CFL Bankruptcy & Creditor Rights 1 — Questions and Answers
Question 1: Under the Bankruptcy Code, a 'preference payment' under Section 547 allows the trustee to avoid transfers made to a creditor within 90 days before bankruptcy if the transfer:
- Allowed the creditor to receive more than it would in a Chapter 7 liquidation (Correct answer)
- Was made for new value given to the debtor at the time of transfer
- Occurred after the debtor filed a voluntary petition
- Was disclosed in the debtor's statement of financial affairs
Correct answer: Allowed the creditor to receive more than it would in a Chapter 7 liquidation
A preference is avoidable when the creditor received more than it would have in a Chapter 7 liquidation, disrupting the principle of equal treatment among similarly situated creditors.
Question 2: The automatic stay under Bankruptcy Code Section 362 immediately halts which of the following upon a bankruptcy filing?
- Most collection actions, lawsuits, and enforcement of judgments against the debtor (Correct answer)
- All state court proceedings regardless of subject matter
- Criminal prosecutions against the debtor
- Actions by secured creditors to enforce perfected liens
Correct answer: Most collection actions, lawsuits, and enforcement of judgments against the debtor
Section 362 broadly stays collection and enforcement actions but has exceptions, including criminal proceedings and certain domestic support enforcement.
Question 3: Under Bankruptcy Code Section 548, a trustee can avoid a fraudulent transfer made within 2 years before the petition if the debtor received:
- Less than reasonably equivalent value while insolvent or rendered insolvent by the transfer (Correct answer)
- Any transfer to a related party within the look-back period
- Payment on account of an antecedent debt while insolvent
- A transfer that depleted the debtor's accounts receivable below $100,000
Correct answer: Less than reasonably equivalent value while insolvent or rendered insolvent by the transfer
Constructive fraudulent transfer requires both inadequate consideration and financial distress (insolvency, unreasonably small capital, or inability to pay debts).
Question 4: In a Chapter 11 reorganization, a 'cramdown' confirmation under Section 1129(b) allows a plan to be confirmed over a rejecting class of creditors if the plan:
- Does not discriminate unfairly and is fair and equitable with respect to the rejecting class (Correct answer)
- Has been approved by at least two-thirds of all creditor classes
- Pays the rejecting class the face value of their claims in cash
- Receives approval of a majority of equity holders
Correct answer: Does not discriminate unfairly and is fair and equitable with respect to the rejecting class
Cramdown requires the plan to be fair and equitable to the rejecting class, which for secured creditors means they retain their lien or receive the present value of their collateral.
Question 5: The absolute priority rule in Chapter 11 liquidations requires that:
- Senior creditors must be paid in full before junior creditors or equity holders receive anything (Correct answer)
- All secured creditors must be paid before the plan is confirmed
- Administrative expenses are paid before all other claims
- Tax claims are paid ahead of all unsecured creditors
Correct answer: Senior creditors must be paid in full before junior creditors or equity holders receive anything
The absolute priority rule prevents equity from retaining value in a cramdown plan if senior creditors are not being paid in full.
Question 6: A financial litigator representing a creditors' committee in Chapter 11 would primarily focus on which objective?
- Maximizing the recovery for unsecured creditors in the reorganization plan (Correct answer)
- Ensuring the debtor's management team is replaced immediately
- Seeking immediate conversion to Chapter 7 liquidation
- Preserving the debtor's pre-petition equity value for shareholders
Correct answer: Maximizing the recovery for unsecured creditors in the reorganization plan
Creditors' committees represent general unsecured creditors and work to maximize their collective recovery through the reorganization process.
CFL Bankruptcy & Creditor Rights 1
Under the Bankruptcy Code, a 'preference payment' under Section 547 allows the trustee to avoid transfers made to a creditor within 90 days before bankruptcy if the transfer: