Execsense powerpoint Warren J. Martin Jr. Attorney

Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

Bankruptcy Law Basics and Best

Practices for Corporate Lawyers

Material in this seminar is for reference purposes only. This seminar is sold with the understanding that neither any of the authors nor the publisher are engaged in rendering legal, accounting, investment, or any other professional service directly through this seminar. Neither the publisher nor the

authors assume any liability for any errors or omissions, or for how this seminar or its contents are used or interpreted, or for any consequences resulting directly or indirectly from the use of this seminar. For legal, financial, strategic or any other type of advice, please personally consult the

appropriate professional.

Warren J. Martin Jr. Porzio, Bromberg & Newman, P.C.

Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

OverviewThis one-hour presentation will be divided into four areas of interest to corporate lawyers:

1. Overview of Bankruptcy Basics;

2. Bankruptcy 363 Sales and Bankruptcy Plan Sales;

3. Structuring Transactions to “Avoid Avoidance;” and

4. Considerations of Alter Ego/Piercing the Corporate Veil/Substantive Consolidation/Extension of Proceedings.Bankruptcy Law Basics and Best Practices for Corporate Lawyers

Warren J. Martin Jr., Porzio, Bromberg & Newman, P.C. www.pbnlaw.com 2

Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

I. Overview of Bankruptcy Basics

A. Goals/Policy of Bankruptcy Law:1. Breathing Spell. 11 U.S.C. §3622. Fresh Start. 11 U.S.C. §11413. Equitable Division of Assets. 11 U.S.C. §1129; §7264. Assets are more productive/valuable when they

remain engaged in the stream of commerce. Chapter 11 seeks to restructure a business’ finances so it can continue to operate, provide employment and pay creditors. 11 U.S.C. §§1107, 1108

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

B. Bankruptcy Law is:

1. Federal Law

2. Paramount to and Supersedes Inconsistent State Law

3. However: Butner v. U.S., 440 U.S. 48(1979) – Property Rights in Bankruptcy are Determined Under State Law, e.g., (i) Is the Lien Properly Perfected? (ii) Does the Debtor Own the Asset?

I. Continued…Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

C. Types of Corporate Bankruptcy Cases

1. Chapter 7 – Liquidation– Liquidate and distribute proceeds to creditors

according to the priorities established under the Bankruptcy Code

2.Chapter 11 – Reorganization– Propose and confirm a plan for repayment of

debts on terms more favorable to the Debtor than was required by the Debtor’s pre-petition contracts

I. Continued…Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

D. How Does a Bankruptcy Proceeding Start?

1. Voluntary Petition – Constitutes an “Order for relief”a. Schedules/Statement of Financial Affairsb. Insolvency not Required

2. Involuntary Petition - not an “Order for relief”a. Different Requirements Depending on Number

of Creditorsb. Insolvency Required if Contestedc. Potential Liability to Petitioners if Petition

Dismissed and Bad Faith Found

I. Continued…Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

E. Chapter 11 - Reorganizations

1. Key Termsa. Debtor-In-Possession – Upon a chapter 11 bankruptcy filing,

the existing management of the company remains in control and makes the decisions for the chapter 11 debtor during the proceedings.

b. Disclosure Statement – A written document prepared by a chapter 11 debtor or other plan proponent designed to provide “adequate information” to creditors to enable them to evaluate the chapter 11 plan of reorganization.

I. Continued…Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

d. Plan – A debtor’s detailed description of how the debtor proposes to pay creditors’ claims over a fixed period of time.

e. Confirmation – Bankruptcy judge’s approval of a plan of reorganization or liquidation in chapter 11.

f. Creditors’ Committee – A group of unsecured creditors who are chosen by the U.S. Trustee’s Office to represent the interests of all general unsecured creditors.

I. Continued…Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

F. Chapter 7 vs. Chapter 111. Chapter 7 – Liquidationa. Mandatory appointment of a trusteeb. Trustee marshals and liquidates assets of business and

distributes the proceeds to creditors in accordance with statute

c. Continued operation of a business (if at all) is only temporary, 11 U.S.C. §721

2. Chapter 11 – Reorganizationa. Debtor retains, manages and operates assets as a debtor in

possession (“DIP”), subject to certain enumerated restrictions, e.g., 11 U.S.C. §§363, 364, 365, 366, etc…

I. Continued…Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

b. A trustee is only appointed for “cause” including fraud or gross mismanagement by the debtor.

c. Chapter 11 reorganization plan can modify the capital structure of the debtor and the payment terms of all obligations. All remaining financial obligations incorporated into the plan of reorganization.

d. Liquidation is also permissible in a chapter 11 case, of ten times through §363 sales. Chapter 11 permits orderly sales with DIP in control as opposed to fire sales conducted by trustee.

