1. MBA 215 Business Law
Professor Ida Jones
Group Project: Chapter 24
Debtor – Creditor Relations & Bankruptcy
David Bacci
Larry Narbaitz
Michelle Van Valkenburg
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2. Project Overview
• Key Points Chapter 24: Debtor–Creditor Relations
• Key Points Review Chapter 24: Bankruptcy
• Relationship to Material in Previous Chapters
• Our Blog: Bankruptcy Hits Home
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3. Chapter 24 Key Points
Debtor-Creditor Relations & Bankruptcy
• Loan Agreements
• Commercial Loan Categories
• Secured Transactions Under the UCC
• Perfecting a Security Interest
• Subordination
• Lender Liability
• Special Defenses Available to Federal Insurers
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4. Loan Agreements
• Parties To The Agreement
– Lenders, Borrowers
• Commitment To Make a Loan
– Term Sheet, letter outlining the terms and conditions for on
which the lender will lend
• Description Of The Loan
– Funding, Interest Rates, Repayment Terms
• Representations & Warranties
– Qualifications, Truthfulness of Representations
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5. Loan Agreements (cont’d)
• Conditions To Closing
– Authority to Approve, Payment of Fees
• Covenants
– Specific Actions borrower’s promises that it will or will not take as
long as the loan is outstanding
• Default
– Events that will trigger the lenders rights to terminate the loan
• Remedies for Default
– Sets forth the lenders remedies incase of default, optional by lender
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9. Secured Transactions Under UCC
• Terminology
– Security Interest, Debtor, Secured Party, Security Agreement
• Formal Requirements
• Rights And Remedies
• Security Agreement
– Parties to the Agreement, Granting Clause, Description of the Collateral,
– After Acquired Property, Proceeds, Debtors Obligations, Cross-Collateral
– Remedies for Default
Rights And Remedies
• Additional UCC Information
– Bagley Chapter 8 p258, Contracts
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10. Perfecting a Security Interest
• Methods of Perfection
– Possession, Control, Filing, Automatic
• Filing Procedure (To Provide Notice)
– What: File a Financing Statement, Where: Office of the Secretary of
State, When: In Advance of the Transaction
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11. Subordination
• An agreement whereby one or more creditors of a
common debtor agree to defer payment of their claims
until another creditor of the same debtor is fully paid.
• Indebtedness To Insiders
– Officers, Directors, Share Holders
• Lien Subordination
– An agreement between two secured creditors whose respective security
interests, liens, or mortgages attach to the same property
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12. Lender Liability
• Breach of Contract
– Lenders failure to act as required by the terms of an agreement
• Breach of Duty of Good Faith
– Lenders failure to act reasonably and fairly
• Fraudulent Misrepresentation
– Lender liable for making a false statement.
– Chapter 7, Contracts (p224), fraud in the factum (misrepresent) and fraud in the
inducement (falsely persuade)
– Chapter 9, Torts (p305), fraudulent misrepresentation
• Economic Duress
– Coercion of the borrower by threatening to do an unlawful act that might injure
the borrower’s business or property
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13. Lender Liability (Cont’d)
• Tortious Interference
– Lenders interferes with normal business decisions of the firm
– Chapter 9, Torts (p309), interference
• Intentional Infliction of Emotional Distress
– Lender publicly ridiculing a debtor
– Chapter 9, Torts (p297), intentional infliction of emotional distress
• Negligence and General Tort Liability
– Claims that do not fall under one of the other categories
• Statutory Bases of Liability
– Lender violates a statutory standard of conduct, i.e. RICO Act
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14. Chapter 24 Key Points
Bankruptcy
• Bankruptcy Law
• Principles Applicable to All Bankruptcies
• Chapter 11 Reorganization
• Chapter 7 Liquidations
• Chapter 13 Consumer
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15. Bankruptcy Law
• Began with the Bankruptcy Act of 1898
• Amended in 1938 by the Chandler Act
• Completely Revised in 1978 by the Bankruptcy Reform Act of 1978
– Substantially lessened the requirements for filing bankruptcy
• Bankruptcy Amendments and Federal Judgeship Act of 1984
– Bankruptcy courts became part of the federal district court system
• Congress Passes the Bankruptcy Reform Act – Vetoed by President Clinton
• Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
– Creates an income-based test to determine whether individuals who file should be
required to repay some or all of their debts rather than receive a complete discharge
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16. Bankruptcy Law (Cont’d)
• Management Duties Shift When Company Enters Insolvency Zone
– Fiduciary duties of directors shift from that of shareholders to the
corporations creditors.
• Initiation of a Bankruptcy Proceeding
– Petition, Order for Relief, Administration of Claims, Bankruptcy
Estate, Distribution of Property
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17. Principles Applicable to All Bankruptcies
• Good Faith Requirement
– Debtor does not have to show that it is insolvent to file for Bankruptcy
• Automatic Stay
– Instantly suspends most litigation and collection activities
• Executory Contracts and Leases
– Accept or reject contracts that have not been fully performed or lease that are
unexpired
– Copyright, Patent, Trademark,
• Sale of Property
– Bankruptcy can facilitate favorable sales of assets other than contracts or leases
• Avoiding Powers
– Trustee has power to invalidate or reverse certain prebankruptcy transactions
– Fraudulent Conveyances (one year prior, intended to hinder creditors)
– Collective Bargaining Agreements (economically necessary, impasse, fairness)
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18. Chapter 11 Reorganizations
• Obtaining Credit
– Customer’s Payments, Extension of Unsecured Credit, Secured Borrowings
– Court Oversight, Turnover of Debtor’s Property
• The Plan
– Debtor has the exclusive right to file a plan of reorganization with the
• Confirmation
– To be confirmed, a plan must meet numerous statutory requirements such as
– Feasibility, Best interest of creditors, Disclosure, Acceptance, Cramdown
• Discharge
– Confirmation under chapter 11 can give reorganized debtors a new start under the plan
• Workouts, Prepackaged, and Prenegotiated Chapter 11 Cases
– Workouts, restructures debtors financial affairs
– Prepackaged, company solicits votes on its plan for reorganization before filing for bankruptcy
– Prenegotiated, debtor files as soon as it can after reaching agreement with debtors, but debtors
do not vote until after debtor files. Advantage is to keep some financial information
confidential
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21. Chapter 7 Liquidations
• Individual Debtors
– Discharged, except for nondischargeable debts such as taxes,
student loans, drunk driving fines, spousal or child support,
claims arising from willful and malicious injury by the debtor
• Bankruptcy Abuse Prevention and Consumer Act of 2005
– Established objective income test that the judge must use to
determine a debtor’s ability to pay
• Nonindividual Debtors
– Chapter 7 does not provide a discharge for corporations,
partnerships, or similar business entities.
– Once their assets are sold, they become defunct shells
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22. Chapter 13 Consumer Bankruptcy
• Deals with the adjustment of debt of an individual or a
married couple with regular income.
• Chapter 13 Requirements
– Regular income, wage earners and individuals engaged in
business, unsecured debts less than $307,657 and secured debts
do not exceed $922,975
• Advantages of Chapter 13
– Stops all creditor collection activity, debtor does not surrender
assets, a god faith effort to pay creditors can preserve goodwill
and future credit prospects.
– Unfortunately, Chapter 13 debtors are often unable to make the
payments outlined in their plan and eventually convert to a
Chapter 7 Liquidation
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