Download Common Bankruptcy Issues

Common Bankruptcy Issues:
How to Mitigate Risk
Presentation to Association of Corporate Counsel (ACC)
Small Law Department Committee
on May 13, 2010
by Amy Swedberg
(612) 672-8367
[email protected]
Maslon Edelman Borman & Brand, LLP
3300 Wells Fargo Center
Minneapolis, MN 55402
www.maslon.com
© 2010 Maslon Edelman Borman & Brand, LLP
Pre-Bankruptcy Tools to Mitigate Risk
Purchase Money Security Interest (PMSI)
Need signed security agreement or
reservation of title in sales document
UCC § 9-324 governs perfection rules
 UCC filed within 20 days of delivery
 Advance written notice to blanket secured
lender if goods are inventory
• Insider or Affiliate Guaranty, Letter of Credit,
Customer Deposit Agreement
• Security Interest in Other Assets
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© 2010 Maslon Edelman Borman & Brand, LLP
Pre-Bankruptcy Tools to Mitigate Risk
Preference Risk (90 days)
TIP: Aggressive payment terms (due upon receipt)
or collection action could create more risk;
payment consistency is important for proof of the
ordinary course of business defense
Vendor Bankruptcy
Prior to bankruptcy file precautionary UCC-1 on
tooling or other assets located at the vendor
No right to terminate executory supply or other
executory agreements after bankruptcy filing;
bankruptcy termination or ipso facto clauses are
unenforceable
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Locating a Bankruptcy Filing
• Court info: www.uscourts.gov/courtlinks
• TIP: www.nysb.uscourts.gov (all courts use 2
letter state code, followed by one letter code,
e.g. “s” for southern,“w” for western, “c” for
central, if applicable, then “b” for bankruptcy)
• Search for bankruptcy filings in states where
debtor is “located” (incorporated or organized)
or debtor’s principal place of business
• Register for PACER log-in and password at
https://pacer.login.uscourts.gov
• Log on to websites at “ecf.” instead of “www.”
https://ecf.nysb.uscourts.gov
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Types of Bankruptcy Filings
• Chapter 11
 Debtor remains in possession and control of its property
and operates in the ordinary course of business
 Debtor seeks confirmation of Ch. 11 plan (120 day
exclusive right to file plan, can be extended for “cause”
up to 18 months) or sells assets in § 363 sale followed
by liquidating plan or conversion to Ch. 7
• Chapter 7
 Ch. 7 trustee has possession and control of assets and
liquidates and distributes according to priorities under
bankruptcy code
 Only individuals have property exemptions
• Chapter 13
 Debtor proposes Ch. 13 repayment plan upon filing
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Priority of Payment in Bankruptcy
• Secured Claims (to extent of value of collateral)
• Ch. 7 Priority Claims (after conversion from Ch. 11)
 Ch. 7 trustee fees, expenses of liquidation and necessary to
preservation of property
• Ch. 11 Priority Claims
 Post-petition administrative expenses necessary for the
debtor to operate in Ch. 11 under 11 U.S.C. § 503(b)
 Certain taxes/wages and other priority claims
 20-day claims under 11 U.S.C. § 503(b)(9)
• Unsecured Claims
• Equity
 Equity may keep interests and pay less than 100% to
unsecured creditors under “new value” plan
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© 2010 Maslon Edelman Borman & Brand, LLP
Common Bankruptcy Issues
Executory Contract Issues (11 U.S.C. § 365)
 Some performance remains due on both sides at the
time of the bankruptcy filing; debtor can assume or
reject in bankruptcy
 Non-debtor has duty to continue performing prior to
rejection of executory contract; debtor generally controls
timing of assumption / rejection decision
 Non-debtor has right to adequate protection including
post-petition payments/performance or may seek to
compel rejection
 Assumption requires full cure; must be assumed “as is”
 Contract may generally be assigned notwithstanding
anti-assignment clause; non-debtor has right of
adequate assurances of future performance
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© 2010 Maslon Edelman Borman & Brand, LLP
Common Bankruptcy Issues
File Proof of Claim (POC)
Use POC form mailed to creditors or pull form from
bankruptcy court website; mail copy with selfaddressed, stamped envelope for proof of receipt
Most Ch. 7 case are filed as “no asset” cases,
notice will state Please Do Not File a Proof of
Claim Unless Instructed To Do So
Watch for Claims Agents and POC Bar Dates; last
day to file claims is generally 90 days after Meeting
of Creditors except larger Ch. 11 cases where the
bar date is set by motion and court order
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© 2010 Maslon Edelman Borman & Brand, LLP
Common Bankruptcy Issues
Evaluate Preference Risk
Bankruptcy Code § 547(b) defines a preference as:
• a transfer of the debtor’s interest in its property,
• to or for the benefit of a creditor,
• on account of an antecedent or existing debt,
• made while the debtor was insolvent, and
• on or within 90 days prior to the petition date (or
one year for insiders) that enables the creditor to
receive more than it would in a Ch. 7 liquidation
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© 2010 Maslon Edelman Borman & Brand, LLP
Common Bankruptcy Issues
Evaluate Preference Defenses
 Ordinary Course of Business (OCB)
 subject or objective test
 Subsequent New Value
 “paid for” new value, emerging view recognized in
most jurisdictions
