“Bankruptcy Primer For
In-House Counsel”
Presented To The Delaware Valley
Association of Corporate Counsel of
America on October 17, 2006 By:
Robert A. Kargen, Esquire
WHITE AND WILLIAMS LLP
1800 One Liberty Place
1650 Market Street
Philadelphia, PA 19103
Ph: (215) 864-7134
Email: Kargenr@whiteandwilliams.com
© White and Williams LLP 2006
Definitions
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Arcane:
Esoteric:
secret; hidden; mysterious
confined to a select circle;
confidential; designed for or
understood by an initiated
and enlightened few; abstruse; profound
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Bankruptcy Law:
Arcane and Esoteric
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Bankruptcy Petition Date
Pre-Petition
© White and Williams LLP 2006
Post- Petition
Constitutional Authority for Congress to
Pass Uniform Laws Regarding Bankruptcy
Article I, § 8, provides:
“To establish an uniform Rule of
Naturalization, and Uniform Laws on the
subject of bankruptcies throughout the
United States;”
© White and Williams LLP 2006
What’s Odd About Congress?
Title 11 of the United States Code contains the statutory provisions of
the Bankruptcy Code.
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Chapter 1 – General Provisions
Chapter 3 – Case Administration
Chapter 5 – Creditors, the Debtor and the Estate
Chapter 7 – Liquidation
Chapter 9 – Adjustment of Debts of a Municipality
Chapter 11 – Reorganization
Chapter 12 – Adjustment of Debts of a Family Farmer or
Fisherman with regular annual income (why is this an even
number?)
Chapter 13 – Adjustment of Debts of an Individual with regular
income
Chapter 15 – Ancillary and Cross-Border Cases
© White and Williams LLP 2006
Differences Between Chapter 7 and
Chapter 11
Chapter 7 – Liquidation
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Commencement of a Case
• Voluntary
• Involuntary
Order for Relief
Appointment of a Trustee
Duties of a Trustee
• Collect and Reduce to Money Property of the Estate
• Investigate Financial Affairs of the Debtor
• Examine Proofs of Claim
• If advisable, oppose discharge of the Debtor
• Furnish information concerning the Estate and Estate’s administration as requested by
•
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a party in interest
Make a final report
Miscellaneous provisions regarding domestic support, transfer of patients from a
health care business, consumer issues, child support issues and other non-business
provisions
© White and Williams LLP 2006
Chapter 7 Liquidation (continued)
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Distribution of Property of the Estate
• Secured Creditors
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will receive their collateral or the proceeds of the
collateral
• Administrative Expenses
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•
© White and Williams LLP 2006
Trustee’s fees (statutory percentages)
Counsel for the Trustee
Other Professionals engaged by the Trustee
Obligations to Vendors or Third Parties incurred in the
course of administering the Debtor’s Estate
Chapter 7 Liquidation (continued)
• Priority Unsecured Creditors
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•
© White and Williams LLP 2006
Domestic Support, Child Support
Allowed Administrative Expenses during the Involuntary
Gap Period
Claims of Employees, but only to the extent of $10,000
for each individual for wages, salaries and commissions
earned within 180 days before the date of the filing of
the Petition
Allowed Unsecured Claims for contribution to Employee
Benefit Plans for services rendered within 180 days
before the filing of the Petition, limited for each such
Plan to the number of employees covered by such Plan
multiplied by $10,000, less the aggregate paid to such
employees under the wage priority
Chapter 7 Liquidation (continued)
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Claims for persons engaged in the production of grain
against a Debtor who operates a grain storage facility, or
fisherman against a Debtor who has acquired fish or fish
products from a fisherman but each limited to the extent
of $4,925
Deposits made by individuals to the extent of $2,225 for
each such individual
Allowed unsecured claims of a governmental unit for
taxes
• General Unsecured Creditors
• Interest holders and equity holders
© White and Williams LLP 2006
Chapter 11 – Reorganization
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Case is commenced by the filing of a petition – either
voluntary or involuntary
Claims of creditors are treated in a Plan
Plan will classify creditors with like claims
Plan will propose treatment of creditors claims
Acceptance of a Plan is obtained by an affirmative
vote of more than 50% in number of creditors and
more than 2/3 in amount of creditors in the class
(only creditors whose claims are “impaired” get to
vote)
© White and Williams LLP 2006
Chapter 11 – Reorganization (continued)
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Debtor’s exclusive period to file a Plan
• 120 days after the date of the Order for Relief
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unless extended by the Court
Court may not extend the exclusivity period
beyond a date which is 18 months after the date
of the Order for Relief
In a small business case, only the Debtor can file
a Plan until 180 days after the date of the Order
for Relief but the Plan must be filed not later than
300 days after the Order for Relief.