I. Continued… Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

G. Automatic Stay – 11 U.S.C. §3621. Stays:a. Commencement or Continuation of Judicial Proceeding or Other

Acts to Collect Pre-Bankruptcy Claimsb. Performance of any act to obtain possession of or create, perfect

or enforce a lien against property of estate

2. Benefits: a. To Debtor b. Ends Competition Among Creditors to Achieve Goal of Equality of

Distribution

3. Exceptions to Automatic Stay, e.g., Police Powers

I. Continued… Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

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H. Strong Arm Provisions - 11 U.S.C. §5441. “Arms” Trustee/DIP With State Law Avoidance Powers

a. Hypothetical Judgment Lien Creditor status: Allows avoidance of unrecorded or improperly recorded financing statements on personal property;

b. “Bona Fide” Real Property Purchaser status: Allows avoidance of unrecorded or improperly recorded mortgages on real property.

2. Utilize State Law Reachback Period3. State Law Fraudulent Conveyances, e.g., NY – 6

years

I. Continued… Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

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I. Claims Process1. Proof of Claim

a. Unsecuredb. Securedc. Priority

2. When to File

I. Continued… Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

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J. Voting Process

1. Disclosure Statement (DS)

2. DS, Plan and Ballot

I. Continued… Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

K. Structure of Plan Classes/Creditor Voting

1. Don’t Need All Classes to Vote in Favor2. Don’t Need All Creditors Within Each Class to Accepta. More Than Half in Numberb. At Least Two-Thirds in Amount

I. Continued… Overview of Bankruptcy Basics

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

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II. Bankruptcy 363 SalesA. Sales Pursuant to Chapter 11 Plans Confirmed Under

§1129

1. Sale is part of the overall restructuring accomplished after a full disclosure and solicitation process.

2. The sale can be done in connection with new financing, issuance of new securities, the fixing of tax claims and the provision of full releases in favor of all parties involved in the plan process.

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

B. 363 Sales

1. Can you sell all or substantially all of an operating business without a plan?

✤ See Lionel and Braniff decisions ✤ See Chrysler, GM, and Lehman Brothers cases. ✤ Legal standard business judgment test, fair value and

no undisclosed “side deals”, In Re Abbots Dairies.

II. Continued… Bankruptcy 363 Sales

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

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C. COMPARISON 363 SALES VS. PLAN SALES

363 SalesPlan Sales*Ordinary APA is used *Sale is incorporated into the Plan (although an APA will likely be used as well) *Lightening Fast 45-60 Days*Plan slow – 6 months

*Sale subject to “higher and better” *Easier to limit the sale to a particular offers buyer/transaction

*Some successor liability protection *Much fuller releases and adjudications incan attempt to be built into the sale connection with confirmation of the Plan.order*Transfer tax relief under section 1146

II. Continued… Bankruptcy 363 Sales

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

D. Procedures For 363 Sales1. Typically a debtor proceeds with a stalking horse bidder and

approaches the Court with a stalking horse contract and proposed bid procedures order.

2. Bid procedures order could include the following protections:

a. breakup fees or expense reimbursements if stalking horse is unsuccessful

b. minimum overbid requirementsc. qualification requirements for competing bids and competing biddersd. accelerated due diligence/auction processe. requirement that the stalking horse bidders’ form of APA be usedf. Require bids to be irrevocable

II. Continued… Bankruptcy 363 Sales

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

3. All of these are designed to put the stalking horse bidder in an advantaged position.

4. These buyer protections must be approved in advance at a hearing on the bid procedures order. Objections may be filed and the Court will decide whether or not these protections unnecessarily “chill” the bidding.

II. Continued… Bankruptcy 363 Sales

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

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E. Court Approval of The Sale

1. Determination of which bid is the “highest and best.”

2. Closing immediately if automatic 10 day stay of sale order is waived or as early as the 11th day if not waived.

3. Mootness: §363(m) provides that if the sale is found to be in “good faith” the sale cannot be reversed on appeal, even if the appeal is successful.

II. Continued… Bankruptcy 363 Sales

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

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F. Sales are “Free And Clear”

1. Pursuant to §363(f) the sale is free and clear of all liens, claims and interest if:

a. The price paid is greater than the aggregate value of all liens on the property.

b. The lien/interest is in bona fide dispute.c. Applicable non bankruptcy law permits the sale of such

property free and clear of such interest.d. The creditor/interest holder could be compelled, in a legal

or equitable proceeding, to accept a money satisfaction of such interest.

II. Continued… Bankruptcy 363 Sales

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

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G. Assumption of Executory Contracts and Leases

1. The buyer may generally select contracts to be assumed and force the rejection of other contracts and leases not desired by the buyer.

II. Continued… Bankruptcy 363 Sales

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

A. Avoiding Powers

1. Who has Standing: Trustee, Debtor-In-Possession, Derivative Standing (Creditors’ Committee), Litigation Trustee

2. Philosophy: a. “Roll back” the petition date – preferences b. Reverse unfair transactions – fraudulent

conveyancesc. Increase Size of Estate For Benefit of All Creditors

III. Structuring Transactions To “Avoid

Avoidance”

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

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B. Preferences

1. A transfer; 2. To or for the benefit of a creditor;3. For or on account of an antecedent debt;4. Made while debtor was insolvent (rebuttable presumption

of insolvency within 90 days of the petition date);5. Made within 90 days of the petition date; and6. Which enables the creditor to receive more than it would

have received if the transfer had not been made and the debtor was liquidated at the time of the transfer.

