bankruptcy 101 it’s not just for beginners
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Bankruptcy 101 –It’s Not Just For Beginners
56174994.3
Bruce S. Nathan, Esq.PartnerPhone: 212.204.6886bnathan@lowenstein.com
Andrew Behlmann, Esq.PartnerPhone: 973.597.2332abehlmann@lowenstein.com
Credit Research Foundation
Virtual August Forum
August 17-19, 2021
Presented by:
1
Bankruptcy Glossary: A Few Key Terms
BANKRUPTCY CODE
The Bankruptcy Code, a federal statute contained in Title 11
of the United States Code, is the core of all bankruptcy law
in the United States. The Bankruptcy Code is not
exhaustive. Courts have interpreted and expanded upon the
express statutory language through case law.
BANKRUPTCY COURT
Bankruptcy Courts are Article I federal courts with
jurisdiction over cases and proceedings under, or arising in
or related to cases arising under, the Bankruptcy Code.
Although the Bankruptcy Court’s powers are limited,
Bankruptcy Courts in practice wield enormous power.
CLAIM
The concept of a “claim” is the most fundamental building
block of the Bankruptcy Code. In essence, a claim is any
legal obligation of the debtor, no matter how remote,
contingent, or esoteric. Any right that could be enforced
against the debtor – now or ever – is probably a claim.
CLASS
Under a chapter 11 plan, claims and equity interests are
classified into classes – groups of substantially similar
claims and equity interests that receive the same treatment
under the plan. Creditors vote on chapter 11 plans
individually but their votes are tallied on a class-by-class
basis to determine acceptance or rejection of the plan.
2
Bankruptcy Glossary: A Few Key Terms
PRIORITY
Every claim has a priority - its rank in the order in which
claims are entitled to be paid. In general, bankruptcy law
requires that senior classes of claims be paid in full before
junior classes. The priority hierarchy established by the
Bankruptcy Code prioritizes certain classes of claims
differently from non-bankruptcy law.
ADMINISTRATIVE
EXPENSE
Administrative expenses, frequently referred to as “admin
claims,” are liabilities incurred by a debtor in the
postpetition operation of its business. Congress has also
granted administrative expense priority to certain prepetition
claims, such as claims for goods received by the debtor
within 20 days before bankruptcy.
DEBTOR IN
POSSESSION (DIP)
Unlike chapter 7, where a trustee is appointed immediately, a
chapter 11 debtor remains in possession and control of its
assets (subject to limitations imposed by the Bankruptcy
Code) and continues operating its business unless the
Bankruptcy Court orders otherwise, which is extremely rare.
3
Overview of Business Bankruptcy ChaptersComparison of Business Bankruptcy Chapters
Chapter 7 Chapter 11
Purpose “Straight” Liquidation – § 704 Business Rehabilitation
Control of Assets
Trustee appointed immediately –
§ 701(a)
Trustee can be elected if
requested by holders of 20% of unsecured claims –§ 702(b)
Debtor remains in possession (DIP) of its
assets and in control of its business under
§ 1107(a)… unless a trustee is appointed under § 1104(a)
ContinuingOperations
Court “may authorize the trustee
to operate the business of the
debtor for a limited period” – §721
DIP or trustee has right to continue
operating the debtor’s business unlesscourt orders otherwise - § 1108
Conclusion Trustee liquidates all assets,
distributes the proceeds, closes the case – § 704
Plan confirmation (could be a joint plan and
disclosure statement) – § 1129
Conversion to Chapter 7 or Dismissal –
(could be structured and likely needs to
follow absolute priority rule) - § 1121(a) and (b)
4
Other Bankruptcy Chapters
Chapter 9 – Municipalities
Chapter 12 – Family Farmers and
Fishermen
Chapter 13 – Individual Debt Repayment
Chapter 15 – Recognition of Foreign
Proceedings
Subchapter V / SBRA
5
Voluntary vs. Involuntary Bankruptcy Filing
VOLUNTARY
In a voluntary bankruptcy case, the debtor
files a voluntary bankruptcy petition to
commence the case on its own behalf.
The filing of a voluntary bankruptcy
petition constitutes entry of an order for
relief, pursuant to which the debtor
becomes subject to the jurisdiction of the
Bankruptcy Court and, in a voluntary
chapter 11 case, becomes a debtor in
possession.
