Free Business Bankruptcy Law Practice Questions

Question 1

A Chapter 11 food distributor holds customer collections subject to its lender’s perfected security interest. A refrigeration failure threatens to destroy stored inventory unless repairs begin today. The lender refuses consent to the repair payment, and no court order authorizes it. The debtor proposes replacement liens that its appraiser considers sufficient to protect the lender against any loss. What should counsel advise before the debtor spends the collections?

Accepted Answer

Seek prompt court authorization on notice, and obtain that authority before making the proposed payment.

Answer

Pay the repair contractor after documenting that preservation of the inventory benefits the lender’s collateral position.

Answer

Grant the proposed replacement liens and pay the contractor once the appraiser confirms their protective value.

Answer

Segregate the repair amount from other collections and pay it subject to a later accounting to the lender.

Question 2

A supplier's invoices require payment within 30 days. For three years, however, its manufacturing customer has consistently paid 55 to 65 days after invoice without collection pressure or changes in credit terms. In a preference action, the trustee challenges a payment made at 60 days. The court finds both the debt and payment ordinary between these parties, but industry evidence establishes a 30-day norm. The supplier's defense turns on which principle?

Accepted Answer

The parties' established course can satisfy the payment requirement despite contrary industry evidence.

Answer

Both the parties' payment history and objective industry practice must support the payment.

Answer

Payment outside the written invoice terms cannot be ordinary between the parties.

Answer

An ordinarily incurred trade debt is protected regardless of how it was paid.

Question 3

A Chapter 11 debtor in possession proposes retaining its longtime law firm. The firm's prepetition fees are fully paid. A partner also completed an unrelated engagement for a current unsecured creditor three years ago. Assume neither relationship creates an adverse interest or another statutory disqualification. The debtor's retention application describes both engagements, but the firm's proposed verified statement omits them because counsel considers them harmless. Which revision is required before filing?

Accepted Answer

Add both engagements to the verified statement; disclosure does not itself require disqualification.

Answer

No revision is needed because the debtor's application already discloses both connections.

Answer

Add the creditor engagement; prior debtor representation need not appear in the verified statement.

Answer

Substitute new counsel; a prior creditor engagement categorically bars general retention.

Question 4

For an impaired Chapter 11 class receiving partial payment of its claims, valid accepting ballots represent 72% in amount and 44% in number of the allowed claims actually voted. Every voting holder has one allowed claim; no votes have been designated or excluded. Several other holders returned no ballot. Which reading of the voting report is correct?

Accepted Answer

Not accepted; the amount test is met, but the numerical-majority test is not.

Answer

Accepted; the amount supporting the plan controls despite the numerical minority.

Answer

Undetermined; nonvoting claims must be included before either threshold can be evaluated.

Answer

Not accepted; at least two-thirds of the voting claims must accept by number.

Question 5

An insolvent manufacturing corporation transfers a production line worth $200,000 to its controlling shareholder in exchange for $20,000. The shareholder is not a creditor, no debt is satisfied, and no additional value reaches the corporation. The transfer occurs five months before the corporation files Chapter 7. The trustee can establish insolvency and the absence of reasonably equivalent value but cannot establish actual intent to hinder, delay, or defraud. Which theory supports avoidance on these facts?

Accepted Answer

Constructive fraudulent transfer under §548(a)(1)(B), based on inadequate value and insolvency.

Answer

Insider preference under §547(b), based on the shareholder's control and the extended lookback.

Answer

Only state-law avoidance under §544(b), because the transfer occurred more than 90 days before filing.

Answer

Actual fraudulent transfer under §548(a)(1)(A), with insolvency alone substituting for proof of intent.

Question 6

A Chapter 11 debtor licenses its trademark to a manufacturer under an executory agreement that was never assumed. The court approves rejection. The manufacturer remains current on its contractual payments, and applicable nonbankruptcy law would preserve its right to use the mark after the licensor’s breach. The debtor nevertheless demands that use stop because trademarks are omitted from the Code’s definition of intellectual property. What is the effect of rejection on the manufacturer’s use right?

Accepted Answer

The right survives because it would remain enforceable following the licensor’s breach outside bankruptcy.

Answer

The right ends when rejection becomes effective because trademark licenses lack protection under §365(n).

Answer

The right survives only if the debtor assumes the license and cures its remaining performance defaults.

Answer

The right survives only if the manufacturer relinquishes its prepetition claim for damages caused by rejection.

Question 7

Four unpaid invoices appear on a Chapter 11 debtor's creditor ledger. Each purchase was in the ordinary course of the debtor's business. Which transaction supports administrative-expense treatment under §503(b)(9)?

Accepted Answer

Parts received 16 days before filing; the invoice was issued 34 days before filing.

Answer

Parts received 27 days before filing; the invoice was issued 9 days before filing.

Answer

Repair services completed 8 days before filing; the invoice was issued 5 days before filing.

Answer

Parts ordered and invoiced 12 days before filing but still at the supplier's warehouse, unreceived by the debtor.

Question 8

At a hearing on a disputed claim, a creditor's lawyer submits a declaration that all invoiced goods were delivered. Before the court rules, authenticated records and the client's admission establish that several invoiced deliveries never occurred. The lawyer submitted the declaration in good faith. The client refuses to correct it and directs the lawyer to resign. The false declaration remains material to the pending decision. Under the ABA Model Rules, what obligation survives a request to withdraw?

Accepted Answer

Disclose the falsity to the court as necessary to remedy the material false evidence.

Answer

Preserve confidentiality and leave correction of the declaration to the client's successor lawyer.

Answer

Withdraw the appearance without identifying the false evidence, thereby ending the candor obligation.

Answer

Avoid further reliance on the declaration and await a formal discovery request for the records.

Question 9

A Chapter 11 debtor requests a loan secured by a lien senior to an existing lender’s lien. At the financing hearing, the debtor proves that the existing lender’s interest would be adequately protected. Its financing evidence establishes only that unsecured credit with ordinary administrative-expense priority is unavailable; the evidence does not address other financing alternatives. The existing lender objects. Which assessment of the debtor’s proof is correct?

Accepted Answer

It is insufficient because the debtor has not established that the credit cannot otherwise be obtained.

Answer

It is sufficient because unavailable administrative unsecured credit and adequate protection together establish every priming condition.

Answer

It is insufficient because the existing lender must consent even when its interest is adequately protected.

Answer

It is sufficient unless the existing lender proves that an alternative lender would actually make the loan.

Question 10

Ninety days before a company's bankruptcy filing, a bank holds a $120,000 unsecured loan claim and owes the company $20,000 on its deposit account. Ten days before filing, the loan remains $120,000 and ordinary customer receipts have increased the deposit balance to $65,000. The bank then sets off the entire $65,000 balance. The debts are mutual, the setoff is otherwise valid, no deposit was engineered to create a setoff right, and no statutory safe harbor applies. What amount may the trustee recover under the §553(b) improvement-in-position test?

Accepted Answer

$45,000

Answer

$20,000

Answer

$55,000

Answer

$65,000

Free Business Bankruptcy Law Practice Questions

Domain 1: General Bankruptcy Multiple Choice

Question 1

Question 2

Question 3

Question 4

Domain 2: General Bankruptcy Ethics Essay

Question 5

Question 6

Domain 3: Business Subspecialty Essay

Question 7

Question 8

Question 9

Question 10

That's 10 of 1,030