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THE NUTS & BOLTS OF BANKRUPTCY LAW 2022: The Nuts & Bolts of a Lift Stay Motion

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THE NUTS & BOLTS OF BANKRUPTCY LAW 2022: The Nuts & Bolts of a Lift Stay Motion

Most businesses of any meaningful size in the United States have a line of credit or term loan with a bank or other lender that is secured by a lien on substantially all of the assets of that business. One of the strongest tools in a secured lender’s toolbox is the ability to ask the bankruptcy court to lift or modify the automatic stay to allow the secured lender to get to its collateral. Needless to say, the debtor will often oppose the lender’s request. This is just one of many aspects of litigation surrounding the automatic stay. The bankruptcy code provides for specific circumstances under which relief from the stay is permitted, and litigation over whether the requisite conditions exist is common. This webinar discusses the scope of the automatic stay and the procedure and grounds for seeking relief.

Part of the webinar series:
THE NUTS & BOLTS OF BANKRUPTCY LAW 2022

See more at https://www.financialpoise.com/webinars/

Most businesses of any meaningful size in the United States have a line of credit or term loan with a bank or other lender that is secured by a lien on substantially all of the assets of that business. One of the strongest tools in a secured lender’s toolbox is the ability to ask the bankruptcy court to lift or modify the automatic stay to allow the secured lender to get to its collateral. Needless to say, the debtor will often oppose the lender’s request. This is just one of many aspects of litigation surrounding the automatic stay. The bankruptcy code provides for specific circumstances under which relief from the stay is permitted, and litigation over whether the requisite conditions exist is common. This webinar discusses the scope of the automatic stay and the procedure and grounds for seeking relief.

Part of the webinar series:
THE NUTS & BOLTS OF BANKRUPTCY LAW 2022

See more at https://www.financialpoise.com/webinars/

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THE NUTS & BOLTS OF BANKRUPTCY LAW 2022: The Nuts & Bolts of a Lift Stay Motion