INVOLUNTARY
Creditors can also force a debtor into
bankruptcy by filing an involuntary
bankruptcy petition and satisfying the
requirements of Bankruptcy Code § 303:
• Petitioning Creditors must hold
unsecured claims totaling at least
$16,750 in amount that
• are not contingent, and
• are not subject to a bona fide
dispute as to liability or amount.
• There must be 3 petitioning creditors if
the debtor has 12+ unsecured
creditors.
• Only need one petitioning creditor if the
debtor has fewer than 12 unsecured
creditors.
Courts are divided as to the meaning of
bona fide dispute.
6
Contested Involuntary Bankruptcy
Petition/Sanctions Risk
Petitioning Creditors on Contested Involuntary Petition
Must Prove the Debtor is Generally not Paying Debts Not
Subject to Bona Fide Dispute as They Become Due
Unsuccessful Petitioning Creditors Could be Directed to
Pay a Debtor’s Costs and Attorneys’ Fees in Defending
an Involuntary Petition – No Bad Faith Prerequisite
Petitioners’ Bad Faith Filing – Large Damage Risk
Intent is to Discourage Creditors From Joining in an
Involuntary Petition Without Doing Appropriate Diligence
7
Automatic Stay of Creditor Actions
11 U.S.C. § 362: Automatic stay arises
automatically upon filing of the petition and
immediately prevents, among other
things…
● Commencing or Continuing Lawsuits
● Terminating an agreement
● Setoff
● Foreclosure
● Entering/Enforcing Judgment
● Taking Collateralized Property Under the UCC
● Taking Back Creditor’s own Property
8
Automatic Stay
Does not Apply to Actions Against Non-Debtors, but
Under Certain Limited Circumstances it can be
Extended (Typically by Court Order)
● Drawing on letter of credit
● Claims vs. guarantors that are not debtors
- Personal guarantors and non-debtor affiliate guarantors
Consequences of Stay Violation
● Contempt of court
● Sanctions
- Including legal fees
● Judgments obtained in violation of the stay are
generally void ab initio (as if they didn’t exist at all)
9
Review First Day Pleadings In Chapter 11 Cases
Affidavit or Declaration in Support of First day Motions Provides Detailed Information Useful to Creditors
● What caused the chapter 11 proceeding
● What the Debtor intends to do in the immediate future
● Capital Structure and financing arrangements
Chapter 11 Financing/use of Cash Collateral
● Critical for creditors continuing to sell to chapter 11 debtor
● Importance of budget
● Sets important case deadlines
● Usually contains many onerous lender friendly provisions
● Interim and final orders/credit agreements filed with Bankruptcy Court
Critical Vendor and § 503(b)(9) Claim Treatment
10
File Preservation/Info Gathering
● Preserve credit and other files – paper/electronic, including
emails
● Preserve telephone logs, recorded phone calls, if any, cell
phone texts and instant messages
● Information gathering regarding proof of claim
- Invoices, bills of lading and delivery receipts for goods
received by Debtor in the ordinary course of business
within 20 days of bankruptcy filing in support of § 503(b)(9)
20 day goods priority claim
- Common carriers only keep records for a maximum period
of nine (9) months so obtain these records immediately
upon learning of a bankruptcy proceeding
Bankruptcy Checklist – What Should Creditors Be
Doing When They Hear Their Customer Filed Chapter 11
11
Obtaining Bankruptcy Court Filings
Download Documents Filed With the Bankruptcy Court From
Court’s Website Generally via PACER Electronic Case Filing
(ECF) Online Service
● www.pacer.gov
● Must create an account and pay (currently $.10 per page)
If Claims Agent has Been Appointed, Agent’s Website Usually
Contains Court Docket – Free Access to Court Filings and
Claims Register
In-House or Outside Counsel can File a Notice of Appearance
With the Court and Request Receipt of All Notices in the Case
You Can Always ask Lowenstein Sandler for any Relevant
Documents
12
Notice of Commencement
Upon the Filing of a Chapter 11 Petition, the Clerk of the
Bankruptcy Court will Send a Notice of Commencement of Case
to all Creditors
The Notice Will Generally Contain the Following Information:
● Proposed counsel for the debtor
● The deadline for filing proofs of claim, if any. In larger chapter 11
cases, the deadline will generally be set at a later date through a
separate motion.
