Bankruptcy 101 – It’s Not Just For Beginners 56174994.3 Bruce S. Nathan, Esq. Partner Phone: 212.204.6886 [email protected]Andrew Behlmann, Esq. Partner Phone: 973.597.2332 [email protected]Credit Research Foundation Virtual August Forum August 17-19, 2021 Presented by :
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Upon the Filing of a Chapter 11 Petition, the Clerk of the
Bankruptcy Court will Send a Notice of Commencement of Case
to all Creditors
The Notice Will Generally Contain the Following Information:
● Proposed counsel for the debtor
● The deadline for filing proofs of claim, if any. In larger chapter 11
cases, the deadline will generally be set at a later date through a
separate motion.
● An explanation of the automatic stay, which prevents creditors
from taking any actions to collect their debts.
● Notice of the Section 341 meeting of creditors
Unsecured Creditors may Also Receive a Solicitation From the
U.S. Trustee Regarding Their Potential Interest in Serving on
the Creditors’ Committee.
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Creditors’ Committees
Larger Creditors Contacted By United States
Trustee Regarding Possible Appointment to
Committee
What Is a Creditors Committee? Pros and
Cons of Service
Committee Formation Process/Questionnaire
Committee’s Role in Case/Issues Addressed
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The Section 341 Meeting of Creditors
Section 341 of the Bankruptcy Code Provides That the
United States Trustee Must Convene a Meeting of Creditors
Generally, 341 Meetings Occur Within 30 days After the
Bankruptcy Petition is Filed
The Debtors Must Produce a Representative for Examination
All Creditors may Attend and ask Questions
In Practice (with Certain Exceptions), Creditors Rarely
Appear and the 341 Meeting is Usually not Substantive
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Risks of Doing Business With a Chapter 11 Debtor
Do not do any Business With Your Customer Post-
Petition Until the Court has Entered an Order Approving
Financing/use of Cash Collateral!
Check for interim DIP financing approval / cash collateral
approval order
Check later for subsequent interim orders and final order
Review budget – a debtor’s post-petition cash
disbursements are typically constrained by a
DIP / cash collateral budget
11th Circuit Delco Oil decision demonstrates the risks
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Bankruptcy Schedules and Statements of Financial Affairs
Every Debtor is Required to File Schedules and a Statement of
Financial Affairs (SOFA), Which may be Supplemented From
Time to Time
The Schedules and SOFA Provide Detailed Disclosures About
the Financial Condition of the Debtor as of the Petition Date and
Certain Pre-Petition Transactions
These Documents Include, Among Other Items:
● Information about the Debtor’s business, assets, liabilities (claims
against the Debtor)
● Executory contracts
● Pending lawsuits
● Payments made within the 90 day preference period to trade and
other creditors
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Proofs of Claim
A formal proof of claim does not need to be filed in a Chapter 11 case unless you disagree with the amount or priority of your claim as set forth in the debtor’s schedules of assets and liabilities, or your claim is listed as unliquidated, disputed or contingent
Nevertheless, it is almost alwaysa good idea, out of an abundance of caution, to file a proof of claim in every bankruptcy case in which you are a creditor, absent a compelling reason otherwise
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Practical Tips for Proofs of Claim
BE SAFE: File Your Proof of Claim as
Soon as the Information Upon Which it is
Based can be Accurately Determined
You do not Want to be in a Position
Where you are Scrambling the day
Before the bar Date to File Your Claim as
Claims Must be Received by the Bar
Date, not Postmarked by that Date
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Practical Tips for Proofs of Claim
Attach Supporting Documentation, e.g., Statement of Account to
Your Proof of Claim (if Voluminous, Indicate That Documents are
Available Upon Request)
Claims are Public Record - Do Not File Confidential Documents
● Invoices, contracts, statements of work, and other documents might
include confidential information
File the Original Proof of Claim, Include a Copy of the Claim and a
Self-Addressed Stamped Envelope, and Request That it be File-
Stamped as Received and Returned to you for Your Records
File / Send Your Proof of Claim by Overnight Delivery (NOT Email or
fax), Oftentimes to the Debtor’s Claims Agent or the Clerk of the
Bankruptcy Court.
