts come in to testify about value of collateral; each of the litigating parties can have its own expert Estate Professionals - all paid out of BE. Counsel for debtor, Counsel for UCC, Counsel for Chpt 11 Trustee, CRO, Accountants, Investment bankers, Counsel for equity/other comms (if the judge approves the comms) Compensation of professionals 330: In determining amount of reasonable compensation to professionals, ct shall consider the nautre, extent, and value of such services taking into account all relevant factors including. Time spent on services. Rates charged for services. Whether services were necessary to admin of, or beneficial at the time services was rendered toward completion of bkcy case. Whether services were performed w/in reasonable amount of time, considering complexity, importance, & nature of problem. Whether compensation is reasonable based on usual compensation of similarly skilled professionals in other cases. 11 USC 102 authorizes award of compensation from BE to officers (including attnys) who help administer BE. 11 USC 104 gives costs incurred in connection w/admin of BE priority over other debts of debtor. Compensation of Attnys in Bkcy - 12 Factors - In re First Colonial Corp8. Time & labor required8. Novelty & difficulty of the questions8. Skill required to perform the legal service properly8. Preclusion of other employment by the attny b/c he accepted the case8. Customary fee8. Whether the fee is fixed or contingent8. Time limitations imposed by client/other circumstances8. Amount involved & results obtained8. Attnys dont get credit for what a case couldve gotten at trial if its settled for less b/f hand1. Would force clients to pay for a benefit they never receive8. Experience, rep, & ability of attny8. Undesirability of the case8. Nature & length of professional relationship w/client8. Awards in similar cases. Two additional considerations in bkcy context - First Colonial9. Strong policy of bkcy act that BE be administered as efficiently as possible9. Peculiarities of bkcy practice which could lead to award of duplicative fees or compensation for non legal services if overlooked2. Ie award of ad interim allowances & possibility that some officers of ct may be providing services to BE in more than one capacity. Three step process to determining reasonable attny fee - First Colonia10. Bkcy judge/dist ct ascertains nature & extent of services provided by attny1. Each attny required to file statement laying out # of hrs worked & how time was spent10. Bkcy judge/dist ct assesses value of services2. No expert opinion required, but can be allowed10. Determine amount of compensation based on value of services & services provided3. Bkcy judge has to explain his findings & reasons for granting fees, including how factors were considered. 3 stages of attny in chpt 11 - Universal Building Products11. Get employed by debtor/UCC/etc,11. Get plan confirmed11. Get fees paid by applying to ct to have it approve fees & then go to reorgd debtor to get paid. Objecting to fees - In re Interlogic Trace Inc12. Facts - TIB brought suit against accountant in state ct for neg, & malpractice in connection w/Debtors chpt 11 case12. Holding - granting attny fees & malpractice claims for same services involve common nucleus of operative facts2. IT had enough general awareness of claims to be brought against accountant that it shouldve brought objections at fee hearing1. b/c it didnt, res judicata will apply & TIB cant pursue malpractice claim12. Rationale - central issue in both fee application & present CoA was provision of accounting services during chpt 113. By granting fees, bkcy ct implied it found that the services had quality & provided value to BE3. TIBs malpractice claim involves the nature of the services provided to BE that bkcy ct had granted fees for3. IT had some questions about whether it go its moneys worth for some of accountants services; sufficient to put them on notice to bring objection/claim against accountant when it requested ct approval of fees3. Fee hearing provided an opportunity for IT to present its malpractice claims12. Nielsen Transactional Test - for res judicata to apply, need4. Identical parties in both suits1. Res judicata doesnt apply unless P could & should have brought malpractice claim in earlier proceeding1. Factors: whether earlier proceeding was adversary proceeding/contested matter, nexus b/w earlier proceeding & claims now asserted, amount of time elapsed since case began4. Prior judgment rendered by ct of competent j/d4. Final judgment on the merits4. Same CoA must be involved in both cases. Pro-snax (5th Cir) - rejected attnys fees b/c there was no benefit to BE13. Some interpret this case to say attnys dont get paid unless plan gets confirmed b/c if theres no approved plan, then theres no benefit to the BE13. Pro-snax only 5th cir, other circuits look at what attnys have done to see if at the time they were providing services, was it reasonable to provide those services at that time Disqualification of Professionals. 327(a) - attny rep'ing BE in bkcy action must not hold or rep an interest adverse to BE and must be disinterested1. doesnt indicate per se ban or gen rule, but needs fact specific inquiry into parties' interests & alignments1. Simply b/c potential for CoI exists doesnt render appointment of counsel nugatory, but makes it voidable as facts warrant. Disinterested 11 USC 103(13)(E): an party is disinterested when he doesnt have an interest materially adverse oto interest of BE or to any class of creditors or equity security holders by reason any direct or indirect relationship to debtor or for any other reason. 1103(b) - Comm counsel may not rep an entity w/interest adverse to comm; Rep of a creditor in the case isnt a per se disqualifying factor. In re WF Development Corp - Where one attny reps both a ltd p & gen ps in bkcy, there will ALWAYS be the potential for conflict & disqualification is proper4. Rationale - in bkcy proceeding, limited & gen ps hold interests adverse to each other b/c gen p's assets are at risk to pay debtor's liabilities, where as ltd ps have limited liability for pship obligations1. Dont need to hold full hearing on whether theres a CoI in rep'ing ltd p & gen p in bkcy b/c potential for conflict always exists in case like this. BR 2014(a) application of any professional seeking retention by debtor or comm shall include a verified statement of the persons to be employed5. Has to include persons connections w/debtor, creditors, any other party in interest, their attnys, accountants, the UST or any other person employed by UST5. Inadequate disclosure can disqualify professional from rep'ing BE, UCC, etc. - In re Universal Building Products2. Defective disclose not a minor issue; goes to heart of bkcy system2. Attnys violated professional codes of conduct soliciting creditors for their proxies & then failed to disclose the connections2. Failure to disclose connections under BR 2014 is enough to warrant disqualification of counsel from employment3. Subsequent disclosures not enough to cure original deficiencies. In re Adelphia Communications Corp - as long as attny never acts adversely to interest of any individual debtor, theres no problem w/one attny rep'ing multiple debtors6. Facts - debtors filed for chpt 11& rep'd by same attny & share some mgmt pros; Creditor group opposed joint rep of debtors6. Holding - affirm bkcy ct ruling on motions b/c debtors attnys have maintained lvl playing field & relief requested by creditors would make matters worse for all debtors2. Bkcy ct didnt abuse its discretion in finding that, given lack of meaningful alternatives & dire consequences associated w/imperiling the plan & sale, a balancing test tilts in favor of continuing exclusivity6. Rationale - Attnys could continue to provide info & attempt to facilitate settlement of interdebtor/intercreditor disputes w/o publicly acting as an advocate for any debtor3. Just b/c attny took actions creditors oppose doesnt mean attny favored parent debtors over subsidiary debtors; bkcy ct found that attny never acted adversely to interest of any individual debtor1. Presence of intercorp claims b/w debtors rep'd by same attny doesnt automatically warrant disqualification of attny1. b/c of costs of hiring extra attnys/professionals, cts take wait & see fact driven approach to determine if other counsel is needed; if all debtors had to have their own counsel, itd burden BEs w/unjustified & insurmountable costs Who can bring motions/object 1109(b): a party in interest, include debtor, T, or creditor comm, etc. may raise & may appear & be heard on any issue in a case under this chpt Comm had standing under 1103(c)(5) &/or 1109(b) to sue on behalf of DIP/TIB - Louisiana World Expo v. Fed Ins Co. Where TIB/DIP doesnt pursue CoA of BE, comm may assert CoA on behalf & in name of DIP w/permission of bkcy ct. Refusal to bring claim was unjust b/c it impaired interests of BE & creditors. Since DIP has duties of TIB, it must collect prop of BE & is accountable for all prop received3. 