 Contemporaneous Exchange of Value
 Assumption of Executory Contract / Critical Vendor
 Small Preference Safe Harbor (<$5,475)
 Venue limitation (<$10,950)
 TIP: Ignore demand letters, you may not be sued, but
watch for summons & complaint to arrive by regular mail
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Common Bankruptcy Issues
Immediately Pursue Reclamation Rights
BAPCPA expanded rights under 11 U.S.C. § 546(c)
• Seller may not reclaim goods unless such seller
demands in writing reclamation of such goods—
• not later than 45 days after the date of receipt of
such goods by the debtor; or
• not later than 20 days after the date of
commencement of the case, if the 45-day period
expires after the commencement of the case
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© 2010 Maslon Edelman Borman & Brand, LLP
Common Bankruptcy Issues
Reclamation Rights (continued)
• Requires written reclamation notice
• Goods must still be in existence and
identifiable
• May receive return of goods
• Reclamation procedures sometimes
addressed in “first day” orders
• Secured lender will almost always have
priority which diminishes the effectiveness of
most reclamation claims
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© 2010 Maslon Edelman Borman & Brand, LLP
Common Bankruptcy Issues
Intellectual Property Issues
Non-debtor as Licensor / Debtor as Licensee
• Customer may assign its licensee rights to a thirdparty notwithstanding anti-assignment clause
 non-debtor should object if licensee rights are nonexclusive; non-exclusive rights are viewed as
personal and generally cannot be assumed and
assigned
• TIPS: non-debtor should demand immediate
payment of post-petition royalties instead of
administrative expense claim due to risk of
administrative insolvency
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© 2010 Maslon Edelman Borman & Brand, LLP
Common Bankruptcy Issues
Intellectual Property Issues (continued)
Debtor as Licensor / Non-Debtor as Licensee
• Non-debtor may elect to retain licensee rights,
including exclusivity, for duration of contract and any
extension under Bankruptcy Code § 365(n)
 Does not apply to trade names or trademarks
 Requires non-debtor to make all ongoing royalty
payments
• TIPS: Support licensee rights with lien on IP; place
source code in escrow; distinguish between
maintenance and royalty payments; avoid high up
front payments or anything that encourages rejection
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© 2010 Maslon Edelman Borman & Brand, LLP
Common Bankruptcy Issues
Secured Lien Rights
• Secured creditor has right to “adequate protection” of
its lien in collateral valued as of the petition date
• Secured creditor can seek relief from the automatic
stay to foreclose on its collateral
 For “cause” including lack of adequate protection
 No equity in collateral and collateral not necessary to an
effective reorganization
• Secured creditor entitled to lien on sales proceeds,
return of collateral or “indubitable equivalent”
• Junior secured creditor may have leverage even with
“out of the money” junior lien under recent 9th Circuit
Clear Channel decision, 391 B.R. 25 (9th Cir. BAP 2008)
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© 2010 Maslon Edelman Borman & Brand, LLP
Common Bankruptcy Issues
Evaluate Priority Admin. Expense Claims
• Code § 503(b): Priority administrative expense
claim for post-petition goods or services necessary for
continued operation or preservation of estate assets
• §503(b)(9) Claim: Available if client supplied goods
in the ordinary course of business 20 days prior to
petition date
 Generally client must file motion for allowance of 503(b)(9)
claim if no alternate procedure is specified
• Procedures or deadlines for asserting may be addressed in
“first day” or other Bankruptcy Court orders
• Watch for deadline earlier than general claims bar date
• 503(b)(9) claim may not be paid until plan confirmation
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© 2010 Maslon Edelman Borman & Brand, LLP
Common Bankruptcy Issues
Setoff Rights (11 U.S.C. § 553)
• Preserves non-debtor’s common law right to offset
mutual debts
 Available only if mutual obligations are both pre-petition
or both post-petition
 Requires relief from the automatic stay and must be
exercised prior to any sale “free and clear” under § 363
Equitable Recoupment
 Debts must arise out of same transaction or occurrence
 No stay relief necessary and may be asserted post-sale
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© 2010 Maslon Edelman Borman & Brand, LLP
Amy J. Swedberg
Partner
Maslon Law Firm
Phone: 612.672.8367
Email: [email protected]
www.maslon.com
AREAS OF EMPHASIS
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Banking and Financial Services
Creditor’s Rights and Bankruptcy
Indenture Trustee Representation
Secured Lending
Amy Swedberg is a partner in Maslon's Financial Services Group. Her practice
focuses primarily on the representation of financial institutions, secured
creditors and equipment lessors in workouts, collection litigation and
bankruptcy, as well as indenture trustees in complex Chapter 11 proceedings.
She also assists corporate counsel on bankruptcy and collection related issues
and asset-based lenders in preparing and negotiating commercial loan
documentation. Prior to joining the firm in 2000, Amy gained valuable
experience practicing as a civil and commercial litigator.
© 2010 Maslon Edelman Borman & Brand, LLP