Assume C has on D’s equipment, which is undersecured SI declining in value (to C’s detriment) as D generates more inventory… thus, as alternative to foreclosure (on C seeks SI), … “adequate 3 options (§ protection” 361(1)-(3))… makes $$ payments (though, estate likely has NO $$… Trustee AND, if NOT spelled out in court order, then unclear whether payments go to principal OR interest) Substitute (though, estate likely has NO unencumbered lien assets) Some other relief that is (i.e. on equivalent” lien “indubitable powers/recoveries) trustee’s avoidance action/foreclosure against property if D does NOT have equity in § 362(d)(2) property property NOT necessary to an reorganization” –AND– “effective is a 2-prong test… BUT, 2nd prong applies ONLY to § 362(d)(2) Ch. 11 most courts will NOT apply 2nd prong to (some courts reinterpret Ch. 7 2nd prong as instead of liquidation” reorganization”) “orderly “effective If D is a printing plant, then printing press IS necessary to an (printing plant can’t run w/o printing reorganization” “effective press)… thus, even if D has NO equity in printing press (i.e. held by lien … C), C may NOT foreclose… undersecured In printing plant, entire suite of assets is dependent on assembly/ value of assets depends on suite… turn-key value thus, if C foreclose on printing press, then all other assets … in printing plant would drop in value (to detriment of other Cs) though, if C can show that there is NO hope for reorganization, … then 2nd prong satisfied property NOT necessary to an “effective b/c there will be NO such reorganization reorganization” Courts do NOT like to predict that will fail… Ch. 11 AND, if D counterargues that will succeed (i.e. Ch. 11 … presents business model), then court will likely favor D As per 1st prong (lack of equity), C and D will present dueling appraisals court splits the difference
Assume undersecured C has SI on D’s equipment, which is declining in value (to C’s detriment) as D generates more inventory… … thus, as alternative to foreclosure (on SI), C seeks “adequate protection” 3 options (§ 361(1)-(3))… Trustee makes $$ payments (though, estate likely has NO $$… AND, if NOT spelled out in court order, then unclear whether payments go to principal OR interest) Substitute lien (though, estate likely has NO unencumbered assets) Some other relief that is “indubitable equivalent” (i.e. lien on trustee’s avoidance powers/recoveries) § 362(d)(2) action/foreclosure against property if D does NOT have equity in property –AND– property NOT necessary to an “effective reorganization” § 362(d)(2) is a 2-prong test… BUT, 2nd prong applies ONLY to Ch. 11 most courts will NOT apply 2nd prong to Ch. 7 (some courts reinterpret 2nd prong as “orderly liquidation” instead of “effective reorganization”) If D is a printing plant, then printing press IS necessary to an “effective reorganization” (printing plant can’t run w/o printing press)… … thus, even if D has NO equity in printing press (i.e. lien held by undersecured C), C may NOT foreclose… In printing plant, entire suite of assets is dependent on assembly/ turn-key value value of assets depends on suite… … thus, if C foreclose on printing press, then all other assets in printing plant would drop in value (to detriment of other Cs) … though, if C can show that there is NO hope for reorganization, then 2nd prong satisfied property NOT necessary to an “effective reorganization” b/c there will be NO such reorganization Courts do NOT like to predict that Ch. 11 will fail… … AND, if D counterargues that Ch. 11 will succeed (i.e. presents business model), then court will likely favor D As per 1st prong (lack of equity), C and D will present dueling appraisals court splits the difference
Bankruptcy_Schechter-Fall-2009.docx