Mayday! Bankruptcy is Looming or Filed Now What?

Transcription

1 Mayday! Bankruptcy is Lming r Filed Nw What? Outline fr Presentatin t ACC Charltte Chapter Jan 19, 2016 David M Schilli and Andrew WJ Tarr We regularly wrk with clients, and in particular, industrial manufacturing clients, whse custmers and suppliers are in financial distress We prepared the fllwing utline t accmpany ur presentatin n (A) issues and best practices fr dealing with distressed custmers and suppliers befre bankruptcy, (B) sme basic bankruptcy principles, (C) issues and best practices fr dealing with distressed custmers and suppliers after a bankruptcy filing and ways fr prtecting yur rights in a bankruptcy prceeding, and (D) preference and fraudulent transfer claims and defenses Befre a Bankruptcy Filing Fr Custmers Lk fr the usual warning signs Clues frm types and timing f payments received Clues frm trade credit Cllectin lawsuits New liens UCC liens, judgment liens and tax liens Inaccessibility f senir management Changes in management r n bard f directrs Lan cvenant defaults Inability t deliver financial statements Inability t meet sales r financial prjectins Mnitr custmers Ggle Alerts Websites UCC and real prperty searches Subscriptin services, like Dunn & Bradstreet, Blmberg News, Debtwire Cnsider seeking t btain credit supprt fr cntinued supply f gds Purchase mney security interest and perfect with UCC filing 1 rbinsnbradshawcm

2 Mayday! Bankruptcy is Lming r Filed Nw What? Standby letter f credit Third-party guaranty Credit insurance Surety bnd Cnsider changing payment terms Cash n delivery (COD), ideally with wire transfer r cashier s check Cash in advance (CIA) Evergreen retainer r cash depsit Reduce credit terms, ideally t less than 20 days Lwer credit limit Depsit payments prmptly Fr Suppliers Lk fr usual warning signs - In additin t all thse mentined earlier Prductin and delivery delays Request fr expedited payments Reductin in wrkfrce r furlugh f emplyees Mnitr suppliers Evaluate status f tling, patterns and mlds Paperwrk Identificatin Segregatin Evaluate status f wrk in prcess Cnsider timing fr qualifying ther ptential suppliers Fr Bth Custmers and Suppliers Demand adequate assurance f perfrmance UCC Trigger: Reasnable grunds fr insecurity ie, dubt ability t perfrm 2 rbinsnbradshawcm

3 Mayday! Bankruptcy is Lming r Filed Nw What? Make written demand fr adequate assurance f future perfrmance Letter f credit Change in payment terms t COD r CIA Obtain guaranty Pending receipt f adequate assurance, suspend perfrmance and stp delivery f gds sld n credit Maintain accurate and cmplete recrds Cnsider terminating any existing supply cntracts fllwing default Will permit change in payment terms Avid ptential bankruptcy-related risk Existing cntracts likely executry cntracts under the Bankruptcy Cde Absent prper terminatin befre bankruptcy filing, Duty t perfrm after bankruptcy Little chance f terminatin absent default after filing Exercise setff r recupment rights Pwerful remedy Prtects a party frm having t pay its debt in full and risking nt getting paid n debt wed Must have mutuality f parties and mutuality f debts fr bth setff and recupment Fr setff, nt necessary that debts arise ut f same transactin r cntract Recupment is a subset f setff; it requires the mutual debts t arise frm same cntract r transactin Basics f Different Types f Business Bankruptcy Cases and Basic Bankruptcy Principles Chapter 7 Liquidatin r straight bankruptcy Typically n cntinuing peratins Curt-appinted trustee takes pssessin f assets and manages liquidatin Chapter 11 Rerganizatin case Mre ften than nt an asset sale under Bankruptcy Cde 363 t preserve ging cncern value 3 rbinsnbradshawcm

4 Mayday! Bankruptcy is Lming r Filed Nw What? Nt like the ld days when a true rerganizatin Cntinuing business peratins even if temprary t get an asset sale cmpleted -- subject t Bankruptcy Curt versight Debtr in pssessin r DIP Unsecured Creditrs Cmmittee United States Trustee N curt-appinted trustee Invluntary case Case filed by creditrs Typically a Chapter 7 filing Debtr can cnvert t Chapter 11 Receiverships and assignments fr the benefit f creditrs Bankruptcies have gtten expensive Often mre cst-effective than bankruptcy (particularly Chapter 11) Remedies based n state statute, s nt cnsistent statutry schemes Outcmes ptentially similar and ften are similar t utcmes in bankruptcy cases, but may be different Distributin scheme in bankruptcy First, secured creditrs paid based upn the value f cllateral Secnd, administrative claims essentially csts and expenses incurred fllwing the bankruptcy filing and as prvided in Bankruptcy Cde 503 Third, general unsecured claims elevated t pririty claim status based n Bankruptcy Cde 507 Furth, general unsecured claims Fifth, equity t extent all ther creditrs paid in full a rarity After a Bankruptcy Filing The autmatic stay Bankruptcy Cde 362 Self-effectuating statutry injunctin Enjins actins t cllect n debts wed r take cntrl f prperty f the bankruptcy debtr Enjins effrts t terminate pre-bankruptcy cntracts 4 rbinsnbradshawcm

