CFL Bankruptcy & Insolvency Litigation 3 — Questions and Answers
Question 1: What is the 'ordinary course of business' defense to a preference claim under 11 U.S.C. § 547(c)(2)?
- A payment is not avoidable if it was made in the ordinary course of the debtor's and creditor's business or financial affairs, and made according to ordinary business terms (Correct answer)
- Any payment made pursuant to a written contract is per se in the ordinary course
- The defense applies only to payments made to trade creditors, not financial institutions
- Ordinary course payments are protected only if made more than 45 days before filing
Correct answer: A payment is not avoidable if it was made in the ordinary course of the debtor's and creditor's business or financial affairs, and made according to ordinary business terms
Section 547(c)(2) protects payments made in the ordinary course of the parties' dealings or according to ordinary industry terms, recognizing that routine commercial transactions should not be disturbed.
Question 2: What is the difference between a 'Chapter 7' and a 'Chapter 11' bankruptcy filing for a corporate debtor?
- Chapter 7 is a liquidation proceeding where a trustee sells assets to pay creditors; Chapter 11 allows the debtor to reorganize and continue operating while restructuring debts (Correct answer)
- Chapter 7 is for small businesses only; Chapter 11 is for large public companies only
- Chapter 7 allows the business to continue with court supervision; Chapter 11 requires immediate liquidation
- There is no practical difference — both result in liquidation of the business
Correct answer: Chapter 7 is a liquidation proceeding where a trustee sells assets to pay creditors; Chapter 11 allows the debtor to reorganize and continue operating while restructuring debts
Chapter 7 results in immediate cessation of business operations and liquidation of assets, while Chapter 11 provides a framework for the debtor to propose a reorganization plan while continuing operations.
Question 3: What is a 'proof of claim' in bankruptcy proceedings, and what happens if a creditor fails to file one?
- A formal document filed by a creditor asserting the right to a distribution from the estate; failure to file may result in disallowance and no distribution (Correct answer)
- A document filed by the debtor listing all creditors who have outstanding claims
- A court order confirming the validity of a creditor's pre-petition judgment
- A security interest filing required to perfect a lien against bankruptcy estate assets
Correct answer: A formal document filed by a creditor asserting the right to a distribution from the estate; failure to file may result in disallowance and no distribution
A proof of claim is the creditor's assertion of a right to payment from the estate; creditors who fail to file by the bar date generally receive nothing from the estate.
Question 4: What are 'executory contracts' in bankruptcy and what right does the debtor have regarding them?
- Contracts where both sides still have material unperformed obligations; the debtor may assume them (taking benefits and burdens) or reject them (treated as a pre-petition breach) (Correct answer)
- Any contract signed within 90 days before the bankruptcy filing
- Employment contracts with executives that must be affirmed within 60 days of filing
- Only real property leases that the debtor wishes to continue during reorganization
Correct answer: Contracts where both sides still have material unperformed obligations; the debtor may assume them (taking benefits and burdens) or reject them (treated as a pre-petition breach)
Under 11 U.S.C. § 365, the trustee may assume profitable executory contracts (curing defaults) or reject burdensome ones (creating a pre-petition damages claim for the counterparty).
Question 5: What is the role of the 'Official Committee of Unsecured Creditors' (UCC) in a Chapter 11 case?
- To represent the collective interests of unsecured creditors by investigating the debtor's affairs, reviewing the reorganization plan, and negotiating with the debtor on behalf of the class (Correct answer)
- To manage the debtor's day-to-day business operations during reorganization
- To act as a neutral mediator between secured creditors and equity holders
- To audit the debtor's financial statements and prepare the disclosure statement
Correct answer: To represent the collective interests of unsecured creditors by investigating the debtor's affairs, reviewing the reorganization plan, and negotiating with the debtor on behalf of the class
The UCC is appointed by the U.S. Trustee and serves as the primary watchdog for general unsecured creditors, with authority to retain counsel and financial advisors at estate expense.
Question 6: What is a 'cramdown interest rate' for secured creditors under Till v. SCS Credit Corp. in a Chapter 13 or Chapter 11 plan?
- The plan interest rate on a secured creditor's claim is the prime rate plus a risk adjustment reflecting the debtor's creditworthiness and plan risk (Correct answer)
- The pre-petition contract rate must be used in all cram-down situations
- The federal funds rate without any adjustment for risk
- The rate equals the yield on 10-year Treasury bonds at the time of confirmation
Correct answer: The plan interest rate on a secured creditor's claim is the prime rate plus a risk adjustment reflecting the debtor's creditworthiness and plan risk
Till held that the appropriate cram-down rate is the prime rate adjusted upward based on the risk of default, rejecting both the contract rate and the coerced loan approaches.
CFL Bankruptcy & Insolvency Litigation 3
What is the 'ordinary course of business' defense to a preference claim under 11 U.S.C. § 547(c)(2)?