11 USC 704(2), 1106(a)(1) - TIB/DIP has duty to maximize the value of BE3. DIP/TIB has authority to bring action for dmgs on behalf of debtor corp against corp principles for gross neg, mismgmt, or breach of fiduciary duty where such action couldve been asserted by debtor corp (or SH in derivative action) prior to bkcy2. Under 704(1), DIP required to pursue CoA if itd be beneficial to BE, but b/c of CoI on part of officers/directors of corp, the DIP refused to bring CoA (basically wouldve been suing themselves). Comm's CoA was prop of BE, so DIP was duty bound to assert CoA if doing so would maximize value of BE. If DIP has CoI in bringing CoA owned by BE, allowing creditor comm to bring claim on DIPs behalf often beneficial to BE5. Less expensive & time consuming than getting TIB to bring claims against DIP insiders Requirements for creditor comm to sue: (1) Claim is colorable; (2) DIP refused unjustifiably to pursue claim; & (3) Comm got permission to sue from bkcy ct - LA World Expo. Creditors interests in chpt 11 not protected when DIP fails to collect prop of BE

AS & Adequate Protection AS 362(a) - most immediate advantage of bkcy to debtor; stops collection efforts against debtor Threat of AS acts as strong incentive for secured creditors to hold off foreclosure/repossession Stay lifting is difficult, time consuming & expensive & unlikely to be accomplished in early days of chpt 11 Debtor knows stay litigation will be filed early on; ct must act on motion to lift AS w/in 30 days or its deemed to be approved as to the requesting creditors collateral, 362(e) When creditor moves to lift AS, burden on DIP to prove theres adequate protection - 362(g)Scope of the AS Comes into effect automatically and instantly upon filing of chpt 11 petition, 362(a), and applies to large number of people who had no prior notice/opportunity to contest AS Even actions taken in innocent violation of AS, w/o notice of bkcy filing, are void/voidable Secured creditors cant foreclose on collateral until end of case or ct lifts the stay under 362(d) AS gives everyone a chance to review assets/debts of debtor b/f reorg of biz; puts everyone on equal playing field, no rush to take debtors assets If debtor has arguable claim to an interest in prop, creditor has to stay action against that prop - Chestnut v. Brown Facts - Cs wife bought prop & made payments for a while, but stopped C filed for bkcy & sent notice to mortgagee of bkcy, but mortgagee foreclosed on Cs wifes prop anyways; They were in community prop state Holding - mortgagee violated AS by foreclosing on prop b/c it was arguable that C had interest in the prop Rationale - Since it was a community prop state & prop mightve been bought w/community assets, it was arguable that C had an interest in the prop even though Cs wife bought it in her name & filed all the paper work/made all the payments Determination of whether something is prop of the BE is a legal issue for the ct to determine If theres any question at all about whether prop is prop of BE, should go to the judge to have him make a ruling Whether its prop of BE is determined solely as a matter of state law 362(b) - exceptions to AS that are narrowly construed P couldnt have unilaterally waived AS against interest of creditors - Farm Credit of Central FL v. Polk Prepetition agreements providing for the lifting of the AS arent per se binding on the debtor AS protects BE prop, provide temporary relief from creditors, & promote equality of distribution among creditors Rationale - cts that have held prepetition waivers of AS valid dealt w/single asset bkcy cases where there was evidence of bad faith filing & no prospect for successful reorg; not the case here Relief from AS MUST be authorized by bkcy ct No other creditors were involved in prepetition agreement nor did bkcy ct approve agreement In re Sky Group Intl - granting a creditor relief from AS jst b/c debtor elected to waive protection of AS ignores fact that AS is designed to protect ALL creditors & treat them equally Primary considerations for determining when non-debtor co-D may be granted stay under 105 - Seitles (a) Irreparable harm and Interference w/rehabilitative process; met when action against non-debtor co-D is inextricably interwoven w/affairs of debtor that it would substantially hinder debtors reorg effort (b) either (1) likelihood of success on merits or (2) sufficiently serious questions going to merits to make them a fair ground for litigation & balance of hardships tipping toward party requesting prelim reliefLifting the AS - 362(d) 11 USC 362(d) (362(a) imposes AS) - gives secured creditor the ability to remove or modify AS Secured creditor filing motion w/bkcy ct to remove/modify AS so it can foreclose/take other action in regards to the collateral Two prongs of 362(d) Can seek to lift AS for cause (cause not defined) Often creditor alleges that its not adequately protected; can be as direct an argument that the prop is not insured Could be argument that value is decreasing b/c of physical harm/deterioration or mkt conditions; should get compensation for decreasing value Alternative means to lift the stay is to prove that there is no equity in the prop (debt greater than value of prop, under collateralized) AND the prop is not necessary for an effective reorg Just being under collateralized alone wouldnt be enough Hard hurdle to overcome b/c assets often necessary for reorg Adequate protection not an element of 362(d)(2) analysis If you can prove debtor cant successfully reorg, can get AS lifted Key to many stay lifting provisions is the valuation of the asset In re Scotia Pacific Co - about single asset real estate debtor, which have special rules for lifting AS Ct said b/c Scopac conducted substantial biz on its prop, it wasnt a SARE w/in meaning of 101(51B) 101(51B) - reqs for SARE Debtor must have real prop constituting a single prop/project Prop generates substantially all of GI of debtor To be SARE, revenues received by owner must be passive in nature (ie receiving rent) No substantial biz is conducted on prop other than biz of operating real prop & activities incidental thereto Merima - SCOTUS said bkcy ct had equitable power under sec 105 to prevent debtor from transferring from chpt 13 when he was acting in bad faith, even though plain language of the statute gave debtor power to make transfer In re Rogers Development Corp Facts - R & B corps developing real estate together; took out 520k loan & 360k line of credit from H; went into default on both & filed for chpt 11 (had completed the construction) Owed H 548k at time of filing; interest accruing at 63k/yr; prop appraised at b/w 700k & 800k Holding - debtor may provide adequate protection through an equity cushion as 361 is not an exclusive list Valuation approximating FMV is the commercially reasonable standard required H adequately protected by equity cushion even if prop is worth as little as 700 b/c their claim is only for 548k 362(d)(2) not