Some Courts and Claims Agents now Also Offer Online Submission
of Proofs of Claim. In those Instances, the Bar Date Notice will
Contain Instructions for Accessing the Online System
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Notice of Deadline to File Proofs of Claim
At a Certain Point During the Case, the Court will fix a Deadline by
Which Creditors Must File Proofs of Claim
● In Chapter 11 cases, the debtor often requests, through a motion, that the
court set a deadline (the “bar date”) by which prepetition proofs of claim,
oftentimes including section 503(b)(9) claims, need to be filed.
● As indicated earlier, in certain cases a court may set the bar date and
notify creditors of the bar date in a notice of commencement of case
● If the case is initially filed under Chapter 7 the bar date is 70 days after the
petition filing date, or a later date included in a separate notice.
Any Claim not Actually Received by the Required Date will be
Disallowed (Subject to Certain Extensions)
Notice Must be Sent to all Creditors at Least 21 Days Before the
Deadline, but Oftentimes More Time is Given
It is Crucial That Creditors Read, Understand, and Follow any
Such Notice
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Late-Filed Proofs of Claim
If a Proof of Claim is not Timely Filed, it may Still be
Worthwhile to File a Late Proof of Claim
If you Establish That you Neither had Notice, nor Actual
Knowledge, of the Bankruptcy Filing (i.e., not Included
on Creditor Matrix or not Served bar Date Notice), you
may be Able to Have Your Claim Treated as Having
Been Timely Filed if the Estate’s Funds Have not yet
General Rule – § 503(b)(9) Request/Allowance Requires
Notice and a Hearing
● No automatic administrative claim without court approval
There is no Federal Bankruptcy Rule Specifying the
Manner in Which to Assert § 503(b)(9) Priority Claims
Timing of Payment - Most Courts Have Rejected
Immediate Payment Over a Debtor’s Objection
● Instead payment upon confirmation of a plan or earlier if a
motion to pay § 503(b)(9) claims is filed by the debtor,
usually in conjunction with a creditors’ committee
Assertion Of “20 Day” Goods Administrative Claims And Timing Of Payment
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No Deadline to Assert § 503(b)(9) Claim in the
Bankruptcy Code
Local Bankruptcy Rules may Create a Deadline
● U.S. Bankruptcy Court, Eastern District, Michigan
- Local Bankruptcy Rule 3003-1 – Deadline to file proof of
claim, or § 503(b)(9) motion in chapter 11 case: 90 days after
first date set for Section 341 meeting of creditors
● U.S. Bankruptcy Court, District of Massachusetts
- Local Bankruptcy Rule 3002-1 – Deadline to file request for
allowance of § 503(b)(9) claim: 60 days from first scheduled
341 meeting date
Deadline To Assert “20 Day” Goods Administrative Claims
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Courts Are Also Setting Deadlines for Asserting § 503(b)(9)
Priority Claims
● One deadline to file claims that includes §503(b)(9) priority claims
and all other general unsecured claims
● Alternate deadline: Separate deadline for asserting § 503(b)(9)
claims than general unsecured claims
Courts Are Also Prescribing the Manner of Asserting
§503(b)(9) Claims, Either
● On the same claim form as the creditor’s general unsecured claim
-or-
● On a special proof of claim form solely related to § 503(b)(9) claims
Deadlines/Assertion Of “20 Day” Goods Administrative Claims
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503(b)(9) Litigation Issues
What Does Receipt Mean?
Are Drop Shipment Claims Eligible for § 503(b)(9)
Priority Status?
Can the Debtor Set Off Pre-Petition Chargeback,
Deduction, Credits and Rebate Claims to Reduce a
Creditor’s § 503(b)(9) Priority Claim?
Should a Section 503(b)(9) Administrative Priority
Claim be Subject to Disallowance Based on Creditor’s
Preference Risk?