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III. Continued…Structuring Transactions To…

Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

C. Preference Defenses:1. Contemporaneous Exchange for Value – the payment

was received contemporaneously in exchange for goods (e.g., CBD or COD)

2. New Value Exception – the creditor provided subsequent new value for which it was not paid

3. Ordinary Course of Business Exception – payment was made in the ordinary course of business or made according to ordinary business terms (e.g., debtor generally paid on net-30 terms and all payments made within the 90 day preference period were net-30 days)

III. Continued…Structuring Transactions To…

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

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D. Fraudulent Transfers - 11 U.S.C. §548 and 11 U.S.C. §544

Bankruptcy Code permits debtor to void certain transfers made within 2 years (548) and up to 4-6 years (544) under state law where:

1. Actual Fraud2. Constructive Fraud – 3 part testa. Transferb. Less than reasonably equivalent value andc. Financial Requirementi. Insolvent/rendered insolventii. Unreasonably small capitaliii. Leave debtor with debts beyond ability to pay

III. Continued…Structuring Transactions To…

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E. “Preference Proofing” Settlements Practice Tip:1. Don’t reduce the claim until the 91st day following receipt of the

funds.2. Example: If $10MM debt compromised for $5MM, paid in 10

monthly installments of $500K, provide for the payments but do not compromise the debt for $5MM. Instead, provide simply that the $10MM is discharged on the 91st day following the final payment (i.e., in the 14th month).

F. “Preference Proofing Payments - - Earmarking Doctrine:1. Money provided by a third-party source who “earmarks” the

funds to be used only to pay your client’s claim. Debtor can have no authority/discretion over the funds.

III. Continued…Structuring Transactions To…

Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com 28

Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

G. “Preference Proofing -- “Mere Conduit”1. If the recipient of the otherwise preferential payment is simply a

pass-through entity but not the beneficial recipient of the payment there will be a common law “mere conduit” defense.

H. Collateralizing Antecedent Debt 1. While such transactions are generally exempt from fraudulent

conveyance exposure, the collateralization of previously unsecured debt within 90 days of a bankruptcy will generally be preferential.Avoiding Avoidance - - Get:

a. a solvency opinion, orb. an opinion that if the company were liquidated, you would receive

more than the value of the collateral you are receiving under the settlement.

III. Continued…Structuring Transactions To…

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

I. The Best Preference Proofing Fraudulent Conveyance Protection:1. If it’s a big enough transaction, do the transaction

within a chapter 11 or an Assignment for the Benefit of Creditors (ABC). This also offers close to absolute protection from fraudulent transfer exposure.

III. Continued…Structuring Transactions To…

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

J. Fraudulent Conveyance Horror Story: ASARCO• In March of 2003, Asarco apparently suffering from solvency

concerns, sells its 54% stake in Southern Peru Cooper (“SPC”) to Asarco’s own parent, Grupo México (“Grupo”) , for $765 million.

• The assets were worth $1.1 billion at the time of the transfer.• On August 9, 2005, Asarco seeks Chapter 11 relief.• On February 2, 2007, Asarco brings claims against Grupo seeking

to avoid the transfer of SPC stock as a fraudulent conveyance.• Not content to provide money damages, the court ruled that the

transfer of the SPC stock was a fraudulent conveyance and that the appropriate remedy under §550 of the Bankruptcy Code is to require return of the fraudulently transferred property.

• The transferred stake in SPC as of the date of the Court’s judgment is estimated to be worth $6 billion.

III. Continued…Structuring Transactions To…

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

K. Avoid Asarco’s Horror Story

1. Obtain a VALID solvency opinion from a reputable CPA firm at the time of the transfer.

2. Obtain a VALID fair market value opinion from a reputable appraiser/investment banking firm that the price paid is fair value for the assets transferred.

3. Pay fair value! The $300 million discount Grupo thought it received ultimately cost it $6 billion.

III. Continued…Structuring Transactions To…

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

• Undercapitalization• Failure to observe corporate formalities• Hopelessly intermingled assets and liabilities• Failure to keep adequate books and records• Actions/appearances that lead vendors/creditors into

believing they are dealing with a single entity

IV. Alter Ego/Piercing the Corporate Veil/ Substantive Consolidation/Extension of Proceedings

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

A. Instances where it arises:

1. Parent/Sub (piercing)2. Affiliate, direct or indirect

(a) substantive consolidation/extension of proceedings.

IV. Continued… Alter Ego, etc…

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

B. How to successfully separate out assets of one from the other? (Besides not doing things listed on slide #30)

1. Conduct the transaction within a bankruptcy proceeding

2. Conduct the transaction within an Assignment for the Benefit of Creditors (ABC) proceeding

3. Obtain VALID opinions as to appropriate capitalization/ solvency at the time of the transaction

IV. Continued… Alter Ego, etc…

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Bankruptcy Law Basics and Best Practices for Corporate LawyersWarren J. Martin Jr., Porzio, Bromberg & Newman, P.C.

www.pbnlaw.com

C. Case Study Extension of Proceedings

1. In re G-1, Building Materials Corporation of America (“BMCA”)

IV. Continued… Alter Ego, etc…

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