Postpetition Security Interests under the Bankruptcy Code

Section 364(c) and (d) of the Bankruptcy Code provides for the creation of security interests in real and personal property under federal law. In this Article, David Gray Carlson discusses the quality and nature of these federal security interests, their remarkable immunity from reversal on appeal, and the ability of postpetition lenders to obtain preferences over other creditors through cross-collateralization clauses and the like

The Housing Bubble and Consumer Bankruptcy (Parts I and II)

During the COVID pandemic housing prices have soared. Consumers who have filed for bankruptcy are now looking at enormous realized and unrealized capital gains. This article assesses the chances that these consumer debtors can keep these gains out of the hands of their creditors. Part I of this two-part article addresses chapter 7 issues, which concern lien stripping, abandonment, and monetary exemptions. It also addresses lien stripping in chapter 13 cases. Part II will address whether a chapter 13 debtor must surrender appreciation value to the chapter 13 trustee or to a trustee in a converted chapter 7 case

Modified Plans of Reorganization and the Basic Chapter 13 Bargain

A very large number of chapter 13 plans are confirmed each year. Unlike chapter 11 plans (for non-individuals), these plans may be revised after confirmation. The modification provisions of the Bankruptcy Code, however, give very little guidance as to what constitutes a permissible modification. In contrast, confirmation of the original plan is very carefully governed. This article theorizes that modification must honor the basic chapter 13 bargain. According to this bargain, the debtor is entitled to the bankruptcy estate and the creditors are entitled to net surplus income. The article assesses whether the diffuse and disorganized caselaw of modification adheres to this normative structure. It explains how some of the precedents permit creditors to raid the bankruptcy estate in violation of a debtor\u27s rights. In particular, it argues that, in a modification, a court should not perform again the best interest of the creditors test of Bankruptcy Code 1325(a)(4), nor should bifurcation of secured claims be revisited

Constructive Trusts and Fraudulent Transfers: When Worlds Collide

When Ponzi schemes collapse and enter into bankruptcy liquidation, bankruptcy trustees assume that conveyances made by the debtor for no consideration are fraudulent conveyances. This Article argues that they are not. Virtually all the assets held by a Ponzi scheme are held in constructive trust for the victims of the fraud. If victims of the fraud can trace the proceeds of their investments into property transferred to a third party, the third party holds the asset transferred in trust for the relevant victim. When a bankruptcy trustee characterizes the asset as a fraudulently conveyed asset, the trustee expropriates the asset from the victim on behalf of the unsecured creditors of the Ponzi scheme. There are only two justifications for this expropriation. First, tracing is impossible or too costly. This claim reduces to the theory that a thief should not restore the loot to the victim when it is costly to do so. Second, when the third party points out that the victims (not the bankruptcy trustee) own the cause of action for restoration of the loot, the third party is making an impermissible ius tertii defense. Being estopped from this defense, the third party must surrender the transferred asset to the bankruptcy trustee. This essentially completes the expropriation of victim property for the benefit of the unsecured creditors, who are scarcely entitled to enjoy this stolen property

Constructive Trusts and Fraudulent Transfers: When Worlds Collide

When Ponzi schemes collapse and enter into bankruptcy liquidation, bankruptcy trustees assume that conveyances made by the debtor for no consideration are fraudulent conveyances. This Article argues that they are not. Virtually all the assets held by a Ponzi scheme are held in constructive trust for the victims of the fraud. If victims of the fraud can trace the proceeds of their investments into property transferred to a third party, the third party holds the asset transferred in trust for the relevant victim. When a bankruptcy trustee characterizes the asset as a fraudulently conveyed asset, the trustee expropriates the asset from the victim on behalf of the unsecured creditors of the Ponzi scheme. There are only two justifications for this expropriation. First, tracing is impossible or too costly. This claim reduces to the theory that a thief should not restore the loot to the victim when it is costly to do so. Second, when the third party points out that the victims (not the bankruptcy trustee) own the cause of action for restoration of the loot, the third party is making an impermissible ius tertii defense. Being estopped from this defense, the third party must surrender the transferred asset to the bankruptcy trustee. This essentially completes the expropriation of victim property for the benefit of the unsecured creditors, who are scarcely entitled to enjoy this stolen property

A Theory of Contractual Debt Subordination and Lien Priority

Creditors distrust debtors and other creditors. Some of this in-security is dispelled by the two basic priority rules-- first in time for secured credit and pro rata sharing for general credit. These priorities, however, are merely suppletive rules that replicate what most creditors want.\u27 Individual creditors can have different objectives that call for different priorities. For that reason, creditors vary their rights by contract.\u27 Two motives exist for subordination agreements. First, a creditor may wish to subordinate its priority to induce another creditor to advance new funds. Second, a junior creditor may wish to advance credit, but the resulting increased leverage of the debtor would violate a covenant in a loan agreement between the debtor and some other creditor. A subordinated debt may be the only kind of debt that does not violate the covenant of a senior creditor. Governance of remote contingencies within the remote contingency of the debtor\u27s liquidation is often too costly. Hence, subordination agreements are often vague and incomplete. When financial disaster strikes, courts are called upon to fill in the omissions left by the contract. The best way for courts to fill in these contractual gaps is by reference to the economics of the basic subordination relationship among creditors. This subordination analysis currently does not exist. The seminal article in the field has stated that a theory of subordination does not matter, providing the agreement is enforced.\u27 The disdain for exploring the structure of the subordination relationship in that article may have deterred the courts from making this inquiry. As a result courts have not been solving interpretation disputes consistently with the dynamics of subordination. This Article examines the nature of voluntary subordination of lien and bankruptcy priorities. Part II briefly addresses the judicial role in determining the meaning of subordination agreements. Part III will demonstrate that all aspects of the agreement to subordinate debt (but not agreements to subordinate lien priority)derive from the junior creditor\u27s simple core promise. The junior creditor promises that, after a point in time, he will receive no payment from the debtor on the junior claim until the senior creditors are paid. From this core promise, courts can build a jurisprudence that is consistent with the economics of consensual subordination. Part IV will show that every promise not to receive payment on the junior debt is a transfer of ownership (an assignment ) of the junior claim from the subordinated lender to the senior creditors. Subordination of debt (but not of lien priority) bridges the gap between the junior creditor\u27s personal obligation and the encumbrance of the junior creditor\u27s property. The shift from the junior creditor\u27s personal obligation to the transfer of the junior creditor\u27s property protects senior creditors from the junior creditor\u27s bankruptcy or other misbehavior. This is an important consideration because the junior creditor is frequently an insider of the common debtor. Recognition that subordination of the junior claim is an assignment by a nonrecourse guarantor in order to secure the senior claim will permit courts to expropriate many useful doctrines pertaining to assignment of claims in action

Article 9 Foreclosures: When Is a Sale Not a Sale?

Article 9 of the Uniform Commercial Code empowers a secured creditor to sell collateral. This power is circumscribed. A secured party may not sell before default. A secured party cannot self-deal in a private sale. A pledgee of securities can sell to itself in a private sale if the securities are of a kind that is customarily sold on a recognized market, but the law is unclear what formalities the pledgee must meet to memorialize the sale. A secured party may not sell in a commercially reasonable manner to a buyer with notice of the commercial unreason. This article explores these and other limits on a secured creditor\u27s power to sell. Sometimes a sale is not a sale