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Bad Debtor Owes Me Money! (Series: Restructuring, Insolvency & Troubled Companies 2020)

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Bad Debtor Owes Me Money! (Series: Restructuring, Insolvency & Troubled Companies 2020)

Sometimes it begins when a client, tenant, or customer starts to slow-pay, with the result that your accounts receivable start to accrue gradually. Other times the issue presents itself more suddenly. Either way, you find your company owed a great deal of money that looks like it may not be collected because your client/tenant/customer has filed bankruptcy, has commenced an assignment for the benefit of creditors, has been put into receivership, or is otherwise just plain insolvent. What do you do? What should you not do? The topics discussed in this webinar include the pros and cons of putting a counterparty into involuntary bankruptcy; when and how you may be able to pursue third parties (like guarantors, directors, or officers) for the amount owed; risks related to preference attack; pros and cons of sitting on a “creditors’ committee” in a Chapter 11; how to negotiate for “critical vendor” protection in Chapter 11; and practical guidance for continuing to provide goods or services to an insolvent counterparty.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/bad-debtor-owes-me-money-2020/

Sometimes it begins when a client, tenant, or customer starts to slow-pay, with the result that your accounts receivable start to accrue gradually. Other times the issue presents itself more suddenly. Either way, you find your company owed a great deal of money that looks like it may not be collected because your client/tenant/customer has filed bankruptcy, has commenced an assignment for the benefit of creditors, has been put into receivership, or is otherwise just plain insolvent. What do you do? What should you not do? The topics discussed in this webinar include the pros and cons of putting a counterparty into involuntary bankruptcy; when and how you may be able to pursue third parties (like guarantors, directors, or officers) for the amount owed; risks related to preference attack; pros and cons of sitting on a “creditors’ committee” in a Chapter 11; how to negotiate for “critical vendor” protection in Chapter 11; and practical guidance for continuing to provide goods or services to an insolvent counterparty.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/bad-debtor-owes-me-money-2020/

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Bad Debtor Owes Me Money! (Series: Restructuring, Insolvency & Troubled Companies 2020)

  1. 1. 1
  2. 2. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  3. 3. 3 Thank You To Our Sponsors
  4. 4. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 5
  5. 5. Meet the Faculty MODERATOR: Thad Wilson - King & Spalding LLP PANELISTS: Jonathan Friedland - Sugar Felsenthal Grais & Helsinger LLP David Johnson - Abraxas Group LLC Ryan Maupin - Grant Thornton LLP 6
  6. 6. About This Webinar – Bad Debtor Owes Me Money! Sometimes it begins when a client, tenant, or customer starts to slow-pay, with the result that your accounts receivable start to accrue gradually. Other times the issue presents itself more suddenly. Either way, you find your company owed a great deal of money that looks like it may not be collected because your client/tenant/customer has filed bankruptcy, has commenced an assignment for the benefit of creditors, has been put into receivership, or is otherwise just plain insolvent. What do you do? What should you not do? The topics discussed in this webinar include the pros and cons of putting a counterparty into involuntary bankruptcy; when and how you may be able to pursue third parties (like guarantors, directors, or officers) for the amount owed; risks related to preference attack; pros and cons of sitting on a ―creditors’ committee‖ in a Chapter 11; how to negotiate for ―critical vendor‖ protection in Chapter 11; and practical guidance for continuing to provide goods or services to an insolvent counterparty. 7
