Bankruptcy For Business Lawyers


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Bankruptcy For Business Lawyers

  1. 1. Bankruptcy for Business Lawyers<br />Thomas Wallrich and Steven Silton<br />
  3. 3. INTERSECTIONS OF BUSINESS AND BANKRUPTCY<br />Business client in financial trouble.<br />Trade Debt.<br />Tax Debt.<br />Change in interest rates.<br />Vendor in financial trouble.<br />Vendor in bankruptcy.<br />Vendor not in bankruptcy.<br />Customer or receivable debtor in bankruptcy.<br />Owners and/or Officers in financial trouble.<br />Business opportunities in bankruptcy.<br />
  4. 4. Questions<br />What happens to unsecured<br /> creditors?<br />What happens to secured obligations?<br />What happens to leases?<br />What happens to unfulfilled contracts?<br />What can be done about tax obligations?<br />Who controls the debtor’s assets?<br />Who can buy the debtor’s assets?<br />What are the risks of doing business with a debtor?<br />
  5. 5. Biblical Times<br />7 Years till forgiveness<br />Deuteronomy 15:1-4<br />
  6. 6. Bankruptcy in History<br />IN ROMAN TIMES- 12 tablets 451-450 B.C.<br />Cessio Bonorum<br /> BK Law enacted by Julius Caeser <br />
  7. 7. U.S. Law<br />Constitution provides for regulation of Bankruptcy laws by congress.<br />Five Bankruptcy Laws.<br />1800<br />1841<br />1867<br />1898<br />1978 and amendments.<br />
  8. 8. Forms of Bankruptcy<br />Chapter 7<br />Chapter 11<br />Chapter 13<br />
  9. 9. Automatic Stay11 U.S.C 362<br />All creditor action and litigation stayed without any further action by debtor.<br />
  10. 10. Relief from Stay<br />Section 362 (d)(1). <br />For “cause” including a lack of adequate protection.<br />Considerations for cause:<br />Existence of insurance coverage;<br />Judicial economy;<br />How far has the litigation progressed;<br />Specialized area of law;<br />Is full relief available without the debtors;<br />Creditors probability of success;<br />Interest of the debtor.<br />
  11. 11. Cash Collateral<br />Section 363 (a)<br />The most fundamental right a debtor has is to use it’s own cash.<br />Need the consent of creditor or court order. <br />Helpful to have a understanding with secured creditor prior to filing.<br />Contested cash collateral hearing often determines ability to reorganize.<br />
  12. 12. Adequate Protection<br />Section 361. All interest in non-cash assets must be protected against loss or diminution in value in Chapter 11.<br />Manners of adequate protection:<br />Periodic cash payments;<br />Replacement lien;<br />Other relief.<br />
  13. 13. Executory Contracts-Unexpired Leases<br />Section 365.<br />Debtor has absolute right to assume or reject executory contracts and leases.<br />Breathing spell following filing to review which leases and contracts are profitable and or necessary for the business operations.<br />Debtor may unilaterally choose to reject.<br />
  14. 14. Determination of Interest<br />Lease or security interest affects treatment.<br />Determined by state law.<br />If lease, governed by Section 365, otherwise by Section 506 (determination of extent of secured claim) and by Section 361 (adequate protection).<br />
  15. 15. Leases and Executory ContractsTiming<br />120 deadline.<br />Extended only once for 90 days.<br />No further extension without consent of landlord.<br />
  16. 16. Sales of Property of the Estate<br />Section 363(f).<br />Allows the debtor to sell property free and clear of liens if:<br />Sale does not violate non-bankruptcy law;<br />Entity consents;<br />Sale price is in excess of outstanding liens; <br />Such interest is in a bona fide dispute; or,<br />Such entity could compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.<br />
  17. 17. Section 363 and Beyond<br />Additional property can be sold, including:<br />A life estate;<br />Licenses (i.e. Liquor license, profits, etc.);<br />Claims.<br />Reorganization often exists of the sale of property out of a bankruptcy and distribution of proceeds (commonly referred to as a 363 Bankruptcy)<br />
  18. 18. Conversion or Dismissal<br />Section 1112(b)(4).<br />Cause includes:<br />Continuing loss;<br />Gross mismanagement;<br />No insurance;<br />Unauthorized use of case;<br />Failure to comply with court order.<br />