available b/c ct cant say that its not feasible for debtor to reorg & prop is necessary for reog Rationale - Maintaining status quo isnt the indubitable equivalent nor granting such other relief Equity cushion can constitute adequate protection w/o moreAdequate Protection - 361 3 nonexclusive means of providing adequate protection: (1) periodic payments; (2) additional or replacement lien; (3) catch all, allowing other means of adequate protection as will result in the realization by such entity of the indubitable equivalent of its interest in prop Equity cushion can, on its own, serve as adequate protection as indubitable equivalent (In re Rogers Development Corp) Problem when collateral depreciates at a rate higher than principal is being paid off; at some point therell no longer be an equity cushion & creditor would no longer be adequately protected United Savings v. Timbers of Inwood - Pivotal case about whats included w/in adequate protection Facts - apt project being built; lender owed 4.3mil In hearing, lender was trying to ask for adequate protection of collateral, bkcy judge determined value of collateral didnt exceed 4.2mil Value of collateral judicially determined to be less than amount of debt; under secured debt, underwater debt SCOTUS - undersecured creditor is not entitled to interest on collateral during the stay to assure adequate protection under 11 USC 362(d)(1) opportunity costs shouldnt be compensated under bkcy code Undersecured creditor couldnt get interest payments for value of collateral for starting after 6 month period b/f foreclosure could be completed Bkcy judge judicially determined that value of prop was expected to increase during pendency of bkcy Important determination w/regards to whether theres adequate protection & what protection creditor can get If value of prop is increasing, the undersecured creditor is not entitled to any additional protection If value of prop had been judicially determined to be decreasing, then undersecured creditor would be entitled to compensation for difference b/w present value as of date of petition & value at end of bkcy Done to maintain undersecured creditors position throughout pendency of bkcy If undersecured creditor cant be compensated at end of bkcy for decrease in value of asset during bkcy, likely that the plan wont be confirmedPayments while Chpt 11 is pending Adequate protection challenges often look at how much debtor must pay creditor during bkcy case If ct orders too high of a payment, it might be more than debtor can handle, making reorg impossible Nature of AP - can be equity cushion, additional liens, cash payments, etc. AP payments sometimes confused w/interest payments Under BC, ALL creditors add prepetition interest to their claims based on the terms of their Ks - 502 Oversecured creditors are entitled to postpetition interest while case is ongoing, 506(b), but not undersecured/unsecured creditors, 502, 506(b) Oversecured can get postpetition interest to extent of equity cushion Interest to oversecured creditor doesnt necessarily have to be paid in cash to creditor; bkcy ct can let interest accrue, but creditor still entitled to include interest in his secured claim TH New Orleans LP - if cash collateral payments reduce creditors claim so he becomes oversecured b/f confirmation, valuation of collateral & claim should be flexible & not limited to single point in time Party who thinks its entitled to 506(b) post petition interest must motion bkcy ct to make such determination & bears burden of proving its entitled to post petition interest (ie its oversecured, extent of equity cushion, & for how long its been oversecured) If FSA thought it was entitled to postpetition interest, it had to make a motion & bear burden of proof Secured creditors right to post petition interest under 506(b) matures at point in time when claim is oversecured Accrued interest under 506(b) isnt paid until confirmation date or effective date of plan, whichever is later K interest rate often an appropriate rate that adequately compensates for risk & is a good estimate as to appropriate discount rate Present Value of Claim - when plan is confirmed, secured creditors are entitled to present value of their claim, unsecured claims entitled to present value of what they wouldve gotten in chpt 7, 1129(a)(7) Creditor must be no worse off than hed have been in chpt 7 Undersecured - get value of total collateral at time of filing + post confirmation interest (ie present value) on that amount + payment for unsecured part of claim at rate unsecureds paid under the plan; no post petition interest In re Oxford Mgmt - ct cant use 105 equitable powers to authorize payments of pre petition debts from post petition funds w/o lifting AS or confirmation of plan Bcky ct set up special scheme to pay pre petition debtors from post petition funds based on sec 105 Ct said sec 105 did not give bkcy ct roving equitable powers; 105 powers have to be exercised in manner consistent w/BC, bkcy cts cant create substantive rights that are otherwise unavailable under applicable law Need statutory powers to do anything under bkcy code; ct cant just rely on equitable powers from sec 105Good Faith for the most part, only secured can seek lifting of AS Unsecureds best chance to get out of chpt 11 is to get case converted to chpt 7; argue bkcy was filed in bad faith 1112(b), can file motion to dismiss case for cause, ie bad faith filing of chpt 11 petition, if its in best interests of creditors & the estate 1112(b)(4) - for cause can include bad faith filing SLG Carbon - filing just to get away from litigation/force a settlement is not filing in good faith Need more details to say that filing was in good faith; if corp is in good financial situation but filing just to stop litigation, then thats bad faith filing US is unusual in allowing solvent corps to file for bkcy allowed b/c its difficult/expensive to prove insolvency & requires valuing assets/liabilities Theres a benefit to filing early b/f problems get out of hand Filing early preserves value for benefit of equity owners In re SGL Carbon Corp Facts - SGL investigated for price fixing w/potential liability of 240mil & filed for chpt 11 Antitrust Ps only ones not to paid in full under plan; would be barred from bringing claims against SGL/affiliates based on CoAs against SGL Holding - biz doesnt have to wait to file chpt 11 until after a massive tort judgment has been entered against it Bkcy was filed in bad faith b/c SGLs petition lacked a valid reorg purpose; it is subject to dismissal for cause under 1112(b) Rationale - attenuated possibility that corp might have to file bkcy in future not enough to establish good faith SGL had 124mil in assets over liabilities & no evidence it had difficulty in meeting its obligations as they came due nor did it have trouble raising/borrowing money No customers terminated their Ks w/SGL based on tort case In re PPI Enterprises - Filing chpt 11 just to take advantage of rent cap in 502(b)(6) is not per se bad faith filing