● An explanation of the automatic stay, which prevents creditors
from taking any actions to collect their debts.
● Notice of the Section 341 meeting of creditors
Unsecured Creditors may Also Receive a Solicitation From the
U.S. Trustee Regarding Their Potential Interest in Serving on
the Creditors’ Committee.
13
Creditors’ Committees
Larger Creditors Contacted By United States
Trustee Regarding Possible Appointment to
Committee
What Is a Creditors Committee? Pros and
Cons of Service
Committee Formation Process/Questionnaire
Committee’s Role in Case/Issues Addressed
14
The Section 341 Meeting of Creditors
Section 341 of the Bankruptcy Code Provides That the
United States Trustee Must Convene a Meeting of Creditors
Generally, 341 Meetings Occur Within 30 days After the
Bankruptcy Petition is Filed
The Debtors Must Produce a Representative for Examination
All Creditors may Attend and ask Questions
In Practice (with Certain Exceptions), Creditors Rarely
Appear and the 341 Meeting is Usually not Substantive
15
Risks of Doing Business With a Chapter 11 Debtor
Do not do any Business With Your Customer Post-
Petition Until the Court has Entered an Order Approving
Financing/use of Cash Collateral!
Check for interim DIP financing approval / cash collateral
approval order
Check later for subsequent interim orders and final order
Review budget – a debtor’s post-petition cash
disbursements are typically constrained by a
DIP / cash collateral budget
11th Circuit Delco Oil decision demonstrates the risks
16
Bankruptcy Schedules and Statements of Financial Affairs
Every Debtor is Required to File Schedules and a Statement of
Financial Affairs (SOFA), Which may be Supplemented From
Time to Time
The Schedules and SOFA Provide Detailed Disclosures About
the Financial Condition of the Debtor as of the Petition Date and
Certain Pre-Petition Transactions
These Documents Include, Among Other Items:
● Information about the Debtor’s business, assets, liabilities (claims
against the Debtor)
● Executory contracts
● Pending lawsuits
● Payments made within the 90 day preference period to trade and
other creditors
17
Proofs of Claim
A formal proof of claim does not need to be filed in a Chapter 11 case unless you disagree with the amount or priority of your claim as set forth in the debtor’s schedules of assets and liabilities, or your claim is listed as unliquidated, disputed or contingent
Nevertheless, it is almost alwaysa good idea, out of an abundance of caution, to file a proof of claim in every bankruptcy case in which you are a creditor, absent a compelling reason otherwise
18
Practical Tips for Proofs of Claim
BE SAFE: File Your Proof of Claim as
Soon as the Information Upon Which it is
Based can be Accurately Determined
You do not Want to be in a Position
Where you are Scrambling the day
Before the bar Date to File Your Claim as
Claims Must be Received by the Bar
Date, not Postmarked by that Date
19
Practical Tips for Proofs of Claim
Attach Supporting Documentation, e.g., Statement of Account to
Your Proof of Claim (if Voluminous, Indicate That Documents are
Available Upon Request)
Claims are Public Record - Do Not File Confidential Documents
● Invoices, contracts, statements of work, and other documents might
include confidential information
File the Original Proof of Claim, Include a Copy of the Claim and a
Self-Addressed Stamped Envelope, and Request That it be File-
Stamped as Received and Returned to you for Your Records
File / Send Your Proof of Claim by Overnight Delivery (NOT Email or
fax), Oftentimes to the Debtor’s Claims Agent or the Clerk of the
Bankruptcy Court.
Some Courts and Claims Agents now Also Offer Online Submission
of Proofs of Claim. In those Instances, the Bar Date Notice will
Contain Instructions for Accessing the Online System
20
Notice of Deadline to File Proofs of Claim
At a Certain Point During the Case, the Court will fix a Deadline by
Which Creditors Must File Proofs of Claim
● In Chapter 11 cases, the debtor often requests, through a motion, that the
court set a deadline (the “bar date”) by which prepetition proofs of claim,
oftentimes including section 503(b)(9) claims, need to be filed.
● As indicated earlier, in certain cases a court may set the bar date and
notify creditors of the bar date in a notice of commencement of case
● If the case is initially filed under Chapter 7 the bar date is 70 days after the
petition filing date, or a later date included in a separate notice.
