class 2 bankruptcy, spring, 2009 the automatic stay randal c. picker leffmann professor of...

Class 2Bankruptcy, Spring, 2009

The Automatic StayRandal C. PickerLeffmann Professor of Commercial Law

The Law School

The University of Chicago

773.702.0864/[email protected] © 2005-09 Randal C. Picker. All Rights Reserved.

April 21, 2023 Copyright © 2005-09 Randal C. Picker 2

The Trust Bankruptcy

Trust Position Cash and Planes: What To Do?

Involuntary Filing Three holders of Second and Third Series

Certificates and Magten Asset Mgmt file involuntary case

Held certificates with face amount of $54.2 million


The Trust Bankruptcy

Joined by RTC with $35.5 million in certificates

Does this meet the standard of 303(b)?


Issues

Are certificates equity interests or debts (claims)?

If claims, are they unsecured?


Is This Entity Eligible under 109?

109 is tied to definition of “person”


Definition of Person

101(41): Person includes individual, partnership, and

corporation, but does not include governmental unit, except that a governmental unit that …


Definition of Corporation 101(9): Corporation

(A) includes - (i) association having a power or privilege

that a private corporation, but not an individual or a partnership, possesses;

(ii) partnership association organized under a law that makes only the capital subscribed responsible for the debts of such association;

(iii) joint-stock company;


Definition of Corporation

(iv) unincorporated company or association; or

(v) business trust; but (B) does not include limited partnership;


Definition of Entity

101(15): Entity includes person, estate, trust, governmental

unit, and United States trustee


Eligibility of Trusts

“Person” Defines Eligibility See 109(b), (d)

“Entity” Definition Separates “Trust” from “Person”

Meaning? Trusts only eligible if captured through

definition of person


Eligibility of Trusts

Person includes corporation, which includes business trust

So generic trusts out, but business trusts in


Is the Trust a Business Trust?

If so Eligible for bankruptcy

How Do We Tell? Is this a question of state law or federal

law? What considerations should influence the

outcome?


541 Property of the estate

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.


LTV Steel

SalesFinance

LTV

Owns

Abbey$SA/FS: AR

Sells/Buys AR

When LTV files C11, what rights does its estate have to the accounts at SF?


LTV Steel

SteelProducts

LTV

Owns

Chase$SA/FS:

Inventory

Sells/Buys Inventory

When LTV files C11, what rights does its estate have to the inventory at SP?


The Court’s Analysis

Says the Court: Furthermore, there seems to be an element

of sophistry to suggest that Debtor does not retain at least an equitable interest in the property that is subject to the interim order. Debtor’s business requires it to purchase, melt, mold and cast various metal products.


The Court’s Analysis

To suggest that Debtor lacks some ownership interest in products that it creates with its own labor, as well as the proceeds to be derived from that labor, is difficult to accept. Accordingly, the Court concludes that Debtor has at least some equitable interest in the inventory and receivables, and that this interest is property of the Debtor’s estate.


362: The Automatic Stay (a) Except as provided in subsection (b) of this

section, a petition filed under section 301, 302, or 303 of this title … operates as a stay, applicable to all entities, of - (1) the commencement or continuation … of a

judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;


362(a) (Cont.)

Automatic Stay (cont.) (2) the enforcement, against the debtor or

against property of the estate, of a judgment obtained before the commencement of the case under this title;

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;


362(a) (Cont.)

Automatic Stay (cont.) (4) any act to create, perfect, or enforce any

lien against property of the estate; (5) any act to create, perfect, or enforce

against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;


362(a) (Cont.)

Automatic Stay (cont.) (6) any act to collect, assess, or recover a

claim against the debtor that arose before the commencement of the case under this title;

(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor;


362(b): Exceptions to the Automatic Stay

(b) The filing of a petition under section 301, 302, or 303 of this title … does not operate as a stay - (1) under subsection (a) of this section, of

the commencement or continuation of a criminal action or proceeding against the debtor;


362(b): Police Power Exception

Automatic Stay (Cont.) (b)(4) under paragraph (1), (2), (3), or (6) of

subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit … to enforce such governmental unit’s … police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s or organization’s police or regulatory power;


362(c): Time Period of Stay

(c) Except as provided in subsections (d), (e), (f) and (h) of this section - (1) the stay of an act against property of the

estate under subsection (a) of this section continues until such property is no longer property of the estate; and


362(c) (Cont.)

(2) the stay of any other act under subsection (a) of this section continues until the earliest of -

(A) the time the case is closed; (B) the time the case is dismissed; or (C) if the case is a case under chapter 7 of

this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied.

362(c) (Cont.)