Right to Setoff - 553 553(a) - Except as otherwise provided in 362 & 363, bkcy code doesnt affect right to setoff a debt arising b/f bkcy, except to the extent that Claim of creditor against debtor is disallowed Claim was transferred by an entity other than the debtor to creditor (1) After commencement of the case OR (2) after 90 days b/f the filing of the petition & while debtor was insolvent Debt owed to debtor by creditor was incurred by creditor (1) After 90 days b/f filing; (2) while debtor was insolvent; AND (3) for the purposes of obtaining a right of setoff against the debtor BC recognizes right of any creditor to offset a debt it owes to the debtor against a debt owed to the creditor by the debtor, subject to some qualifications/limitations; limits debtors access to its cash Enables creditor to obtain, in effect, full payment of its claim up to amount of its debt to debtor Especially important for banks; deposits w/bank (checking/savings account) basically debts owed by bank to debtor Not technically a security interest, although it has much the same effect & is treated as one for most purposes under BC 506(a) - creditor w/right to setoff is treated as secured for the amount of its setoff right 363(c) - account subject to setoff is treated as cash collateral & governed by rules for using cash collateral 362(a)(7) - creditor w/setoff right is subject to AS & may not exercise setoff w/o permission of ct See Citizens Bank of MD v. Strumpf - temporary admin hold pending application to lift AS to exercise right to setoff didnt violate AS Still needed ct approval to setoff w/o violating AS BC doesnt create right to setoff, merely enforced rights that exist under nonbkcy law Nonbkcy law limits right to setoff against special purpose accounts (ie escrow account) If biz in trouble, bank cant reach into any special purpose account to setoff debt owed by biz Citizens Bank of MD v. Strumpf Facts - debtor filed for chpt 13 & MD bank, which debtor had checking account w/, put admin hold on debtors account b/c he was in default on prebkcy loan; setoff debt owed to bank by placing hold on debtors checking account Bank refused to pay withdrawals that would reduce account balance below amount needed to pay back bank Bank filed motion for relief from AS & for setoff; debtor filed motion to hold bank in contempt & for violation of AS Holding - banks admin hold, refusing to pay withdrawals from checking account that would reduce balance below amount needed to pay back bank, didnt violate 362(a) AS Rationale - (1) banks action wasnt a setoff w/in meaning of 362(a)(7) b/c:3. (a) bank didnt purport permanently to reduce the checking account balance by the loan amount3. (b) requirement of such intent was implicit in the rule followed by a majority of j/ds addressing the question & setoff hasnt occurred until theres2. A decision to effectuate a setoff, some action accomplishing the setoff, recording of the setoff3. (c) 542(b) & 553(a) generally allowed the imposition of a setoff right that a creditor possessed b/f filing3. Even if state law were different, whether a setoff has occurred is a matter of fed law3. (d) reference in 553(a) to 362 was most naturally read as allowing 362(a)(7)s restriction upon when an actual setoff might be effected3. (2) debtors contention that admin hold violated AS rested on false premise that admin hold had taken something from debtor or exercised dominion over debtors prop3. Ct wont read 362(a)(3), (6) as proscribing what 542(b) and 553(a) were plainly intended to allow; temporary refusal of a creditor to pay a debt thats subject to setoff against a debt owed to debtor3. just b/c youre exercising control doesnt mean youre exercising control for purposes of the AS7. Bank not holding debtors money; bank account just represented a promise to pay the debtor by the bank1. Refusal to pay was neither a taking of possession of debtors prop nor exercising of control over it; merely a refusal to perform its promise7. Dont interpret 362(a) to proscribe what 542(b) & 553(a) are designed to allow; ie the temporary refusal of a creditor to pay a debt that is subject ot setoff against a debt owed by the debtor2. Cant setoff unless you go to ct & file motion & get approval from ct. Strumpf holding doesnt make sense b/c prop of BE expansive & doesnt matter where its located or who holds it (11 USC 541)4. Would lead banks to put admin freezes on accounts w/o calling it a setoffOperating in Chpt 11Who's Running the Show? DIP retains control of biz (BE) and continues running it; often creditors & debtor focus on operation of biz as central concern of ongoing chpt 11 Amt paid to creditors in chpt 11 depends in large part on success of biz in chpt 11 If disputes b/w debtor & creditors get serious, creditors can try to convert case to chpt 7 or appoint TIB to run biz In re Sharon Steel Corp Facts - SSC manufactures steel; of 2 furnaces, most efficient one was shut down pending 18mil in repairs & the other was 3yrs overdue for relining & was in trouble of imminent shutdown. SSC filed for chpt 11; had 742mil in liabilities & 478mil in assets. UCC moved to appoint TIB b/c debtor losing 2mil/month when steel prices were rising & mgmt couldnt precisely measure losses as it had no postpetition profit/loss statements2. Mgmt also didnt renegotiate loan to more favorable interest rate which would save SSC 4mil/yr Holding - b/c of mgmts mishandling of biz & potential CoIs, it was appropriate to appoint TIB to run SSC Rationale - appointment of TIB in chpt 11 the exception, not the rule. 1104(a)(2) - creates flexible standard to appoint TIB when its for the interests of creditors, equity security holders, & other interests of BE. Evidence of mismgmt2. Paid 294mil to secureds & 9.8mil & 970k to execs when SSC lacked money to reline furnace & had to borrow 30mil at 28-30% interest2. Just b/f filing, paid 3.7mil to financial mgmt services biz, transferred yacht, plane & stock to other parties & mgmt didnt try to undo any of these transfers2. Appears that SSC mgmt engaged in systematic syphoning off of assets on eve of bkcy Why creditors move to have TIB appointed Sometimes creditors explicitly seek liquidation in chpt 11, which goes faster/smoother when entrenched mgmt is ousted Dealings b/w creditor & mgmt become source of debtors troubles Bad acts by mgmt doesnt always lead to appointment of TIB if mgmt is essential to success of biz In re Rush - professional engineer had Ks w/gov; had engaged in suspicious trans b/f bkcy. Gov & creditors opposed appointing trustee b/c engineer was vital to continued operation of biz Why allow Chpt 11 Liquidation? w/mgmt running liquidation in chpt 11, likely theyll get better prices for the assets & it avoids chpt 7 trustee fees 2005 Amendments 1104(e) - say that UST shall move for appointment of TIB if there are reasonable grounds to suspect that current mgmt participated in actual fraud, dishonesty, or crim conduct as they managed debtor or made financial reports 1104(a)(3) - If theres reason to dismiss case, ct may replace DIP w/TIB if such a move is in best interests of BE. Ct already had this power under gen trustee appointment provisions of 1104(a)(2) Why let old mgmt run biz as DIP? Often they know the most about the biz & have greatest incentive to succeed If biz not in scandal w/old mgmt, appointing TIB unattractive to most cts but if biz is going to be sold off dept by dept, unclear how important knowledge of biz is as a factor to keep DIP in charge Appointment of examiner 1104(c) - middle option b/w allowing DIP to run biz & appointing TIB Examiner investigates affairs of debtor to: (1) identify pre bkcy fraud & mismgmt; (2) discover CoAs that should be brought by BE; (3) monitoring DIPs performance Creditors like examiner b/c it allows experienced & knowledgeable mgmt to keep running biz, but creditors will have someone keeping an eye on things Cts have assumed they can appoint examiners to do wide range of things; assume that they can define & limit examiners power pretty much as they choose. In re Gliatech - ct treated examiner like special counsel appointed for specific discrete job rather than to do investigations & make recommendations like a TIB would