Any Claim not Actually Received by the Required Date will be
Disallowed (Subject to Certain Extensions)
Notice Must be Sent to all Creditors at Least 21 Days Before the
Deadline, but Oftentimes More Time is Given
It is Crucial That Creditors Read, Understand, and Follow any
Such Notice
21
Late-Filed Proofs of Claim
If a Proof of Claim is not Timely Filed, it may Still be
Worthwhile to File a Late Proof of Claim
If you Establish That you Neither had Notice, nor Actual
Knowledge, of the Bankruptcy Filing (i.e., not Included
on Creditor Matrix or not Served bar Date Notice), you
may be Able to Have Your Claim Treated as Having
Been Timely Filed if the Estate’s Funds Have not yet
Been Distributed
22
Claims Priority
Secured
Claims
“Superpriority”
Administrative
Expense Claims
Administrative Expense
Claims (503(b)(9) Goods
and Postpetition Trade,
Employees, Taxes,
Professionals, etc.)
Unsecured Priority
Claims (Certain Taxes,
Wages, etc.)
General Unsecured
Claims (Prepetition Trade)
Equity
Subordinated Claims
23
Meltdown in Chapter 11: Administrative Insolvency
● Insufficient funds to pay all chapter 11
administrative priority claims in full
● hhgregg – appliance/consumer electronics retailer
● Toys “R” Us
● Sears
● Barneys
● Forever 21
Risk of Post-Petition Trade Credit: What If You Guess Wrong?
24
Critical Vendor Orders
There is no Bankruptcy Code Provision That Expressly Authorizes
Critical Vendor Status
It is Court-Created Based on the Doctrine of Necessity
● Limited by the 7th Circuit Court of Appeals decision in Kmart
Corporation, but the doctrine is still alive and thriving in most
jurisdictions
Critical Vendor Status is Contingent Upon Court Approval Authorizing
(not Directing) a Debtor’s Payment of pre-Petition Claims of Creditors
Deemed “Critical” or “Essential” to a Debtor’s Ongoing
Business/Successful Reorganization
● Exception to claims priority rules
● Debtor designates critical vendors
● Frequently focused on § 503(b)(9) “20 day goods” priority claims,
which theoretically have to be paid in full anyways upon
confirmation of a plan
25
Critical Vendor Orders
Standard for a Debtor Determining Critical Vendors
● The Debtor has very broad discretion, but courts
ultimately have the final say
● Courts have reached varying conclusions on when a
vendor is “critical”
- Some courts prohibit preferred critical vendor status
- Among those courts allowing critical vendor status, some
are stricter than others
- A vendor is less likely to be deemed critical if it is
obligated to continue selling to the Debtor via a pending
supply contract
26
Critical Vendor Orders
No Assurance of 100% Payment of a Critical
Vendor’s pre-Petition Claim – Subject to Negotiation
Quid pro quo: Creditors Receiving Such Payments
Must Agree to Extend Post-Petition Credit (Entitled to
Administrative Priority Status) and Other Terms
● Oftentimes the most favorable terms provided within a
fixed period of time prior to the bankruptcy filings are
required.
27
Critical Vendor Orders
Critical Vendor Agreement Should Be Reviewed
by Counsel
● Negotiate payment and other terms
● Be careful of fine print that prevents any change in
prices and other non-credit related terms including
credit limits
● Risk of disgorgement of critical vendor payments if the
creditor stops extending credit consistent with the
agreed upon terms
● Negotiate default provision that gives critical vendor
an out
28
Administrative Claim for the Value of Goods the
Debtor Received Within 20 days of Bankruptcy Filing
20 day Goods Must be Sold to the Debtor in the
Ordinary Course of the Debtor’s Business
Safety net for Trade Creditors that Supply Goods not
Services!