New Serial Filing Stay Limits Added in 2005 to create 362(c)(3) and

362(c)(4)



362(d): Relief from the Automatic Stay

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay - (1) for cause, including the lack of adequate

protection of an interest in property of such party in interest;


362(d) (Cont.)

(2) with respect to a stay of an act against property under subsection (a) of this section, if -

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective reorganization

[(3): Special SARE rules] [(4): Serial filings/real property]


105(a)

Power of Court The court may issue any order, process, or

judgment that is necessary or appropriate to carry out the provisions of this title.


Electronic Disabling

BankDebtor

1. Bank lends $ secured by equipment2. Bank can disable equipment remotely via wireless signal and allowed to do so on default by Debtor

1. Debtor defaults and files under C11

2. Bank clicks remote

3. Does Bank violate the automatic stay?


Electronic Disabling by Govt

SBADebtor

1. SBA lends $ secured by equipment2. SBA can disable equipment remotely via wireless signal and allowed to do so on default by Debtor

1. Debtor defaults and files under C11

2. SBA clicks remote

3. Does SBA violate the automatic stay?


FCC Capitalization Regs

FCCDebtor

1. FCC issues regs requiring spectrum license holders to meet minimum net worth requirements2. FCC issues license to Debtor

1. Debtor files under C11

2. FCC revokes license for failure to satisfy reg

3. Does FCC violate the automatic stay?


Two Principles as to Debtors and Gov’t

Debtor Must Comply with Applicable Law Filing for bankruptcy does not exempt a

debtor from laws Gov’t as Creditor Has No Special Position


28 USC § 959 Trustees and receivers suable; management;

State laws (a) Trustees, receivers or managers of any

property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property. Such actions shall be subject to the general equity power of such court so far as the same may be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury.


28 USC § 959 (cont.) Trustees and receivers suable; management;

State laws (cont.) (b) Except as provided in section 1166 of title 11, a

trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof.


FCC Full Payment Regs

FCCDebtor

FCC issues license to Debtor subject to regulation that revokes license in absence of full payment of auction price

1. Debtor files under C11

2. FCC invokes license revocation and re-auctions

3. Does FCC violate the automatic stay?


Actual Case

Structure of Deal between NextWave and FCC Nextwave paid down payment N executed promissory notes for balance N granted FCC security interest in license

and FCC filed UCC financing statements


Actual Case

License Provisions “conditional upon the full and timely

payment of all monies due pursuant to … the terms of the Commission’s installment plan as set forth in the Note and Security Agreement executed by the licensee”

“[f]ailure to comply with this condition will result in the automatic cancellation of this authorization”

April 21, 2023 Copyright © 2005 Randal C. Picker 39

525 Antidiscrimination Provision

(a) … a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated


525 (Cont.)

Antidiscrimination Provision solely because such bankrupt or debtor is or has

been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.


FCC v. NextWave (US, 2003)

“In these cases, we decide whether § 525 of the Bankruptcy Code, 11 U.S.C. § 525, prohibits the Federal Communications Commission (FCC or Commission) from revoking licenses held by a debtor in bankruptcy upon the debtor’s failure to make timely payments owed to the Commission for purchase of the licenses.”



“We think Congress meant what it said: The government is not to revoke a bankruptcy debtor’s license solely because of a failure to pay his debts.”



“(As we described in our statement of facts, the FCC purported to take such a security interest in the present cases. What is at issue, however, is not the enforcement of that interest in the bankruptcy process, but rather elimination of the licenses through the regulatory step of “revoking” them— action that the statute specifically forbids.)”

Meaning

FCC Acting in Two Different Capacities As Regulator

Subject to 525 limits As Creditor

Seemingly free and clear of 525 limits (but subject to automatic stay limits?)

How do we separate these two?



Nicolet

Rough Facts CERCLA (Superfund) environmental site Statute creates broad strict liability for many

potentially responsible parties (PRPs), including Nicolet

EPA hires outside contractors to clean up site, spends $1MM, expects to spend $300K more


Nicolet

EPA sues Nicolet, among others, in federal district court seeking reimbursement of past and future expenses

Nicolet files for Chapter 11 District court in which EPA lawsuit was

pending “placed this CERCLA suit in civil suspense” based on automatic stay

US objected based on 362(b)(4)


Nicolet

Gov’t wants suit to continue to fix damages but agrees that it cannot seek to collect a money judgment from Nicolet

Questions How does 362(b)(4) apply here? Why on earth does the gov’t care about

obtaining a money judgment that it agrees it cannot enforce?

class 2 bankruptcy, spring, 2009 the automatic stay randal c. picker leffmann professor of...

Documents