CBA CBA Asset Administration & Liquidation 2 — Questions and Answers
Question 1: What is 'surcharge' under 11 U.S.C. § 506(c), and who may assert it?
- Interest charged to a secured creditor for delay
- Recovery from collateral of reasonable costs incurred to preserve or dispose of it (Correct answer)
- A penalty imposed on a debtor for bad faith
- An administrative fee charged by the US Trustee
Correct answer: Recovery from collateral of reasonable costs incurred to preserve or dispose of it
Section 506(c) allows the trustee to surcharge a secured creditor's collateral for the reasonable and necessary costs of preserving or disposing of that property for the creditor's benefit.
Question 2: In a Chapter 7 liquidation, which waterfall correctly reflects the priority of distributions?
- Secured → Administrative → Priority Unsecured → General Unsecured → Equity (Correct answer)
- Administrative → Secured → General Unsecured → Equity → Priority Unsecured
- Priority Unsecured → Secured → Administrative → General Unsecured → Equity
- General Unsecured → Priority Unsecured → Secured → Administrative → Equity
Correct answer: Secured → Administrative → Priority Unsecured → General Unsecured → Equity
Distributions flow first to secured creditors (from collateral), then administrative expenses, then priority unsecured claims, then general unsecured claims, and finally to equity holders.
Question 3: What is the significance of a 'free and clear' sale under 11 U.S.C. § 363(f)?
- The sale is exempt from all state and federal taxes
- Assets are sold without any liens, claims, or encumbrances attaching to the property (Correct answer)
- The buyer receives a warranty deed guaranteed by the court
- The debtor retains an interest in the sold property post-sale
Correct answer: Assets are sold without any liens, claims, or encumbrances attaching to the property
A § 363(f) sale transfers property free and clear of liens and encumbrances, which then attach to the sale proceeds rather than the property itself.
Question 4: Which of the following is a valid defense to a preference action under 11 U.S.C. § 547(c)?
- The creditor was a secured creditor
- The payment was made in the ordinary course of business (Correct answer)
- The debtor was solvent at the time of transfer
- The transfer occurred more than 30 days before the petition
Correct answer: The payment was made in the ordinary course of business
The ordinary course of business defense under § 547(c)(2) protects transfers made consistent with prior dealings between the parties or standard industry practice.
Question 5: What is the trustee's 'strong arm' power under 11 U.S.C. § 544?
- Authority to forcibly remove occupants from estate property
- Ability to assume the status of a hypothetical lien creditor to avoid unperfected security interests (Correct answer)
- Power to reject burdensome contracts without court approval
- Right to surcharge secured creditors for administrative costs
Correct answer: Ability to assume the status of a hypothetical lien creditor to avoid unperfected security interests
The strong arm power allows the trustee to step into the shoes of a hypothetical judgment lien creditor, defeating security interests that were not properly perfected before the petition.
Question 6: What must a trustee obtain before selling real property of the estate outside the ordinary course of business?
- Written consent from all creditors
- Approval from the US Trustee only
- Court approval after notice and a hearing (Correct answer)
- Approval from the debtor-in-possession
Correct answer: Court approval after notice and a hearing
Sales of estate property outside the ordinary course of business require court authorization after notice and a hearing to allow parties in interest to object.
CBA CBA Asset Administration & Liquidation 2
What is 'surcharge' under 11 U.S.C. § 506(c), and who may assert it?