WHAT TO DO WHEN YOU RECEIVE A NOTICE OF BANKRUPTCY FILING:
AN OVERVIEW OF BANKRUPTCY LAW, RULES, AND PROCEDURES
Joshua W. Wolfshohl, Partner
Aaron J. Power, Associate
PORTER HEDGES LLP1000 Main Street, 36th Floor
Houston, Texas 77002(713) 226-6695 Tel
(713) 226-6295 [email protected]
November 10, 2015
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TOPICS
Types of Bankruptcy Cases Commencement of the Case Property of the Estate The Automatic Stay Use/Sale of Property of the Estate Executory Contracts/Unexpired Leases Asserting Claims in Bankruptcy Discharge Preferences/Fraudulent Transfers/Postpetition
Transfers
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TYPES OF BANKRUPTCY CASES
Liquidation
Chapter 7– Individual or Corporate liquidation– Estate administered by chapter 7 trustee– The trustee may operate the business for a limited time in order
to maximize value– Prepare schedules and statement of financial affairs; once case
is filed, chapter 7 trustee takes over; limited involvement by corporate counsel
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TYPES OF BANKRUPTCY CASES
Reorganization
Chapter 11– Corporate reorganization or liquidation (also individual
reorganization for certain individuals)– Estate is generally administered by debtor as a debtor in
possession, rather than a trustee– Debtor continues operations, although the business may be
liquidated or reorganized– Debtor proposes “plan of reorganization” or “plan of liquidation”
• Debtor solicits creditors and interest holders to accept or reject the plan
• The plan must be approved by the Bankruptcy Court and meet certain statutory requirements
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TYPES OF BANKRUPTCY CASES
Personal Reorganization
Chapter 13– Individual reorganization– Chapter 13 trustee is assigned to the case– Debtor commits disposable income for 3-5 years to pay creditors– Plan must be confirmed by the Bankruptcy Court and meet
certain statutory requirements
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COMMENCEMENT OF THE CASE
The Bankruptcy Petition Voluntary vs. Involuntary Who is Eligible to be a Debtor?
– Individuals – Chapter 7 vs. Chapter 13/Chapter 11– Corporations and other business entities – Chapter 7 vs.
Chapter 11– Insolvency is Not a Requirement
The “Petition Date” and Pre/Postpetition Debts Filings on Petition Date (or short by after)
– Schedules– Statement of Financial Affairs (SOFAs)
Section 341 Meeting of Creditors
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THE AUTOMATIC STAY
11 U.S.C. § 362
The automatic stay is a broad federal injunction designed to stop most acts or actions against a debtor or property of the estate.
Section 362 stays commencement or continuation of – all judicial, administrative or other actions or proceedings against a
debtor– Enforcement against a debtor of any judgment– acts to obtain possession of property of the estate or to exercise
control over property of the estate– acts to create, perfect or enforce liens against property of the estate– acts to create, perfect or enforce against property of the debtor any
lien– any act to collect, assess or recover a claim against the debtor, or
any setoff.
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SCOPE OF THE AUTOMATIC STAY
Generally, the automatic stay extends only to the debtor. Claims against third parties are, therefore, not impacted
by a bankruptcy filing. Pending Litigation
– Suggestions of Bankruptcy in all pending litigation cases
– Need motion to life stay to proceed
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EXCEPTIONS TO THE STAY
The commencement or continuation of a criminal action or proceeding against the debtor (§ 362(b)(1)).
The perfection of a lien within thirty (30) days of the granting of the lien by the debtor (§ 362(b)(3)).
The commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit’s police and regulatory power (§ 362(b)(4)).
A tax audit, the issuance to the debtor of a notice of tax deficiency, a demand for tax returns, or a tax assessment (§ 362(b)(9))
Any act by a lessor to the debtor under a lease of nonresidential real property that has terminated by its terms before the commencement of or during the bankruptcy case to obtain possession of the leased property (§ 362(b)(10)).
The presentment of a negotiable instrument and the giving of notice of and protesting dishonor of such an instrument (§ 362(b)(11)).
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EFFECT OF STAY VIOLATIONS
The Bankruptcy Code provides that the willful violation of the automatic stay can result in compensatory and punitive damages against a creditor if an individual is injured.
Most courts have held that because the word “individual” is used, damages under Section 362(k) may not be awarded to a corporate debtor.
However, damages may be awarded for willful violation of the stay pursuant to the court’s general contempt powers or pursuant to its equitable powers under Section 105(a).
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RELIEF FROM THE AUTOMATIC STAY
Must file a motion Court must rule within 30 days
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EXECUTORY CONTRACTS AND UNEXPIRED LEASES
Assumption/Rejection– Deadline to assume or reject depends on whether case is chapter 7 or
chapter 11 Chapter 7
– Executory contracts, residential real property leases and personal property leases – 60 days to assume or reject
Chapter 11– Executory contracts, residential real property leases and personal
property leases must assume or reject before confirmation – Non-residential real property leases – 120 days after petition
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ASSERTING CLAIMS IN BANKRUPTCY
Filing a Proof of Claim – look at deadline; claims agent?; where to file?
Post-Petition Claims – file in main case vs. claims register
20 Day Administrative Claims Reclamation Claims – must send notice Secured vs. Unsecured Claims
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FILING A PROOF OF CLAIM
A standard form promulgated by the court for purposes of identifying each creditor’s claim by nature, priority and amount.
The proof of claim should have attached to it all evidence of indebtedness, security interests and liens, and perfection of the security interests and liens.
It is a good practice for creditors to file a proof of claim early in any bankruptcy case.