Cash Collateral Biz need $ to keep operations going while long term plan of reorg is developed, but cong worried about giving DIPs control over cash as its a volatile/easily transferred asset Creditors whos loans are secured by inventory/accounts also worry about DIPs use of cash that secures their loans 363(c)(1) - cash not subject to lien can be used in ordinary course of biz w/o much constraint Cash Collateral 363 - Cash subject to a lien (often b/c its proceeds from sale of secured inventory or collection of accounts, UCC Art 9) cant be used by DIP w/o permission of bkcy ct 363(a) - cash collateral means cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a security interest as provided in section 552(b) of this title, whether existing b/f or after the commencement of a case under this title. Sec 552(a) - secured parties cant have security interest in prop acquired after filing of bkcy; no security interests in after acquired prop even if K says that such an interest would be granted Exception is that secured parties would have an interest in the proceeds from the prop they had a security interest in Use of cash collateral - under 363, DIP cant use one dollar of a lenders cash collateral w/o one of two things: 1) the lenders consent or 2) authority of bkcy ct Bkcy judges, as required by bkcy code, safeguard cash & secured creditors interests in cash very strenuously Can be found in contempt of ct if debtor uses creditors cash collateral w/o creditors consent or cts approval Use of cash collateral is done most of the time by consent through agreed cash collateral order. Has attached budget by line item saying how cash collateral will be used in coming months1. If DIP doesnt follow line item budget from cash collateral order, creditors can object to use of cash DIP can use prop of BE in ordinary course of biz w/o ct approval, but rules for cash collateral superimposed on this rule. Cash earned in ordinary course of biz after filing bkcy still cash collateral Critical vendors paid under line item in cash collateral order & through critical vendor order Both in cash collateral & DIP financing, approval from ct comes in 2 steps (DIP financing in 11 USC 364, Bkcy R. P. 4001) Preliminary hearing 1st; usually very quick, can be 1st or 2nd day. Ct should only approve use of cash or borrowing of money necessary to avoid any irreparable harm to debtor1. Allows use of cash/borrowing of money for expenses that are necessary 2nd hearing no sooner than 14 days after preliminary hearing; gives other creditors chance to see if use of cash/terms of loan are satisfactory Orders on cash collateral & DIP financing are critical to case Orders can have clauses w/far reaching implications (eg debtor wont propose a plan of reorg that is not approved by DIP lender) DIPs might agree to such orders/terms b/c it might be only source of funding/cash to get through bkcy Often only source of funding is existing lender; if DIP has no cash & needs to make payroll & continue to operate, DIP doesnt have a lot of leverage In re Earth Lite Facts - SB sought relief from AS & wanted to prevent EL from using its cash collateral; SB prepetition creditor who had provided DIP financing secured by inventory; EL had stopped making payments under agreement Holding - debtor must prove creditor is adequately protected w/o using crutch of 3rd party guarantees SB is more than adequately protected if debtor resumes Ktual monthly payments & cures default SB not entitled to injunction & EL can keep using cash collateral to operate biz Rationale - whenever noncash collateral is liquidated (ie inventory sold) the proceeds are cash collateral so long as theyre subject to the original lien; DIP has to provide adequate protection when using cash collateral Debtor, b/f using cash collateral, cant rest on equity cushion alone; must offer more b/f it can use cash collateral Debtor should be making periodic payments to creditor for use of cash collateral; debtor should be given opportunity to cure default from missed payment

Post Petition Financing (DIP Financing) - 364 Important for DIP to say to creditor, customers, suppliers that it has a source of financing to keep them from running away from corp in chpt 11 Often, a big part of DIP loan is said to be earmarked for critical vendors & other ongoing corp expenses as well as reorg costs DIP loan in almost every case is secured by a senior lien & will have a term, the earlier of confirmation or whatevers negotiated When DIP loan is due, its due & has to be paid When DIP loan matures, AS could be lifted to allow DIP lender to foreclose on prop w/in 2 weeks of start of case: DIP lender can secure all of the assets DIP lender can get provisions in DIP order that require its approval of plan DIP lender can get provisions favorable to DIP lender & unfavorable to unsecured creditors DIP financing order its not reviewable on appeal unless the DIP financing order is stayed DIP financing/cash collateral order would likely say its secured by pre petition & post petition asset even though post petition assets generally not part of BE (unless theyre derived from a pre petition asset) DIP lenders charge large interest rates; can price out risk of making loan Not bad time to lend b/c all of DIP's conduct is being scrutinized by ct; Will get huge payoff when debtor reorgs Sec 364 - allows DIP to entice lender post bkcy Can offer admin priority to lender under sec 507; get paid b/f unsecured debtors 364(b) If thats not sufficient for lender can (364(c)): (1) give a lien on any unecumbered prop; (2) Give priority admin claim; or (3) Give junior lien on secured prop Possible to displace 1st lien on secured prop & take a superpriority lien on that prop 364(d). Only if DIP cant get any other lending. Theres adequate protection for lien that was sr & is being made jr 364(d) & Adequate Protection - First South Savings Assn Facts - FS pre petition creditor secured by unfinished hotel. Debtor wanted 2mil loan secured by a lien that was superior (super priority) over FS' existing lien on building Cant give super priority liens anywhere else in law except under bkcy code w/bkcy ct approval. Can only give approval if existing lender is adequately protected1. Need sufficient equity cushion in pre petition collateral to cover pre petition debt & post petition DIP loan1. Here, DIP lenders own expert said collateral would leave FS exposed by 1mil1. Judges hesitant to impose super priority lien over pre petition lien if theyre not entirely certain theres enough equity in collateral to cover both pre & post petition debts 5th Cir reversed super priority lien b/c there wasnt adequate protection/sufficient equity in collateral Debtor can offer adequate protection by offering to make cash payments or by offering other collateral. dont have to just look at value of existing collateral to determine if theres adequate protection, but thats the start point Most important protection DIP can offer DIP lenders is security interest in assets Prepetition security interests secured by after acquired prop cease to operate instant bkcy is filed 552(a) - prepetition security interests dont attach to prop acquired by DIP after filing Proceeds Argument/Tracing - Doesnt apply to cash collateral (ie new inventory bought w/proceeds from selling prepetition inventory subject to security interest). Creditor must be able to trace value in unbroken chain directly from prop in which it held security interest to new prop New prop created/bought by BE after filing doesnt automatically get secured by lien of creditor w/after acquired prop clause; instead prop goes to BE & reps interests of all creditors DIP can offer DIP financers security interest in unencumbered prepetition prop & new prop it acquires post petition In re Garland Corp Facts - GC filed for bkcy & sought DIP financing & got 1.4mil in post petition loans that were deemed priority costs of admin under 507(b) & had 1st encumbrance on all assets of debtor UCC opposed further DIP financing of 500k Holding - record supports finding that debtor urgently needed the money & it was otherwise unavailable Ct may allow use of unencumbered assets to secure DIP financing so long as it complies w/364(c)(2) Rationale - despite short term operating losses, bkcy ct didnt err in finding that debtor could be successfully reorg'd Hearing for 500k loan showed debtor had tried & failed to obtain unsecured credit Needed money to keep operating; 1300 employees told to call ahead to see if plant would be open. Essential raw materials only available on a cash on delivery basis & other trade creditors wouldnt product needed materials w/o assurances of payment No express statutory requirement that unsecureds be given adequate protection. 