© White and Williams LLP 2006
Chapter 11 – Reorganization (continued)
• A small business Debtor is a person engaged in a
commercial or business activity (excluding a person whose
primary activity is the business of owning or operating real
property) that has aggregate non-contingent liquidated
secured and unsecured debts as of the date of the Petition
or the date of the Order for Relief in an amount not more
than $2,000,000 and in which case a Trustee has not been
appointed.
• In a small business case, the Court must confirm a Plan that
complies with all of the provisions of the Bankruptcy Code
not later than 45 days after the Plan is filed unless the time
for confirmation is extended by the Court.
© White and Williams LLP 2006
Chapter 11 – Reorganization (continued)
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The “Cram Down”
• The Plan must not discriminate unfairly and it must
be fair and equitable with respect to each class of
claims or interest that is impaired under, and has
not accepted, the Plan
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Fair and equitable with respect to secured creditors:
Secured creditors must retain their liens securing their
claims; and
ii. Secured creditors must receive, on account of their claim,
deferred cash payments totaling at least the allowed amount
of the claim with a value, as of the effective date, of at least
the value of the creditor’s interest in the Estate’s interest in
such property (is this Greek?) or
i.
© White and Williams LLP 2006
Chapter 11 – Reorganization (continued)
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Secured creditors must realize the “indubitable equivalent” of
their claims
Fair and equitable with respect to unsecured creditors:
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The unsecured creditors receive property of a value, as of the
effective date of the Plan, equal to the allowed amount of their
claim (they are paid in full) or
• The holder of any claim or interest junior to the claims of the
unsecured creditors will not receive or retain anything on account
of such junior claim or interest (the “Absolute Priority Rule” and
the so-called “New Value Corollary or Exception”).
• In addition, with respect to each impaired class of claims or
interests, each holder of a claim or interest has to receive at least
what they would receive on account of their claim if the Debtor
were liquidated under Chapter 7 of the Bankruptcy Code.
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know
The Automatic Stay
• The filing of a Petition (including an Involuntary Petition)
operates as a stay, applicable to all entities, of:
•
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© White and Williams LLP 2006
the commencement or continuation, including the issuance or
employment of process, of any judicial, administrative or other
action against the Debtor to recover on a claim that arose prior
to the commencement of the case
the enforcement of a judgment obtained before the
commencement of the case
any act to obtain possession of property of the Estate or to
exercise control over property of the Estate
any act to create, perfect or enforce a lien
What Entities Dealing with the Debtor
Should Know (continued)
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•
© White and Williams LLP 2006
any act to collect, assess or recover a claim that arose
before the commencement of the case
the set-off of any debt owing to the Debtor that arose
before the commencement of the case
the commencement or continuation of a proceeding
before the tax court concerning a corporate debtor’s tax
liability for a taxable period which the Bankruptcy Court
may determine
What Entities Dealing with the Debtor
Should Know (continued)
• Statutory exceptions to the automatic stay:
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© White and Williams LLP 2006
Very limited – primarily dealing with domestic relations
issues such as the establishment of paternity, child
support, visitation, alimony and certain actions involving
the government under certain federal statutes and
arcane and esoteric provisions regarding commodities
brokers, stockbrokers, commodity contracts, swap
agreements and the like.
The stay generally exists until the case is closed or the
case is dismissed or if it is a Chapter 7 liquidation at the
time a discharge is granted or denied.
