1. Secured Transactions Assignment 27
Priority Under Bankruptcy Law

2. The Big Picture Part Two: The Creditor Third Party Relationship
Chapter 6-7: Perfection
Chapter 8: Concept of Priority
Assignment 26: Priority Under State Law
Assignment 27: Priority Under Bankruptcy Law
Chapter 9: Specific Priority Rules

3. State vs. Bankruptcy Protections
State Protections (26)
Bankruptcy Protections (27)

4. State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
Bankruptcy Protections (27)

5. State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose

6. State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
2. Debtor can’t dislodge secured creditor without payment in full
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose

7. State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
2. Debtor can’t dislodge secured creditor without payment in full
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
2. DIP can force sale under §363(f)

8. State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
2. Debtor can’t dislodge secured creditor without payment in full
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
2. DIP can force sale under §363(f) and DIP can grant prior lien under §364(d)

9. State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
2. Debtor can’t dislodge secured creditor without payment in full
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
2. DIP can force sale under §363(f) and DIP can grant prior lien under §364(d)

10. State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
Debtor can’t dislodge secured creditor without payment in full
Prior perfected secured creditor is entitled to possession, Grocers Supply.
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
DIP can force sale under §363(f) and DIP can grant prior lien under §364(d)

11. State vs. Bankruptcy Protections
State Protections (26)
1. The secured creditor can foreclose at any time after default
Debtor can’t dislodge secured creditor without payment in full
Prior perfected secured creditor is entitled to possession, Grocers Supply.
Bankruptcy Protections (27)
1. The automatic stay prevents foreclosure unless (1) no adequate protection or (2) DIP has no bankruptcy purpose
DIP can force sale under §363(f) and DIP can grant prior lien under §364(d)
DIP may use the collateral, §363

12. Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property free and clear of any interest in such property of an entity only if –
applicable nonbankruptcy law permits sale of such property free and clear of such interest;
such entity consents;
such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
such interest is in bona fide dispute; or
such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

13. Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property free and clear of any interest in such property of an entity only if –
applicable nonbankruptcy law permits sale of such property free and clear of such interest;
such entity consents;
such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
such interest is in bona fide dispute; or
such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

14. Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property free and clear of any interest in such property of an entity only if –
applicable nonbankruptcy law permits sale of such property free and clear of such interest;
such entity consents;
such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
such interest is in bona fide dispute; or
such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

15. Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property free and clear of any interest in such property of an entity only if –
applicable nonbankruptcy law permits sale of such property free and clear of such interest;
such entity consents;
such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
such interest is in bona fide dispute; or
such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

16. Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property free and clear of any interest in such property of an entity only if –
applicable nonbankruptcy law permits sale of such property free and clear of such interest;
such entity consents;
such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
such interest is in bona fide dispute; or
such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

17. Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property free and clear of any interest in such property of an entity only if –
applicable nonbankruptcy law permits sale of such property free and clear of such interest;
such entity consents;
such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
such interest is in bona fide dispute; or
such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

18. Bankruptcy Code §363(f)
(f) The trustee [DIP] may sell property free and clear of any interest in such property of an entity only if –
applicable nonbankruptcy law permits sale of such property free and clear of such interest;
such entity consents;
such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
such interest is in bona fide dispute; or
such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

19. Bankruptcy Code §364(d)
(d)(1) The court may authorize the obtaining of credit or the incurring of debt secured by a senior lien on property of the estate that is subject to a lien

20. Bankruptcy Code §364(d)
(d)(1) The court may authorize the obtaining of credit or the incurring of debt secured by a senior lien on property of the estate that is subject to a lien only if –
The trustee is unable to obtain such credit otherwise; and

21. Bankruptcy Code §364(d)
(d)(1) The court may authorize the obtaining of credit or the incurring of debt secured by a senior lien on property of the estate that is subject to a lien only if –
The trustee is unable to obtain such credit otherwise; and

22. Bankruptcy Code §364(d)
(d)(1) The court may authorize the obtaining of credit or the incurring of debt secured by a senior lien on property of the estate that is subject to a lien only if –
The trustee is unable to obtain such credit otherwise; and
There is adequate protection of the interest of the holder of the [already existing] lien

23. Problem 27.1, page 460 $200 sale expense
The Chapter 7 trustee is selling problem 26.1 property free and clear of liens
29K
25K
10K
17K

24. Problem 27.1, page 460 $200 sale expense
The Chapter 7 trustee is selling problem 26.1 property free and clear of liens
How much should Kinski bid?
29K
25K
10K
17K

25. Problem 27.1, page 460 $200 sale expense
The Chapter 7 trustee is selling problem 26.1 property free and clear of liens
How much should Kinski bid? $25K
29K
25K
25K
10K
17K
Before
After

26. Problem 27.1, page 460 $200 sale expense
The Chapter 7 trustee is selling problem 26.1 property free and clear of liens
How much should Kinski bid? $25K
Expenses of sale?
29K
25K
25K
10K
17K
Before
After

27. Problem 27.1, page 460 $200 sale expense
The Chapter 7 trustee is selling problem 26.1 property free and clear of liens
How much should Kinski bid? $25K
Expenses of sale? Paid from proceeds
29K
25K
25K
10K
17K
Before
After

28. Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000
800K
1.1M

29. Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000
Former value $3 million.
800K
1.1M

30. Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
800K
1.1M 1M

31. Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First.
800K
1.1M 1M

32. Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First. Both liens are extinguished. 1M

33. Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First. Both liens are extinguished.
Can Bank prevent the sale?
800K
1.1M 1M