  7. 7. About This Series – Restructuring, Insolvency & Troubled Companies Companies fail all the time, for all sorts of reasons. Some companies become distressed, or even insolvent, because of mismanagement; others because of fraud; others for myriad other reasons- some intrinsic to the company and some extrinsic. Regardless of the cause, failing or failed companies create a unique set of issues, risks, and even opportunities for all involved. This area of law and finance has become so specialized that no fewer than five (American Bankruptcy Institute; Association of Insolvency & Restructuring Advisors; Commercial Law League of America; National Association of Federal Equity Receivers; Turnaround Management Association) national organizations exist to help those who specialize in the field to stay up to date on the latest developments, strategies, and tactics in the area. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and other seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 8
  8. 8. Episodes in this Series #1: Help, My Business is In Trouble! Premiere date: 8/19/20 #2: Opportunity Amidst Crisis- Buying Distressed Assets, Claims, and Securities for Fun & Profit Premiere date: 9/16/20 #3: Bad Debtor Owes Me Money! Premiere date: 10/14/20 9
  9. 9. Episode #3 Bad Debtor Owes Me Money! 10
  10. 10. Early Signs of Distress • Financial or other covenant compliance • Delay in delivering financial results • Going concern from audit • Exercise of cure rights • Unexpected management and board changes • Increased reliance on consultants • Termination of material contracts • Accounting restatement • Data security breach • IP infringement issues • Cash hoarding • Material changes in cash management system • Change in accounting firm • Post transaction integration issues • Unexpected cost increases • Unexpected customer loss • Government investigation • Change in regulatory environment • Casualty, loss of key assets • Material litigation • Report of fraud or irregular conduct 11
  11. 11. Preventative Measures  Guarantees (Personal, Affiliate or Corporate Parent)  Letters of Credit  Collateral  Credit Insurance  Cash in Advance (CIA)  Cash on Delivery (COD)  Consignment  Security Deposits  Intercreditor Agreements 12
  12. 12. Preventative Measures • Monitor the debtor’s solvency:  Several financial services firms provide credit opinions regarding commercial companies and their ability to meet their debts as they become due.  If, for instance, your company extends trade credit to a particular customer whose business represents a significant source of your company’s revenue, it would be prudent to request such an opinion from time to time in order to hedge against the downside risk should that customer file for bankruptcy  If the company or its debt is publicly traded, monitor securities disclosures and reports from credit rating agencies (e.g., Moody’s, S&P, Fitch) 13
  13. 13. Customer/Supplier Defaults – Now What? • Creditor Remedies:  Send to collections  Stop performing  Sue/Evict customers/guarantors  Institute lawsuit  Seek appointment of a Receiver  Seek involuntary bankruptcy  Setoff deposit or collect on LOC 14
  14. 14. Debtor Protections • Debtor may seek to protect itself by:  Commencing Assignment for Benefit of Creditors (―ABC‖)  Filing for Bankruptcy  Filing ―pre-emptive‖ lawsuit 15
  15. 15. Bankruptcy in Brief • Bankruptcy court is a unit of federal district court. • A Petition, filed with the bankruptcy court, commences case and triggers automatic stay. 16 Chapter 7 Chapter 11 Chapter 13 • Companies and individuals • Debtor stays in possession of assets and administers case itself to reorganize or conduct orderly liquidation • Individuals only • Trustee appointed to oversee debt repayment plan • Companies and individuals • Trustee appointed to liquidate assets 3 most common filings types
  16. 16. The Automatic Stay in Bankruptcy • Upon filing for bankruptcy, the automatic stay prohibits creditors from seeking to collect on prepetition debts or exercise remedies—i.e., an automatic injunction prohibiting creditors from starting or continuing actions to collect debts or enforce debts against debtor’s property • Allows debtor ―breathing room‖ to make decisions in time of crisis • Prohibited actions include continuing litigation, enforcing or perfecting liens, setting off mutual debts, sweeping deposits, and taking actions to obtain debtor’s property • Creditors who knowingly violate automatic stay will be liable for damages 17
  17. 17. Relief from the Automatic Stay • A creditor, typically secured, can obtain relief from automatic stay • Creditor essentially has 2 options:  Prove ―cause,‖ which may include a lack of ―adequate protection‖ (discussed later); or  Prove that: o debtor has no equity in the property; and o property is not necessary for an effective reorganization 18
