CBS Business Bankruptcy & Reorganization 3 — Questions and Answers
Question 1: Which type of claim has the highest priority in a Chapter 11 case under § 507?
- Administrative expenses of the estate incurred after the petition date (Correct answer)
- Pre-petition wage claims up to the statutory cap
- Domestic support obligations owed by the debtor
- Pre-petition tax claims of governmental units
Correct answer: Administrative expenses of the estate incurred after the petition date
Under § 507(a)(2), administrative expenses—costs of administering the estate—have the highest priority among unsecured claims after domestic support obligations in § 507(a)(1).
Question 2: What standard governs approval of a Chapter 11 disclosure statement?
- It must contain adequate information for a hypothetical reasonable investor to make an informed judgment about the plan (Correct answer)
- It must be approved by a majority of unsecured creditors before filing
- It must be certified by an independent auditor as accurate
- It must contain a liquidation analysis approved by the U.S. Trustee
Correct answer: It must contain adequate information for a hypothetical reasonable investor to make an informed judgment about the plan
Under § 1125(a), a disclosure statement must provide 'adequate information'—enough for a reasonable creditor to evaluate the proposed plan.
Question 3: A Chapter 11 debtor seeks to sell substantially all its assets outside the ordinary course of business. What is required?
- Court approval after notice and a hearing, typically through a § 363 sale (Correct answer)
- Unanimous consent of all creditor classes
- Filing an amended plan of reorganization first
- Approval by the U.S. Trustee only
Correct answer: Court approval after notice and a hearing, typically through a § 363 sale
Sales outside the ordinary course of business require court authorization under § 363(b) after notice to creditors and an opportunity for hearing.
Question 4: What is 'DIP financing' and why is it critical in Chapter 11 cases?
- Post-petition financing that provides the debtor with operating capital and often receives super-priority status (Correct answer)
- Pre-petition secured debt that is automatically preserved upon filing
- Financing provided by the U.S. Trustee to keep operations running
- Emergency funding from existing equity holders to avoid liquidation
Correct answer: Post-petition financing that provides the debtor with operating capital and often receives super-priority status
Debtor-in-possession financing under § 364 provides liquidity during reorganization and may be granted super-priority liens senior to existing creditors.
Question 5: In Chapter 11, what is the role of the Official Committee of Unsecured Creditors (UCC)?
- To represent the interests of general unsecured creditors and participate in plan negotiations (Correct answer)
- To replace the debtor in possession as the operator of the business
- To serve as the court's appointed expert on valuation matters
- To approve or reject all DIP financing arrangements
Correct answer: To represent the interests of general unsecured creditors and participate in plan negotiations
The UCC under § 1102 is appointed by the U.S. Trustee and has standing to investigate the debtor, negotiate the plan, and retain professionals at estate expense.
Question 6: What is the 'best interests of creditors' test required for Chapter 11 plan confirmation?
- Each dissenting creditor must receive at least as much as they would in a Chapter 7 liquidation (Correct answer)
- The plan must generate more value than any alternative business strategy
- Creditors must vote to approve the plan by a supermajority
- The debtor must demonstrate positive cash flow within 12 months of confirmation
Correct answer: Each dissenting creditor must receive at least as much as they would in a Chapter 7 liquidation
Under § 1129(a)(7), every creditor who does not accept the plan must receive at least what they would receive in a Chapter 7 liquidation.
Question 7: How does the Bankruptcy Code treat post-petition interest on unsecured claims in a solvent Chapter 11 debtor's estate?
- Unsecured creditors in a solvent estate may be entitled to post-petition interest before equity receives a distribution (Correct answer)
- Post-petition interest is never allowed on unsecured claims in Chapter 11
- Post-petition interest on unsecured claims must be approved by the court annually
- Post-petition interest accrues only for creditors holding claims over $1 million
Correct answer: Unsecured creditors in a solvent estate may be entitled to post-petition interest before equity receives a distribution
If the estate is solvent, the absolute priority rule and § 726(a)(5) logic require payment of post-petition interest to unsecured creditors before equity holders recover anything.
CBS Business Bankruptcy & Reorganization 3
Which type of claim has the highest priority in a Chapter 11 case under § 507?