Academic

Every commercial law teacher and bankruptcy teacher should distribute this story on the first day of class.  About a year and half ago, BofA mistakenly terminated both its and Citibank's financing statements perfecting security interests against Heller Ehrman, the California law firm that is now in dissolution.  Basically, someone checked the wrong box on this form!  This could turn out to be something close to a $57 MM clerical error. 

The firm had already paid the banks $51 MM since the firm announced its dissolution in September.  The banks tried to file a "correction" in October; the firm's dissolution committee discovered the termination document in November; in December the firm filed for Chapter 11 and has asked the court to throw out the banks' attempted October correction.  Assuming a strict application of the UCC, the attempted October correction would be a preferential transfer of a security interest, which would be avoided.  That makes the $51 MM in payments to the banks (or whatever portion was paid within the 90 days before Heller's bankruptcy filing) preferential.  So they have to give it back.  And the remaining $6 MM owed by the firm would also be unsecured.  So the banks might end up with something close to a $57 MM unsecured claim, instead of the secured position they thought they had.  Ugh.  Everyone make sure your malpractice premiums are paid up!

Apologies if your eyes glazed over while reading that last paragraph.  Can you tell I've been grading bankruptcy exams?  I actually thought about saving this fact pattern for next year's exam, but it's just too good not to share!