34. Problem 27.2, page 460 First lien, $1.1 million; second lien $800,000
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First. Both liens are extinguished.
Can Bank prevent the sale?
Objection: “No grounds under §363(f)”
800K
1.1M 1M

35. What are the grounds for this sale?
(f) The trustee may sell property free and clear of any interest in such property of an entity only if –
applicable nonbankruptcy law permits sale of such property free and clear of such interest;
such entity consents;
such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
such interest is in bona fide dispute; or
such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

36. What are the grounds for this sale?
(f) The trustee may sell property free and clear of any interest in such property of an entity only if –
applicable nonbankruptcy law permits sale of such property free and clear of such interest;
such entity consents;
such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
such interest is in bona fide dispute; or
such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

37. What are the grounds for this sale?
(f) The trustee may sell property free and clear of any interest in such property of an entity only if . . .
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property

38. What are the grounds for this sale?
(f) The trustee may sell property free and clear of any interest in such property of an entity only if –
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property
800K
1.1M 1M

39. What are the grounds for this sale?
(f) The trustee may sell property free and clear of any interest in such property of an entity only if –
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property
What is the “aggregate value of all liens”
on this property?
800K
1.1M 1M

40. What are the grounds for this sale?
(f) The trustee may sell property free and clear of any interest in such property of an entity only if –
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property
What is the “aggregate value of all liens”
on this property?
$1.9 million?
800K
1.1M 1M

41. What are the grounds for this sale?
(f) The trustee may sell property free and clear of any interest in such property of an entity only if –
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property
What is the “aggregate value of all liens”
on this property?
$1.9 million?
$1 million? Oneida Lake
800K
1.1M 1M

42. Problem 27.2, page 460
First lien, $1.1 million; second lien $800 thousand
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First
Can Bank prevent the sale?
Objection: “No grounds under §363(f)”
Assume the objection fails. Bank expects a future value of $3 million. What should Bank do if the sale goes forward? Bid at the sale, §363(k)
800K
1.1M 1M

43. Problem 27.2, page 460
First lien, $1.1 million; second lien $800 thousand
Former value $3 million.
If the cars are sold for $1 million during bankruptcy, who gets the money?
First
Can Bank prevent the sale?
Objection: “No grounds under §363(f)”
Assume the objection fails. Bank expects a future value of $3 million. What should Bank do if the sale goes forward? Bid at the sale, §363(k)
800K
1.1M 1M

44. Problem 27.3, page 461
We represent debtor seeking to finance completion of office complex

45. Problem 27.3, page 461
We represent debtor seeking to finance completion of office complex 1M 4M 2M
Now

46. Problem 27.3, page 461
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M 1M 4M 2M
Now

47. Problem 27.3, page 461
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M 1M 4M 2M
Now

48. Problem 27.3, page 461
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M 1M 1M 4M 4M 4M 2M
Now
Complete

49. Problem 27.3, page 461
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M 1M 1M 4M 4M 4M 2M
Now
Complete
How do we get the money to finish it?

50. Problem 27.3, page 461
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M 1M 1M 4M 4M 4M 2M
Now
Complete
How do we get the money to finish it?
File bankruptcy.

51. Problem 27.3, page 461
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M 1M 4M 2M 2M 2M 2M
Bky
Complete
How do we get the money to finish it?
File bankruptcy. Bifurcate $4M claim.

52. Problem 27.3, page 461
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M 1M 4M 2M 2M 2M 2M
1.5M
Bky
Complete
How do we get the money to finish it?
File bankruptcy. Bifurcate $4M claim.
Borrow $1.5 million; grant a first lien under §364(d)

53. Problem 27.3, page 461
We represent debtor seeking to finance completion of office complex
First is $4M; second is mechanics liens for $1M; value is $2M
Cost to complete is $1.5M, value complete is $4M 1M 4M 2M 2M 2M 2M
1.5M
Bky
Complete
How do we get the money to finish it?
File bankruptcy. Bifurcate $4M claim.
Borrow $1.5 million; grant a first lien under §364(d)
Is anyone injured by that borrowing?

54. Problem 27.4, page 461
120K
In Problem 26.4 we loaned $10K on a second mortgage
10K
80K

55. Problem 27.4, page 461
120K
In Problem 26.4 we loaned $10K on a second mortgage
Now the first forecloses. Where do we stand?
10K
80K

56. Problem 27.4, page 461
120K
120K
In Problem 26.4 we loaned $10K on a second mortgage
Now the first forecloses. Where do we stand?
We need $80K cash to protect our position.
10K
80K
Before
After

57. Problem 27.4, page 461
120K
120K
In Problem 26.4 we loaned $10K on a second mortgage
Now the first forecloses. Where do we stand?
We need $80K cash to protect our position.
10K
80K
Before
After
Where do we stand if our friend files for bankruptcy?

58. Problem 27.4, page 461
120K
120K
In Problem 26.4 we loaned $10K on a second mortgage
Now the first forecloses. Where do we stand?
We need $80K cash to protect our position.
10K
80K
Before
After
Where do we stand if our friend files for bankruptcy?
Automatic stay; first can’t force sale

59. Problem 27.4, page 461
120K
120K
In Problem 26.4 we loaned $10K on a second mortgage
Now the first forecloses. Where do we stand?
We need $80K cash to protect our position.
10K
80K
Before
After
Where do we stand if our friend files for bankruptcy?
Automatic stay; first can’t force sale
Payment in full under Chapter 13 plan (cure and reinstate)