Class 12
Bankruptcy, Spring, 2009
Pre-Confirmation
Distributions
Randal C. Picker
Leffmann Professor of Commercial Law
The Law School
The University of Chicago
773.702.0864/[email protected]
Copyright © 2005-09 Randal C. Picker. All Rights
Sec. 554

Abandonment of property of the estate
(a)
After notice and a hearing, the trustee
may abandon any property of the estate
that is burdensome to the estate or that is of
inconsequential value and benefit to the
estate.
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725

Disposition of certain property
 After
the commencement of a case under this
chapter, but before final distribution of property of
the estate under section 726 of this title, the
trustee, after notice and a hearing, shall dispose of
any property in which an entity other than the
estate has an interest, such as a lien, and that has
not been disposed of under another section of this
title.
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Sec. 1171. Priority Claims

Applicable Only in Railroad Reorganizations
 (a)
There shall be paid as an administrative
expense any claim of an individual or of the
personal representative of a deceased individual
against the debtor or the estate, for personal injury
to or death of such individual arising out of the
operation of the debtor or the estate, whether such
claim arose before or after the commencement of
the case.
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Sec. 1171. Priority Claims
(b)
Any unsecured claim against the debtor
that would have been entitled to priority if a
receiver in equity of the property of the
debtor had been appointed by a Federal
court on the date of the order for relief
under this title shall be entitled to the same
priority in the case under this chapter.
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363

Use, sale, or lease of property
(b)(1)
The trustee, after notice and a
hearing, may use, sell, or lease, other than
in the ordinary course of business, property
of the estate … .
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363 (cont.)

Use, sale, or lease of property (cont.)
 (c)(1)
If the business of the debtor is authorized to
be operated under section 721, 1108, 1203, 1204,
or 1304 of this title and unless the court orders
otherwise, the trustee may enter into transactions,
including the sale or lease of property of the
estate, in the ordinary course of business, without
notice or a hearing, and may use property of the
estate in the ordinary course of business without
notice or a hearing.
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Harm Mitigation Incentives I

Hypo: Solvent Firm
Owes
creditor $100 today
Tomorrow: Coin Flip
With probability 1-p, will continue to owe
$100
 With prob p, further harm will accrue and will
owe $1100 (increase in harm of $1000)

Firm

can spend $10 to avoid coin flip
When should it do so?
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Answer

Answer
Firm
should compare 1000p and 10
Spend the money if 1000p > 10

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Meaning if p > .01
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Harm Mitigation Incentives
II

Hypo with Insolvent Firm
Firm
has $110 in assets
Two claims
$100 claim fixed
 $100 claim subject to coin flip process as
before

Equity
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holders beneath creditors
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Harm Mitigation Incentives
II
Firm
could spend $10 and has three
choices available to it
1. Do nothing
 2. Spend $10 to avoid the coin flip
 3. Spend $10 on lottery ticket

• Very very low probability of winning but will
make the firm solvent if the ticket is a winner

What will the firm do? What should it do?
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Answer

Will
Once
insolvent, equity holders will get
nothing
New claims irrelevant; equity still will get
nothing
Lottery ticket is only way to get something

Should
Lottery
ticket constructed to be bad bet;
avoiding the coin flip still socially valuable
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Mabey

Core Facts
Effort
to create $15 million fund prior to
confirmation of plan of reorganization to pay
during the case for emergency treatment of
women injured by the Dalkon Shield
Payments would be made before claims
were allowed; would count against ultimate
payments on allowed claims but
overpayments would not be recovered
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Mabey

Is this different from my hypos?
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Critical Vender Orders

Key Questions
Under
what circumstances, if any, can
prepetition claims be paid before the date of
general distribution to prepetition claims?
What does that do?
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Kmart

Core Facts
Files;
first day orders
Pay critical vendors to induce more delivery
 Pays $300 million in prepetition debts in full
for 2,330 supplies

Case
eventually pays other prepetition
claims—45,000 creditors—at 10 cents per
dollar
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Kmart

Key Questions
Is
pre-confirmation payment valid?
Under what circumstances?
Using what as statutory authority?
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Sec. 1129(a)(7): Best
Interests of Creditors Test

1129(a) The court shall confirm a plan only if all
of the following requirements are met:
 (7)
With respect to each impaired class of claims
or interests 
(A) each holder of a claim or interest of such class • (i) has accepted the plan; or
• (ii) will receive or retain under the plan on account of such
claim or interest property of a value, as of the effective
date of the plan, that is not less than the amount that such
holder would so receive or retain if the debtor were
liquidated under chapter 7 of this title on such date
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Types of Claims

Customer Claims
Product
warranty claims
Frequent flyer program obligations?


Employee Claims
Critical Vendor Claims
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Kmart Test

Debtor must prove two items:
“But
for immediate full payment, vendors
would cease dealing”
“business will gain enough from continued
transactions with the favored vendors to
provide some residual benefit to the
remaining, disfavored creditors, or at least
leave them no worse off.”
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