CIRA Legal & Regulatory Environment 3 — Questions and Answers
Question 1: A secured creditor holds a lien on equipment worth $500,000 but is owed $800,000. Under Section 506, what is the creditor's status regarding the $300,000 deficiency?
- Fully secured claim for the entire $800,000
- Two claims: $500,000 secured and $300,000 general unsecured (Correct answer)
- Administrative expense priority for the deficiency
- The deficiency is discharged upon plan confirmation
Correct answer: Two claims: $500,000 secured and $300,000 general unsecured
Section 506(a) bifurcates an undersecured claim into a secured claim equal to collateral value and an unsecured claim for the deficiency.
Question 2: What is a 'preference' under Section 547 of the Bankruptcy Code, and what is the general look-back period for non-insiders?
- A fraudulent transfer made within 2 years before filing
- A transfer to a creditor on account of an antecedent debt within 90 days before filing (Correct answer)
- A transfer made outside the ordinary course of business within 1 year before filing
- A lien perfected within 30 days after the debtor receives the collateral
Correct answer: A transfer to a creditor on account of an antecedent debt within 90 days before filing
A preference under Section 547 is a transfer to a creditor on account of antecedent debt made within 90 days before filing while the debtor was insolvent.
Question 3: Which test is used under Section 548 to determine if a transfer was made for less than reasonably equivalent value?
- The business judgment rule
- The 'reasonably equivalent value' test based on fair market exchange (Correct answer)
- The liquidation value test applied at the petition date
- The going-concern value standard approved by the court
Correct answer: The 'reasonably equivalent value' test based on fair market exchange
Section 548 avoids transfers where the debtor received less than reasonably equivalent value in exchange while insolvent or rendered insolvent by the transfer.
Question 4: In a bankruptcy case, what is a 'proof of claim' and when must it typically be filed?
- A document filed by the debtor listing all known creditors
- A written statement filed by a creditor asserting a right to payment from the estate (Correct answer)
- A court order establishing the amount owed to each creditor class
- A declaration by the U.S. Trustee verifying the debtor's scheduled liabilities
Correct answer: A written statement filed by a creditor asserting a right to payment from the estate
A proof of claim is a written statement filed by a creditor pursuant to Bankruptcy Rule 3001, asserting the creditor's right to payment from the estate by the claims bar date.
Question 5: What does 'adequate protection' mean in the context of a secured creditor's rights during a Chapter 11 case?
- Insurance coverage on the debtor's assets equal to replacement cost
- Compensation to a secured creditor to protect against diminution in collateral value during the stay (Correct answer)
- A court-ordered lien on all postpetition assets equal to prepetition debt
- A priority claim granted to administrative expense creditors
Correct answer: Compensation to a secured creditor to protect against diminution in collateral value during the stay
Adequate protection under Section 361 compensates secured creditors for the diminution in collateral value resulting from the automatic stay or use of cash collateral.
Question 6: Under Article 9 of the Uniform Commercial Code, how does a secured creditor perfect a security interest in most personal property?
- By recording a deed of trust in the county recorder's office
- By filing a UCC-1 financing statement with the appropriate state office (Correct answer)
- By taking physical possession of the collateral in all circumstances
- By obtaining a court judgment and recording it in the debtor's home state
Correct answer: By filing a UCC-1 financing statement with the appropriate state office
Under UCC Article 9, perfection of a security interest in most personal property is accomplished by filing a UCC-1 financing statement with the Secretary of State.
Question 7: What is the significance of the 'new value exception' to the absolute priority rule in Chapter 11 plans?
- It allows unsecured creditors to receive new equity if they contribute fresh capital
- It permits existing equity holders to retain an interest in exchange for new money contributions (Correct answer)
- It exempts tax authorities from the absolute priority rule requirements
- It enables administrative creditors to skip junior classes in distributions
Correct answer: It permits existing equity holders to retain an interest in exchange for new money contributions
The new value exception allows existing equity holders to retain interests in a reorganized debtor if they contribute new money or money's worth in an amount necessary for reorganization.
CIRA Legal & Regulatory Environment 3
A secured creditor holds a lien on equipment worth $500,000 but is owed $800,000.
Under Section 506, what is the creditor's status regarding the $300,000 deficiency?