CFL Bankruptcy & Insolvency Litigation 1 — Questions and Answers
Question 1: What is the 'automatic stay' in a bankruptcy proceeding and what does it prevent?
- An immediate injunction that stops virtually all collection actions, lawsuits, and enforcement of judgments against the debtor upon filing (Correct answer)
- A court order requiring the debtor to stay in business during reorganization
- A freeze on the debtor's bank accounts pending trustee review
- A delay in the bankruptcy discharge granted only in Chapter 7 cases
Correct answer: An immediate injunction that stops virtually all collection actions, lawsuits, and enforcement of judgments against the debtor upon filing
The automatic stay under 11 U.S.C. § 362 halts nearly all actions against the debtor and their property immediately upon filing, giving the debtor breathing room to reorganize.
Question 2: What is a 'preference payment' under 11 U.S.C. § 547, and why is it subject to avoidance in bankruptcy?
- A payment made to a creditor within 90 days before filing that allows the creditor to receive more than they would in a Chapter 7 liquidation (Correct answer)
- Any payment made to a secured creditor during the bankruptcy case
- A court-approved payment to critical vendors during reorganization
- The first payment made under a confirmed Chapter 11 plan
Correct answer: A payment made to a creditor within 90 days before filing that allows the creditor to receive more than they would in a Chapter 7 liquidation
Section 547 allows the trustee to claw back transfers made within 90 days (one year for insiders) that give the transferee more than they would have received in a Chapter 7 distribution.
Question 3: Under the Bankruptcy Code, what is the 'absolute priority rule' in Chapter 11 reorganizations?
- Senior creditors must be paid in full before junior creditors or equity holders receive any recovery under a reorganization plan (Correct answer)
- Secured creditors have absolute priority over all estate assets regardless of value
- The rule requires all employee wages to be paid before any other claims
- Administrative expenses are the first priority in all bankruptcy cases
Correct answer: Senior creditors must be paid in full before junior creditors or equity holders receive any recovery under a reorganization plan
The absolute priority rule requires that each class of creditors be paid in full — or consent to lesser treatment — before any junior class receives anything under a plan.
Question 4: What is a 'fraudulent conveyance' in the context of bankruptcy litigation?
- A transfer of assets made with actual intent to hinder, delay, or defraud creditors, or a transfer made for less than reasonably equivalent value while the debtor was insolvent (Correct answer)
- Any transfer of assets made within six months of a bankruptcy filing
- A payment to an officer or director that exceeds market compensation
- A transfer of intellectual property to a subsidiary
Correct answer: A transfer of assets made with actual intent to hinder, delay, or defraud creditors, or a transfer made for less than reasonably equivalent value while the debtor was insolvent
Bankruptcy Code Section 548 allows avoidance of intentional fraudulent transfers and constructive fraudulent transfers made without fair consideration while insolvent.
Question 5: What is 'equitable subordination' under 11 U.S.C. § 510(c) in bankruptcy proceedings?
- A court-ordered remedy that lowers a creditor's priority to below other creditors if the creditor engaged in inequitable conduct that harmed other creditors (Correct answer)
- The automatic subordination of all insider claims to general unsecured claims
- A provision that subordinates secured claims to unsecured employee claims
- The recharacterization of debt as equity for all related-party loans
Correct answer: A court-ordered remedy that lowers a creditor's priority to below other creditors if the creditor engaged in inequitable conduct that harmed other creditors
Equitable subordination allows courts to reorder a claimant's priority level as a remedy for inequitable conduct, typically requiring misconduct, harm to other creditors, and inconsistency with bankruptcy law.
Question 6: In a Chapter 11 bankruptcy, what is 'DIP financing' and why do lenders providing it receive special treatment?
- Debtor-in-possession financing that provides the reorganizing company with working capital; DIP lenders receive super-priority administrative claims and often first-priority liens (Correct answer)
- Pre-petition credit facility that automatically converts to equity upon filing
- Financing provided by the debtor to its subsidiaries during restructuring
- Post-confirmation financing arranged by the plan proponent
Correct answer: Debtor-in-possession financing that provides the reorganizing company with working capital; DIP lenders receive super-priority administrative claims and often first-priority liens
DIP lenders provide critical post-petition liquidity and receive super-priority status and priming liens under 11 U.S.C. § 364, giving them priority over all pre-petition secured creditors.
CFL Bankruptcy & Insolvency Litigation 1
What is the 'automatic stay' in a bankruptcy proceeding and what does it prevent?