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AN OVERVIEW OF COMMERCIAL BANKRUPTCY LAW FROM A TRADE

CREDITOR’S PERSPECTIVE

GSCFM – 2019

WANDA BORGES, ESQ. BORGES & ASSOCIATES, LLC

575 UNDERHILL BLVD.SYOSSET, NY 11791516-677-8200 x 225

wborges@borgeslawllc.com

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PURPOSE OF BANKRUPTCY Stay of Creditor Actions

Foreclosure Enter/Enforce Judgment Commence/or Continue Lawsuits Take Collateralized Property Under the UCC Take Creditor’s Own Property

Fresh Start Individual Debtor discharged of most

indebtedness Equitable Distribution of Debtor’s Assets

According to Claims Priority

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VARIOUS TYPES OF BANKRUPTCY CASES - CHAPTER 7

Liquidation Business Terminates Operation

Exception is rare Trustee Appointed or Elected

Sell or collect assets of Debtor Investigate/prosecute claims against

third parties Reconcile claims

VARIOUS TYPES OF BANKRUPTCY CASES - CHAPTER 9

A Municipality Commences its Bankruptcy Case by Filing a Chapter 9 Petition

Section 303 of the Bankruptcy Code, Dealing With the Commencement of an Involuntary Bankruptcy Case, is NOT applicable To Chapter 9 Cases

A Chapter 9 Case Cannot be Converted to a Case under Another Chapter

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VARIOUS TYPES OF BANKRUPTCY CASES– CHAPTER 9

A state is Not a municipality and is Not eligible to be a Chapter 9 Debtor

A Municipal Debtor is Eligible to be A Chapter 9 Debtor if it Satisfies the Following Requirements. It must be municipality It must be authorized under state law to be a chapter 9

debtor It must be insolvent Chapter 9 petition must be filed in “good faith”

Eligibility Can be Challenged Order for Relief Entered Upon Satisfaction of Eligibility

Requirements

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WHAT IS A MUNICIPALITY?

A “Municipality” is “a political subdivision or public agency or instrumentality of a State.”

Municipalities Include, but are not limited to: Counties Cities Towns Villages Municipal utilities School districts or public schools Other taxing districts, including road

districts Fire/police departments

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VARIOUS TYPES OF BANKRUPTCY CASES– CHAPTER 11

Reorganization or Rehabilitation of Business Liquidating Chapter 11 Debtor’s Management Continues Chapter 11 Trustee Displacing Management – the

Exception Cause, including fraud, dishonesty,

incompetence or gross mismanagement Appointment in creditors’ best interests Grounds to convert or dismiss case Special United States Trustee Grounds based

on fraud

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VARIOUS TYPES OF BANKRUPTCY CASES– CHAPTER 11

Small Business Debtor Debts not more than $2,566,050

Includes secured and unsecured debt Excludes insider/affiliate debt

No creditors’ committee Fast track chapter 11

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VARIOUS TYPES OF BANKRUPTCY CASES– CHAPTER 12

Family Farmer Eligibility Limited

Only individuals with regular income Aggregate debts cannot exceed $4,153,150 Not less than 50 percent of debt (exclusive of

mortgage on principal residence) arises out of the farming operation

Family owned corporation or partnership also eligible if more than 50 percent of stock or equity is held by

family More than 80 percent of assets relate to farming

operation

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VARIOUS TYPES OF BANKRUPTCY CASES– CHAPTER 12

Family Fisherman Eligibility Limited

Only individuals with regular income Aggregate debts cannot exceed $1,924,550 Not less than 80 percent of debt (exclusive of

mortgage on principal residence) arises out of the commercial fishing operation

Family owned corporation or partnership also eligible if more than 50 percent of stock or equity is held by

family More than 80 percent of assets relate to farming

operation

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VARIOUS TYPES OF BANKRUPTCY CASES– CHAPTER 13

Debtor Retains Assets Creditors Receive Deferred Payments Under

Chapter 13 Plan Unsecured debt need not be paid in full

All projected disposable income for 5 years must fund plan payments

Eligibility Limited Only individuals with regular income Unsecured debt cannot exceed $394,725 Secured debt cannot exceed $1,184,200