Replaces Reclamation as an Effective Value
Maximizing Trade Creditor Remedy
§ 503(b)(9) “20 Day” Administrative Priority Claims
29
General Rule – § 503(b)(9) Request/Allowance Requires
Notice and a Hearing
● No automatic administrative claim without court approval
There is no Federal Bankruptcy Rule Specifying the
Manner in Which to Assert § 503(b)(9) Priority Claims
Timing of Payment - Most Courts Have Rejected
Immediate Payment Over a Debtor’s Objection
● Instead payment upon confirmation of a plan or earlier if a
motion to pay § 503(b)(9) claims is filed by the debtor,
usually in conjunction with a creditors’ committee
Assertion Of “20 Day” Goods Administrative Claims And Timing Of Payment
30
No Deadline to Assert § 503(b)(9) Claim in the
Bankruptcy Code
Local Bankruptcy Rules may Create a Deadline
● U.S. Bankruptcy Court, Eastern District, Michigan
- Local Bankruptcy Rule 3003-1 – Deadline to file proof of
claim, or § 503(b)(9) motion in chapter 11 case: 90 days after
first date set for Section 341 meeting of creditors
● U.S. Bankruptcy Court, District of Massachusetts
- Local Bankruptcy Rule 3002-1 – Deadline to file request for
allowance of § 503(b)(9) claim: 60 days from first scheduled
341 meeting date
Deadline To Assert “20 Day” Goods Administrative Claims
31
Courts Are Also Setting Deadlines for Asserting § 503(b)(9)
Priority Claims
● One deadline to file claims that includes §503(b)(9) priority claims
and all other general unsecured claims
● Alternate deadline: Separate deadline for asserting § 503(b)(9)
claims than general unsecured claims
Courts Are Also Prescribing the Manner of Asserting
§503(b)(9) Claims, Either
● On the same claim form as the creditor’s general unsecured claim
-or-
● On a special proof of claim form solely related to § 503(b)(9) claims
Deadlines/Assertion Of “20 Day” Goods Administrative Claims
32
503(b)(9) Litigation Issues
What Does Receipt Mean?
Are Drop Shipment Claims Eligible for § 503(b)(9)
Priority Status?
Can the Debtor Set Off Pre-Petition Chargeback,
Deduction, Credits and Rebate Claims to Reduce a
Creditor’s § 503(b)(9) Priority Claim?
Should a Section 503(b)(9) Administrative Priority
Claim be Subject to Disallowance Based on Creditor’s
Preference Risk?
33
Chapter 11 Plans
A Plan proposes (and if confirmed and effective, establishes)
the classification and treatment of claims against a
Chapter 11 debtor
Bankruptcy Court must approve a Disclosure Statement and
Solicitation Procedures that the debtor uses to solicit votes
Disclosure Statement: Describes the plan and must provide
adequate information for voting creditors to make a choice
Plan ProposedVotes
SolicitedAccepted Confirmed Effective
34
Chapter 11 Plans
Once confirmed and effective, a plan is effectively a contract
between the debtor and its creditors
A confirmed, effective plan binds all creditors – even if they
voted to reject the plan or did not vote at all
The obligations of the “Reorganized Debtor” under the plan
take the place of its obligations that existed pre-confirmation
The Bankruptcy Code prescribes a number of legal standards
that a plan must meet to be confirmable
If a class of creditors votes to reject the plan but another
impaired class accepts the plan, the plan can still be
confirmed so long as the Bankruptcy Court finds that the
plan is fair and equitable to and does not discriminate
against the rejecting class
35
Dual-Track: Simultaneous Plan and Sale Process
Many chapter 11 cases follow a dual-track strategy
● Nearly all retail chapter 11 filings start out this way
Debtor markets its business for sale while simultaneously
negotiating a plan of reorganization with lenders and other
key creditor constituencies
Stated goal is usually a going-concern sale, in which the
buyer continues operating the debtor’s business
Dual-track processes frequently result in an asset sale under
section 363 of the Bankruptcy Code (sale of assets free and
clear of claims and interest) followed by a plan of liquidation
that winds down the debtor after reconciling claims,
liquidating its remaining assets, and paying distributions
● Liquidation frequently involves pursuit of litigation claims
36
Chapter 11 Plans: Third-Party Releases
Included in many (perhaps most) Chapter 11 plans
Typically named “Release by Holders of Claims and Interests”
Releases claims of creditors against non-debtor third parties
such as directors, officers, shareholders, private equity sponsors,
affiliates, subsidiaries, etc.
Opt-In vs. Opt-Out vs. Nonconsensual Releases
● Modern trend is toward “opt-out” releases
● Failure to take affirmative steps to opt out is deemed consent
● Nonconsensual releases – no opportunity to opt out, typically
reserved for extraordinary circumstances
FAILURE TO OPT OUT OF A THIRD-PARTY RELEASE WILL
PROBABLY RELEASE (AMONG OTHER THINGS) ANY CLAIMS
YOU MAY HAVE AGAINST NON-DEBTOR GUARANTORS!
