Thomas Califano, DLA Piper LLP (US)
E: thomas.califano@dlapiper.com
Daniel Gluck, Simon Gluck & Kane LLP
E: dgluck@customs-law.com

Filing the case
◦ Case commenced by filing a voluntary petition with the bankruptcy court
◦ Upon filing, bankruptcy court will have jurisdiction over all assets of and
claims against the debtor, regardless of where assets are located or claims
arise
◦ In a voluntary proceeding, no requirement that debtor be insolvent
◦ Need first day relief to take certain actions and make necessary payments at
the outset of the case
 E.g., pay prepetition employees wages, continue customer programs, pay insurance
obligations and tax obligations, continue cash management system, pay shippers
and warehousemen, provide adequate assurance deposits for utility companies,
obtain use of cash collateral and DIP financing
◦ Critical Vendors
 Courts may allow a debtor to pay all or a portion of the prepetition claims of certain
essential vendors that (a) cannot be readily replaced, (b) would stop doing business
with the debtor if not paid on their prepetition claims, and (c) if such vendor stopped
doing business with the debtor, the debtor and its operations would be irreparably
harmed





Bankruptcy Judge
United States Trustee
Debtor in Possession (or Trustee, if one is appointed)
Creditors’ Committee
In addition to the above, parties in interest include



any creditor;
any interest holder;
any indenture trustee; and
the Securities and Exchange Commission
◦
◦
As soon as practicable after the filing, a committee of
creditors holding unsecured claims (typically between 3
and 7 separate creditors) is appointed by the United
States Trustee.
A creditors’ committee ordinarily consists of persons or
entities, willing to serve, holding the largest claims or
interests of the kind represented by that committee. A
committee may retain attorneys, accountants or other
agents, and whose compensation, after court approval,
is paid from the debtor’s estate.
◦ A committee may consult with the debtor;
 investigate the acts, conduct, assets, liabilities, and financial
condition of the debtor, the operation of the debtor’s
business and the desirability of continuation of such
business and other matters relevant to the case or
formulation of a plan;
 participate in the formulation of a plan;
 request the appointment of a trustee or examiner;
 perform such other services as are in the interests of those
represented; and
 provide information to creditors who hold the kinds of claims
represented by the committee and solicit comments from
such creditors and as may be required by the Court
◦ The Bankruptcy Code facilitates an equality of distribution of a
debtor’s assets among similarly situated creditors in accordance
with priority scheme among different classes of creditors and
interest holders
◦ DIP lender
 subject to negotiated “carve out” for professionals and the U.S. Trustee
◦ Secured parties to extent of security interest in collateral
◦ Administrative claims
 Claims for the value of any goods sold to the debtor in the ordinary course
of the debtors’ business and received by the debtor within 20 days before
the commencement of the bankruptcy case are considered administrative
claims under the Bankruptcy Code (503(b)(9) claims)
◦ Priority claims
◦ Unsecured claims
◦ Equity interests

Automatic stay – Sec. 362, one of the most fundamental protections
available to a chapter 11 debtor
◦ Statutory injunction preventing any act to collect on prepetition obligations
(e.g., trade creditors cannot demand payment on their past obligations)
 Includes litigation, collection efforts, lien enforcement actions and foreclosurerelated actions
◦ Sec. 362 also stays actions that would affect or interfere with property of the
estate, property of the debtor or property in the custody of the estate and
prohibits the unilateral termination of contracts with the debtor

“Property” is defined very broadly by the Bankruptcy Code as:
◦ All legal and equitable interests (e.g., the right to file a lawsuit) of the debtor
as of the commencement of the case, wherever located and by whomever
held
◦ Executory contracts also considered “property of the estate.” Thus, unilateral
termination of contracts by non-debtor parties is prohibited by the automatic
stay notwithstanding the debtor’s defaults.
Automatic stay is effective immediately upon
filing of the bankruptcy case
Automatic stay may be lifted for cause by order
of the bankruptcy court


◦
Most often filed by secured creditors for lack of adequate
protection (i.e., the value of the property securing the lien is
declining in value while it is being held by the debtors) or
that the debtor lacks equity in the property

Relief from automatic stay granted when creditor
can demonstrate that there is “cause” for
granting relief
◦ A creditor shows "cause" by showing that the creditor’s interest in
a particular property is not “adequately protected”, or showing that
the debtor has no equity in the property and that the property is
not needed for a reorganization.
◦ The court may give relief to the creditor in the form of periodic
cash payments or an additional or replacement lien on the
property.
Contractual rights limited by
automatic stay
Must obtain relief
from automatic
stay to foreclose /
obtain possession
File motion seeking
relief from the
automatic stay
Relief requested for
cause, including lack
of adequate protection
or
Relief requested on basis
that debtor has no equity in
property and property is not
necessary for reorganization
Demonstrate that secured
position continues to
decline in value if debtor
maintains possession and
use of property
Amount owed by
debtor must be
equal to or in
excess of value of
property
Compare market value of
property to amount owed
by debtor; review
maintenance records,
market data, etc.
Need market data
and possibly
expert to testify
Must show debtor
does not need
property to
reorganize its
operations
Alternative
sources
Not critical to
operations