What Entities Dealing with the Debtor
Should Know (continued)
• Relief from the Automatic Stay
• Motion for Relief
• For Cause, including lack of adequate protection of an interest
in property
• With respect to a stay of an act against property, if a Debtor
does not have equity in the property and the property is not
necessary to an effective reorganization
• The Court will grant relief from the stay with respect to a stay
of an act against a single asset real estate by a creditor whose
claim is secured by an interest in such real estate unless, not
later than a date that is 90 days after the entry of the Order for
Relief, the Debtor has filed a Plan of Reorganization with a
reasonable possibility of being confirmed or the Debtor has
commenced monthly payments that may, in the Debtor’s sole
discretion, be made from rents or other income generated from
the property and are in an amount equal to interest at the then
applicable non-default contract rate of interest.
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Executory Contracts
● What is an Executory Contract?
• A contract in which both parties still have something to do to
perform (other than the payment of money) and where the failure
to perform would constitute a breach of the contract.
● Assumption - a Trustee or Debtor-in-Possession may assume
an executory contract
● Conditions to Assumption:
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•
© White and Williams LLP 2006
The Trustee must cure or provide adequate assurance that it will
promptly cure any existing defaults (other than bankruptcy defaults)
Compensate or provides adequate assurance that the Trustee will
promptly compensate a party for any actual pecuniary loss, and
Provides adequate assurance of future performance under the
contract or lease.
What Entities Dealing with the Debtor
Should Know (continued)
Executory Contracts (continued)
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Assignment
• If a Trustee assumes a contract, he may then assign the contract
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even if the contract specifically prohibits assignment (Is this
Wonderland?).
In order to assign the contract, the Trustee must first assume it
and provide adequate assurance of future performance by the
assignee of such contract.
The decision to assume or reject executory contracts is based on
the business judgment rule
Note: There are special provisions in the Section dealing with
assumption or assignment of executory contracts for shopping
center leases, intellectual property licenses, timeshare interests
and contracts for the sale of real property among others.
• Status of an executory contract not assumed or rejected
•
© White and Williams LLP 2006
Non-Debtor party must take affirmative action to resolve the question
What Entities Dealing with the Debtor
Should Know (continued)
Sales of Goods to Debtors-in-Possession
 C.O.D.
 C.B.D
 Credit Terms
• Administrative Claims
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Right of Reclamation
 The Bankruptcy Code has some protections for
individuals who deliver goods to a debtor shortly before
bankruptcy:
• A seller of goods, who has sold goods to the Debtor in the ordinary
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course of the seller’s business has a right to reclaim such goods if
the Debtor received them while insolvent, within 45 days before
the date of the commencement of the case.
However, the seller may not reclaim the goods unless it demands,
in writing, reclamation of the goods not later than 45 days after the
date of receipt of such goods by the Debtor, or not later than 20
days after the date of commencement of the case if the 45 day
period expires after the commencement of the case.
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Right of Reclamation (continued)
• In addition, if a seller fails to provide notice in the manner
set forth above, the seller may still assert a right to an
administrative claim equal to the value of any goods
received by the Debtor within 20 days before the date of the
commencement of a case as long as the goods were sold to
the Debtor in the ordinary course of the Debtor’s business.
Thus, companies that sell goods to Debtors and which are
received by the Debtor within 20 days before the
commencement of the case, will be entitled to an
administrative claim (which are paid prior to unsecured
claims) even if the Seller fails to request reclamation.
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Proofs of Claim
 Always file a Proof of Claim
 Submission to jurisdiction of the Bankruptcy
Court
 Claims objection process
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Preferences
 I don’t make the laws – if you don’t like them, write to your
Congressman
 A preference is a transfer of property of the Debtor to a creditor subject
to the ability of a Debtor or Trustee to recover such transfer for the
benefit of the Estate
 In order to recover a preferential payment, the following elements must
be proved – the transfer of property or granting of a lien, must have
been made:
1.
2.
3.
4.
5.