37
Post Confirmation/Objection to Claims Distributions are Only Made to Creditors Whose Claims are “Allowed”
● Claim scheduled by debtor (i) in a liquidated amount, (ii) not disputed, and (iii) non-contingent,
or
● Proof of claim filed by claimant and no party-in-interest objects to allowance thereof
Debtor/ Trustee Generally has 90-180 days From the Chapter 11 Plan Effective Date to Object to Claims, Subject to Likely Multiple Extensions
Objection to a Claim Could Seek Full or Partial Disallowance
If your Claim is Objected to, you will Receive Notice at Least 30 Days Prior to the Hearing
● Carefully review the objection and any exhibits to determine the basis for the objection to your claim
● Many objections are “omnibus” objections, which may include objections to many claims on the same grounds
● If you disagree with the grounds stated in the objection, the first step is to contact the party that filed the objection
38
Post Confirmation - Payment of Allowed Claims
Distributions are Generally Paid by a Distribution Agent or
Liquidation Trustee
Unless Creditors Receive an Objection or Other Notice, They do
not Need to do Anything to Protect Their Claim
However, a Distribution Agent or Liquidation Trustee may Require a
W-9 or Other Tax Documentation as a Prerequisite to Receiving a
Distribution, Which Should be Sent Promptly
Creditors Should Also Provide Prompt Notice of any Change of
Address
Creditors may Receive one or more Distributions, Depending on
the Recovery Provided in the Plan and the Course of the Claims
Reconciliation Process
39
Any Transfer of an Interest of the Debtor in Property;
To or for the Benefit of a Creditor;
On Account of an Antecedent Debt Owed by the Debtor Before a Transfer:
● Cash in advance payments are not preferences
Made While the Debtor was Insolvent;
● On or within 90 days before a bankruptcy filing; or
● Between 90 days and one year before a bankruptcy filing for transfers made to insider creditors; and
That Enables Such Creditor to Receive More Than Such Creditor Would Receive if:
● The case were a Chapter 7 case;
● The transfer had not been made; and
● Such creditor received payment to the extent provided by other provisions of Title 11.
● Critical Vendor Defense?
Preference: Elements Of Claim
40
Small Business Reorganization Act of 2019 Changes To Preference Law
Effective February 19, 2020
Section 547(b) Amended to add the Following due
Diligence Requirement for Filing Preference
Litigation:
● “(b) Except as provided in subsections (c) and (i) of this
section, the trustee may, based on reasonable due
diligence in the circumstances of the case take into account
a party’s known or reasonably knowable affirmative
defenses under subsection (c), avoid any transfer of an
interest of the debtor in property….”
● Preference defendants still have the burden of proving the
preference defenses
41
Transfer was Intended by the Debtor and the
Creditor to be a Contemporaneous Exchange for
new Value; and
Transfer was in Fact a Substantially
Contemporaneous Exchange
Examples:
● COD transaction: payment tendered for delivery of
goods
- Risk of bounced COD check/ACH payment; replacement
payment not protected by this defense
Preference Defenses: Contemporaneous Exchange For New Value (COD)
42
Preference Defenses: New Value
Creditor Selling Goods/Providing Services on Credit Terms to
a Debtor After a Payment, that was not Secured and not Paid
by an Otherwise Unavoidable Transfer, Reduces Preference
Exposure
Goods Shipped/Services Provided on Credit Terms Following
Payment Reduce Preference Exposure
New Value Cannot be Applied to Subsequent Payments
Frequently Litigated New Value Defense Issues:
● Does the new value defense apply to invoices that were:
- repaid prior to the bankruptcy filing?
- repaid post-petition pursuant to a critical vendor order?
- entitled to priority status under section 503(b)(9) and repaid
post-petition?