  1. 1. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  2. 2. 3 Thank You To Our Sponsors:
  3. 3. 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. 4
  4. 4. Meet the Faculty MODERATOR: Josh Gadharf – McDonald Hopkins PLC, Detroit PANELISTS: Edward L. Schnitzer – Montgomery McCracken Walker & Rhoads LLP, New York James Sullivan – Windels Marx Lane & Mittendorf LLP, New York David A. Warfield – Thompson Coburn LLP, St. Louis 5
  5. 5. About This Webinar The Nuts & Bolts of a Lift Stay Motion Most businesses of any meaningful size in the United States have a line of credit or term loan with a bank or other lender that is secured by a lien on substantially all of the assets of that business. One of the strongest tools in a secured lender’s toolbox is the ability to ask the bankruptcy court to lift or modify the automatic stay to allow the secured lender to get to its collateral. Needless to say, the debtor will often oppose the lender’s request. This is just one of many aspects of litigation surrounding the automatic stay. The bankruptcy code provides for specific circumstances under which relief from the stay is permitted, and litigation over whether the requisite conditions exist is common. This webinar discusses the scope of the automatic stay and the procedure and grounds for seeking relief. 6
  6. 6. About This Series The Nuts & Bolts of Bankruptcy Law 2022 During the past few years, companies across a broad spectrum of industries have faced challenges stemming from the COVID-19 pandemic, supply chain interruptions, labor shortages, and inflation, among other things. Many businesses have been crippled by decreased revenues, increased debt, uncertain prospects and vaporized equity. Sometimes companies in distress cannot heal on their own and are forced to check into the hospital of Chapter 11 . . . or arrive at the door of the emergency room before negotiating a cure. If you need to understand Chapter 11 – whether to avoid it or learn how to harness its power – this program is for you. Designed for the corporate attorney, litigator, business consultant, executive and others not already experienced in Chapter 11, each episode in this Financial Poise webinar series takes a deep dive into one aspect of a Chapter 11 bankruptcy case at a level that can be understood by the non-expert. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without background in these areas, yet also invaluable to seasoned attorneys, accountants, and other professionals who need to refresh their understanding of this timely topic. Each episode brings you an engaging conversation designed to entertain as it teaches, and may be viewed independently so that your knowledge will be enhanced whether you attend one, some, or all episodes. 7
  7. 7. Episodes in this Series #1: The Nuts & Bolts of a Chapter 11 Plan Premiere date: 5/3/22 #2: The Nuts & Bolts of a Lift Stay Motion Premiere date: 6/7/22 #3: The Nuts & Bolts of DIP Financing Premiere date: 7/12/22 #4: The Nuts & Bolts of a 363 Motion Premiere date: 8/16/22 #5: The Nuts & Bolts of Retention Premiere date: 9/2/22 #6: The Nuts & Bolts of a First Day Hearing Premiere date: 10/25/22 8
  8. 8. Episode #2 The Nuts & Bolts of a Lift Stay Motion 9 Please note: These slides, consisting of key provisions of the Bankruptcy Code each preceded by a brief faculty comment, provide a separate resource from the audio program. The program will follow a discussion format, independent of these slides.
  9. 9. Overview • Introduction • Scope of the Automatic Stay • Procedure for Enforcing the Automatic Stay • Relief From the Automatic Stay • Litigation • Miscellaneous Considerations 10
  10. 10. Introduction to the Automatic Stay 11
  11. 11. Introduction to the Automatic Stay Under 11 U.S.C. § 362(a), the filing of a bankruptcy petition immediately and automatically stays substantially all litigation, lien enforcement, or other activities by creditors against the debtor and its property. 12
  12. 12. Purposes of the Automatic Stay The automatic stay serves several purposes: 1. Provides time to effect a reorganization or an orderly liquidation 2. Prevents a race to the courthouse 3. Protects debtor from creditor harassment, promoting a “fresh start” 13
  13. 13. Effectiveness of Stay • The automatic stay arises by operation of law when bankruptcy petition is filed. • Fully effective without judicial action. • Acts in violation of the automatic stay are void or voidable. 14
  14. 14. Types of Litigation 2 primary types of litigation regarding the automatic stay: 1. Requests by the debtor to enforce the stay 2. Requests by creditors for relief from the stay 15
  15. 15. Scope of the Automatic Stay 16
  16. 16. Duration of Stay • Begins immediately upon the filing of the bankruptcy petition. • Can end at different times: ✓ When the case is closed or dismissed, or a discharge is granted or denied. ✓ Regarding actions against property of the bankruptcy estate, the stay ends when the property is no longer property of the estate (e.g., it has been sold). ✓ If the stay is terminated or modified during the bankruptcy case (11 U.S.C. § 362(d)). 17
