Problem.Preferences

     A. Lender advances $200,000 to finance debtor's acquisition of a residence and secures the promissory note with a deed of trust on the real property being purchased. At the same time, debtor buys a car on credit, financing the purchase with a secured loan from her credit union. Within 90 days of both of these transactions the debtor files a Chapter 7 bankruptcy proceeding. May the bankruptcy trustee avoid the deed of trust or the security interest in the car? See Bankr. Code 547(b), 101(54).

     B. Recall the facts from Lovelady v. Bryson Escrow. Suppose the Loveladys initially secured the purchase price of the restaurant business only with a mortgage on the leasehold. Several months later, when Loop's was in arrears on its payments under the promissory note, the Loveladys agreed to forbear foreclosing on the leasehold in exchange for Loop's grant to the Loveladys of a security interest in the equipment and fixtures of the restaurant. After Loop's granted the additional security interest to the Loveladys its financial position continued to deteriorate and, within 90 days of having granted the additional security interest, it filed a Chapter 11 bankruptcy proceeding.  Could the debtor-in-possession avoid the Lovelady's mortgage on the leasehold?  In the equipment and fixtures of the restaurant?  To what end?  In addition to Bankr. Code 547(b), consider the following edited language from Bankr. Code 1107(a):  " . . . a debtor in possession shall have all the rights . . . of a trustee serving in a case under this chapter." 

     Suppose that the bankruptcy court had ordered conversion of the Chapter 11 to a Chapter 7 proceeding based on a showing by an interested creditor of continuing loss to the estate and absence of a reasonable likelihood of rehabilitation (Bankr. Code 1112(b)(1)).  Prior to conversion, the debtor-in-possession had made no attempt to avoid the mortgage or the security interests.  May the trustee in the Chapter 7 proceeding avoid the Lovelady's mortgage on the leasehold?  The security interest in the equipment and fixtures?  To what end?  In addition to Bankr. Code 547(b), consider the following edited language from Bankr. Code 348(a):  "Conversion of a case from a case under one chapter of this title to a case under another chapter of this title . . . does not effect a change in the date of the filing of the petition . . ."

     C. You have filed a $125,000 breach of contract action and have just obtained a pre-judgment attachment of the defendant's property. Or, alternatively, you have just obtained a judgment against the defendant for $125,000 and have either obtained a judgment lien through recording or obtained an execution lien by causing the sheriff to levy a writ of execution on the defendant's property. Or, alternatively, you have settled the lawsuit by agreeing to take installment payments secured by a deed of trust on the debtor's real property and/or a security interest in some of the debtor's personal property. Within two weeks of the attachment, or the recording, or the levy of the writ of execution, or the execution of the deed of trust or security agreement, as the case may be, the defendant files a bankruptcy proceeding. May the liens arising from your use of the judicial process or resulting from the consensual security be avoided as preferences? If, prior to taking any of the actions creating judicial or consensual liens, you think that the debtor might file a bankruptcy proceeding in response to your actions, should you refrain from taking those actions?

     D. You represent a creditor with a large unsecured claim against the debtor sued in the preceding problem. You have learned that the plaintiff in that lawsuit has obtained a judicial or consensual lien on property of the debtor. Should you consider filing an involuntary bankruptcy forcing the debtor into bankruptcy?