What You Should What You Should Consider Before Selling Consider Before Selling Your Bankruptcy Claim!Your Bankruptcy Claim!

Presented by: Philip P. Philbin CCE

Managing Director and Senior Consultant

Commercial Credit Management Associates

www.commercialcreditmanagementassociates.com

What is “Claims Trading”?What is “Claims Trading”?

Chapter 11 BankruptciesChapter 11 Bankruptcies The buying and selling of claims in The buying and selling of claims in

bankruptciesbankruptcies Unregulated and very lucrative Unregulated and very lucrative

industryindustry Began in the 1990’sBegan in the 1990’s Started by banks, hedge funds, Started by banks, hedge funds,

claims traders claims traders Ordinary CreditorsOrdinary Creditors

Creditor’s Claims And Filing A Creditor’s Claims And Filing A Proof Of Claim (POC)Proof Of Claim (POC)

Only “claims” can be discharged Only “claims” can be discharged Only “claimants” with “claims” Only “claimants” with “claims”

can vote on plan of reorganization can vote on plan of reorganization in a Chap 11 casein a Chap 11 case

Secured and Unsecured claimsSecured and Unsecured claims Debtor’s and Creditors Debtor’s and Creditors

responsibilities responsibilities

Claims Sales AgreementsClaims Sales Agreements

The Offer/Expression of Interest The Offer/Expression of Interest

The ConfirmationThe Confirmation

The Assignment of Claim The Assignment of Claim AgreementAgreement

Exactly What Do These “Claims Exactly What Do These “Claims Traders” Traders”

Want From You?Want From You?

What possible reason What possible reason would make you interested would make you interested in “selling” your claim? in “selling” your claim?

Getting at least some of Getting at least some of your money back by your money back by cashing out now at a cashing out now at a fixed price fixed price

Lower the risk of getting Lower the risk of getting nothingnothing

Buyers Of Claims- Who Are Buyers Of Claims- Who Are Those Guys?Those Guys?

Brokers and Traders as Brokers and Traders as MiddlemenMiddlemen

Passive InvestorsPassive Investors

Active InvestorsActive Investors

You Would Think That Speculating You Would Think That Speculating On A Corporate Bankrupt Debtor On A Corporate Bankrupt Debtor

Would Be Risky!Would Be Risky! There is significant There is significant

value to be realized value to be realized in the in the reorganization and reorganization and asset saleasset sale

The reward far The reward far exceeds the price exceeds the price they paid from they paid from creditors who want creditors who want cash nowcash now

You Would Think That Speculating You Would Think That Speculating On A Corporate Bankrupt Debtor On A Corporate Bankrupt Debtor

Would Be Risky!Would Be Risky! Traders look to buy a particular Traders look to buy a particular

specific assetspecific asset Other Buyers are looking to Other Buyers are looking to

becoming the asset owner of the becoming the asset owner of the bankrupt company to put them in bankrupt company to put them in the best position when the the best position when the company emerges from the company emerges from the bankruptcybankruptcy

More purchased claims puts the More purchased claims puts the buyer in a stronger position in the buyer in a stronger position in the unsecured creditors committeeunsecured creditors committee

What is the Federal What is the Federal Bankruptcy Procedures Bankruptcy Procedures

3001(e)3001(e) The Federal Bankruptcy Procedures The Federal Bankruptcy Procedures

3001(e) governs claim trading under the 3001(e) governs claim trading under the US Bankruptcy Code.US Bankruptcy Code.