43
Transfer was in Payment of a Debt Incurred by the Debtor
in the Ordinary Course of Business or Financial Affairs of
the Debtor and the Creditor; and
Subjective Test – Made in the Ordinary Course of Business
or Financial Affairs of the Debtor and the Creditor; OR
Objective Test – Made According to Ordinary Business
Terms
Creditor can Choose Most Beneficial (Subjective or
Objective) Prong of the Ordinary Course of Business
Defense
Ordinary Course Of Business Preference Defense
44
Courts Have Been Inconsistent and Unpredictable in Applying Subjective
Component of Ordinary Course of Business Defense
Evaluating pre-Preference Payment History.
● How long?
● Full range?
● Modified range?
● Only when Debtor is financially healthy?
● Deviation off an average or mean?
● Comparison of average days to pay in pre-preference and preference
history?
● Bucket Analysis?
Consistency in Timing of Payments Before and During Preference Period Alone Might not Be Sufficient to Prove Subjective Component of Defense
Fact-Specific Threats to Subjective Component
Subjective Component of Ordinary Course of Business Defense Encourages Litigation
45
Ordinary Course Of Business Preference Defense –Ordinary Business Terms Alternative: Objective Component
Proof Requirement is Currently Evolving
● General Standard? Transfer was not so unusual or
idiosyncratic as to render it an aberration in the relevant
industry – Seventh Circuit Court of Appeals decision
Which Industry to Consider? Creditor’s? Debtor’s?
Variation?
Includes Range of Industry Terms
● No need to prove single set of business terms within an
industry
● Ordinary business terms may vary widely across industries
46
NEW “COVERED PAYMENT” EXCEPTION TO PREFERENCE LIABILITY
TEMPORARY SUBSECTION 547(J)
Consolidated Appropriations act of 2021 Created a New Preference
Exception: “Covered Payment of Supplier Arrearages”
● Payment made in connection with an agreement or arrangement made or
entered into on and after March 13, 2020 (onset of COVID) between a
debtor and a supplier of goods or services to delay or postpone payment
of amounts due under an executory contract
Payment Cannot Exceed the Amount due Under the Executory
Contract Before March 13, 2020
Does not Include Fees, Penalties and Interest in an Amount Greater
Than That Scheduled to be Paid Under the Contract or Which the
Debtor Would owe if the Debtor had Made all Payments on Time and
in Full Before March 13, 2020
Sunsets on December 27, 2022, but Continues to Apply to Bankruptcy
Cases filed Before December 27, 2022
47
SBRA’s Increased Venue Limits On Small Claims
The Venue Provision That Forces a Trustee or Debtor-in-
Possession to Commence Litigation on Smaller Claims in
the District Court Where the Defendant Resides (Corporate
Headquarters or Principle Place of Business) has Been
Increased From $13,650 to $25,000
● Impact: Trustees/debtors-in-possession may be less likely
to commence suit on preference and other claims seeking
recovery of less than $25,000
Does the Increased Venue Limit Apply to Bankruptcy Cases
Filed Before SBRA’s Effective Date of February 19, 2020?
SBRA Change Ignores Prior Conflicting Decisions Over
Applicability of Venue Limit to Preference/Other Avoidance
Actions
48
DO NOT IGNORE DEMAND
Request a List of all Checks That Make up the Claim and Copies of
Cancelled Checks or Proof of Wire Transfers With Remittance
Instructions
Confirm all Payments Received Within 90 Day Preference Period
● If payment is not actually received immediately demand proof of
payment
● No preference if payment received more than 90 days before filing
Statute of Limitations: has it Expired or is it About to Expire?
Can the Trustee Actually Sue You:
● LESS THAN $6,825 IN THE AGGREGATE? NO
- Trustees most likely to send demand letter anyway
● Where can the Trustee sue you? Venue limitation
React and Respond To Initial Preference Demand Letter
49
Preference Checklist Review Defense Strategy With Management
Create Preference Defense Analyses, Including new Value and Subjective Ordinary Course of Business Defenses
Was the Debtor Insolvent at the Time of the Bankruptcy Filing?