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VARIOUS TYPES OF BANKRUPTCY CASES– CHAPTER 15

Known as Ancillary or Cross-Border Cases

Cooperation between US courts, trustees, examiners, debtors and debtors in possession

AND Courts and other competent authorities or

foreign countries involved in cross-border insolvency cases

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INVOLUNTARY BANKRUPTCY PETITIONS

Three or More Petitioning Creditors Have Unsecured Claims Not contingent Not subject to a bona fide dispute as to

Liability or Amount

Totaling not less than $15,775 Debtor has 12 or more unsecured creditors Debtor generally not paying these debts

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INVOLUNTARY PETITION SANCTIONS UPON DISMISSAL

Debtor’s Costs and Attorneys’ Fees in Defending Involuntary Petition No bad faith prerequisite

Petitioners’ bad faith filing could subject them to: Debtor’s actual damages arising from

involuntary bankruptcy filing Punitive damages Could be substantial dollars

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BANKRUPTCY FILING CREATES BANKRUPTCY ESTATE

Property of Debtor’s Estate All legal, equitable interests of debtor in

property when case commenced Includes:

Tax refunds Insurance Proceeds Other property

Does Not Include Exempt Assets

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AUTOMATIC STAY

Bankruptcy Filing Stays Creditor Action Creditor CANNOT

Collect debt owed by debtor Terminate agreements Foreclose on collateral Setoff Recoupment? Commence or continue lawsuit Enforce a judgment Stop doing business if there is an ongoing contract

in existence If no ongoing contract, creditor is free to cease

doing business with Debtor

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AUTOMATIC STAY IN CHAPTER 9 CASES

When a Chapter 9 Bankruptcy Petition is Filed, an Automatic Stay Arises that is broader than the Automatic Stay under §362 of the Bankruptcy Code, Applicable to Chapter 7, 11, 12 and 13 Cases

Breathing Space Municipality given time to work out its creditor and cash

flow problems by: Potentially raising new revenues Renegotiating contracts, and/or Restructuring debt obligations

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AUTOMATIC STAY IN CHAPTER 9 CASES

Creditor Action to Collect Claims Against Debtor is Stayed

The Automatic Stay also Extends to any Actions that Could Otherwise be Taken Against a Municipality’s Officers or Employees, and to all the Inhabitants of the Debtor Municipality, if these Actions Seek to Enforce a Claim Against the Municipality

However, the Automatic Stay Does Not Apply to the Application of “Special Revenues” Pledged to Special Revenue Bondholders Holding Liens on Such Revenues

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AUTOMATIC STAY

Consequences of Stay Violation Contempt of court

Visteone case example Metaldyne case example

Sanctions

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AUTOMATIC STAY Does Not Apply to Any Act to Perfect or Maintain or

Continue Perfection of an Interest in Property to the Extent Trustee’s Rights and Powers are Subject to Such Perfection Under Section 546(b) Allows for post-petition perfection of mechanics’

lien rights that relate back pre-petition Does Not Apply to Actions Against Non-Debtors

Drawing on letter of credit Claim vs. guarantors

Exception – Chapter 13 co-debtors on consumer debts

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DISCHARGE

Principal Reason for Bankruptcy Effect of Discharge

Debtor relieved of all personal liability on dischargeable claims

Chapter 7 Discharge – Eligibility Only individuals, not corporations,

partnerships and limited liability companies Chapter 11 Discharge – Eligibility

Individuals Other entities – corporations, partnerships and

LLCs

DISCHARGE

Chapter 13 Discharge STATUTORY PROVISIONS 11 U.S.C. § 1328(b) – chapter 13 discharge

After completion of all plan payments If plan payments are not complete THEN

IF debtor’s failure to complete is beyond his or her control

IF the value of property actually distributed is not less than would have been paid under a chapter 7

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DISCHARGE Objection to Discharge of All Debt

Section 727(a) grounds Transfers of property of Debtor with intent to

hinder, delay or defraud a creditor within one year of bankruptcy filing

Debtor’s concealment, destruction, falsification, failure to keep or preserve records