There are validation requirements under There are validation requirements under Rule 3001(e) that need to be metRule 3001(e) that need to be met

The courts do not generally supervise The courts do not generally supervise the trading of claimsthe trading of claims

Rule 3001(e) treats the claim as a free Rule 3001(e) treats the claim as a free market of private transactions for a market of private transactions for a buyer and a sellerbuyer and a seller

Disclosure and other requirements for Disclosure and other requirements for trading in public securities is not trading in public securities is not requiredrequired

What is the Federal What is the Federal Bankruptcy Procedures Bankruptcy Procedures

3001(e) 3001(e) Under Rule 3001(Under Rule 3001(ee), if a seller did not file a ), if a seller did not file a

proof of claim (POC) in the bankruptcy case proof of claim (POC) in the bankruptcy case prior to selling its claim, neither seller nor prior to selling its claim, neither seller nor buyer has to file notice of the transfer of the buyer has to file notice of the transfer of the claim with the courtclaim with the court

Once the transfer is complete, only the Once the transfer is complete, only the seller can file a POC on the transferred claimseller can file a POC on the transferred claim

The seller’s POC needs to include a copy of The seller’s POC needs to include a copy of the transfer of claim to prove that the seller the transfer of claim to prove that the seller is the valid owner of the claim against the is the valid owner of the claim against the debtor and entitled to the disbursements of debtor and entitled to the disbursements of payments from the claimpayments from the claim

What is the Federal Bankruptcy What is the Federal Bankruptcy Procedure 3001(e)Procedure 3001(e) If a POC was filed by the seller before the If a POC was filed by the seller before the

claim sale, the buyer must provide the claim sale, the buyer must provide the evidence of the claim transfer providing evidence of the claim transfer providing the transfer noticethe transfer notice

When filed, the clerk of the court is When filed, the clerk of the court is required to immediately send the notice required to immediately send the notice to the seller but to notify other parties-in-to the seller but to notify other parties-in-interestinterest

To insure the buyer gets paid, the buyer To insure the buyer gets paid, the buyer will notify the debtor or the debtor’s will notify the debtor or the debtor’s designate for dispensing payments designate for dispensing payments fromfrom the bankruptcy casethe bankruptcy case

Notice must include the buyer’s address Notice must include the buyer’s address and notice to forward payments to the and notice to forward payments to the buyer at their addressbuyer at their address

Filing an ObjectionFiling an Objection

If seller files an If seller files an objection, the court objection, the court will hold a hearing if will hold a hearing if written objection is written objection is filed within 20 days of filed within 20 days of the court’s mailing of the court’s mailing of the noticethe notice

If written objection is If written objection is not filed, the buyer not filed, the buyer unconditionally unconditionally becomes the valid becomes the valid owner of your claim.owner of your claim.

Filing an ObjectionFiling an Objection If written objection is If written objection is

filed, the court clerk filed, the court clerk must mail the hearing must mail the hearing notice, with a copy of notice, with a copy of the objection, to both the objection, to both seller and buyer, 30 seller and buyer, 30 days prior to hearingdays prior to hearing

If the court finds the If the court finds the transfer valid, it will transfer valid, it will enter an order making enter an order making buyer the legitimate buyer the legitimate valid ownervalid owner

Pitfalls Selling Your Claim- Pitfalls Selling Your Claim- Devil Is In The Details!Devil Is In The Details!

First notice is an offer letter with a time sensitive First notice is an offer letter with a time sensitive date to accept or reject date to accept or reject ““subject to acceptable subject to acceptable documentationdocumentation””

If you accept and agree on the price within the time If you accept and agree on the price within the time window, then you will need to agree on the window, then you will need to agree on the documentsdocuments

Claims buyer rushes the “assignment agreement” Claims buyer rushes the “assignment agreement” requiring your signature and quick returnrequiring your signature and quick return

A quick turnaround process benefits the buyer and A quick turnaround process benefits the buyer and eliminates any negotiationeliminates any negotiation

There is no negotiating with the buyers- It’s a Sellers There is no negotiating with the buyers- It’s a Sellers MarketMarket

Pitfalls Selling Your Claim- Pitfalls Selling Your Claim- Devil Is In The Details! Devil Is In The Details!