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Chapter 11 Plans
A Plan proposes (and if confirmed and effective, establishes)
the classification and treatment of claims against a
Chapter 11 debtor
Bankruptcy Court must approve a Disclosure Statement and
Solicitation Procedures that the debtor uses to solicit votes
Disclosure Statement: Describes the plan and must provide
adequate information for voting creditors to make a choice
Plan ProposedVotes
SolicitedAccepted Confirmed Effective
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Chapter 11 Plans
Once confirmed and effective, a plan is effectively a contract
between the debtor and its creditors
A confirmed, effective plan binds all creditors – even if they
voted to reject the plan or did not vote at all
The obligations of the “Reorganized Debtor” under the plan
take the place of its obligations that existed pre-confirmation
The Bankruptcy Code prescribes a number of legal standards
that a plan must meet to be confirmable
If a class of creditors votes to reject the plan but another
impaired class accepts the plan, the plan can still be
confirmed so long as the Bankruptcy Court finds that the
plan is fair and equitable to and does not discriminate
against the rejecting class
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Dual-Track: Simultaneous Plan and Sale Process
Many chapter 11 cases follow a dual-track strategy
● Nearly all retail chapter 11 filings start out this way
Debtor markets its business for sale while simultaneously
negotiating a plan of reorganization with lenders and other
key creditor constituencies
Stated goal is usually a going-concern sale, in which the
buyer continues operating the debtor’s business
Dual-track processes frequently result in an asset sale under
section 363 of the Bankruptcy Code (sale of assets free and
clear of claims and interest) followed by a plan of liquidation
that winds down the debtor after reconciling claims,
liquidating its remaining assets, and paying distributions
● Liquidation frequently involves pursuit of litigation claims
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Chapter 11 Plans: Third-Party Releases
Included in many (perhaps most) Chapter 11 plans
Typically named “Release by Holders of Claims and Interests”
Releases claims of creditors against non-debtor third parties
such as directors, officers, shareholders, private equity sponsors,
affiliates, subsidiaries, etc.
Opt-In vs. Opt-Out vs. Nonconsensual Releases
● Modern trend is toward “opt-out” releases
● Failure to take affirmative steps to opt out is deemed consent
● Nonconsensual releases – no opportunity to opt out, typically
reserved for extraordinary circumstances
FAILURE TO OPT OUT OF A THIRD-PARTY RELEASE WILL
PROBABLY RELEASE (AMONG OTHER THINGS) ANY CLAIMS
YOU MAY HAVE AGAINST NON-DEBTOR GUARANTORS!
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Post Confirmation/Objection to Claims Distributions are Only Made to Creditors Whose Claims are “Allowed”
● Claim scheduled by debtor (i) in a liquidated amount, (ii) not disputed, and (iii) non-contingent,
or
● Proof of claim filed by claimant and no party-in-interest objects to allowance thereof
Debtor/ Trustee Generally has 90-180 days From the Chapter 11 Plan Effective Date to Object to Claims, Subject to Likely Multiple Extensions
Objection to a Claim Could Seek Full or Partial Disallowance
If your Claim is Objected to, you will Receive Notice at Least 30 Days Prior to the Hearing
● Carefully review the objection and any exhibits to determine the basis for the objection to your claim
● Many objections are “omnibus” objections, which may include objections to many claims on the same grounds
● If you disagree with the grounds stated in the objection, the first step is to contact the party that filed the objection
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Post Confirmation - Payment of Allowed Claims
Distributions are Generally Paid by a Distribution Agent or
Liquidation Trustee
Unless Creditors Receive an Objection or Other Notice, They do
not Need to do Anything to Protect Their Claim
However, a Distribution Agent or Liquidation Trustee may Require a
W-9 or Other Tax Documentation as a Prerequisite to Receiving a
Distribution, Which Should be Sent Promptly
Creditors Should Also Provide Prompt Notice of any Change of
Address
Creditors may Receive one or more Distributions, Depending on
the Recovery Provided in the Plan and the Course of the Claims
Reconciliation Process
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Any Transfer of an Interest of the Debtor in Property;
To or for the Benefit of a Creditor;
On Account of an Antecedent Debt Owed by the Debtor Before a Transfer:
● Cash in advance payments are not preferences
Made While the Debtor was Insolvent;
● On or within 90 days before a bankruptcy filing; or
● Between 90 days and one year before a bankruptcy filing for transfers made to insider creditors; and
That Enables Such Creditor to Receive More Than Such Creditor Would Receive if:
● The case were a Chapter 7 case;
● The transfer had not been made; and
● Such creditor received payment to the extent provided by other provisions of Title 11.