To or for the benefit of a creditor;
On account of an antecedent debt;
While the Debtor was insolvent (there is a presumption of insolvency);
Made within 90 days prior to the filing of a Petition or between 90 days and
one year if the transferee was an insider; and
Which enables the creditor to receive more than the creditor would receive
if the case were a case under Chapter 7 and the transfer had not been
made (i.e., payments to fully secured creditors cannot be avoided).
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Preferences (continued)
 Defenses to Preference Action
• Contemporaneous exchange
• Ordinary course of business
• New value
 Nationwide jurisdiction – If the amount of the
claim is $5,000 or greater and the Debtor’s
debts are not primarily consumer debts.
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Fraudulent Transfers
 The Debtor-in-Possession or Trustee may avoid a transfer (recover
the amount of money or property transferred) made within two years
prior to the bankruptcy if:
 The transfer was made with actual intent to hinder, defraud or delay
creditors; or
 The Debtor received less than a reasonably equivalent value in
exchange for the transfer or obligation; and
1.
2.
3.
4.
was insolvent at the time of transfer;
was engaged in business with insufficient or unreasonably small capital;
intended or believed it would incur debts beyond its ability to pay them or
made the transfer for the benefit of an insider under an employment
contract and not in the ordinary course of business
© White and Williams LLP 2006
Sales of Assets Free and Clear of Liens
and Encumbrances
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The Bankruptcy Code allows a Debtor or Trustee,
under certain circumstances, to sell assets free and
clear of liens and encumbrances (the “363 Sale”):
Trustee may sell such assets if the assets have a
value greater than any liens on them or
The Debtor-in-Possession may sell such assets in
connection with a liquidating Chapter 11 proceeding
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Post-Petition Effect of Security Interest
 Property acquired by the Estate or by the Debtor after the
commencement of the case is not subject to any lien from any
security agreement entered into prior to the commencement of
the case;
 If a security interest created prior to the filing of the case
extends to property of the Debtor and to proceeds, products,
offspring or profits of such property, then such security interest
will extend to such proceeds, products, offspring or profits
acquired by the Estate after the commencement of the case to
the extent provided by the security agreements
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Set-Off
 The Bankruptcy Code does not affect the
right of a creditor to offset a mutual debt
owing by the creditor to the Debtor that arose
before the commencement of the case
 However, relief from the automatic stay is
required to effectuate a set-off.
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Recoupment
 The Bankruptcy Code does not specifically
address recoupment, but the case law allows
a non-debtor party to exercise its right of
recoupment without requiring relief from the
automatic stay.
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Creditors’ Committee
 Only applicable in a Chapter 11 proceeding, not a Chapter 7
 The U.S. Trustee appoints a Committee of Creditors
 The Committee will ordinarily consist of persons willing to serve
that hold the seven largest claims against the Debtor of the
kinds represented on such Committee.
 In appropriate circumstances, the Trustee’s office may also
appoint Committees of equity security holders
 Duties of a Creditors Committee
1. Consult with the Trustee or Debtor-in-Possession concerning
administration of the case;
2. Investigate the acts, conduct, assets, liabilities and financial
condition of the Debtor, the operation of its business and any
other matter relevant to the case or to the formulation of a Plan;
3. Participate in the formation of a Plan
© White and Williams LLP 2006
What Entities Dealing with the Debtor
Should Know (continued)
Right to be Heard
 The Bankruptcy Code allows any “party-ininterest” to appear and be heard on any
issue in a case.
© White and Williams LLP 2006
The Following Businesses or Entities are
Often Involved in Bankruptcy Proceedings:
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Landlords
Equipment Lessors
Asset purchasers
Vendors and suppliers
Benefits providers to the Debtor’s employees
Insurance companies dealing with debtors
Creditors – secured and unsecured, including banks and financial
institutions
Professionals providing services to the Debtor and Creditors
Committee
There are diverse and often conflicting interests of the parties involved
in a Bankruptcy case (all for one and one for all – NOT)
© White and Williams LLP 2006
Need for Counsel (this is an unpaid
advertisement)
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Experienced bankruptcy counsel is essential
to protect the claims and interests of a partyin-interest in a bankruptcy proceeding or
under a Plan, asset sale, or adversary
proceeding.
© White and Williams LLP 2006