Bankruptcy Law, The Law of Debtors and Creditors Problem Set Answers, Warren Westbrook Sixth Edition - Problem Set 20

Problem Set 20, p. 450

20.1

• Yes, he can run the business in the ordinary course; but he cannot use the cash collateral as before.
• §363(c)(2) the debtor may not use, sell or lease cash collateral unless each entity that has security consents or the court, after the notice and a hearing, authorizes it.

• Definition of cash collateral §363(a).

• UCC 9-315(a) the security interest will continue in the collateral property and attach to any identifiable proceeds of collateral.

20.2

• It is cash collateral,
• Why does the bank want the compensating balance? Like a security interest; at least setoff interest of 10%, better than nothing

• The compensating balance debt is squarely within §553(a)(3): Specially created within 90 days before the filing for the setoff while the debtor is insolvent. So the $15K cannot be setoff.

• Pottow: The bank should be allowed to set off $25K ($40k-15k).

20.3

• As a general rule, the bank can set off $50K and the debtor can use other $11K. But under §553(a)(2) the creditor cannot setoff the debt that was transferred to the creditor after 90 days before the date of filing and while the debtor was insolvent.

• We can argue that Gretchen is insolvent.

• So the bank cannot set off at all.

20.4

• You should investigate the rumors before the negotiation

• financial decision
• market decision:
• sister company
• fiduciary duty to this company.

• The solution is to appoint a trustee; what is the trustee’s obligation: to investigate the debtor’s affairs

• it is like a fraud conveyance
• whether the current management committed fraud, dishonesty, incompetence or mismanagement.

• What is the difference between the trustee and examiner? Why does the examiner need to investigate some debtor’s affairs? In case of trustee, the trustee take place of DIP, so no DIP anymore; in the case of examiner, the examiner does not displace the DIP.

• Someone committing the fraud, you appoint the trustee;
• If you bring the petition to appoint the trustee, can you get your money back if you withdraw the petition? Maybe not.

• §1104 (c)(2) mandatory appointed trustee or examiner.
• §503(c)(2) the severance fee should not be paid to an insider of the debtor unless the payment is part of program that is generally applicable to all full-time employees and the …

• But §303(h) is a “generally not paying standard”, right?

Problem Sets: Table of Contents

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