5 Mayday! Bankruptcy is Lming r Filed Nw What? Bankruptcy Curt can impse sanctins fr willful vilatins f 362 stay 362 stay des nt apply t any nn-debtrs Gds in transit Permissible t stp gds in transit if nt yet delivered t debtr r its agent Pst-filing supply Adequate assurance f perfrmance (UCC 2-609) cntinues t apply Executry cntracts - Bankruptcy Cde 365 Each party wes the ther perfrmance May be assumed r rejected in the bankruptcy case Pending assumptin/rejectin decisin, bth parties must perfrm In a Chapter 11 case, debtr will typically have until plan cnfirmatin r asset sale t assume r reject In a Chapter 7 case, deemed rejectin 60 days after bankruptcy filing absent a Bankruptcy Curt extending the deadline Critical Vendr dctrine Nt expressly prvided in Bankruptcy Cde but allwed under case law in Chapter 11 cases Requires a Bankruptcy Curt rder Permits payment n pre-bankruptcy balance if truly critical t debtr s cntinued peratins Nt permitted if alternative supply surces readily available Nt permitted if pst-bankruptcy shipments n credit made Reclamatin fr gds supplied during the 45 days befre bankruptcy Bankruptcy Cde 546(c) and UCC 2-702(2) Applies t gds delivered t debtr in 45 days befre bankruptcy filing Must make written demand n debtr within 20 days fllwing bankruptcy filing Might have limited effectiveness because f senir bank liens Failure t invke right = waiver Typically, reclamatin claims reslved, subject t any senir bank liens Supply f gds during the 20 days befre bankruptcy filing Bankruptcy Cde 503(b)(9) Grants pririty status fr the value f these gds 5 rbinsnbradshawcm

6 Mayday! Bankruptcy is Lming r Filed Nw What? Elevates amunt supplied abve general unsecured claims Requires that gds are received by debtr in 20 days befre filing Requires that gds be purchased in debtr s rdinary curse f business Requires prf f claim t be filed be aware f any filing deadline Administrative expense claims are usually paid in full Might limit new value defense t a preference claim fr amunt paid under 503(b)(9) Setff and recupment The right f setff is preserved in bankruptcy Effecting setff is prhibited by 362 stay withut Bankruptcy Curt apprval Recupment is nt prhibited by 362 stay Recupment is requires the mutual debts t arise frm same cntract r transactin Debtr in pssessin financing DIP financing allws debtr t perate business in Chapter 11 and pay pst-petitin vendrs Nrmally lined up befre the bankruptcy filing and is apprved very early in the case and n an expedited timeline Asset sales under Bankruptcy Cde 363 Sale f assets free and clear f liens utside the rdinary curse f business Includes cntracts asset buyer wants t assume Typically ccurs fairly early in a bankruptcy case Occurs in bth Chapter 7 and Chapter 11 cases but sale as ging cncern des nt typically ccur in a Chapter 7 case Requires Bankruptcy Curt apprval f bth prcess and sale Be aware f curt-impsed deadlines fr bjectins t sale and assignment f cntracts Prf f Claims Must be aware f bar date fr filing claims and prper place fr filing Shuld receive ntice f bar date and filing instructins By filing a claim, cnsent t jurisdictin f Bankruptcy Curt and likely waive jury trial right Required in Chapter 7 case t prtect right t distributin Required in Chapter 11 case nly if debtr lists claim n claim schedules as unliquidated, cntingent r disputed 6 rbinsnbradshawcm

7 Mayday! Bankruptcy is Lming r Filed Nw What? Failure t file by bar date waives claim Generally unsecured creditrs are nt entitled t pst-bankruptcy interest, even if permitted under cntract dcuments Official Bankruptcy Frm 410 in hard cpy f materials New frm as f December 1, 2015 Fairly simple and straight-frward Imprtant t attach any cntract dcuments and invices (r a summary f invices) Nt required, but we typically include an exhibit cntaining shrt summary f backgrund facts and basis fr claim Preferences - Bankruptcy Cde 547 Essentially payments n accunt f existing unsecured debt within 90 days f bankruptcy filing (b) Defenses Cntempraneus exchange f new value Ordinary curse f business Subsequent new value Purchase mney security interest Ttal payments less than $6,225 Likely wn t hear abut preference claim until clse t tw years after bankruptcy filing Fraudulent Transfers - Bankruptcy Cde 548 Pre-bankruptcy transfers and payments that diminish the bankruptcy estate Actual fraudulent transfers The debtr made transfer with the actual intent t hinder, delay r defraud The smking gun Cnstructive fraudulent transfers The debtr received less than reasnably equivalent value fr transfer The debtr: Was inslvent at the time f the transfer r was rendered inslvent Was engaged in business r transactin, r was abut t s engage, with unreasnably small capital 7 rbinsnbradshawcm

8 Mayday! Bankruptcy is Lming r Filed Nw What? Intended t incur, r believed it wuld incur, debts beynd the ability t repay as they matured Made transfers t r fr the benefit f an insider under an emplyment agreement and nt in the rdinary curse f business Tw-year lk back perid under Bankruptcy Cde 548 Lnger lk back perid under state law made applicable under Bankruptcy Cde 544 Litigatin typically fcuses n: Reasnably equivalent value in exchange fr transfer Inslvency issues Likely wn t hear abut fraudulent transfer claim until clse t tw years after bankruptcy filing 8 rbinsnbradshawcm