Mba 215 Group Project Power Point


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Mba 215 Group Project Power Point

  1. 1. MBA 215 Business Law Professor Ida Jones Group Project: Chapter 24 Debtor – Creditor Relations & Bankruptcy David Bacci Larry Narbaitz Michelle Van Valkenburg 1
  2. 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 2
  3. 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 3
  4. 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 4
  5. 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 5
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  7. 7. Commercial Loan Categories • Loans Categorized By Lender – Banks, Insurance Companies, Purchasers of Commercial Paper • Loans Categorized By Purpose – Term & Revolving 7
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  9. 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 9
  10. 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 10
  11. 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 11
  12. 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 12
  13. 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 13
  14. 14. Chapter 24 Key Points Bankruptcy • Bankruptcy Law • Principles Applicable to All Bankruptcies • Chapter 11 Reorganization • Chapter 7 Liquidations • Chapter 13 Consumer 14
  15. 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 15
  16. 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 16
  17. 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) 17
  18. 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 18
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  21. 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 21
  22. 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 22
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  24. 24. Relationship to Other Material • Chapter 7 Contracts – Slide on Lender Liability (Bagley p224, fraud) • Chapter 8 Sales and E-Commerce – Slide on Secured Transactions (Bagley p258, contracts) • Chapter 9 Torts – Slide on Lender Liability (Bagley p305, fraud) 24