Subject to certain limitations, executory contracts and unexpired
leases may be assumed (and assigned), or rejected by a debtor at
any time before confirmation of a chapter 11 plan

A counterparty to a contract must continue to perform so long as the
debtor honors its post-petition contractual obligations

Debtor is required to cure defaults as a condition of assuming a
contract

With the exception of personal service contracts and intellectual
property licenses, executory contracts generally may be assumed or
assigned even if the non-debtor party objects to such assumption or
assignment and even if the provisions in the contract prohibit
assignment (e.g., anti-assignment clauses)

Preferences are certain transfers of a debtor's property made
by an insolvent debtor prior to bankruptcy that favor certain
creditors over others. Elements of a preference are ◦
◦
◦
◦
◦
A transfer of an interest of the debtor in property
Made to or for the benefit of a creditor
Made on account of pre-existing debt
Made while the debtor was insolvent
Made within 90 days before the filing of the bankruptcy petition
 (or within one year, if made to an Insider, e.g., a director or officer of the
debtor)
◦ That enabled the creditor to receive more than it would have received in
a chapter 7 liquidation



Voidable in bankruptcy, so that a debtor (or trustee) can
bring an action against a creditor to bring property
transferred preferentially (or the value thereof) back into
the estate.
If preferentially transferred property is successfully
recovered by the estate, it is distributed to other creditors
in accordance with the priority scheme under the
Bankruptcy Code.
Defenses
◦ Contemporaneous exchange for new value
◦ Ordinary course of business or financial affairs of the debtor and
the transferee or made according to ordinary business terms

Priority Treatment of Governmental Customs
Duties Claims
◦ Section 507(a)(8)(F) of the Bankruptcy Code
 Customs duties owing by a debtor “to a governmental unit” have
priority over general unsecured claims in bankruptcy
◦ Section 507(d) of the Bankruptcy Code
 “An entity that is subrogated to the rights of a holder of a claim of a
kind specified in subsection . . . (a)(8) . . . of this section is not
subrogated to the right of the holder of such claim to priority under
such section.” (emphasis added) (reference to section (a)(8) added in
Bankruptcy Reform Act of 1994)

In re International Engineers, Inc. (2d Cir. 1987)
◦ Broker voluntarily paid customs duties to U.S., and argued that such
payment effected an assignment of the U.S.’s priority claim
◦ Court denied priority and found that there was no manifestation of an
intention by the U.S. to assign its priority status
◦ Court also stated that “customs brokers are free to negotiate for such an
assignment when the duties are paid.”

R.J. Saunders & Co. v. Vincent (2d Cir. 1962)
◦ Broker executed surety bond (as principal) in favor of U.S., paid customs
duties as obligated, and sought priority claim under subrogation theory
◦ Court denied priority and noted that Congress has allowed subrogated
priority in only one situation – where a surety on a bond given to the U.S.
discharges the debt on behalf of the principal

I.C. Herman & Co. v. Taub, Hummel & Schnall, Inc. (2d
Cir. 1974)
◦ Importer executed bond (as principal) in favor of U.S., but broker did not execute
as either principal or surety
◦ Broker voluntarily paid customs duties and sought priority claim under subrogation
theory
◦ Court denied priority, citing to same rationale used in R.J. Saunders, but stated
that “all a customs broker need do to gain priority is to go surety on the importer’s
customs duty bond.”

In re Chalk Line Mfg. (Bankr. N.D. Ala. 1995)
◦ Broker paid customs duties to U.S. and sought priority under assignment and
subrogation theories
◦ Court rejected both arguments, finding legislative intent precluded subrogation and
that the Secretary of Treasury acted beyond its authority in promulgating a federal
regulation (19 CFR § 141.1) purporting to assign priority status to brokers

Possessory Lien
o

Advance of Funds
o

Include language in agreement with customer providing that customer needs to
advance funds for all fees and expenses that broker pays or incurs on behalf of client
(e.g., duties, freight, taxes and storage)
Negotiate an express assignment of priority claim with U.S.
o

Include language in agreement with customer providing for continuing lien on goods
coming in to the broker’s possession
Recommendation of court in International Engineers
Shippers, Common Carriers and Warehousemen Motion
o
o
Debtors often seek payment of prepetition amounts owing to customs brokers under a
first day shippers, common carriers and warehousemen motion to avoid disruption in
flow of goods
E.g., In re Loehmann’s Holdings Inc., Case No. 13-14050 (Bankr. S.D.N.Y. Jan. 16,
2014); In re DSI Holdings, Inc., Case No. 11-11941 (Bankr. D. Del. June 28, 2011); In re
Jennifer Convertibles, Inc., Case No. 10-13779 (Bankr. S.D.N.Y. Aug. 4, 2010); In re
Uno Restaurant Holdings Corp., Case No. 10-10209 (Bankr. S.D.N.Y. Feb. 17, 2010)