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Corporate Bankruptcy and

Reorganization

Prof. Jesse M. Fried

U.C. Berkeley School of Law

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Course Details

1. Contents

-- Chapter 7 and Chapter 11 of US Bankruptcy Code-- other statutory and non-statutory law relating to bankruptcy

2. Materials

Reading Packages (based on material of Prof. Mark Roe)

Statutory Appendix (Appendix B)

3. Exam (24-hour) Take-home exam

-- questions in English

-- (typed) answers in English or Hebrew

4. Office Hours: after class

appointment by email:

friedj@law.berkeley.edu

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Course Outline

Introduction

I. A World Without Bankruptcy (Non-bankruptcy law)

II. Chapter 7: Liquidation Bankruptcy

III. Valuation in the Absence of a Cash Sale

IV. Chapter 11: Overview and Plan Requirements

V. Recovering Funds and Reranking Claims

(other topics if time permits)

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Introduction

1. Sources of Business Financing

2. The Bankruptcy Code

3. Financial Claims on the Corporation

4. Basic Balance Sheet

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Sources of Business Financing in the

U.S.

Internal Financing Retained Earnings

Debt Financing

Equity Financing Common Stock

Preferred Stock

IPOs & SecondaryOfferings

60%38%

2%

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Bankruptcy CodeChapter 1: Definitions, Power of Court

Chapter 3: Administration of Bankruptcy

Estate

Chapter5: What is in the Bankruptcy Estate

Chapter 7: Liquidation Provisions

Chapter 11: Reorganization Provisions

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Financial Claims on the Corporation

1.Creditors

Banks

Finance companies, insurance companies, etc.

Public bondholders (including debentureholders) Trade Creditors (suppliers)

Employees

Contract breach creditors

Tort Victims (sometimes)

Government (tax, regulatory claims)2.Equityholders

--- Preferred stockholders

--- Common stockholders

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Basic Balance Sheet

/

+ +

=$ $

$ = $Debt $Equity

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I. A World Without Bankruptcy

A. Individual creditor remedies

1. Unsecured

2. Secured

B. Priorities Outside Bankruptcy

C. Common Pool Problem loss of going concern

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Creditors remedies outside bankruptcy

What happens when the borrower (debtor) does notpay?

1. Unsecured creditor

-- goes to court to get judgment-- if gets judgment, then gets judgment (or judicial)

lien right to payment

-- if debtor does not pay, creditor asks sheriff to

seize property

2. Secured creditor: loan secured by collateral

-- can seize collateral (but only peacefully)

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Article 9 in a Nutshell

Creation and enforcement of security interests (SI) in

personal property. Similar rules for real property

Two rights

1. Property right right to repossess collateral from

defaulting debtor

2. Priority right over third parties (other creditors,

purchasers)

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Two steps to creating effective SI

I. Attachment

written security agreement

lender gives value, debtor owns

asset

II. Perfection

for rights against 3rd parties

must perfect SI by taking possession of

collateral or public filling

judicial lien has priority over unperfected SI

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What happens when there is intercreditor

conflict 2 or more creditors attempting to seize

asset?

Unsecured vs. unsecured

grab law first come, first served

(first to get judgment or first to seize assets)

Unsecured vs secured

secured wins

Secured vs. Secured

first to perfect (file) wins

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Common Pool Problem Loss of Going Concern

Value --

Business ABC

2 machines (A, B) each worth $20,000

going concern value of ABC: $50,000

$10,000 more than liquidation value of$40,000

3 creditors (1, 2, 3), each owed $20,000

ABC cannot pay its loans.

*All creditors are unsecured. What does Creditor #1 do?#2? #3? How much do they recover in total?

**Creditor #1 s loan secured by machine A. What does #1 do?

#2? #3? How much do they recover in total?

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Purposes of Bankruptcy

1. Preserve going concern value (if there is any)

(bankruptcy overrides grab law, which makes preservation of

going concern value impossible outside bankruptcy)

a. Automatic Stay (Part II)

b. Recovery of assets (Part V)

2. Divide the pie among creditors, equityholders

a.Liquidation sale of entire business or asset-by-asset for

cashcash divided according to Chapter 7 (Part II)

b. Reorganization parties get equity, debt in reorganized

firm -- Chapter 11 (Part IV)

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II. Chapter 7: Liquidation Bankruptcy

Automatic Stay

B. Overview of Distribution in Chapter 7 (with exercises)

C. Statutory Priority in Chapter 7

D. Priority Unsecured Creditors

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Automatic Stay

Stops individual collection efforts against debtor

--- cannot sue

--- cannot impose lien--- cannot take property

Necessary to preserve going concern value

Section 362 of the Bankruptcy Code (p. 612)

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Overview of Distribution in Chapter 7 (1 of5)

General rule: all debt has equal priority debt is

paidpro rata

3creditors owed $6000

A. owed $1000

B. owed $2000

C. owed $3000

Debtor has $3000 in cash

>> Each creditor is paid ($3000 $6000) per$1 owed

>>>>> A. receives $500

B. receives $1000

C. receives $1500

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Overview of Distribution in Chapter 7 (1 of5)

3 important exceptions

1. Secured debt2. Subordinated debt

3. Priority unsecured debt (Section 507)

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Overview of Distribution in Chapter 7 (3 of5)

Secured debt: (debt secured by collateral)paid the amount of collateral, up to amount owed

if there is a deficiency, gets unsecured

claim for that amount

Owed Value of Collateral Receives

$100 V > $100 $100

$100 V $100 $100

$100 V < $100 Vunsecured

claim for

($100 - $V)

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Overview of Distribution in Chapter 7 (4 of5)

Subordinated debt

X is subordinated to YX must give all of its share to Y

until Y is paid in full

Pro rata SubordinationX owed $5000 $2500 $1000

Y owed $3000 $1500 $3000

$4000 of assets

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Overview of Distribution in Chapter 7 (5 of5)

Section 507 (a)

Priority UnsecuredCreditors

1. Administrative expenses

2. Gap Claims

3,4. Wage claims, up to ~ $4Kper

person earned within 90 days of

filing, employee benefit contributions

5. Fishermen farmers

6. Customer deposits

7. Unsecured tax claims (income,

excise, property, etc.)