Bankruptcy ABCs For
Healthy Companies
Morris S. Bauer, Esq.
The material provided herein is for informational purposes
only and is not intended as legal advice or counsel.
LOOK OUT!
Bankruptcy Filings On The Rise
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The Economic Indicators
Unemployment, Interest Rates, Housing
Market (Foreclosures), Stock Market,
Consumer Spending, Bad Credit Card Debt
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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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Commencement of a
Bankruptcy 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
Bankruptcy Case (Cont.)
• Effect of Filing:
– Automatic Stay (Section 362 of the
Bankruptcy Code)
– Requirement for Court Approval of the
Disposition of Any Assets of the Debtor
– Jurisdiction of Court Over Debtor’s Assets
and Any Causes of Action against the
Debtor
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The Chapters of Bankruptcy
Chapter 7
Chapter 9
Chapter 11
Chapter 13
Chapter 15
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Chapter 7
What is Chapter 7?
– Liquidation
– Business No Longer Operating
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Who is a Chapter 7 Trustee?
Do I receive notice of the Chapter 7 case?
Do I file a proof of claim?
Will I have to give back any money?
– Preference Actions
– Will I receive any monies on my claim?
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Chapter 11
• Utilization of Chapter 11
– Reorganization
– Sale as a Going-Concern
– Orderly Liquidation
• Who Can File Chaper 11
– Corporations, Limited Liability Companies,
Partnerships, Sole Proprietorships,
Individuals
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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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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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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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Types of Notices Mailed to
Creditors
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Committee Formation Meeting
First Day Motions to Largest Unsecured Creditors
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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Should I Continue to Do
Business With a Debtor?
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Access to Financial
Information of Debtor
Business Terms
Administrative Expense Claim
Emotions v. Profit
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Available Information
• Schedules of Assets and Liabilities and
Statement of Financial Affairs
• Monthly Operating Reports
• Counsel to Creditors Committee
• Other Creditors
• The Web
• Court’s Website – Pacer
• Newspaper Articles, etc.
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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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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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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,
License Agreements, and Collective Bargaining
Agreements
• A non-Debtor party is required to continue with
performance under the contract.
• Motion to Assume or Reject Lease or Contract
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Landlords
• Debtor must assume or reject NonResidential Lease within 210 days unless
Landlord consents to further extension
• Debtor required to make all lease payments
in accordance with lease terms
• Motion for stay relief to terminate lease and
other recourse
• Assumption of Lease and Assignment to
Third Party
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Time Line of a Chapter 11 Case
First Day Motions
• DIP Financing/Use of Cash Collateral
• Financial Reporting
• Sale or Liquidation of Business
• Plan of Reorganization/Plan of Orderly
Liquidation
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First Day Motions
• 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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Financial Reporting
• Schedules of Assets and Liabilities and
Statement of Financial Affairs
• Budget for Use of Cash Collateral and DIP
Financing
• Monthly Operating Reports
• Disclosure Statement Provides Historical
Financial Information and Forecasts
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Sales of Assets in Chapter 11
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Notice of Asset Sale
Sale Free and Clear of All Liens, Claims
and Encumbrances
Assumption and Assignment of Executory
Contracts
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Payment of Arrearages
Adequate Assurance of Future Performance
Higher and Better Offers
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Plan of Reorganization and
Disclosure Statement Process
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Plan of Reorganization
• Contents of Plan
• Classification of Claims
– Secured Claims (Lender)
– Priority Claims (Taxes, Wages)
– Unsecured Claims (Trade)
• Treatment of Claims
– Negotiations with Lender and Committee
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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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Plan of Orderly Liquidation
• Contents of Plan and Approval Process
• Liquidation Trust
• Assets Available for Unsecured Creditors
– Remaining Sale Proceeds, if any
– Preference Actions
– Other Causes of Action
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Questions and
Answers
Thank you for coming!