It's Only Money? How Your Clients Can Keep More of It When Customers File Bankruptcy

It’s Only Money? How Your Clients Can Get or Keep More of it When a Customer Files Bankruptcy

Presented byTeri G. RasmussenPlunkett Cooney

Who is PLUNKETT COONEY?

Established 1913 325 Employees 150 Attorneys Nine Michigan Offices and one in

Columbus Ohio Full-service business and litigation firm

Presentation Objectives Clarify what a bankruptcy filing really means

Provide insights into creditor strategies

Give overview of major bankruptcy concepts

Automatic Stay Proofs of Claim Preferences Chapter 11 Plans

Purpose of Bankruptcy

To allow "honest" but insolvent debtors to obtain a "fresh start"

To ensure payment of creditors in an orderly fashion to extent debtor has assets

Fresh Start Purpose

– Providing some "breathing room" to allow restructuring of debt through additional repayment time and discounting of the amount to be repaid; and

– Allowing individual debtors to receive a "discharge" from all or some of the debtor's debts when the debtor is an individual.

Types of Bankruptcy

Chapter 7 Liquidation Chapter 13 Wage Earner Plan Chapter 11 Reorganization Chapter 15 Cross-Border Insolvency State Law Alternatives

– Receiverships– Assignment for Benefit of Creditors– Composition Agreements

Takes a “snapshot” of the debtor’s financial situation on the day the petition is filed

– The debtor’s assets are gathered and administered (i.e. sold/liquidated) by a panel Chapter 7 trustee.

– Creditors are paid according to the priority of their claim.

Continued

Chapter 7 Liquidation

– All claims of the same priority receive their pro rata share of any available liquidation proceeds.

– Rarely receive more than a fraction of what owed



Voluntary or Involuntary: Chapter 7 may be voluntary or involuntary.

Type of Debtors: Chapter 7 is available to any type of debtor (i.e., individuals and business organizations).

Length: generally less than one year, but can be much longer depending on complexity and amount of assets involved

Continued

Chapter 7 Liquidation Frequency: A discharge under Chapter 7

may be granted only to individual debtors and only once …

– Every eight years after the petition date of a past Chapter 7 case

– Every six years after a prior Chapter 13 filing, unless either the previous Chapter 13 plan was a 100 percent plan or paid at least 70 percent and was the debtor’s “best effort” “proposed in good faith”

Chapter 13 Wage Earner Plan

Purpose: To provide individual debtors with “regular income” an alternative to …

– Liquidation under Chapter 7

– The complexities of Chapter 11

Type of Debtors: Chapter 13 is available only to individuals (including sole proprietors, but no other business organization).

Eligibility: Chapter 13 is available only to persons:

– With “regular income”

– Who have secured debts of less than $1,010,000 (amount is indexed), and unsecured debts of about $340,000 (amount is indexed)

– Who have completed an approved complete credit counseling course in personal financial planning


Voluntary Only: Chapter 13 can only be used voluntarily.

Length: Typically 3-5 years

Frequency: A discharge under Chapter 13 can only be granted to individuals and only if the debtor has not received a discharge in

– A Chapter 7, 11, or 12 case filed within four years; or

– A Chapter 13 case filed within two years


Chapter 13 Wage Earner Plan Procedure

Debtor proposes a repayment plan known as a Chapter 13 Plan which must meet certain requirements, including that creditors get at least as much as they would under a Chapter 7 liquidation.

Creditors have an opportunity to object and the Chapter 13 Plan must be “confirmed” by the bankruptcy court before it becomes effective.

Continued

Chapter 13 Wage Earner Plan Procedure

Following confirmation, the debtor submits all of the portion of his or her income specified in the “confirmed” Chapter 13 Plan to a Chapter 13 trustee who administers the implementation of the confirmed Chapter 13 plan.

Chapter 11 Reorganization

Chapter 11 is an alternative …

– to liquidation under Chapter 7 when permitting the debtor to continue to operate the business for the benefit of the creditors is better than simply liquidating the debtor’s assets

– to Chapter 13 when the debtor exceeds the debt limitation for that sort of bankruptcy

Continued


– Chapter 11 can also be utilized for liquidation when a debtor wishes to retain control over the assets.

– Generally very expensive due to length and required payments to professionals such as attorneys and accountants

Debtor in Possession: Typically the debtor’s management stays in control of the debtor (called the “debtor in possession” or “DIP”)

– Role of the DIP: DIP must manage the debtor’s assets for the benefit, of the creditors.

Continued

Chapter 11 Reorganization - DIP

– Fraud/Gross Mismanagement: The bankruptcy court will appoint a third party trustee or “examiner” if it is necessary to protect the creditors from fraud or gross mismanagement.