  19. 19. Plan and Disclosure Statement<br />Section 1123 defines content of plan.<br />Section 1125 defines content of disclosure statement.<br />Contract Between Debtor and Creditors.<br />Plan classifies similar claims and defines distributions.<br />Debtor has exclusive right to file a plan for 120 days.<br />
  20. 20. Claims in Bankruptcy<br />Definition. Section 101 (5). Any right to payment. Or any right to an equitable remedy which gives rise to a right to payment.<br />Procedure.<br />Properly filed proof of claim is prima facie proof of validity.<br />Section 502 (b) states grounds for allowance/objections to claims. <br />
  21. 21. Secured Claims<br />Section 506.<br />Claim is secured only to the extent of the value of collateral.<br />Adequate protection is provided to the extent of security interest.<br />
  22. 22. Priority Claims<br />Section 507 lists which claims have priority treatment:<br />Approved administrative expenses;<br />Taxes;<br />Section 502 (f) gap claims;<br />Certain wages, salaries and commissions up to $10,000.<br />Employee benefit contributions.<br />
  23. 23. Preference Claims<br />Section 547:<br />Transfer;<br />To or for the benefit of a creditor;<br />For or on account of an antecedent debt.<br />Made within 90 days (1 year for insiders) of filing;<br />Made will debtor was insolvent;<br />Which gives creditor more than he would have received in a liquidation.<br />
  24. 24. Fraudulent Conveyances<br />Section 544 and 548.<br />Transfer for less than adequate consideration.<br />Timing (2 years)or under state law.<br />
  25. 25. Bankruptcy Court Litigation<br />Jurisdiction.<br />Venue.<br />
  26. 26. 2005 Amendments<br />Ten things you need to know about business bankruptcy after bankruptcy reform<br />
  27. 27. 2005 Amendments Automatic Stay<br />A number of exceptions including what could be construed as a good faith exception.<br />
  28. 28. 2005 Amendments<br />Changes to the administration of small business bankruptcies.<br />New restrictions on preferences.<br />Venue and other changes to preference litigation.<br />Chapter 15.<br />
  29. 29. 2005 Amendments<br />Changes to lease and executory contract provisions.<br />Expanded grounds for appointment of trustee or examiner.<br />Expanded ability to solicit acceptance.<br />Utilities have much greater power.<br />Secured creditors stronger. Unsecured creditors more regulated.<br />
  30. 30. Back to the Questions-Intersections<br />
  31. 31. INTERSECTION REVISITED<br />Business client in financial trouble.<br />Trade Debt.<br />Tax Debt.<br />Change in interest rates.<br />Answers:<br />Review cash flow without unsecured creditor payments.<br />Review secured creditor structure (cash collateral).<br />Review bad leases and contracts.<br />Review creditor claims.<br />Review pending litigation.<br />
  32. 32. INTERSECTION REVISITED<br />Vendor in financial trouble.<br />Vendor in bankruptcy.<br />Vendor not in bankruptcy.<br />Answers:<br />Reviewing existence of security.<br />Analyze potential preferences.<br />Review reclamation issues.<br />
  33. 33. INTERSECTIONS REVISITED<br />Customer or receivable debtor in bankruptcy.<br />Answers:<br />Review status of bankruptcy.<br />Don’t pay without court order.<br />Make sure you are paying right person.<br />Owners and/or Officers in financial trouble.<br />Answers:<br />Watch out for tax issues.<br />No key employee compensation arrangements.<br />Monitor pension funds contributions.<br />Avoid fiduciary traps.<br />
  34. 34. INTERSECTIONS REVISITED<br />Business opportunities in bankruptcy.<br />Answers:<br />Understand your clients’ markets.<br />Educate your clients’ on ability to purchase property from debtors.<br />Maintain relationship with local trustees, turnaround companies and liquidators.<br />
  35. 35. INTERSECTION REVISITED<br />Inform clients that an official letter from a “Trustee” for a demand for a repayment of a preference should not be honored without review.<br />File claims as soon as received. Watch for objection to claims which are often done in bulk. File right claim.<br />
  36. 36. The End<br />