1. Class 8 Bankruptcy, Spring, 2009 Trustee as Hypothetical Lien Creditor Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2005-09 Randal C. Picker. All Rights Reserved.

2. May 11, 2015Copyright © 2005-09 Randal C. Picker2 552 n Postpetition effect of security interest u (a) Except as provided in subsection (b) of this section, property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case.

3. May 11, 2015Copyright © 2005-09 Randal C. Picker3 552 (cont.) n Postpetition effect of security interest (cont.) u (b)(1) Except as provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this title, if the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor acquired before the commencement of the case and to proceeds, product, offspring, or profits of such property, then such security interest extends to such proceeds, product, offspring, or profits acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise.

4. May 11, 2015Copyright © 2005-09 Randal C. Picker4 The Unperfected Secured Creditor n Hypo u Bank lends debtor $1000 and takes a security interest in equipment u Bank fails to file a UCC-1 financing statement for the equipment u Equipment is worth $1000 u An unsecured creditor is owed $1000 u Who has priority?

5. May 11, 2015Copyright © 2005-09 Randal C. Picker5 9-317(a) n (a) [Conflicting security interests and rights of lien creditors.] u A security interest or agricultural lien is subordinate to the rights of: w (1) a person entitled to priority under Section 9 ‑ 322; and

6. May 11, 2015Copyright © 2005-09 Randal C. Picker6 9-317(a) w (2) except as otherwise provided in subsection (e), a person that becomes a lien creditor before the earlier of the time: (A) the security interest or agricultural lien is perfected; or (B) one of the conditions specified in Section 9- 203(b)(3) is met and a financing statement covering the collateral is filed.

7. May 11, 2015Copyright © 2005-09 Randal C. Picker7 9-102(a)(52): “Lien Creditor” n “Lien creditor” means: u (A) a creditor that has acquired a lien on the property involved by attachment, levy, or the like; u (B) an assignee for benefit of creditors from the time of assignment; u (C) a trustee in bankruptcy from the date of the filing of the petition; or u (D) a receiver in equity from the time of appointment.

8. May 11, 2015Copyright © 2005-09 Randal C. Picker8 9-322(a)(1) n Conflicting perfected security interests and agricultural liens rank according to priority in time of filing or perfection

9. May 11, 2015Copyright © 2005-09 Randal C. Picker9 9-322(a)(1) n Priority dates from the earlier of u the time a filing covering the collateral is first made or u the security interest or agricultural lien is first perfected n if there is no period thereafter when there is neither filing nor perfection

10. May 11, 2015Copyright © 2005-09 Randal C. Picker10 9-322(a)(1) n If resolved outside of bankruptcy u Depends on what happens next u Unsecured creditor could become lien creditor and take priorty over Bank u Otherwise Bank would have priority

11. May 11, 2015Copyright © 2005-09 Randal C. Picker11 What Should We Do In Bankruptcy? n 544(a) is the Answer u Creates a hypothetical deemed status for the trustee in bankruptcy

12. May 11, 2015Copyright © 2005-09 Randal C. Picker12 544 n Trustee as lien creditor and as successor to certain creditors and purchasers u (a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by--

13. May 11, 2015Copyright © 2005-09 Randal C. Picker13 544 (cont.) n Trustee as lien creditor and as successor to certain creditors and purchasers (cont.) u (a) (cont.) w (1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;

14. May 11, 2015Copyright © 2005-09 Randal C. Picker14 544 (cont.) n Trustee as lien creditor and as successor to certain creditors and purchasers (cont.) u (a) (cont.) w (2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or

15. May 11, 2015Copyright © 2005-09 Randal C. Picker15 544 (cont.) n Trustee as lien creditor and as successor to certain creditors and purchasers (cont.) u (a) (cont.) w (3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

16. May 11, 2015Copyright © 2005-09 Randal C. Picker16 550 n Liability of transferee of avoided transfer u (a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from - w (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or w (2) any immediate or mediate transferee of such initial transferee.

17. May 11, 2015Copyright © 2005-09 Randal C. Picker17 550 (cont.) n Liability of transferee of avoided transfer (cont.) u (b) The trustee may not recover under section (a)(2) of this section from - w (1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or w (2) any immediate or mediate good faith transferee of such transferee.

