Corporate Bankruptcy 101
Sponsored by
New Jersey Corporate Counsel Association
&
Norris McLaughlin & Marcus, P.A.
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LOOK OUT!
Economic Indicators Forecast a Rise in
Bankruptcy Filings
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The Economic Indicators
Unemployment, Interest Rates, Housing
Market, Stock Market, Bad Credit-Card Debt
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The Economic Indicators
• Stock Market/Dow Jones
– Oct 14 – 9,311
– YTD Change – (3,877)
– YTD % Change – (29%)
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The Economic Indicators
• Unemployment Rate at 6.1%
– Worst in 5 Years
– 760,000 year-to-date job losses
– Job losses in retail, manufacturing,
construction and leisure/hospitality
– Job gains in government, education and
health services
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The Economic Indicators
• Interest Rates
– Fed Fund Rate
– WSJ Prime Rate
Oct 14
Year Ago
1.50%
4.50%
4.50%
7.75%
• Housing –
• Bad Credit-Card Debt
– 2008 – $40 Billion vs. 2009 – $95 Billion
• Budget Deficit at $454.8 billion
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Factors Leading to
Financial Distress
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Liquidity Crisis
Asset-Based Loan Default
Loss of Major Client/Customer
Loan Maturity and Unable to Refinance
Drop in Revenue
Increased Operating Costs
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The Chapters Of Bankruptcy
Chapter 7
Chapter 9
Chapter 11
Chapter 13
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Recent Bankruptcy Filings
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Retail
– Sharper Image
– Goody’s Family Clothing
– Mervyn’s
– Linens ‘N Things
– Lillian Vernon
– Friedman’s Jewelers
– Whitehall Jewelers
– Boscov’s
– Steve & Barry’s
Distribution
– Leiner Health Products
– Mrs. Fields Cookies
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Real Estate/Finance
– Lehman Bros.
– Washington Mutual
– WCI Communities
– Home Banc Mortgage
– American Home Mortgage
Other
– Jevic Transportation
(Logistics)
– Semgroup (Energy)
– Skybus (Airline)
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Utilization of the Chapter 11
Process
• Reorganization
• Sale as a Going-Concern
• Orderly Liquidation
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Who Can File a Chapter 11
Businesses
Corporations, Limited Liability
Companies, Partnerships
Individuals
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Commencement of a
Chapter 11 Case
• Minimum Documents Necessary to File a Case:
– Petition, Corporate Resolution, Creditor List, List of Twenty
Largest Unsecured Creditors, and List of Equity Interest
Holders
• Timing:
– Minutes With the Advent of Electronic Filing
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Commencement of a
Chapter 11 Case (Cont.)
• Notice to Creditors:
– Twenty Largest Will Receive Notice Within
a Day of the Commencement Date (If
Emergent First-Day Hearings Are
Requested)
• Other Creditors Will Receive Notice
Within Approximately Two Weeks
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Commencement Of a
Chapter 11 Case (Cont.)
• Effect of Filing:
– Automatic Stay (Section 362 of the
Bankruptcy Code)
– Requirement for Court Approval of Any
Action Outside of the Ordinary Course of
Business
– Jurisdiction of Court Over Debtor’s Assets
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The Players
What is a Debtor-in-Possession?
My company is losing money. I get to stay
in control and keep collecting the same
compensation. What more can I ask for?
Yippee!
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Debtor’s Professionals
Who are they?
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Counsel
Special Counsel
Chief Restructuring Officer
Accountants
Investment Bankers
Environmental Engineers
Brokers (real estate or business)
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Debtor’s Professionals
How are they retained and how
do they get paid?
Retention Requirements
Compensation
(No such thing as a free lunch!)