● Critical Vendor Defense?
Preference: Elements Of Claim
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Small Business Reorganization Act of 2019 Changes To Preference Law
Effective February 19, 2020
Section 547(b) Amended to add the Following due
Diligence Requirement for Filing Preference
Litigation:
● “(b) Except as provided in subsections (c) and (i) of this
section, the trustee may, based on reasonable due
diligence in the circumstances of the case take into account
a party’s known or reasonably knowable affirmative
defenses under subsection (c), avoid any transfer of an
interest of the debtor in property….”
● Preference defendants still have the burden of proving the
preference defenses
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Transfer was Intended by the Debtor and the
Creditor to be a Contemporaneous Exchange for
new Value; and
Transfer was in Fact a Substantially
Contemporaneous Exchange
Examples:
● COD transaction: payment tendered for delivery of
goods
- Risk of bounced COD check/ACH payment; replacement
payment not protected by this defense
Preference Defenses: Contemporaneous Exchange For New Value (COD)
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Preference Defenses: New Value
Creditor Selling Goods/Providing Services on Credit Terms to
a Debtor After a Payment, that was not Secured and not Paid
by an Otherwise Unavoidable Transfer, Reduces Preference
Exposure
Goods Shipped/Services Provided on Credit Terms Following
Payment Reduce Preference Exposure
New Value Cannot be Applied to Subsequent Payments
Frequently Litigated New Value Defense Issues:
● Does the new value defense apply to invoices that were:
- repaid prior to the bankruptcy filing?
- repaid post-petition pursuant to a critical vendor order?
- entitled to priority status under section 503(b)(9) and repaid
post-petition?
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Transfer was in Payment of a Debt Incurred by the Debtor
in the Ordinary Course of Business or Financial Affairs of
the Debtor and the Creditor; and
Subjective Test – Made in the Ordinary Course of Business
or Financial Affairs of the Debtor and the Creditor; OR
Objective Test – Made According to Ordinary Business
Terms
Creditor can Choose Most Beneficial (Subjective or
Objective) Prong of the Ordinary Course of Business
Defense
Ordinary Course Of Business Preference Defense
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Courts Have Been Inconsistent and Unpredictable in Applying Subjective
Component of Ordinary Course of Business Defense
Evaluating pre-Preference Payment History.
● How long?
● Full range?
● Modified range?
● Only when Debtor is financially healthy?
● Deviation off an average or mean?
● Comparison of average days to pay in pre-preference and preference
history?
● Bucket Analysis?
Consistency in Timing of Payments Before and During Preference Period Alone Might not Be Sufficient to Prove Subjective Component of Defense
Fact-Specific Threats to Subjective Component
Subjective Component of Ordinary Course of Business Defense Encourages Litigation
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Ordinary Course Of Business Preference Defense –Ordinary Business Terms Alternative: Objective Component
Proof Requirement is Currently Evolving
● General Standard? Transfer was not so unusual or
idiosyncratic as to render it an aberration in the relevant
industry – Seventh Circuit Court of Appeals decision
Which Industry to Consider? Creditor’s? Debtor’s?
Variation?