18. May 11, 2015Copyright © 2005-09 Randal C. Picker18 550 (cont.) n Liability of transferee of avoided transfer (cont.) u (c) If a transfer made between 90 days and one year before the filing of the petition— w (1) is avoided under section 547(b) of this title; and w (2) was made for the benefit of a creditor that at the time of such transfer was an insider; the trustee may not recover under subsection (a) from a transferee that is not an insider. u (d) The trustee is entitled to only a single satisfaction under subsection (a) of this section.

19. May 11, 2015Copyright © 2005-09 Randal C. Picker19 551 n Automatic preservation of avoided transfer u Any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or any lien void under section 506(d) of this title, is preserved for the benefit of the estate but only with respect to property of the estate.

20. May 11, 2015Copyright © 2005-09 Randal C. Picker20 Later Senior Liens n Hypo u 2/1: Bank enters into possible financing deal with debtor and files financing statement for equipment and lends $5,000 u 3/1: Finco lends $10,000 to debtor and take security interest in equipment and files UCC-1

21. May 11, 2015Copyright © 2005-09 Randal C. Picker21 Later Senior Liens u 3/2: Bank takes security interest in equipment u Who has priority?

22. May 11, 2015Copyright © 2005-09 Randal C. Picker22 Later Senior Liens n Answer u Under 9-322, first to file wins, so Bank has priority over Finco

23. May 11, 2015Copyright © 2005-09 Randal C. Picker23 Avoiding A Senior Lien n Same Hypo But u Add $10,000 in USC u Have the debtor file for bankruptcy on 4/1 u Assume equipment is worth $5,000 n What We Need to Know u 3/2 security grant will be avoidable as preference under Section 547

24. May 11, 2015Copyright © 2005-09 Randal C. Picker24 Avoiding A Senior Lien n What happens when we avoid the senior lien?

25. May 11, 2015Copyright © 2005-09 Randal C. Picker25 551’s Preservation of the Lien n The Language Again u Any transfer avoided under section … 544 … is preserved for the benefit of the estate but only with respect to property of the estate.

26. May 11, 2015Copyright © 2005-09 Randal C. Picker26 Avoiding a Junior Lien n Hypo u 2/1: Bank lends $10,000 to debtor, secured by equipment and files a UCC-1 u 3/1: Finco lends $10,000 to debtor and take security interest in equipment and but fails to file UCC-1 u 4/1: Debtor files for bankruptcy; unsecured creditors of $10,000 and equipment worth $10,000

27. May 11, 2015Copyright © 2005-09 Randal C. Picker27 Avoiding a Junior Lien n What happens? n Is this Kors?

28. May 11, 2015Copyright © 2005-09 Randal C. Picker28 Kors n Core Facts u Kors is the avoidable junior lien hypo + a subordination agreement u Howard Bank should be senior (filed 7/13/78) but made a mistake in its financing statement and is unperfected u SBIC should be junior (filed 7/19/78) but has perfected security interest

29. May 11, 2015Copyright © 2005-09 Randal C. Picker29 Different Sub Language n Payment Subordination u “We SBIC agree that we will pay over to you Howard Bank any funds that we receive from the debtor until you Howard Bank has been paid in full.” n What would that mean? How does that differ from the actual language?

30. May 11, 2015Copyright © 2005-09 Randal C. Picker30 Subordination Agreement n The Language u SBIC agreed to be “subject and subordinate to the effect given to any prior security interests therein required to be given to Howard Bank” n What does this mean? n Should we treat this as the avoidable senior lien case?

31. May 11, 2015Copyright © 2005 Randal C. Picker31 Fraudulent Transfer n Hypo u D has $10,000 in USC claims u D sells asset to T for $5,000 but asset is actually worth $10,000 u D is insolvent at time of transfer u Sometime later, D files for bankruptcy with $1,000 in assets

32. May 11, 2015Copyright © 2005 Randal C. Picker32 Fraudulent Transfer u At the time of the filing, D has $10,000 in USC claims w $1,000 are claims that arose prior to the sale to T w $9,000 arose after the sale n What happens?

33. May 11, 2015Copyright © 2005 Randal C. Picker33 Applicable Non-Bankruptcy Law n Uniform Fraudulent Transfer Act u D’s sale to T will be fraudulent transfer as against creditors in existence at time of sale u Those creditors could ignore the transfer and follow the asset into T’s hands u Meaning? w Those creditors could recover the $1,000 that they are owed from T

34. May 11, 2015Copyright © 2005 Randal C. Picker34 In Bankruptcy? n 544(a) Irrelevant u Deemed status would treat trustee as creditor arising after the transfer u Under applicable law, post-transfer creditors can’t complain n 544(b) Applies!