364(c)(2) - no requirement for adequate protection in respect to credit obtained under this provision In re Hubbard Power & Light Facts - DIP sought financing by providing super priority admin claim and a priming lien on all of debtors assets & assignment of & first priority security interest in all revenue debtor receives to lender needed funds to clean up fire so biz could resume operations Debtor had no valuable prop except for raw land; investment of 300k-400k would increase value of prop Secured lenders/county w/lien on prop objected to DIP financing Holding - since clean up which would improve value of land & is a condition precedent of loan, county is adequately protected Grant debtors motion to obtain sr priority financing under 364(d) Rationale - county has little to no secured claim in land, any improvement to real prop by way of clean up would improve county's position & provide adequate protection Debtor cant get secured lien on unencumbered prop b/c all of its prop is encumbered Cross Collateralization - undersecured prepetition creditor agrees to provide post petition financing in exchange for security interest that covers post petition loan & undersecured portion of pre petition debts Shapiro v. Saybrook Manufacturing Facts - SMC owed MH 34mil prepetition that was only secured to 10mil; MH provided DIP secured financing of 3mil & also received security for 24mil of previously undersecured loans Holding - 364(e) only applies if challenged lien/priority was allowed under 364; cant determine if appeal is moot b/f determining whether lien/priority was allowed. Cross collateralization isnt allowed by BC & shouldnt be allowed based on equitable powers1. its not authorized as a method of post petition financing under 3641. its beyond the scope of bkcy cts inherent equity powers b/c its directly contrary to fundamental priority scheme of BC Rationale - 364(c), (d) - by their terms only apply to future, post petition, extensions of credit; dont authorize granting liens to secure pre petition loans. Sec 105 equitable power isnt unlimited; 507 fixes priority of claims & expenses against BE1. Creditors w/in given class are to be treated equally & bkcy cts cant create their own rules of super priority w/in a single class; cross collateralization does exactly this. Rehab of debtor doesnt justify use of any means 11th Cir rejected use of cross collateralization; There isnt a bright line rule about cross collateralization in other circuits Saybrook doesnt stand for idea that DIP lender cant secure loan for more than its worth Case does stand for that DIP lender cant enhance its position by making loan contingent on DIP increasing collateral to secure pre-petition debt Mootness - stay of bkcy ct order is required for certain orders (ie post petition financing) to be appealed Moots the appeal of a DIP financing order; Saybrook crack in 364(e) in 11th Cir b/c it said cross collateralization wasnt allowed under 364(e) (extreme exception to 364(e) rule) If stay is imposed, itll be hard for biz to operate; if its not imposed, then itll be hard to undo the order if appeal is granted 364(e) - designed to encourage post petition lenders by assuring them that their rights will not be upset by an appeal of the order that gives them security or priority unless it is stayed Helps prevent them form being stuck w/high risk loan Party appealing financing order must apply for a stay of the order & that party often required to post a bond. Absent a stay, the lender is protected in its security/priority even if app ct later decides the financing order was ill advised/not allowed by BC Often means that action of bkcy ct will never be subjected to an effective review In re First South Savings - FSS showed likelihood of success on merits b/c its claim on BE wasnt adequately protected; issued limited writ Rationale - dont need to show probability of success on merits, just that youve got a substantial case on the merits & balance of equities weighs in favor of granting the stay. absent a stay pending appeal the DIP financing would be allowed provided loan was made in good faith & w/proper notice, thus thered be irreparable injury to FSS if stay isnt granted. To get mandamus relief, SCOTUS requires that moving party has no other adequate means to attain the relief he seeks & must satisfy burden of showing that his right to writ is clear & indisputable2. Standard for mandamus: remedy is available only when theres clear & indisputable abuse of discretion or usurpation of judicial power by trial ct criteria to determine whether a stay pending appeal is appropriate (First South Savings): whether movant has made a showing of likelihood of success whether movant has made showing of irreparable injury if stay isnt granted whether granting stay would substantially harm other parties whether granting stay would serve public interest Proper recourse for creditor opposed to use of DIP financing funds is to get an order staying financing pending appeal - EDC Holding Co Holding - where its evident from loan agreement itself that trans has an intended effect that is improper under BC, the lender is not in good faith. Lender acting in good faith isnt protected by 364(e); its irrelevant what the improper purpose is Facts - debtor received DIP loan to pay wages (507(b)(3) priority claim) & UCC objected to paying 77k in creditors attnys fees from loan Rationale - bkcy ct order was never stayed under 364(e), thus if CMB was acting in good faith when it lent 77k for attnys fees, its priority couldnt be affected by the validity of the order & issue of validity is moot. Union attnys fees not entitled to priority & not entitled to be paid by BE prop; no allowance will be made to creditors attny for proving his clients claim Owner Financing - old equity holders can be a source of funds for debtor in chpt 11 In return for investment, they often want ownership of post bkcy biz APR - bkcy code follows rule that generally, equity interest holders cant retain value unless all creditors have been paid in full New value exception - when equity holders provide new value that cant be obtained elsewhere to finance reorg, bkcy ct may permit equity to retain ownership if its convinced that the bargain is fair & creditors will benefit B of A v. LaSalle - old equity holders cant just buy equity in biz as part of plan w/o giving others a similar opportunity to bid In small biz, where owner is basically the biz, creditors may accede to continued participation by old equity as a practical matter Financing Goods/Services - BC doesnt require suppliers to continue doing biz w/debtor after filing, unless theres an enforceable executory K that debtor assumes Normal supply Ks just series of orders, not a single ongoing K Absent ongoing Ks, suppliers reluctant to extend further credit despite fact that theyll have admin priority if they do - 503(b), 507(a)(1) Rule in bkcy that unsecured prepetition creditors cant be paid except on pro rata basis Substantive consolidation - Babcock v. Wilcox: having DIP financing w/multiple debtors doesnt substantively consolidate the debtors bkcys even if theyre procedurally consolidated