– A third party trustee may perform additional services (i.e., legal or accounting) if the court approves.

Chapter 11 Reorganization – Removal of DIP

Chapter 11 Reorganization Creditors’ Committee: The court will appoint a

“creditors’ committee” from the unsecured creditors to represent the creditors, but is not required to do so if the total debts are less than $2 million.

Type of Debtors: Chapter 11 is available to any type of individual or business entity debtor.

Voluntary or Involuntary: Chapter 11 may be voluntary or involuntary.

Length: From the date the petition is filed until the plan is confirmed can take years

Implementation of the plan following confirmation is likely to take several more years.

Frequency: There is no statutory limit on how frequently a debtor may seek protection under Chapter 11.


Chapter 15 Cross-Border Insolvency Purpose - Provide effective mechanisms for

dealing with insolvency cases involving debtors, assets, claimants and other parties in interest in more than one country.

General - Added to the Bankruptcy Code in 2005. Usually an ancillary proceeding to one initiated in another country when a full-blown U.S. bankruptcy case is not merited.

Receiverships

Upon the petition of a creditor, the court appoints a third party receiver to take control of the debtor’s assets.

The receiver liquidates the debtor’s assets and distributes the proceeds pro-rata to the creditors in a fashion similar to a Chapter 7 Trustee.

Unless otherwise provided by court order, there is no discharge upon completion.

Often used in conjunction with commercial real estate. May be gaining in popularity.

Assignment for Benefit of Creditors (a.k.a. ABC) The debtor voluntarily assigns its assets to a

third party custodian.

The custodian liquidates the debtor’s assets and distributes the proceeds pro rata to the creditors.

The debtor does not obtain a discharge upon completion.

Rarely used in Ohio, but more popular elsewhere

Composition Agreements

A composition agreement is a contract between the debtor and one or more creditors whereby the creditors agree to accept less in full settlement of the debtor’s obligations.

Debtor is discharged with respect to the creditors that are a party to the contract and thereby have agreed to the discharge.

Bankruptcy Petitions

Voluntary- If a business entity is filing, an appropriate corporate resolution or other requisite corporate action authorizing the filing is required.

Involuntary - In order to file an involuntary petition…

The debtor must owe at least $13,475 (amount is indexed) in unsecured debts

Continued

Bankruptcy Petitions

The debtor must either

– Not be paying bona fide debts when due (called “equity sense” insolvency)

– Have a custodian or receiver appointed under state law within the last 120 days

If there are more than 12 creditors, at least three unsecured creditors (owed at least $13,475) must join in the petition (one may file if it is owed $13,475).

Involuntary Petitions

If the court finds that the petition has merit, the debtor must prepare the Statement of Financial Affairs and Schedules of Assets and Liabilities.

Debtor may convert to a Chapter 11 or Chapter 13 if otherwise eligible.

Statement of Financial Affairs / Schedule of Assets & Liabilities

Both MUST be filed within 15 days after the petition is filed unless an extension is granted by the bankruptcy court.

The Statement of Financial Affairs is a series of questions focused on the debtor’s pre-filing behavior with respect to its assets, income, and liabilities.

Continued

Statement of Financial Affairs & Schedule of Assets &Liabilities

The Schedule of Assets and Liabilities is a balance sheet type document prepared on a “liquidation value” basis which

Lists the debtor’s assets and

Itemizes the amount of each and every debt owed, together with the name and address of the creditor and

Itemizes the estimated value of any collateral securing the obligation.

Schedule of Assets Schedule of Assets & Liabilities& Liabilities

Schedule AReal Property Schedule BPersonal Property Schedule C Property Claimed as Exempt Schedule D Creditors Holding Secured

Claims (includes both fully secured and only partially secured creditors)

Schedule ECreditors Holding Unsecured Priority Claims

Continued

Schedule of Assets Schedule of Assets & Liabilities& Liabilities

Schedule FCreditors Holding Unsecured Nonpriority Claims

Schedule G Executory Contracts and Unexpired Leases

Schedule H Codebtors Schedule I Current Income of Individual

Debtor(s) Schedule J Current Expenditures of

Individual Debtor(s)

Immediate Effect of Bankruptcy Filing Creation of Bankruptcy Estate – Created

immediately upon filing of petition or in an involuntary case when the “order for relief” is entered. – Appointment of Trustee: All of the debtor’s

assets are no longer controlled by the debtor for his benefit. In a Chapter 7 or Chapter 13 case, the debtor’s assets are immediately transferred to the control of a trustee to manage and dispose of for the benefit of the debtor’s creditors.