Debtor’s knowingly and fraudulently making a false oath

Debtor’s failure to satisfactorily explain loss or deficiency of assets

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DISCHARGE

Objection to Dischargeability of Claim Section 523(a) grounds Obtaining credit based on false pretenses,

false representations, actual fraud or a materially false written financial statement made with intent to deceive and on which creditor reasonably relied

Debtor’s fraud or defalcation while acting in fiduciary capacity, larceny or embezzlement

Debtor’s willful and malicious injury to another entity or property

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DISCHARGE

11 U.S.C. §523 provides discharge NOT granted with respect to: MOST TAXES Luxury goods or services – more than $675 within 90

days prepetition Cash advances more than $950 for consumer credit

under open end credit plan within 70 days of bankruptcy filing.

Debt not listed nor scheduled in time to permit creditor to participate in bankruptcy and file a proof of claim. Some courts hold debt which would have been

dischargeable if properly listed will be dischargeable despite failure of debtor to include such debt

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DISCHARGE

Deadline for Objecting to Discharge/Dischargeability Short 60 days after 341 meeting Subject to extension upon court approval

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DENIAL OR REVOCATION OF DISCHARGE

Common bases to deny or revoke discharge under 11 U.S.C. §727 Fraudulently transferred or concealed property within 1

year of bankruptcy or after filing. Concealment, destruction, mutilation, falsification or

failure to keep or preserve financial information Knowingly or fraudulently, in connection with case:

Makes a false oath or account Presented or used a false claim Gave, offered, received or attempted to obtain money,

property or advance for acting or forbearing to act Refusal to obey court order Failure to explain any loss of assets or deficiency of assets

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CLAIMS ISSUES

Essential to file a claim in every chapter In a chapter 11 proceeding, Bankruptcy Code

says not necessary IF Claim is listed on schedules as

Non-contingent Not disputed A fixed dollar amount

WARNING – IGNORE THIS AND FILE A PROOF OF CLAIM IN EACH AND EVERY CASE

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CLAIMS ISSUES

Claims Bar Date Date Fixed by the court for claims to be filed Notice will be sent to creditor’s address AS LISTED BY

THE DEBTOR Notice will not be sent in every case Sometimes notice will say NOT to file a claim

A CLAIM FILED LATE WILL NOT BE ALLOWED Except under extremely limited circumstances – OR Except when every other claim is paid 100%

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HOW TO FILE A CLAIM

Official Bankruptcy Form B-410 (recently amended in December, 2016) May be found at uscourts.gov

Forms and Fees Bankruptcy Forms Part I – Official Forms, Instructions, Committee Notes B-410 – Proof of Claim

Fill out and mail to appropriate court (where case is pending)

Fill out and mail to appropriate claims agent This information will be provided on Notice to File Claims

File Online Most Bankruptcy courts provide for online filing

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CRITICAL VENDOR MOTIONS

Doctrine of Necessity

Creditor essential to debtor’s business operations

Debtor will be forced to buy goods for cash in advance or COD

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CRITICAL VENDOR MOTIONS/ORDERS

Cost of goods or services from different vendor much greater

Debtor cannot get goods or services anywhere else

Debtor has favorable contract with vendor Vendor threatening not to sell to debtor at all

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CRITICAL VENDOR ISSUES FOR CREDITORS

QUID PRO QUO

Creditors receiving critical vendor status must agree to extend post-petition credit

There may be other requirements

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CRITICAL VENDOR DEMANDS BY THE DIP

■ Agree to continue to supply goods and services based on “Customary Terms”

■ Continue to supply goods or services on an uninterrupted basis

■ No credit limit or cap

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CRITICAL VENDOR DEMANDS BY THE DIP

SAMPLE (Cooper Automotive)

“On the Filing Date, the Debtors requested authority to pay pre-bankruptcy claims of certain suppliers in recognition of the importance of the Debtors’ relationships with these suppliers… order authorizing the Debtors, under certain conditions, to pay the prepetition claims of certain trade creditors that agree to the terms set forth below and to be bound by the terms of the Final Order”