Critical Vendors Critical vendors get their pre petition debts paid (not necessarily all at once) exception that says certain unsecured suppliers, whos goods/services are crucial to debtors biz, can be paid on prepetition debts as a condition of providing future goods/services; typical critical vendor deal gets all of their pre petition debt paid now & often is contingent of providing trade credit Only debtor can ask for critical vendor status If creditor sought critical vendor status, could be seen as trying to collect AS b/c trying to collect pre petition debt through critical vendor status Critical vendor status arises as a corollary of the AS AS says no creditor/party can take action against debtor after petition has filed & debtor cannot pay any obligation that it owed as of the date of its petition Debtor precluded from paying debtors that it owed money b/f petition b/c bkcy wants creditors to be paid through reorg as equally as possible under the rules. Dont want debtor favoring some creditors over others. Also gives debtor breathing space b/c he wont have to pay pre-petition debts No matter AS, can pay vendors for post petition obligations (admin expense of BE); ie can pay vendors for goods/services provided after the petition is filed If vendor tries to condition delivery of post petition goods on payment of pre petition debts, it would violate AS (unless approved as part of bkcy plan/by judge) b/c creditor trying to collect on pre petition debt; creditor could be sanctioned for violating AS If vendor tried to charge more for post petition goods than pre petition goods (assuming goods are unique/special), if no K b/w parties agreeing on price from pre petition & higher price not going to offset pre petition debt, then the creditor is likely not violating AS by charging more Need linking conduct b/w post petition charges & pre petition debts; if pre petition debt not being paid down, then vendor likely ok if creditor uses part of higher price to reduce pre petition debt, it would violate AS If debtor offers to pay for post petition goods & additionally would ask ct to get approval to pay pre petition debt owed to vendor, wouldnt violate AS If creditor made same offer, could be seen as trying to collect on pre petition debt & violation of AS 2005 Amendments 546(c) - expanded trade creditors right of reclamation; if debtor receives goods while insolvent & its w/in 45 days fo filing, seller may have right to get goods back if it makes timely written demand 506(c) - reclamation works against debtor but not against secured lender who claims the newly delivered prop as inventory. Blanket security interest that covers inventory/after acquired prop will continue to trump supplier, negating any right to reclaim goods 503(b)(9) - seller of goods received by debtor w/in 20 days b/f filing gets automatic admin priority; right to 100% payment Could cause admin chaos in figuring out who is entitled to what goods & may operate to prejudice other creditors Make debtor even more dependent on DIP loans as its soul source of financing b/c they have to pay suppliers or lose inventory Increase risk that fewer companies will be able to reorg 7th Cir - CV doctrine must be narrowly limited to vendors who were demonstrated to be critical, otherwise theyd have to wait to get paid on prepetition debts like all other unsecureds In re Kmart - CRITICAL VENDORS Facts - Kmart filed for bkcy & on 1st day sought permission to pay immediately & in full pre petition claims of all critical vendors; bkcy ct gave approval to pay 2300 CVs 300mil+ out of DIP financing Other unsecured paid 10c/$ (mostly in stock of reorgd Kmart); one creditor objected to CV order & dist ct reversed order after payments had been made Holding - dont decide whether 363(b)(1) could be used to pay prepetition debts b/c CV order here was unsound no matter how 363(b)(1) is read Record wasnt proper to show preferential payment to CV creditors had a prospect of benefit to other creditors CV order cant stand & preferential payments can be recovered for benefit of all creditors Rationale - reversing preferential payments is done by bkcy ct all the time & if order to pay CVs was invalid, then CVs have received preferences that Kmart is entitled to recoup for benefit of all creditors Confirmation of plan doesnt stop admin of BE (except to extent plan so provides) Equitable doctrines that prevent rescission of transfers from DIP dont apply here; no detrimental reliance (ie in providing DIP financing). Continuing to do biz w/debtor b/c of CV payments may or may not be reliance, but it is not detrimental. Might be different if debtor becomes insolvent during bkcy; then CVs might be allowed to retain payments under CV order to extent of post petition deficiencies No const obligation to make every creditor a party to every contested matter in bkcy; since all CV order said was Kmart could pay creditors it deemed CVs, only had to name Kmart as a party in this action 363(b)(1) - TIB/DIP after notice & hearing may use, sell, or lease, other than in ordinary course of biz, prop of BE; paying CVs for pre petition debts is a use of prop other than in ordinary course of biz. Priorities dont change unless a statute allows for it Paying CVs based on idea that theyll stop doing biz w/debtor if not paid for pre petition debts. Some will keep doing biz w/debtor b/c they need the biz or b/c theyre bound by long term Ks. makes it unnecessary to compensate them preferentially for prepetition debts Dont need to pay pre petition debts to assure creditors that debtor will pay for new obligations. Can require payment of cash or its equivalent for new deliveriesUse, Sale & Lease of BE Prop Sales from Chapter 11 - more and more bizes are coming out of Chapter 11 in sales; outside the ordinary course of biz 363(b) - TIB, after notice/hearing, can sell/use/lease BE prop, other than in ordinary course of biz To use/sell/lease prop outside ordinary course of biz, file motion under 363 to all creditors who have secured interest in the prop; once ct approves, can close the transaction Two ends of the spectrum; a lot of room in between in determining what is and is not ordinary course of biz. the 363 sale is located in the early stage of the bkcy w/end goal of confirmation; Stabilizing biz Which contracts to reject Claims are being filed Negotiate w/the creditors. Hard to do a 363 sale outside of the plan, especially when its essentially all of the debtors assets; sale as a going concern b/f filing plan Can file a plan that includes 363 sales of assets as part of the distribution of prop try to figure out which assets to sell to get money in, which you will need at confirmation date Build up as much a cash reserve so theres enough cash to pay the administrative claims, making plan feasible Sometimes selling the assets not b/c debtor wants to but b/c it needs cash to build up the reserves. Proposed Sale of all of the Assets in 363 subject to more ct scrutiny than sale of a few assets 363(c) - if biz of debtor is authorized to be operated, TIB may enter into trans, including sale/lease/use of BE prop, in ordinary course of biz w/o notice/hearing Cant use/sell lease cash collateral unless: gets consent of secured parites or gets ct approval, after notice/hearing 363(k) - secured parties can credit bid on sales of their collateral up to extent of allowed secured claim (value of prop) Sales from Chapter 11 -more and more bizes are coming out of Chapter 11 in sales. Outside the ordinary course of biz. General rule, a company is authorized to operate the ordinary course of biz w/o ct authority. File motion under section 363 to all creditors and those who have secured interest in the property. Only then could you close the transaction. Two ends of the spectrum. A lot of room in between in determining what is and is not ordinary course of biz. Ordinary Course - whether the BoD need to approve trans is one factor in deciding in whether it is in the ordinary course Horizontal and vertical view of the transaction - Take the view of the creditor's view secured creditor; must tell them that you are going to use the secured collateral Want a ct order b/c UCC/TIB (if there is one) could challenge the ordinary course of biz & have ct say trans is invalid b/c there is no authority to do so Make sure what authority you rely upon is good authority to determine ordinary course of biz; look to what biz has done day in and day out. Remember - Every time the debtor goes to ct for approval, the BE is paying the UCC's pro fees as well as its own out of BE prop (admin priority claims paid in full) In re Gulf Coast Facts - debtor proposed selling essentially all BE prop in 363 sale outside ordinary course of biz Unsecureds would get nothing from sale b/c secured credit bidding; no cash coming into BE Holding - ct rejected proposed sale b/c it would deprive creditors of protections that chpt 11 process provides File chpt 11 & try to sell biz