In a chapter 11 case and the claim is scheduled but the debtor has not listed the claim as contingent, unliquidated, or disputed, the creditor does not need to file a proof of claim.
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POST-PETITION CLAIMS
All expenses incurred by the debtor post-petition in the ordinary course of business generally constitute administrative expenses under Section 503(b).
The test is whether such expenses are “actual and necessary expenses of preserving the estate”.
These includes goods and services provided to a debtor from the petition date forward.
Equal in priority to the professional fees of the debtor’s lawyers, investment bankers and financial advisors
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20 DAY ADMINISTRATIVE CLAIMS
11 U.S.C. § 503(b)(9) provides that after notice and a hearing, the Court may allow administrative expenses, including the value of any goods received by the debtor within 20 days before the commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.
Exception to the general rule that prepetition claims may not be paid absent order of the bankruptcy court.
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RECLAMATION CLAIMS
11 U.S.C. § 546(c) preserves a seller’s state law reclamation rights under Section 2-702 of the Uniform Commercial Code if:– The Seller sold goods to the Debtor.– All of the goods were sold to the Debtor in the ordinary course of the seller’s
business (if the sale to the person comports with the usual or customary practices of the kind of business in which the seller is engaged or with the seller's own usual or customary practices).
– The Debtor received delivery of the goods within 45 days of filing for bankruptcy.
– The Debtor was insolvent when the goods were received.– The Seller provided written notice demanding that the goods were being
reclaimed either (1) within 45 days of the delivery or (2) within 20 days after the debtor’s filing for bankruptcy, if the 45 day period expired after the bankruptcy case was filed.
– The goods must be identifiable and in the possession of the debtor on the date of the reclamation demand.
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SECURED / UNSECURED CLAIMS
Secured Creditors’ security interest must be perfected prior to the petition date.
Claim is only secured to the extent of the creditor’s interest in property of the estate plus the amount of any allowable setoff; remaining claim constitutes an unsecured “deficiency” claim.
If a creditor is oversecured, it may be entitled to postpetition interest and any reasonable fees, costs, etc. provided for in the creditor’s loan documents
Secured Creditor’s security interest attaches to the proceeds of any property sold.
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SECURED / UNSECURED CLAIMS
Unsecured creditors generally receive a pro-rata share of the proceeds of any unencumbered estate assets, after payment of administrative claims and priority claims.
Exceptions:– “Critical Vendors”– Certain employee claims– Assumed Executory Contracts/Unexpired Leases
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DISCHARGE
Effect of a Bankruptcy Discharge– In individual cases, a discharge relieves the debtor of any judgment or
claim to the extent it constitutes a personal liability– A discharge operates as an injunction against future actions to recover
against the debtor for personal liability and, with certain limitations, operates as an injunction against attempts to collect from property acquired after the commencement of the bankruptcy case.
Exceptions to Discharge– Certain types of debts can be excepted from discharge:
• Certain taxes• Certain types of claims arising from fraudulent conduct of the debtor, embezzlement
and larceny• Child support• Claims arising from willful and malicious injury to another entity or property• Certain student loans
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PREFERENCES
Preference litigation is a common risk to unsecured and undersecured creditors.
Definition of Preference is a payment– to and for the benefit of a creditor– for or on account of an antecedent debt owed by the debtor before the
transfer is made– made while the debtor was insolvent
• on or within 90 days (non-insiders) or • between 90 days and one year (insiders) before the filing of the
petition, – that enables the creditor to receive more than it would receive in a
case under Chapter 7. The essence of a preferential transfer is that it diminishes the debtor’s
bankruptcy estate and prefers a creditor who would not be entitled to such a payment by virtue of an enforceable lien, setoff or other means.
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DEFENSES TO PREFERENCES
Contemporaneous exchanges for new value– the creditor must demonstrate that it is a creditor to or for whose benefit
an alleged transfer was made– the creditor must show that it and the debtor intended to make a
contemporaneous exchange for new value– the exchange must be in fact contemporaneous and for new value.
Ordinary course of business payments– the underlying debt on which payment was made was incurred in the
ordinary course of business or financial affairs of both parties– the transfer was made in the ordinary course of business or financial
affairs of both parties or the transfer was made according to ordinary business terms.
Subsequent new value– the creditor extended alleged new value after receiving a preferential
transfer – the new value was unsecured– the new value remains unpaid.
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FRAUDULENT TRANSFERS
Bankruptcy Code allows a debtor/trustee to recover transfers made to the debtor (within 2 years of the petition date) that are actually or constructively fraudulent.
Actual– Transfers made with the “intent to hinder, delay or defraud”
creditors
Constructive– If debtor transfers property for less than “reasonably equivalent
value”– When the debtor is insolvent (or becomes insolvent as a result of
the transfer) or undercapitalized
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UNAUTHORIZED POSTPETITION TRANSFERS
The trustee may avoid any transfer of property of the estate that is made after the commencement of the bankruptcy case and is not authorized by the Bankruptcy Court
Creditors should obtain Bankruptcy Court approval before receiving postpetition transfers that are outside the ordinary course of business
WHAT TO DO WHEN YOU RECEIVE A NOTICE OF BANKRUPTCY FILING:
AN OVERVIEW OF BANKRUPTCY LAW, RULES, AND PROCEDURES
Joshua W. Wolfshohl, Partner
Aaron J. Power, Associate
PORTER HEDGES LLP1000 Main Street, 36th Floor
Houston, Texas 77002(713) 226-6695 Tel
(713) 226-6295 [email protected]
November 10, 2015
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