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CRITICAL VENDOR ORDERS

Only Debtor determines who will be deemedcritical

Accept no payments without a court order Not always granted

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503(b)(9) MOTIONS

PROTECTION WHICH HAS REPLACED RECLAMATION

◦ “20 DAY” ADMINISTRATIVE EXPENSE CLAIM

NOTICE AND A HEARING

CLAIM FOR THE VALUE OF GOODS RECEIVED BY A DEBTOR WITHIN 20 DAYS PRIOR TO THE COMMENCEMENT OF THE BANKRUPTCY CASE FOR GOODS SOLD TO THE DEBTOR IN THE ORDINARY COURSE OF THE DEBTOR’S BUSINESS

“20 DAY” ADMINISTRATIVE CLAIM

Safety Net For Trade Creditors Disregards More Onerous Requirements for Successful Reclamation◦ No written reclamation demand required.◦ No secured inventory lender defense.◦ No goods on hand requirement.◦ No solvency defense.◦ Reclamation Rights Still Pertinent for Goods

Received by Debtor from 21–45 Days Before Bankruptcy Filing

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“20 DAY” ADMINISTRATIVE CLAIM PROCEDURE

Administrative Expense Priority Claim Notice And A Hearing:

No Automatic Administrative Claim Without Court Approval.

20 day goods must be sold to the Debtor in the ordinary course of Debtor’s business

Creditor should act quickly No deadline to act in statute

Court orders may create deadline

Radnor Holdings Corporation – early administrative bar date set

Pre-petition claims bar date precluded late filing of Section 503(b)(9) priority claim – Dana Corporation − U.S. Bankruptcy Court, Southern District of New York

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TIMING OF PAYMENT OF 503(b)(9) CLAIMS

Immediately? Conditioned on extension of credit?

Upon Plan Confirmation or Some Other Event? Townsends Risk of Administrative Insolvency

Court decides!

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COURT ORDERS APPROVING PAYMENT OF 503(b)(9) CLAIMS

Debtor Authorized, But Not Required, to Pay Allowed 20 Day Administrative Expense Claims Up to an Aggregate Cap

Payment Tied to Continued Extension of Credit Creditor May Move for Allowance/Payment if

Debtor Fails to Pay Unlike Critical Vendor

FORMATION OF A CREDITORS’ COMMITTEE

Generally 7 largest unsecured creditors Prepetition committee may be appointed Party in interest may petition court to change

membership of the committee Small business may be added More than one committee may be appointed

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CREDITORS’ COMMITTEE

FUNCTION OF CREDITORS’ COMMITTEE Investigate into the Financial Affairs of the Debtor

Prior to Chapter 11 Proceeding During Chapter 11 Proceeding

Negotiate a Plan of Reorganization Debtor has a viable business and can reorganize

with payments to creditors Negotiate a Liquidation/Sale

Debtor cannot survive in business Sell all the assets to a third party as a “going

concern” Sell all the assets piecemeal.

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EXECUTORY CONTRACTS

DEFINITION ONE WHERE SOME FUTURE ACT IS TO BE DONE

(Black’s Law Dictionary) ONE IN WHICH A PARTY HAS MATERIAL

UNPERFORMED OBLIGATIONS (Wikipedia) No definition in the Bankruptcy Code

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WRITTEN EXECUTORY CONTRACTS

Requirements Agreement

Consignment Agreement

Service Agreement

Media Contracts

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LONG TERM PURCHASE ORDERS AS EXECUTORY CONTRACTS

Term may be 30 days or ten years Acceptance in the past binds creditor May be for one product, one service or one task May be for multiple products May be tied in to another contract

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EXECUTORY CONTRACTS AND THE BANKRUPTCY CODE

11 U.S.C. §365(d)(2) authorizes a debtor to assume or reject any executory contract subject to court approval Defaults must be cured or adequate assurance

must be provided Creditor must be compensated for any actual

pecuniary damage due to default Adequate assurance of future performance

must be given

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EXECUTORY CONTRACTS

DEFINITIONS ASSUMPTION

all prepetition monies paid Adequate assurance of future performance

REJECTION contract is terminated No future action Creditors’ prepetition claim becomes a

general unsecured claim

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EXECUTORY CONTRACTS ASSUMPTION OR REJECTION

Debtor has absolute right to assume or reject No strict deadline Debtor must decide before Plan Confirmation

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