  18. 18. Adequate Protection • Protects value of a secured creditor’s collateral during the bankruptcy case • It is often applied when value of collateral is declining in value (e.g., debtor is using cash collateral to sustain operations during bankruptcy) • Bankruptcy Code provides three non-exclusive examples of adequate protection:  Periodic or lump-sum payments to creditor with an interest in the property;  Additional or replacement liens (e.g., a lien on cash proceeds of the sale of property)  Other relief resulting in indubitable equivalent of the creditor’s interest in property (e.g., reporting/inspection rights, payment of creditor’s legal/advisory fees) 19
  19. 19. Classes of Claims in Bankruptcy • Creditors in bankruptcy case are distinguished by types of claims they hold & priority of payment among them • Types of claims (in order of payment priority):  Secured – creditors with a lien on debtor’s property  Administrative – post-petition expenses necessary to administer bankruptcy (e.g., legal and advisory fees) and operate debtor’s business (e.g., wages, taxes, 503(b)(9) and reclamation claims); often times administrative claims are ―paid in full.  Priority – certain pre-petition claims given priority under Bankruptcy Code (e.g., taxes, pension obligations or wages earned within 180 days of bankruptcy)  Unsecured – creditors without collateral (e.g., utilities, credit card, trade creditors, bondholders, PBGC, tort claimants) 20
  20. 20. Distribution Waterfall 21 DIP Priming Lien Secured Claims1 Adequate Protection Liens General Unsecured Claims2 Equity Interests “Carve-Out” for Professional Fees “Surcharge” Against Collateral 1 Order of lien priority may be subject to Intercreditor Agreement (ICA) 2 Order of payment priority may be subject to ICA Administrative Claims Priority Unsecured Claims DIP Superpriority Claims Adequate Protection Claims General Unsecured Claims (including undersecured claims)2 Equity Interests Priority Unsecured Claims Administrative Claims “Carve-Out” for Professional Fees Secured Value Unsecured Value • Certain Employee Wage Claims (up to a cap) • Certain contributions to Employee Benefit Plans (up to a cap) • Tax Claims
  21. 21. Claims of Trade Creditors • Trade creditors have 3 important ways to get (1) administrative priority, (2) the goods returned, or (3) paid for all or a portion of their prepetition claims— 1. 20-Day Claims (aka “503(b)(9) Claims”) – value of any goods received by debtor in the 20-day period preceding the bankruptcy and sold on an ordinary-course basis (e.g., invoices related to shipments delivered within 20 days of bankruptcy) 2. Reclamation Claims – right of seller to take back ordinary-course goods received by debtor within 45 days of bankruptcy and sold on credit terms while debtor was insolvent; provides vendor with credit protection, negotiating leverage, and ability to recover goods. 3. Critical Trade Vendor Designation – payment of prepetition claims of Critical Trade Vendors if authorized by court order (see next slide) 22
  22. 22. Payments to Critical Trade Vendors in Bankruptcy • Debtors often seek entry Critical Trade Order as part of first-day motions • Grants debtor the authority to settle and pay specific claims of unsecured creditors providing debtor with essential goods • Rationale: certain trade creditors are indispensable to debtor’s capacity to stay in business • Bankruptcy Code contains no explicit authority for this relief  Some bankruptcy courts use equitable powers under the doctrine of necessity (derived from § 105(a) of the Bankruptcy Code) to allow such payments if— 1) Vendor would cut off supplies or services absent payment of prepetition claims 2) Debtor could not operate as a going concern without vendor and would be forced to liquidate 23
  23. 23. Claims of Trade Creditors 24 Critical Vendor Designation Reclamation Rights 507(b) Claims 45 days before bankruptcy Seller can reclaim goods sold prepetition if debtor received goods while insolvent Value of goods received given administrative priority 20 days before bankruptcy Goods received: Upon entry of Critical Trade Order, debtor can pay seller’s prepetition claims immediately
  24. 24. General Unsecured Creditors • General unsecured creditors (―GUCs‖) stand behind secured creditors and priority unsecured creditors • General unsecured creditors often viewed as having the most to lose in chapter 11 cases (sometimes referred to as the ―fulcrum security‖ if parties ahead of the GUCs are ―in the money‖) • Litigation (or threatened litigation) may be only means for recovery by GUCs 25