  17. 17. Notice of the Stay • Bankruptcy court mails notice to known creditors disclosed by the debtor. • Stay effective against creditor regardless of whether it receives notice. • Creditors usually cease actions in violation of stay once they learn of it. 18
  18. 18. Jurisdiction • State and federal non-bankruptcy courts have concurrent jurisdiction with bankruptcy courts to determine whether the stay applies to litigation before them. • The bankruptcy court has final adjudicative authority. 19
  19. 19. Acts Prohibited • 11 U.S.C. § 362(a) -- Actions prohibited by the automatic stay include: ✓ Actions against the debtor ✓ Actions against the debtor’s property (property of the bankruptcy estate) ✓ Commencement or continuation of judicial and administrative proceedings ✓ Nonjudicial activities (e.g. demands, collection letters, phone calls, etc.) ✓ Enforcement of lien rights by taking possession of property, foreclosure, etc. ✓ Garnishment ✓ Enforcing setoff right ✓ Termination of contracts, licenses, etc. ✓ Suing on debtor’s insurance policies (e.g. products liability, D&O, etc.) 20
  20. 20. Acts Not Prohibited Actions NOT generally prohibited by the stay include: • Debtor’s continued prosecution of its own claims • Proceedings against non-debtor third parties (e.g. non-debtor spouses, parent corporations, guarantors, etc.) • Continuation of proceedings against debtor’s co-defendants • Actions against partners of partnership debtor • Post-petition claims • Creditor’s exercise of right of recoupment (but use caution!) • Continuing certain acts to perfect a lien • Expiration of contracts by their own terms 21
  21. 21. Exceptions to the Stay 11 U.S.C. § 362(b) has 28 specific exceptions to the stay, including: • Criminal prosecution and exercise of governmental police power • Enforcement of environmental laws • Certain actions to perfect a security interest • Action by commercial lessor to obtain possession of real property under lease that expired prior to or during the bankruptcy case • Government audits to determine tax liability Other narrow exceptions are judicially created, or found elsewhere in bankruptcy code 22
  22. 22. Enforcing the Automatic Stay 23
  23. 23. Enforcement Overview Enforcement is usually done by: • Contempt proceedings under § 105(a) of the Bankruptcy Code and Bankruptcy Rule 9020 • Where the debtor was injured by a violation of the stay, under § 362(k) of the Bankruptcy Code 24
  24. 24. Issues in Enforcement of Stay • Was the creditor’s action prohibited by the stay? • If so, what sanctions should be imposed because of the violation? 25
  25. 25. Contempt Proceedings Facts that must be established to prove contempt: • Person engaged in conduct that violated the stay • Person had information that a bankruptcy case was filed or the stay was in effect Act in violation of stay is void or voidable regardless of violator’s awareness of stay, but contempt only found if violator was aware Proof of intent to violate the stay not required. 26
  26. 26. Remedies for Violation of the Stay Remedies for violation of the stay may include: • Court order to comply with the stay. • Damages arising from violation, including attorneys’ fees and costs, out-of-pocket losses, loss of goodwill, etc. • Punitive damages (11 U.S.C.A § 362(k)) 27
  27. 27. Burden of Proof • The moving party bears the burden to prove the violation. • Movant must prove damages resulting from violation. • Most courts require preponderance of evidence, but some require clear and convincing evidence. 28
  28. 28. Declaratory Relief If a creditor is uncertain whether an action violates the stay, it can: ✓ Proceed with the action and risk sanctions for violation of the stay ✓ File an adversary proceeding under Bankruptcy Rule 7001, seeking declaratory relief. ✓ In some districts, request a “comfort order” 29
  29. 29. Relief From the Automatic Stay 30
  30. 30. Relief Overview Under § 362(d) of the Bankruptcy Code, the court can terminate, annul, modify, or condition the continuation of the automatic stay. The court has considerable latitude to tailor relief to the exigencies of the circumstances. 31
  31. 31. Procedure for Relief • Relief is obtained by filing a motion. • If opposed, motion is a contested matter under Bankruptcy Rule 9014. • Motion for relief may be granted without a hearing, if unopposed. • If opposed, however, the court must commence the hearing on the motion within 30 days, and must resolve the motion within 30 days after the first hearing, unless extended with consent or on a showing of compelling circumstances. 32
  32. 32. Burden of Proof • Party seeking modification has initial burden of demonstrating grounds for relief . • If relief from stay relates to property, movant has burden of proof for showing extent of debtor’s equity (or lack thereof) in the property. • Valuation of the property is often a central issue. 33