Continued

Immediate Effect of Bankruptcy Filing

– Chapter 11 DIP: In a Chapter 11, the debtor retains control of the assets as “debtor-in-possession” but must act as a trustee for the benefit of creditors.

Automatic Stay

Automatic Stay: Upon filing of a petition the “automatic stay” stops all collection actions by all creditors, including secured creditors. Exception - alimony/child support

Initial Questions What kind of creditor is client?/ Who is the

most important creditor? How connected to debtor? Secured >>> what type of collateral Unsecured

Trade creditor or supplier Equipment lessor Real Property Lessor Taxing Authority

Economic Effect of Filing on creditor Creditor’s Objectives

Initial Questions

Who/ What is Debtor? What about codebtors? Individual or Business Industry Sector Service, Manufacturing, Retail

TYPE of debt, i.e. business or personal

Initial Questions

Why is Creditor Faced with Bankruptcy Filing? Foreclosure sale/ repossesion of collateral Client Collection Action Other Creditors Voluntary Decision of Debtor

Initial Questions

Where was petition filed? When did filing happen? How did creditor client find out? What is Case No.?

Dealing with a Dealing with a Bankruptcy FilingBankruptcy Filing

Understand structure of Bankruptcy Code. The Bankruptcy Code is found in Title 11 of the federal U.S. Code and consists of eight numbered chapters. – Chapters 1, 3, and 5 contain general rules

applicable to all bankruptcy cases. – Chapters 7, 9 (municipal), 11, 12 (farmer),

13, and 15 have provisions which apply only to cases filed under those chapters.

Dealing with a Bankruptcy Filing – Dealing with a Bankruptcy Filing – Developing a StrategyDeveloping a Strategy

Catalog options and special considerations Type of security held/Importance to Debtor Significance/Substantiality of Claim Relative

to claims held by others Likely Participation of Other Players

Debtor Trustee Other Creditors


Availability of Specialty Sections Lessor Claims Administrative Claims

Review Documentation


Determination of Secured Status Range of Value of Collateral

Appraisals Effect of Other Liens

Compare to Amount of Debt

Assess Vulnerabilities

Dealing with a Bankruptcy Filing

Review bankruptcy schedules – Make sure you or your client are properly

listed.– Learn and understand about indebtedness

to other creditors. – Determine likely level of repayment.

Attend “first meeting of creditors” – Meeting is led by the U.S. trustee and

provides an opportunity for creditors to ask general questions about what precipitated the bankruptcy filing and what sort of treatment they might be able to expect for their claim.

– Non-attorneys may attend and participate in the questioning so long as they are there on behalf of a particular creditor or other party in interest.

Dealing with a Bankruptcy Filing

File appropriate proof of claim to evidence indebtedness owed to you or your client and reference any collateral securing repayment.

Creditor or creditor’s attorney may file proof of claim with bankruptcy court.

Dealing with a Dealing with a Bankruptcy FilingBankruptcy Filing

Types of ClaimsTypes of Claims

Secured claim – if value of collateral is less than the amount of the debt, the difference is an unsecured claim.

Unsecured Priority Claim – (i.e., taxes, certain pre-petition wages)

Unsecured Non-priority Claim – (i.e., trade creditors, credit card debt)

Continued

Types of ClaimsTypes of Claims

Executory Contract – (i.e., lease of equipment or business premises; other unexpired contract

Administrative Claims – for services provided after the filing of the bankruptcy

CANNOT use proof of claim form.

Instead must apply to bankruptcy court for payment pursuant to §503 of the Bankruptcy Code

Priority of Claims1. Exempt Assets belong to the debtor

(only applies to inidividuals), then

2. Secured Creditors are paid in full; then

3. Priority and Preferred Unsecured Creditors

Priority of Claims3. Priority and Preferred Unsecured Creditors

a. Administrative costs

b. Debts incurred after filing; then

c. Wages/employee benefits up to $11,000 (amount is indexed)

(1) Wages must be earned within 90 days prior to filing the petition, then

(2) Employee benefits must be earned within 180 days of filing the petition, then

Priority of Claims3. Priority and Preferred Unsecured Creditors

d. Customer deposits up to $2,500 (amount is indexed) per customer; then

e. Alimony and child support; then

f. Taxes, then

4. ALL OTHER UNSECURED CREDITORS

Bankruptcy Preferences

A payment or grant of collateral/conveyance of assets that allows the recipient to receive more than their fair share of the now bankrupt customer's available cash and assets

Based upon extent secured

Bankruptcy Preferences

Must be repaid because it frustrates the underlying policy of federal bankruptcy law that similar creditors should be treated in a similar fashion.

This policy is intended to discourage a mad grab by creditors that might accelerate a financially ailing company's slide into bankruptcy.