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Types Of Creditors
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Banks (Pre-Petition Lenders)
Equipment Lessors
Landlords
Trade Payables
Taxing Authorities (Priority Claim)
Priority Claims (Wages, Commissions,
Benefits, including Union Claims)
• Equity Holders (Shareholders)
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Creditors’ Committee
• Formation Process
• Role of Committee
• Committee
Professionals
• Compensation of
Committee
Professionals and
Committee Members
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United States
Trustee’s Office
• Role: Monitoring Chapter 11 Cases
– Conducting Committee Formation Meeting
– Conducting Meeting of Creditors
– Professional Retention and Fee Application
Oversight
– Quarterly Fees
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First Day Motions
“I filed Chapter 11 and I am now told I
can’t pay anyone (including employees)
until the Court says I can. What is the
delay?”
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First Day Motions (Cont.)
• Use of Cash Collateral or Debtor-inPossession Financing
• Payment of Wages and Other Employee
Benefits
• Customer Refunds and Rebates
• Pre-Petition Critical Vendors
• Payment of Sales, Use and Other Taxes
• Maintaining Cash Management Systems
• Utility Companies
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First Day Motions (Cont.)
Who is Served?
How quickly does the Court hear the
Motions?
Can they be opposed?
What is the likelihood of the Court
denying the Debtor’s requested relief?
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DIP Financing vs. Cash
Collateral
What is Cash Collateral?
What is DIP Financing?
How are creditors affected by DIP
Financing versus Cash Collateral?
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Types of Notices Mailed to
Creditors
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Committee Formation Meeting
Notice of the Section 341 Meeting
Notice of Bar Date Along With a Proof of Claim Form
Notice of Sale of Assets
Notice of Settlements/Abandonment
Notice of Professional Fee Application Hearings
Notice of Disclosure Statement Hearing
Notice of Plan Confirmation
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Executory Contracts
• An Executory Contract is a contract in which
both parties still have continuing obligations.
• Examples: Residential or Commercial
Leases, Certain Equipment Leases, Service
Contracts, and License Agreements
• A non-Debtor party is required to continue
with performance under the contract.
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Executory Contracts (Cont.)
• Assumption/Rejection of a Lease
• Motion to Compel Assumption or Rejection
• Bankruptcy Code provides Debtor with a 120day period to decide to assume or reject a
non-residential lease, which period can be
extended for an additional 90 days thereafter
and further if consented to by the landlord.
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Executory Contracts (Cont.)
Equipment Leases
Is it a True Lease vs. Disguised Security
Financing? Does it matter?
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Executory Contracts (Cont.)
• License Agreements
• Intellectual Property
• Union Contracts
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Sale of Assets in a
Chapter 11 Case
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Types of Sales
• Asset Sale vs. Stock Purchase
• Section 363 vs. Plan of
Reorganization
• Higher and Better Offers
• Secured Creditor Sale/Foreclosure
Sale
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Chapter 11 Bankruptcy Sale
Process
• Retention of an Investment Banker/Business
Broker
• Motion to Fix Bidding Procedures
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Bidding Procedures Hearing
Standard Asset Purchase Agreement
Stalking Horse Agreement
Break-Up Fees
Minimum Bids/Overbid
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Impact of a Chapter 11 Sale
• Sale Free and Clear of All Liens, Claims and
Encumbrances
– Successor Liability
• Assumption and Assignment of Executory
Contracts
– Payment of Arrearages
– Adequate Assurance of Future Performance
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Plan of Reorganization and
Disclosure Statement Process
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Exclusivity
The Debtor has the exclusive right to file
a plan for a period of 120 days, which
may be extended up to 18 months.
Competing Plans – Plan filed by Creditors
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Plan Negotiations
• Treatment of Secured Creditor, who is
primary lender to the Debtor
• Negotiations with Creditors’ Committee
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Plan Negotiations from
Committee Stand-Point
• Is the Debtor viable?
• What would unsecured creditors receive in a
liquidation?
• Are there claims against Insiders (leverage)?
• Are there claims against the Lenders, i.e.
lender liability (leverage)?
• Are there avoidance claims against vendors?