  25. 25. Official Committee of Unsecured Creditors • Committee of Unsecured Creditors (aka the ―UCC‖ or the ―Creditors’ Committee‖) ​  Comprised of unsecured creditors holding the largest claims  Appointed by the U.S. Trustee (DOJ ―bankruptcy watchdog‖)  UCC = ―Guardians of the Process‖—central voice and opportunity to be heard for the unsecured creditors  Expenses are paid out of the Debtor’s assets and constitute administrative claims  UCC gives creditors with small or de minimis claims mechanism to participate in case (otherwise it’d be economically irrational)  Usually key ―opponents‖ to DIP loan provisions
  26. 26. Official Committee of Unsecured Creditors • General Duties of UCC and its members  The UCC is considered a fiduciary body of the GUCs, therefore each member owes fiduciary duties to all GUCs (see Neiman Marcus-Marble Ridge)  Oversee and consult with Debtor concerning case administration​  Investigate all aspects of the Debtor’s business ​  Participate in formulation/negotiation of the plan​  Prosecute estate causes of action (if Debtor unreasonably refuses to do so)​
  27. 27. Getting Paid in Bankruptcy • Debtor must file bankruptcy schedules and statements of financial affairs listing all prepetition claims its records show as outstanding against it on the petition date • BUT: if creditor’s claim is not listed in Schedules, or debtor lists incorrect amount of or basis for claim, creditor must file Proof of Claim.  Failure to file a Proof of Claim, when necessary, will result in creditor relinquishing right to vote on plan of reorganization and/or receive distributions from bankruptcy estate, if any are made 28
  28. 28. Proof of Claim • Requirements for Proof of Claim:  Court has form to be filled out showing amount, basis, and other information relating to claim  Must be supported by writing & signed by authorized representative of creditor  Properly filed claims presumptively valid; burden then shifts to trustee or debtor to object to claim  Filing proof of claim arguably submits a creditor to bankruptcy court jurisdiction  Must provide documentation supporting the claim, unless such supporting documentation is voluminous 29
  29. 29. Risk of Preference Attack • Bankruptcy Code equips debtor with the ability to avoid (i.e., clawback) certain pre- bankruptcy transactions as ―preferences‖ if certain conditions are met • Elements of a ―preference‖  Transfer made on account of pre-existing debt (i.e., debt that existed before transfer)  Made while the debtor was insolvent (rebuttable presumption debtor was insolvent throughout 90-day period before the bankruptcy)  Made within 90 days of bankruptcy (or 1 year for insiders) • Resulting in a greater distribution than the creditor would have received in a liquidation • Debtor or trustee have obligation to do ―reasonable due diligence in the circumstances of the case‖ and ―tak[e] into account a party’s known or reasonably knowable affirmative defenses‖
  30. 30. Common Defenses to Preference Claims • The Bankruptcy Code lays out several statutory defenses to preference claims, including: 1. Ordinary course payment – transfers made in the ordinary course of business (i.e., consistent with prior transfers in timing, amount and circumstances)  Note – payment ―in the ordinary course‖ is a legal term of art that must be analyzed with counsel before asserting such defense  Note – Ordinary business terms is a second way to prove ―ordinary course‖ defense 2. Subsequent advance or new value – goods or services provided to debtor on unsecured basis after receipt of a preference (e.g., using value of goods shipped to debtor after debtor made an otherwise preferential payment to offset liability). 31
  31. 31. Common Defenses to Preference Claims 3. Contemporaneous exchange of new value – parties to transfer intended transfer to be a contemporaneous exchange for new value given to debtor, and such transfer was actually made contemporaneously • Example:  Vendor and Debtor exchange emails agreeing to COD terms for shipment of goods  Vendor delivers goods to debtor, & Debtor pays Vendor at the time of delivery  Debtor files BK 10 days later  The payment, despite being made during preference period, is protected as contemporaneous exchange of new value 32
  32. 32. About the Faculty 33