  33. 33. Grounds for Relief From Stay 11 U.S.C. § 362(d)—Four statutory grounds for relief: 1. Cause, including creditor’s lack of adequate protection 2. Debtor’s lack of equity in property, and property is unnecessary for an effective reorganization 3. Single asset real estate 4. Other real property, under certain circumstances 34
  34. 34. Lack of Adequate Protection • Essentially means that debtor has not protected a secured creditor’s ability to realize the value of its collateral. • For example, if the value of collateral is declining, or collateral is at risk or uninsured. • Debtor may provide adequate protection to mitigate, such as by making cash payments to creditor, providing additional liens, etc. 35
  35. 35. Lien Enforcement Most litigation regarding relief from the stay involves secured creditors seeking court permission to foreclose upon their collateral. 36
  36. 36. Oversecured Creditors • If the collateral is worth more than what the debtor owes to the secured creditor, the secured creditor may not be able to obtain relief from the stay if its value is fully protected. • Often hinges on determination of “equity cushion”: the amount by which the value of the collateral exceeds the debt. • Factors regarding the collateral and the debtor’s circumstances can influence the court’s evaluation of the equity cushion. • Junior liens do not affect senior lienholder’s equity cushion. • Oversecured creditors may recover postpetition interest. 37
  37. 37. Undersecured Creditors • A creditor is undersecured if its collateral is worth less than what the debtor owes it. • The automatic stay is generally lifted to permit an undersecured creditor to take possession of its collateral from the debtor. • The reason is that, if the property is sold in the bankruptcy estate, all proceeds will go to the senior secured creditor, and no value will be left for the debtor or its other creditors. 38
  38. 38. Necessary for an Effective Reorganization • The court may deny an undersecured creditor relief from the automatic stay to take possession of its collateral if the debtor needs the collateral for an effective reorganization, such as because the debtor is using the collateral in its continuing business operations. • Most courts use the “feasibility test” to determine whether collateral is necessary to the debtor’s reorganization. Under this test, to defeat a motion for relief from the stay, the debtor must show that a reorganization is a reasonable prospect within a reasonable period of time. 39
  39. 39. Valuation of Collateral • Depending on the circumstances of each case, a court may use a “going concern value” or “forced sale liquidation value” • Liquidation value is generally used in Chapter 7 cases, and in some Chapter 11 cases. 40
  40. 40. Relief From Stayed Litigation Creditor seeking relief must show “cause” for relief from the stay to continue or initiate litigation in nonbankruptcy forum. For example: • Claim can be more expeditiously resolved in another court. • Claim involves unsettled question of state law. • Specialized tribunal exists to adjudicate claim. • Plaintiff must obtain judgment to recover against insurance policy, insurer will pay cost of defense, and judgment will not be enforced against debtor in bankruptcy case • Where claim has no connection to bankruptcy case (e.g., where debtor is a fiduciary) 41
  41. 41. Factors for Continuing Nonbankruptcy Litigation Twelve factors, some of which include whether: • Relief would result in partial or complete resolution of issues • Action primarily involves third parties • Interests of judicial economy and expeditious and economical resolution of the litigation • Whether the parties are ready for trial in the other case 42
  42. 42. About the Faculty 43
  43. 43. About The Faculty Josh Gadharf – jgadharf@mcdonaldhopkins.com Josh is a member in the Detroit office of McDonald Hopkins PLC. He counsels clients in both distressed and non-distressed settings. Josh regularly represents public and private companies, strategic and financial investors, directors, officers, lenders, creditors, and shareholders. Josh’s debtor practice involves advising companies and their boards of directors and management teams in business restructuring scenarios ranging from out-of-court restructurings to chapter 11 reorganizations and liquidations. He also represents purchasers of distressed assets and lenders involved in distressed workouts. In addition, Josh provides counseling in non-distressed settings to businesses, business owners, and investors and serves as outside general counsel to several middle market businesses where he advises on transactional, corporate, and commercial litigation matters. To read more about Josh, go to https://mcdonaldhopkins.com/Team/Attorney/j/Joshua-Gadharf 44