in 363 sale instead of filing chpt 7 to negotiate own deal/control asset/get best price 363(k) - generally, in a 363 sale, secured creditor has the right to credit bid on collateral securing claim to extent of allowed secured claim (ie collaterals value, 506) 363 sale allows the secured creditor to credit bid and there would be nothing left for the other liens to attach to. Nothing would be coming into BE from sale except release from liability for the secured claim. The biz would be sold free and clear of all liens, claims and encumbrances, etc. Rule - the AS is terminated when there is an agreed cash collateral order (as to the BE prop subject to order) Different parties concerns in 363 sales UCC - was there adequate notice/marketing/fair value of sale Were there competing bids/auction for sale; large auctions can help drive up price for assets Debtor - gets cash now; mkt for asset might be declining; buyer might impose time constraints & revoke offer if its not accepted; sale could help biz continue by providing cash for payroll; it could cost more to get asset through a plan Couldve already tried to sell it to other people and failed Secured creditor - get chance to credit bid up to allowed claim; faster than foreclosure; decrease their risk by getting their claim out of bkcy & get the asset; can take the asset, sell it, and move on 363 sale Process debtor files the 363 motion creditors and equity committee could file objections and then there is a hearing b/f the judge and the debtor has the burden to establish the reasons for the sale the biz justification Why it should proceed in a 363 and not a plan or reorg if debtor can establish that it is fair value and it has done some marketing, then they can take into the account all of the factors in ruling on the motion for the bkcy. Debtor file a motion to establish bid procedures in order to conduct an auction for the sale of assets the bidders will submit a memorandum and the bidders will have to provide a 5 percent cash deposit and evidence of financial capabilities. Will have to show the different procedures that they will use in making the 363 sale. It has become fairly standard practice for large cases; not of it is in the Code; motion for bid procedures and motion to sell the second procedure. if the ct approves the bid procedures, it alleviates the motion to sell bc you have had the auction and bid and established market value and there is not much more to say at the motion to sell hearing Emergency 363 sales - example was immediate sale of GM no plan GM has helped change the perception of the perception of the 363 salel If we can have a 363 sale of GM in two weeks, then why not allow it in other cases. Chapter 11 plan of liquidation -larger cases 363 sale and plan of liquidation and how to distribute the proceeds and have voting on it and disclosure statements and how to wind up the case Sometimes you sell the assets and then move to dismiss the case and move to convert the case to Chapter 7; move to convert the case is an automatic process Section 363 sale denied - move to foreclose; secured creditors can seek to foreclose if they can get bkcy ct to lift AS **RiverRoad --1129 context; says you cant confirm a plan through cramdown on secured creditor if it denies them the right to credit bid in auction of collateral; just giving proceeds not enough to be indubitable equivalent in this situation Where the plan is selling prop through cramdown plan on secured, has to allow for them to credit bid in 7th cir 5th cir - allowed plan to be confirmed that crammed down w/o allowing credit bid when secured got proceeds of sale b/c it was the indubitable equivalent of the secured claim (money from sale = indubitable equivalent) while 363 is broad, certain claims will not be shed; claims for personal injury from a successor buyer, environmental claims, make it difficult to shed these interest on these theories Two ways to sell property of BE: Sale - transfer of assets for value, including provisions for adequate protection. Rule - when the sale short circuits the requirements of Chapter 11 by establishing the terms of the plan secretly, when it includes unauthorized releases the transaction cannot be authorized under section 363(b). It would alter creditors' rights, dispose of assets, and release claims and therefore cannot dispose of the crown jewel asset that might restrict a future organization. Section 363 - Must be justified by a Debtor - When an objector to a proposed transaction under 363(b) claims that it is being denied certain protection bc approval is sought pursuant to 363(b) instead of part of a reorg plan, the objector must specify the protection sought. Factors that would invalidate a 363(a) sale Will it dispose of all the claims against the debtor? Will the transaction restrict the creditors' rights to vote? The transaction did not dispose of virtually all of the Cajun's assets, leaving little prospect or occasion for further reorg. General Rule - A ct will authorize a sale of all or substantially all of the debtor's assets under the Code and w/o a plan or disclosure statement when the debtor can show that not selling the assets would amount to a wasting of those assets. When the debtor can establish that the assets were fairly marketed, parties in interest were provided notice and the sale is in the debtor's best interest. Those who like procedure/efficiencysee 363(b) sale as desirable bc they view them as maximizing creditor recovery Traditionalists -see the dangers in the developments which are driven by creditors in possession. Section 1123 - contents of plan has to say how secured interests, BE prop, etc are going to be dealt w/under the plan In re Trans World Airlines - 3d Cir. Issue - whether or not the Ct can sell the assets or the property of the estate free and clear of an interest in such property and b/c the claims against TWA were connected to or arise from the assets sold. Holding - Interests are not limited to in rem interest suggests that they are interest in property w/in the meaning of 363(f) in the sense that they arise form the property being sold Or else the section would not deal w/situations in which there were things other than the lien. Rationale - 363(f) - interest in property - the trend seems to be toward a more expansive reading of interest in property which encompasses other obligations that may flow from ownership of the property. some cts have narrowly interpreted interest in proeprty to mean in rem interests such as liens. Any interest - is intended to refer to obligations that are connceted to or arise from the property being sold. Monetary Satisfaction - if the debtor had liquidated, then the claims at issue would have received the distribution provided to other general unsecured creditors on account of their claims. In the Matter of River Road Hotel Partners, LLC It sets forth the criteria that a debtor's Chapter 11 reorg plan must satisfy to be confirmed by a BC. Rule - must be fair and equitable to have a cramdown plan, therefore sales propose selling an encumbered asset free and clear of liens could be confirmed so long as the debtor's asset sales complies w/section 363(k). Indubitable equivalent - what constitutes the indubitable equivalent depends on the amount of the creditor's lein and the current value of the secured asset Philadelphia Newspapers Issue - what rights does a secured lender have when its collateral is sold pursuant to section 1123(a)(5)(d). Cramdown1129(b) - provides circumstances under which reorg plan can be confirmed over the objection of secured creditors process referred to as a cramdown bc the secured claims are reduced to the present value of the collateral While the remainder of the debt becomes unsecured, forcing the secured creditor to accept less than the full value of its claim and thereby allowing the plan to be crammed down. Transfer of assets w/the liens intact and deferred cash payments equal to the present value of the lender's secured interest in the collateral