  33. 33. About The Faculty Thad Wilson - ThadWilson@KSLAW.com Thad Wilson is a Partner in the Atlanta office of King & Spalding LLP and a member of its Financial Restructuring Practice Group. Ranked by Chambers USA 2020 as a ―Rising Star‖ in Bankruptcy, Thad represents a broad spectrum of clients in financial restructuring, corporate and insolvency matters, including debtors, secured and unsecured creditors, and other parties in interest in major Chapter 11 bankruptcy cases. He has extensive experience representing clients in insolvency-related litigation and disputes. Thad is a member of the American Bankruptcy Institute, the Turnaround Management Association (currently a board member of its Atlanta chapter), and the State Bar of Georgia. In 2014, Thad was elected to the initial class of Barristers of the W. Homer Drake, Jr. Georgia Bankruptcy American Inn of Court, of which he is currently a member. 34
  34. 34. About The Faculty Jonathan Friedland - jfriedland@sfgh.com Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his job simply: to make money for clients whenever possible and to protect their interests at every turn. Licensed in four states, Jonathan’s transactional work focuses on representing private funds and other owners of private businesses, and the businesses they own. He regularly advises on M&A activities, structuring new ventures and restructuring old ones, and on other commercial relationships. Jonathan is rated AV® Preeminent™ by Martindale-Hubbell, 10/10 by AVVO, and enjoys several other similar distinctions. Jonathan graduated from the State University of New York at Albany, magna cum laude (in three years) and from the University of Pennsylvania Law School. He clerked for a federal judge before entering private practice and served for several years as an Adjunct Professor of Strategic Management at the University of Chicago’s Graduate School of Business. Jonathan is lead author and editor of several significant treatises, several chapters in other treatises, and scores of articles on law and business. 35
  35. 35. About The Faculty David Johnson - david@abraxasgp.com David Johnson (@TurnaroundDavid), founder and managing partner of Abraxas Group, has a 20-year track record of driving organizational change. In an advisory capacity, David has served as an interim executive or financial advisor to dozens of middle market companies in transition. Throughout his career, David has demonstrated a commitment to thought leadership, with numerous speaking engagements and articles on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation to his credit. David received his MBA from the University of Chicago and completed his undergraduate studies at Fairleigh Dickinson University. 36
  36. 36. About The Faculty Ryan Maupin - Ryan.Maupin@us.gt.com Ryan is a Principal in Grant Thornton's Strategic Solutions practice where he specializes in advising boards, domestic and international company senior executives, secured and unsecured creditors, hedge funds, and private equity funds, in restructuring situations both in-court and out-of-court. Mr. Maupin is primarily focused on advising clients in complex financial restructurings, §363 sale processes, liquidations - as well as serving in various interim management roles. In 2017 Ryan was honored as a member of the American Bankruptcy Institute’s inaugural ―40 under 40‖ class, recognizing top bankruptcy, insolvency and restructuring professionals in the country. Prior to Grant Thornton Ryan was a Director in KPMG’s Transactions and Restructuring Group where he focused on large cross-border restructuring mandates. Prior to KPMG Ryan was a secondee in Grant Thornton’s Cayman Islands office where he assisted Official Liquidators on a number of cross-border insolvency proceedings. 37
  37. 37. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 38
  38. 38. ABOUT DailyDAC DailyDAC.com is the leading source of information about assignments, article 9, bankruptcy, receiverships, out-of-court workouts and vulture investing, designed for business owners and vulture investors. Visit us at www.dailydac.com. Premium Public Notice Service DailyDAC’s Premium Public Notice Service helps market asset sales on behalf of fiduciaries (e.g., Chapter 11 debtors- in-possession and committees, trustees, receivers, assignees), secured lenders selling collateral under UCC Article 9, and auctioneers to a very large and self-selected group of potential bidders and their advisors. The Service also assists with noticing other events, deadlines, and milestones – including tombstones and other press releases. Our free weekly newsletter, DailyDAC contains our latest bankruptcy article, current Public Notices and all opportunistic deals added to our proprietary database that week. Sign up at: https://www.dailydac.com/dacyak-weekly-newsletter-signup/

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