Bankruptcy & Insolvency Litigation Flashcards

What is the 'automatic stay' in a bankruptcy proceeding and what does it prevent?

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.

What is a 'preference payment' under 11 U.S.C. § 547, and why is it subject to avoidance in bankruptcy?

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.

Under the Bankruptcy Code, what is the 'absolute priority rule' in Chapter 11 reorganizations?

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.

What is a 'fraudulent conveyance' in the context of bankruptcy litigation?

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.

What is 'equitable subordination' under 11 U.S.C. § 510(c) in bankruptcy proceedings?

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.

In a Chapter 11 bankruptcy, what is 'DIP financing' and why do lenders providing it receive special treatment?

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.