Includes Range of Industry Terms
● No need to prove single set of business terms within an
industry
● Ordinary business terms may vary widely across industries
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NEW “COVERED PAYMENT” EXCEPTION TO PREFERENCE LIABILITY
TEMPORARY SUBSECTION 547(J)
Consolidated Appropriations act of 2021 Created a New Preference
Exception: “Covered Payment of Supplier Arrearages”
● Payment made in connection with an agreement or arrangement made or
entered into on and after March 13, 2020 (onset of COVID) between a
debtor and a supplier of goods or services to delay or postpone payment
of amounts due under an executory contract
Payment Cannot Exceed the Amount due Under the Executory
Contract Before March 13, 2020
Does not Include Fees, Penalties and Interest in an Amount Greater
Than That Scheduled to be Paid Under the Contract or Which the
Debtor Would owe if the Debtor had Made all Payments on Time and
in Full Before March 13, 2020
Sunsets on December 27, 2022, but Continues to Apply to Bankruptcy
Cases filed Before December 27, 2022
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SBRA’s Increased Venue Limits On Small Claims
The Venue Provision That Forces a Trustee or Debtor-in-
Possession to Commence Litigation on Smaller Claims in
the District Court Where the Defendant Resides (Corporate
Headquarters or Principle Place of Business) has Been
Increased From $13,650 to $25,000
● Impact: Trustees/debtors-in-possession may be less likely
to commence suit on preference and other claims seeking
recovery of less than $25,000
Does the Increased Venue Limit Apply to Bankruptcy Cases
Filed Before SBRA’s Effective Date of February 19, 2020?
SBRA Change Ignores Prior Conflicting Decisions Over
Applicability of Venue Limit to Preference/Other Avoidance
Actions
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DO NOT IGNORE DEMAND
Request a List of all Checks That Make up the Claim and Copies of
Cancelled Checks or Proof of Wire Transfers With Remittance
Instructions
Confirm all Payments Received Within 90 Day Preference Period
● If payment is not actually received immediately demand proof of
payment
● No preference if payment received more than 90 days before filing
Statute of Limitations: has it Expired or is it About to Expire?
Can the Trustee Actually Sue You:
● LESS THAN $6,825 IN THE AGGREGATE? NO
- Trustees most likely to send demand letter anyway
● Where can the Trustee sue you? Venue limitation
React and Respond To Initial Preference Demand Letter
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Preference Checklist Review Defense Strategy With Management
Create Preference Defense Analyses, Including new Value and Subjective Ordinary Course of Business Defenses
Was the Debtor Insolvent at the Time of the Bankruptcy Filing?
● Check the Bankruptcy Schedules
● Check any Financial Statements you may Have Received From the Debtor
Develop a Game Plan and Negotiation Thresholds
Communicate Preference Defenses to the Trustee
Consult With your Bankruptcy Attorney, Particularly After Commencement of Litigation
● Determine your answer deadline (often 30 days from issuance of a summons), unless there is a procedures order entered in the case which could extend the deadline
- DO NOT ALLOW A DEFAULT JUDGMENT TO BE TAKEN AND TIMELY CONTACT YOUR BANKRUPTCY ATTORNEY IF AN EXTENSION IS NOT GRANTED
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Bruce S. NathanPartner, Bankruptcy & Restructuring
With more than 35 years of experience in the bankruptcy and insolvency field, Bruce
is a recognized leader nationwide in trade creditor rights and the representation of
trade creditors in bankruptcy and other legal matters. He has represented trade and
other unsecured creditors, unsecured creditors' committees, secured creditors, and
other interested parties in many of the larger Chapter 11 cases that have been filed.
Bruce also handles letters of credit, guarantees, security, consignment, bailment,
tolling, and other agreements and legal credit issues for the credit departments of
institutional clients.
Among his various legal recognitions, Bruce received the Top Hat Award in 2011, a
prestigious annual award honoring extraordinary executives and professionals in the
credit industry. He was co-chair of the Avoiding Powers Committee that worked with
the American Bankruptcy Institute's (ABI) Commission to Study the Reform of Chapter
11, participated in ABI's Great Debates at their 2010 Annual Spring Meeting–arguing
against repeal of the special BAPCPA protections for goods providers and commercial
lessors–and was a panelist for a session sponsored by ABI. He is a frequent presenter
at industry conferences throughout the country, as well as a prolific author regarding
bankruptcy and creditors' rights topics in various legal and trade publications.
Bruce is a co-author of "Trade Creditor Remedies Manual: Trade Creditors' Rights
under the UCC and the U.S Bankruptcy Code," published by ABI at the end of 2011.
He has also contributed to ABI Journal and is a former member of ABI's Board of
Directors and former co-chair of ABI's Unsecured Trade Creditors Committee.