● Check the Bankruptcy Schedules
● Check any Financial Statements you may Have Received From the Debtor
Develop a Game Plan and Negotiation Thresholds
Communicate Preference Defenses to the Trustee
Consult With your Bankruptcy Attorney, Particularly After Commencement of Litigation
● Determine your answer deadline (often 30 days from issuance of a summons), unless there is a procedures order entered in the case which could extend the deadline
- DO NOT ALLOW A DEFAULT JUDGMENT TO BE TAKEN AND TIMELY CONTACT YOUR BANKRUPTCY ATTORNEY IF AN EXTENSION IS NOT GRANTED
50
Bruce S. NathanPartner, Bankruptcy & Restructuring
With more than 35 years of experience in the bankruptcy and insolvency field, Bruce
is a recognized leader nationwide in trade creditor rights and the representation of
trade creditors in bankruptcy and other legal matters. He has represented trade and
other unsecured creditors, unsecured creditors' committees, secured creditors, and
other interested parties in many of the larger Chapter 11 cases that have been filed.
Bruce also handles letters of credit, guarantees, security, consignment, bailment,
tolling, and other agreements and legal credit issues for the credit departments of
institutional clients.
Among his various legal recognitions, Bruce received the Top Hat Award in 2011, a
prestigious annual award honoring extraordinary executives and professionals in the
credit industry. He was co-chair of the Avoiding Powers Committee that worked with
the American Bankruptcy Institute's (ABI) Commission to Study the Reform of Chapter
11, participated in ABI's Great Debates at their 2010 Annual Spring Meeting–arguing
against repeal of the special BAPCPA protections for goods providers and commercial
lessors–and was a panelist for a session sponsored by ABI. He is a frequent presenter
at industry conferences throughout the country, as well as a prolific author regarding
bankruptcy and creditors' rights topics in various legal and trade publications.
Bruce is a co-author of "Trade Creditor Remedies Manual: Trade Creditors' Rights
under the UCC and the U.S Bankruptcy Code," published by ABI at the end of 2011.
He has also contributed to ABI Journal and is a former member of ABI's Board of
Directors and former co-chair of ABI's Unsecured Trade Creditors Committee.
Tel: 212.204.8686 | Fax: 973.442.6851 | E-mail: bnathan@lowenstein.com
Education
University of Pennsylvania Law School (J.D. 1980)
Wharton School of Finance and Business (M.B.A. 1980)
University of Rochester (B.A. 1976)
Bar Admissions
New York
51
Andrew BehlmannPartner, Bankruptcy & Restructuring
Andrew Behlmann is a partner in Lowenstein Sandler’s Bankruptcy &
Restructuring Department. Andrew leverages his background in corporate
finance and management to approach restructuring problems, both in and
out of court, from a practical, results-oriented perspective. With a focus on
building consensus among multiple parties that have competing priorities,
Andrew is equally at home both in and out of the courtroom, and he has a
track record of turning financial distress into positive business outcomes.
Clients value his counsel in complex Chapter 11 cases, where he represents
debtors, creditors' committees, purchasers, and investors.
Andrew writes and speaks frequently about bankruptcy matters and financial
issues. Before becoming a lawyer, he worked in senior financial
management at a midsize, privately held company.
Tel: 973.597.2332 Fax: 973.597.2333 | E-mail: abehlmann@lowenstein.com
Education
Seton Hall University
School of Law (J.D.
2009), magna cum
laude; Order of the
Coif
University of Missouri-
Saint Louis (B.S.
2005), Business
Administration-
Finance and
Accounting; Beta
Gamma Sigma
Bar Admissions
New Jersey
|
52
Recent Publications
June 1, 2021
Preference Defense in the Wake of the Pandemic: A Primer, Lowenstein Sandler LLP
Bruce S. Nathan, Andrew Behlmann, Michael Papandrea, Arielle B. Adler
May/June 2021
Second Circuit Dismisses Appeal of Critical Vendor Order in Windstream Holdings, Business Credit
Bruce S. Nathan, Michael Papandrea
March/April 2021
Additional Preference Protection in Recent Stimulus Legislation: Reality or Illusion?, Business Credit
Bruce S. Nathan, Eric Chafetz, Michael Papandrea
Q1 2021
The Recent COVID-19 Legislation’s Bankruptcy Code Amendments of Interest to Trade Creditors, Perspective by CRF
Bruce S. Nathan, Michael Papandrea
February 2021
A Primer on Selling Bankruptcy Trade Claims, Business Credit
Bruce S. Nathan, Scott Cargill
January 2021
Reclamation Rest in Peace? The Eighth Circuit Will Soon Weigh In, Business Credit
Bruce S. Nathan, Michael Papandrea
NEW YORK PALO ALTO NEW JERSEY UTAH WASHINGTON, D.C.
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