  44. 44. About The Faculty James Sullivan - jsullivan@windelsmarx.com James Sullivan’s primary practice focus is corporate restructuring and bankruptcy, distressed situations and complex commercial disputes. He brings a wealth of experience representing creditors’ committees, corporate debtors, banks, secured and unsecured creditors, trustees and distressed investors in large Chapter 11 cases. James has handled a range of cases for his clients in litigation, trial and mediation. On the transactional side, he counsels borrowers and lenders in matters involving corporate and acquisition financing. He also appears before numerous federal and state courts throughout the country on these matters. James is honored with a listing in New York Super Lawyers® and is rated AV Preeminent™ in his field by Martindale- Hubbell. He is described by his clients as “a smart lawyer who understands business issues and is always on his clients’ side.” Prior to joining Windels Marx, he was a partner at the law firms of Moses & Singer, Arent Fox and McDermott Will & Emory. He regularly authors and lectures on numerous topics concerning bankruptcy, and is an experienced pilot who enjoys skiing and scuba diving. 45
  45. 45. About The Faculty David A. Warfield – dwarfield@thompsoncoburn.com David is a 30-year veteran of the financial restructuring world who provides practical, straight-forward advice to all types of institutions that interact with a distressed business. As the lead attorney for multiple high-profile matters, David is skilled at managing complex restructurings and unraveling the competing interests of all relevant parties. In both in-court bankruptcies and out-of-court workouts, David has led work on many complex, multi-party matters, including one recent case involving a large-scale fraud and tens of thousands of consumer claims. His clients include debtors, senior secured lenders, bondholders, creditors' committees, receivers and asset purchasers. Tapping his business education, David looks for creative solutions that satisfy the diverse constituencies of a distressed business. He puts a premium on speed, as value erodes and options diminish nearly every day in a financial restructuring. David's quick thinking and persistence helps clients preserve value and plan for the future even as "the ice cube melts." 46
  46. 46. About The Faculty Edward L. Schnitzer - eschnitzer@mmwr.com Edward L. Schnitzer is Chair of Montgomery McCracken’s Bankruptcy & Financial Restructuring Department and a member of the firm’s Management Committee. He represents creditor committees, creditors, litigation trustees, equity committees, and debtors, with particular expertise in bankruptcy litigation including the prosecution and defense of avoidance actions, claims objections, and collection and turnover actions. Ed is a court-approved mediator and has mediated disputes in the Health Diagnostic, Standard Register, Borders and WP Steel bankruptcy cases. As a member of the N.Y.C. Bar Association’s Pro Bono Bankruptcy Panel, he has represented individuals in need of pro bono assistance in adversary proceedings. Following law school, Ed served as an Assistant District Attorney in the Bronx where he handled appeals before the Appellate Division, New York Court of Appeals, Southern District of New York and Second Circuit, as well as tried several cases and assisted with the prosecution of a first degree murder trial. He then joined the SEC’s Enforcement Division where he investigated violations of the Federal Securities Laws. To read more about Ed, go to https://www.mmwr.com/attorney/edward-l-schnitzer 47
  47. 47. 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. 48
  48. 48. Commercial Bankruptcy Litigation is a must-have resource for any non-bankruptcy attorney who is involved in a chapter 11 bankruptcy case. It is also a handy “take on the road” treatise for the experienced chapter 11 professional. This 2,000- plus page treatise, updated yearly, and with contributions from some of the country's most respected practitioners from top firms across the U.S., covers topics from general bankruptcy and procedure to appeals. Commercial Bankruptcy Litigation, 2d, 2022 ed. eBook available through Thomson and Reuters and Amazon 49
  49. 49. Strategic Alternatives For And Against Distressed Businesses, 2022 ed. Strategic Alternatives for And Against Distressed Businesses is one of a kind. It is the only resource that provides comprehensive state-by-state comparisons of assignments for the benefit of creditors and receiverships. This alone makes the book a must-have for every insolvency professional. “If you can only own one book about corporate restructuring and insolvency, there is a compelling case that this should be the one.” eBook available through Thomson and Reuters and Amazon 50
  50. 50. 51
  51. 51. 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/ 52
  52. 52. About Financial Poise 53 Financial Poise™ has one mission: to provide reliable plain English business, financial, and legal education to individual investors, entrepreneurs, business owners and executives. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

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