Current Trends on What to Do When Your Customer Files Bankruptcy

Transcription

1 Current Trends on What to Do When Your Customer Files Bankruptcy Lisa S. Gretchko Howard & Howard Attorneys PLLC Monday, June 13, :45-5:00 p.m. Session No

2 Agenda 2 1. How and why Chapter 11 cases of today differ from Chapter 11 cases of yesteryear. 2. What should a credit manager do when a customer files Chapter 11? 3. Special issues a credit manager should watch out for. *Disclaimer: This presentation does not constitute legal advice or a legal opinion on any matter discussed. This presentation is for educational purposes only. If you have a specific legal question, please consult with an attorney of your own choice.

3 How and Why Chapter 11 Cases of Today Differ From Chapter 11 Cases of Yesteryear 3 Yesteryear s Chapter 11 Today s Chapter 11 Going-concern sale of all (or most) of debtor s assets was relatively rare; although often a portion of the debtor s business was sold as a going concern. Generally, debtor businesses either reorganized or liquidated. Going-concern sales are very common, and they often occur very early in the bankruptcy case. Bankruptcy Code 363 makes these sales free and clear. Secured creditors view them as a good way to liquidate collateral and get paid relatively quickly and without having to finance the debtor s reorganization efforts and professional fees. Courts and debtors view going-concern sale as a way to preserve jobs.

4 How and Why Chapter 11 Cases of Today Differ From Chapter 11 Cases of Yesteryear (cont d) 4 Yesteryear s Chapter 11 Today s Chapter 11 The Bankruptcy Code ( 365) allowed Bankruptcy Courts to extend the time for debtor to assume or reject leases of nonresidential property for long periods of time and/or multiple extensions; courts often extended the deadline through the Plan Confirmation Date. The 2005 amendments to Bankruptcy Code limit the length of time a debtor has to assume or reject a lease of non-residential real property to 120 days and the Bankruptcy Court can grant the debtor only one 90 day extension (for a total of 210 days) unless the landlord consents to further extensions. This makes it difficult for retail stores to reorganize (e.g., Borders).

5 How and Why Chapter 11 Cases of Today Differ From Chapter 11 Cases of Yesteryear (cont d) 5 Yesteryear s Chapter 11 Today s Chapter 11 Creditors had reclamation claims for goods sold on credit and received debtor within the 10-day reclamation period. Bankruptcy Code 546(c) gave creditors with a rightful reclamation claim a secured claim or an administrative priority claim if they were denied the right to reclaim their goods. The 2005 amendments to the Bankruptcy Code expanded the reclamation period to 45 days, BUT reclamation claims are now expressly subject to prior recorded security interests in the goods the creditor seeks to reclaim. Creditors now receive administrative priority for goods delivered to the debtor within 20 days before the bankruptcy. Because claims under 503(b)(9) have administrative priority, they are paid on the effective date of the Chapter 11 Plan of Reorganization.

6 6 What Should a Credit Manager Do When a Customer Files Chapter 11? 1. Call bankruptcy counsel immediately. 2. Always consider stopping goods in transit. Goods should stay stopped until you receive adequate assurance that you will be paid (e.g. wire transfer or cash) in advance of delivery, or COD. Debtors are often strapped for cash, and will want creditors to accept an administrative claim as adequate assurance of payment. An administrative claim is not the same as cash. If your company is willing to accept an administrative claim as adequate assurance of payment, you should not deliver the goods to the debtor unless debtor issues a post-petition purchase order or the Bankruptcy Court enters an order providing that post-petition deliveries on pre-petition purchase orders will have administrative priority.

7 7 What Should a Credit Manager Do When a Customer Files Chapter 11? (cont d) 3. Reclamation demand: although reclamation is generally a hollow remedy since the 2005 amendments to the Bankruptcy Code made it expressly subject to prior recorded security interest in the goods the creditor seeks to reclaim, reclamation claims still have value if there is no prior perfected security interest against the goods your company seeks to reclaim.

8 8 What Should a Credit Manager Do When a Customer Files Chapter 11? (cont d) 4. Get details on the Chapter 11 case and determine if the debtor has filed a motion to sell its assets as a going-concern. If so: a. Gather all contracts with the debtor (including rebate agreements), and determine: (i) the amount that the debtor owes under those contracts; and (ii) whether your company wants to object to the debtor assuming your contract and assigning it as part of the sale; b. Gather all open invoices;

9 9 What Should a Credit Manager Do When a Customer Files Chapter 11? (cont d) c. Determine whether your company delivered goods to the debtor within 20 days before bankruptcy ( 503(b)(9) claim); d. Determine whether your company needs to object to the sale in order to protect claims, rights, or interests that should not be washed away in a 363 sale. Examples include setoff rights, license rights (especially intellectual property licenses); e. Determine whether the debtor is attempting to include your company s property (or your customer s property, e.g., tooling) in the sale.

10 10 Special Issues a Credit Manager Should Watch Out For 1. The debtor s schedules might list the debt owing to your company as a contingent trade payable. This may signal that the debtor plans to use available rebates to pay your company s 503(b)(9) claim, or perhaps its other claims. In May, 2015 the Delaware Bankruptcy Court issued its opinion in ADI Liquidation, Inc. (case No ) and ruled that the debtor can, in the debtor s discretion, use setoff or recoupment rights to pay secured claims, 503(b)(9) claims, or general unsecured claims.

11 11 Special Issues a Credit Manager Should Watch Out For (cont d) 2. The debtor s motion to sell assets often purports to sell the debtor s accounts, including any rebate that your company owes the debtor. If your company owes the debtor a rebate, that rebate owed to the debtor gives your company setoff rights that the Bankruptcy Code treats as collateral, and your company will want to: (i) object to any sale that purports to wash away those setoff rights, and (ii) preserve set-off and recoupment rights when filing a proof of claim.

12 12 Special Issues a Credit Manager Should Watch Out For (cont d) 3. The typical protocol for 503(b)(9) claims often requires the creditor to publicly file tremendous amounts of information, including invoices and other information from which anyone (including your competitors) can see your company s pricing information. Always redact pricing information from 503(b)(9) claims (and from any other publiclyfiled document.)

13 13 Special Issues a Credit Manager Should Watch Out For (cont d) 4. The debtor s notice that it wants to assume and/or assign any executory contracts often: (i) recites that the cure amount is -0-, and (ii) gives the creditor very little time object (either to the assumption, the assignment, or the -0- cure amount.) Credit managers need to watch for any notice regarding a proposed assumption or assignment of your company s contract(s) with the debtor, and notify counsel immediately.

14 Summary 14 Today s Chapter 11 cases often involve a 363 sale of all (or most) of the debtor s assets early in the case, thus making Chapter 11 cases more active at the outset than in the past, and more expensive in terms of legal fees at the outset. Consult bankruptcy counsel early. Watch for notice(s) regarding assumption/assignment of your company s contract(s) and cure amounts. Take action to protect your company s rights from being washed away in a 363 sale. Debtors continue to invent and use new strategies to wipe out the claims and rights of others; creditors need to be vigilant and actively monitor the debtor s case.