Bankruptcy & Insolvency Litigation Flashcards

What test do courts apply to determine whether a debtor was insolvent at the time of a challenged transfer in a bankruptcy avoidance action?

Answer: The balance sheet test: whether liabilities exceeded the fair value of assets at the time of the transfer

The Bankruptcy Code's insolvency definition is the balance sheet test: a debtor is insolvent when the sum of debts exceeds the fair value of all property at a fair valuation.

What is a 'cram-down' in Chapter 11 plan confirmation?

Answer: Confirmation of a plan over the objection of a dissenting class if the plan is fair and equitable and does not discriminate unfairly

Under 11 U.S.C. § 1129(b), a plan may be confirmed over a dissenting class's objection if it satisfies the 'fair and equitable' standard, which includes the absolute priority rule for that class.

What is the 'new value exception' to the absolute priority rule in Chapter 11?

Answer: Existing equity holders may retain an interest if they contribute new money or money's worth to the reorganized entity equal to the value of the interest received

The new value exception permits existing equity to survive a cram-down if shareholders contribute new capital at least equal in value to the equity interest they retain in the reorganized entity.

Under the 'business judgment rule' as applied in bankruptcy, what standard governs a Chapter 11 trustee's or DIP's decision to sell assets outside the ordinary course of business?

Answer: The trustee must show a sound business purpose for the sale and that it is in the best interest of the estate and its creditors

Section 363(b) requires court approval and a showing of sound business purpose for sales outside the ordinary course, and courts apply a business judgment standard to the debtor's decision.

What is 'substantive consolidation' in bankruptcy, and when do courts order it?

Answer: The pooling of assets and liabilities of multiple affiliated entities into a single bankruptcy estate, ordered when the entities are so intertwined that separate treatment would harm creditors

Substantive consolidation merges the legal estates of related entities, eliminating inter-company claims and pooling assets for creditor distribution — courts require a showing that benefits outweigh harm to creditors who dealt with entities separately.

What is the 'strong arm clause' under 11 U.S.C. § 544, and what power does it grant the bankruptcy trustee?

Answer: The power to avoid any transfer that could be avoided by a hypothetical lien creditor or bona fide purchaser of real property as of the filing date

Section 544's strong arm powers give the trustee the status of a hypothetical lien creditor or bona fide purchaser, allowing avoidance of unperfected security interests and other defective pre-petition transfers.