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Plan of Reorganization
• Contents of Plan
• Classification of Claims
• Treatment of Claims
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Disclosure Statement
• Content: Similar to a Prospectus
• Provide Sufficient Information for a
Reasonable Person to Vote on the Plan
• Notice of Disclosure Statement Hearing
• Objections to Disclosure Statement
• Approval of Disclosure Statement
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Requirements for Approval
of Plan of Reorganization
• Consent of Impaired Classes of Creditors
• Fair Treatment of Creditors
– Class of Creditors Must Receive More Than What They
Would Receive in a Liquidation
– Absolute Priority Rule -Junior Class of Creditors Cannot
Receive Anything Until the Senior Class of Creditors is Paid
in Full Unless Senior Class Consents
– New Value
– LaSalle – Is Equity Paying Fair Value to Retain Ownership?
• Feasibility
• Cram-Down
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Representation of Creditors
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In-House Monitoring of
Chapter 11 Cases
 Centralized Mailing Address for Bankruptcy Notices
 Bankruptcy Department to File Proofs of Claim, Note Important
Dates, and to Receive Any and All Bankruptcy-Related
Documents
 Outside Counsel
 Forms and Letter Responses
 Proof of Claim Form
 Reclamation Demand Letter
 Response to Preference “Dunning” Letters
 Basic Knowledge of Preference Defenses
 Bankruptcy Rights With Respect to Contracts with Debtor
 Access to Pacer
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General
• Filing a Notice of Appearance
• Serve Reclamation Demand, if
Applicable
• Adhere to the Deadline for Filing Proof of
Claim
• Analyze Potential Preference Exposure
• Be Cognizant of the Debtor’s Viability
and Continuing Operations
• Motion Objecting to Claims
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Reclamations
 Administrative Claim – Automatic Administrative Claim for any
goods received by the Debtor within 20 days prior to the Petition
Date.
– Bar Date for filing Administrative Claim
– Motion to Compel Payment of Administrative Claim
 Reclamation Demand - Within 20 days of the Petition Date,
Creditor may serve demand on the Debtor for the return of
goods received by the Debtor within 45 days prior to the Petition
Date.
 Defenses to Reclamation Demand
– Subject goods no longer in possession of Debtor as of the
Petition Date
– Lender with a Lien on all Inventory, including subject goods
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Claims Process
• Bar Date (Deadline to File a Claim)
• Filing a Proof of Claim
• Motion Objecting to Claims
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Claims Trading
• What is it?
• Benefits of Selling Claim
• Risks of Selling Claim
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Personal Injury Claimants
• Automatic Stay Stops Litigation
• File Motion for Stay Relief to Seek
Recovery from Insurance Carrier
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Landlords
• Debtor must assume or reject NonResidential Lease within 240 days
unless Landlord consents to further
extension
• Debtor required to make all lease
payments in accordance with lease
terms
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Landlords (Cont.)
• Motion to Compel Assumption
• Relief From Stay to Terminate Lease
• Motion Seeking Adequate Protection
Payments
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Landlords (Cont.)
• Assumption of Lease
– Adequate Assurance of Future Performance
– Cure of Any Arreages
• Assignment of Lease
– Adequate Finances of Assignee
– Shopping Center Leases
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Equipment Leases
Equipment Financing
• True Lease vs. Disguised Security
Interest
• Motion for Stay Relief
• Motion for Adequate Protection
• Assumption of Lease
• Sale of Equipment
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Preference Actions
Adding Insult to Injury
• Preference Payments – Typically, any payment
received within 90 days of the Petition Date
• Dunning Letter from Debtor or Liquidating Trustee’s
Counsel
• Defenses
– Contemporaneous Exchange
– New Value
– Ordinary Course of Business or financial affairs of
the debtor and the transferee or made according
to ordinary business terms
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Doing Business With a Debtor
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Business Terms
Administrative Expense Claim
Emotions v. Profit
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Discussion and Q&A
www.acc.com/chapters/njcca
njcca@comcast.net
MORRIS S. BAUER, ESQ.
908-252-4345 | msbauer@nmmlaw.com
LARRY K. LESNIK, ESQ.
908-252-4347 | lklesnik@nmmlaw.com
BRUCE J. WISOTSKY, ESQ.
908-252-4347 | bjwisotsky@nmmlaw.com
Norris McLaughlin & Marcus, P.A.
Somerville, NJ
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