Have legal counsel review the Have legal counsel review the documentsdocuments

Buyers often slip into their agreement Buyers often slip into their agreement certain standard certain standard representations/warranties;representations/warranties; Enforceability of the claimEnforceability of the claim Absence of any defensesAbsence of any defenses No preference claimsNo preference claims

Pitfalls Selling Your Claim- Pitfalls Selling Your Claim- Devil Is In The Details! Devil Is In The Details! Buyers will require an agreement that they Buyers will require an agreement that they

be reimbursed if their return is less than be reimbursed if their return is less than anticipatedanticipated

Buyers require indemnification for attorney’s Buyers require indemnification for attorney’s fees expensed in defense against an attempt, fees expensed in defense against an attempt, or threatened attempt, by parties to object or or threatened attempt, by parties to object or otherwise reduce value of the claimotherwise reduce value of the claim

If the final value is less that it’s original If the final value is less that it’s original amount, buyers will require that sellers agree amount, buyers will require that sellers agree to repay the entire, or partial, amount of the to repay the entire, or partial, amount of the difference, including interest from the date of difference, including interest from the date of the claim transfer through the transfer datethe claim transfer through the transfer date

How to Get The Most From Your How to Get The Most From Your Claim Sale and Minimize LossClaim Sale and Minimize Loss

Good Signs that your claim is Good Signs that your claim is valid;valid; Your claim is listed on the Your claim is listed on the

debtor’s schedule as debtor’s schedule as UndisputedUndisputed

Check that your balance Check that your balance matches the debtor’s stated matches the debtor’s stated balancebalance

Meet all bar datesMeet all bar dates Review all of your AR payments Review all of your AR payments

for a potential payment for a potential payment preference claimspreference claims

CONCLUSIONSCONCLUSIONS

Can be a profitable ventureCan be a profitable venture Avoiding PitfallsAvoiding Pitfalls Be knowledgeableBe knowledgeable Confer with Legal CounselConfer with Legal Counsel

Thank You!Thank You!

QuestionsQuestions& &

AnswersAnswersPhilip P. Philbin CCEManaging Director & Senior Consultant

Commercial Credit Management Associateswww.commercialcreditmanagementassociates.com

Upcoming Series ofUpcoming Series ofEDUCATIONAL WEBINARSEDUCATIONAL WEBINARS

““Preference Claims in Bankruptcies- How to Preference Claims in Bankruptcies- How to Eliminate Preferences”Eliminate Preferences”

““Filing A Lawsuit- Start To Finish”Filing A Lawsuit- Start To Finish” ““Convenience Charges on B2B Credit Card Convenience Charges on B2B Credit Card

Transactions- Yes you Can!”Transactions- Yes you Can!” ““Managing Collection Agencies”Managing Collection Agencies” ““How To Get And Maintain Accountability in Credit How To Get And Maintain Accountability in Credit

Management”Management”

AND MANY MOREAND MANY MORE

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Webinars: Webinars: How to Handle Customers Who File for BankruptcyHow to Handle Customers Who File for Bankruptcy

- Wednesday, July 22, 2009- 2:30 PM - 3:30 PM EASTERN TIMELink = - Wednesday, July 22, 2009- 2:30 PM - 3:30 PM EASTERN TIMELink = http://www.businessexpertwebinars.com/component/option,com_attend_events/http://www.businessexpertwebinars.com/component/option,com_attend_events/task,view/id,1388/afflink,bewphilipphilbin042409task,view/id,1388/afflink,bewphilipphilbin042409 How to Handle Customers Who File for Bankruptcy How to Handle Customers Who File for Bankruptcy- Wednesday, October 07, 2009- 2:30 PM - 3:30 PM EASTERN TIMELink = - Wednesday, October 07, 2009- 2:30 PM - 3:30 PM EASTERN TIMELink = http://www.businessexpertwebinars.com/component/option,com_attend_events/http://www.businessexpertwebinars.com/component/option,com_attend_events/task,view/id,1389/afflink,bewphilipphilbin042409task,view/id,1389/afflink,bewphilipphilbin042409