35. May 11, 2015Copyright © 2005 Randal C. Picker35 544(b) n Trustee as lien creditor and as successor to certain creditors and purchasers u (b)(1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.

36. May 11, 2015Copyright © 2005 Randal C. Picker36 544(b) (cont.) n Trustee as lien creditor and as successor to certain creditors and purchasers (cont.) u (b)(2) Paragraph (1) shall not apply to a transfer of a charitable contribution (as that term is defined in section 548(d)(3)) that is not covered under section 548(a)(1)(B), by reason of section 548(a)(2). Any claim by any person to recover a transferred contribution described in the preceding sentence under Federal or State law in a Federal or State court shall be preempted by the commencement of the case.

37. May 11, 2015Copyright © 2005 Randal C. Picker37 What Happens? n Two Issues to Focus On u Extent of the Avoidance w How much can be recovered from T? u Beneficiaries w Who benefits from the avoidance?

38. May 11, 2015Copyright © 2005 Randal C. Picker38 544(b) Legislative History n Senate Report 95-589 u “Subsection (b) … gives the trustee the rights of actual unsecured creditors under applicable law to avoid transfers. It follows Moore v. Bay …”

39. May 11, 2015Copyright © 2005 Randal C. Picker39 Possible Results n 1. Trustee As Agent for Pre-Transfer Creditors u Trustee limited to extent of pre-transfer claims and those creditors are the beneficiary n 2. Ditch Beneficiaries Limit u Trustee can avoid to extent of pre-transfer claims and all creditors benefit

40. May 11, 2015Copyright © 2005 Randal C. Picker40 Possible Results n 3. Ditch Extent Limit and Beneficiaries Limit

41. May 11, 2015Copyright © 2005 Randal C. Picker41 Trustee As Agent for Pre- Transfer Creditors n Analysis u Creditors owed $1,000 and could recover that from T u Trustee does so under 544(b) and gives the money to these creditors u Post-transfer creditors get the debtor’s $1,000 in assets u T ends up $4,000 to the good

42. May 11, 2015Copyright © 2005 Randal C. Picker42 Trustee As Agent for Pre- Transfer Creditors n Not understood to be the result of Moore v Bay

43. May 11, 2015Copyright © 2005 Randal C. Picker43 Ditch Beneficiaries Limit n Analysis u Creditors owed $1,000 and could recover that from T u Trustee does so under 544(b) and shares that money will all creditors u That gives $2,000 in assets against $10,000 in claims

44. May 11, 2015Copyright © 2005 Randal C. Picker44 Ditch Beneficiaries Limit u Pre-transfer creditors get $200 on their $1,000 u Post-transfer creditors get $1800 on their $9,000 in claims u T ends up $4,000 to the good n Not understood to be the result of Moore v Bay

45. May 11, 2015Copyright © 2005 Randal C. Picker45 Ditch Both Limits n Analysis u Creditors owed $1,000 and could recover that from T u Trustee avoids the transfer under Section 544(b) and gets back ??? w Fraudulent transfer law typically gives good faith transferee lien on asset to extent of value given

46. May 11, 2015Copyright © 2005 Randal C. Picker46 Ditch Both Limits u Think of trustee as recovering excess value from T: $5,000 u That gives $6,000 in assets against $10,000 in claims and all paid 60 cents on the dollar u Pre-transfer creditors get $600, post- transfer creditors get $5400 n This is understood to be the result of Moore v Bay

47. May 11, 2015Copyright © 2005 Randal C. Picker47 Ozark n Three Causes of Action by the Trustee u The alter ego action u Action to recover unpaid debt (Sec. 541) u A preference action (Sec. 547) n What is the basis for allowing the trustee to bring the alter ego action? u 541? 544?

48. May 11, 2015Copyright © 2005 Randal C. Picker48 544 n Trustee as lien creditor and as successor to certain creditors and purchasers u (a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by--

49. May 11, 2015Copyright © 2005 Randal C. Picker49 544 (cont.) n Trustee as lien creditor and as successor to certain creditors and purchasers (cont.) u (a) (cont.) w (1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;

50. May 11, 2015Copyright © 2005 Randal C. Picker50 And Contrast This with Proposed 544(c) n Organized around u “The trustee may enforce any cause of action that a creditor …”