Statutory Definition of Preference – Section 547 On an antecedent (i.e., past due) debt owed

to a creditor Made while the now bankrupt customer was

"insolvent" Within 90 days (or a year, if the creditor is an

"insider" such as a shareholder, officer, or director of the bankrupt debtor, or another affiliated company) before the date the bankruptcy proceeding was filed

Continued

Statutory Definition of Preference – Section 547

That allowed the creditor to receive more on its claim than it would have had the payment not been made and the claim paid through the bankruptcy proceeding

Performing a “Preference Analysis” Gather a full payment history for the period of

at least the year before the payments in question were made.

All invoices showing both sales made and payments received during this period

Copies of any correspondence, including e-mail, contracts, checks, or other evidence of payments

Continued

Performing a “Preference Analysis”

Determine the number of days which generally elapsed between presentation of the invoices and receipt of payment and detect any patterns, that can also be useful.

Preference Exceptions Contemporaneous Exchange - §547(c)(1)

Ordinary Course of Business - §547(c)(2)

– Made in the "ordinary course of business or financial affairs" of the creditor and bankrupt customer in payment of a debt "incurred in the ordinary course of business or financial affairs" of the parties.

– Payment made "according to ordinary business terms" is also excepted.

Continued

Preference Exceptions

Subsequent New Value - §547(c)(4)

Extent to which creditor conveyed more value to debtor than it received

Payments to Fully Secured Creditors

Dealing with a Chapter 11 Plan of Reorganization

Submission of plan

Contents of plan – 11 U.S.C. 1123

– Classification of claims

– Treatment of each class of claims

– Means for implementation

Disclosure Statement – 11 U.S.C. §1125

Chapter 11 Plan VotingChapter 11 Plan Voting

“Impaired” creditors vote to ACCEPT or REJECT the plan. Acceptance occurs if

– Two-thirds of the claims in amount voting in the class vote to accept; AND

– One-half of the claims in number voting in the class vote to accept

At least one class of non-insider impaired creditors must vote to accept the plan.

Confirmation of Plan

If an impaired class rejects the plan, the plan must provide for each creditor in that class to receive at least as much as they would have received in a Chapter 7 liquidation scenario. This is sometimes called a “cramdown.” 11 U.S.C. §1129.

A proposed Plan of Reorganization may also be challenged on a number of other grounds such as feasibility by way of an objection to confirmation.

Continued

Confirmation of Plan

Once confirmed, the contents of the plan and the treatment provided for a particular claim become a new contract superseding the original terms of the transaction between the debtor and creditor. 11 U.S.C. §1141.

Other Bankruptcy Concepts

Adequate Protection

– Used to protect secured creditors by the diminution in the value of their collateral

– Trustee may be required to make cash payments or provide additional collateral to secure creditor

– Debtor failure to provide can be a grounds for relief from stay


Cash Collateral

– When debtor has granted a lender a security interest in substantially all assets, it is not permitted to use cash generated from receivables generation, disposition of assets, etc. without consent of the lender and/or approval of bankruptcy court. 11 U.S.C. §363.


Relief from Stay – Creditors can petition bankruptcy court for “relief from stay to continue collection action when:

– There is a lack of adequate protection

– The debtor has no equity in the collateral, and it is not necessary for an “effective reorganization.”

– For “cause” …11 U.S.C. §362(d)


Executory Contracts

– Trustee or DIP may choose to accept or reject executory contracts (i.e., lease agreements, unexpired contracts, union agreements)

– In case of nonresidential real property leases, rental payments must be kept current until a decision as to what to do is made.


Conversion

– If debtor is not making acceptable progress toward confirmation of a plan in Chapter 13 or Chapter 11 case, creditors can ask bankruptcy court to convert case to Chapter 7 liquidation.

For More Information…

Basic Overview

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/

process.html

Teri G. RasmussenTeri G. Rasmussen Creditors’ Rights and Debt Collection

– Business Bankruptcy & Insolvency– UCC and Secured Transactions– Commercial Finance– Commercial Litigation

General Corporate and Business Law– Business Acquisitions and Sales – Joint Ventures and Strategic Alliances– Corporate Governance and Shareholder Disputes– Contracts and Loan/Lease Documentation– Business Formation and Financing– Business Planning– Real Estate

Visit my legal blog:OHIO PRACTICAL BUSINESS LAW

http://www.ohiopracticalbusinesslaw.com

of Plunkett Cooney

Attorney and Counselor at Law

Plunkett Cooney

300 E. Broad Street, Suite 590

Columbus, OH 43215

Direct: (614) 629-3017

[email protected]

Teri G. Rasmussen, J.D.