Business Bankruptcy and Creditors Rights Issues

Transcription

1 Business Bankruptcy and Creditors Rights Issues

2 AGENDA I. Introduction V. Fraudulent Transfers II. Bankruptcy Overview a. History of Bankruptcy Code b. Types of Bankruptcies a. Intent to Defraud b. Defenses VI. Pre-bankruptcy Strategies III. Claims in Bankruptcy a. Claim Filing Process b. Types of Claims IV. Preference Actions a. Statutory Right to Recover b. Statutory Defenses a. Seeking/Accepting Payments b. Requesting Security c. Prepayment (C.O.D) d. Additional Strategies e. Claim Sales VII. Questions

3 I Introduction

4 Moderator Speakers Scott L. Walker Associate General Counsel, Freddie Mac Ryan G. Foley Partner, Shook, Hardy & Bacon, L.L.P. Michael A. Zito Partner, Shook, Hardy & Bacon, L.L.P.

5 II Bankruptcy Overview

6 Bankruptcy Laws 1898 Congress passed Bankruptcy Act 1978 Amended and became known as Bankruptcy Code 2005 Bankruptcy Abuse Prevention and Credit Protection Act ( BAPCPA )

7 Types of Bankruptcies Chapter 7 Liquidation Trustee appointed to control company No further business Chapter 11 Reorganization Debtor stays in control of company and attempts to re-pay its debts Opportunity for further business Chapter 15 Chapter 15 allows proceedings for a foreign debtor or other related parties to access U.S. Bankruptcy Courts. Typical scenario is when foreign parent company files bankruptcy in its home country and subsidiary is based here in the U.S. and needs protection from creditors.

8 Other Types of Bankruptcies Chapter 9 Financially Distressed Municipalities Examples in the news: Detroit and Sacramento Chapter 12 Designed for financially distressed family farmers or family fishermen Must have regular income from farming or fishing business Debt repayment plans of 3 to 5 years Chapter 13 Provides for adjustment of debts for individuals with regular income Allows debtor to keep property and pay debtors over time Debt repayment plans of 3 to 5 years

9 Impact of Bankruptcies Automatic Stay Loss of future business Loss/reduction of current A/R Preference claims

10 III Claims of Bankruptcy

11 I. Claim Filing Process Governed by Bankruptcy Code 501, 502 and 503 Creditor required to file proof of claim to ID debt Filing preserves claim for purposes of getting paid in bankruptcy Proof of claim form is short and basic Strict deadlines for filing claim Failure to file form can cause waiver of claim

12 II. Types of Claims Unsecured claim o For work done prior to bankruptcy o No priority o Typically get less than full payment

13 Prepetition Priority Claims 503(b)(9) Priority for goods delivered to debtor within 20 days prior to bankruptcy Partial replacement for limiting reclamation claims (discussed later), N/A to goods sold days before Bankruptcy Unlike reclamation, no written demand required Assert claim pursuant to bar date notice which could be same as regular date or separate date Claim form will accompany notice of bar date Key: 503(b)(9) claims must be paid in full upon confirmation of a plan, and in a liquidation have priority over unsecured claims 13

14 Administrative Priority Claim For work done during a bankruptcy Entitled to priority ahead of claims for services/product provided prior to bankruptcy o Priority given to induce parties to do business with debtor in bankruptcy o More likely to get paid in full 14

15 Reclamation Claims State/bankr. law right to demand return of unpaid goods if learn of customer insolvency Requirements - written demand, insolvent when received goods, still in possession at demand Timing can be made up to 45 days from debtor s receipt, 20 more days if bankruptcy intervenes 2005 Br. law - reclamation rights always subject to prior rights of secured creditor in inventory 2005 Br. law - deleted provision requiring courts to grant priority claim if deny reclamation Reclamation of less value since 2005 law change, but still reason to send reclamation demands 15

16 Practice Pointers Know the Proof of Claim/Administrative Claim Bar Date Work with internal business clients to determine amounts outstanding Determine if have cause to attempt for relief from the automatic stay Speak with Debtor s counsel or the Trustee regarding projected distribution to creditors Perform cost/benefit analysis based on projected return on any claim(s) you may have

17 IV Preference Actions

18 Preference Claim Overview Governed by Section 547 of the Bankruptcy Code Action to recover amounts paid by debtor to creditors within 90 days prior to bankruptcy Basis Presumed debtor insolvent in 90 days prior to bankruptcy, and so creditors receiving payments preferred over others Impact - May have to return payments received within 90 days of bankruptcy even though provided product Cannot get product back even if have to return payments

19 Transfer of property of a debtor (Section 547(b)): To the creditor Preference Claim Elements On an antecedent debt (credit transaction) Made while debtor is insolvent On or within 90 days prior to bankruptcy (1 year prior if creditor is insider) That enables creditor to receive more than if debtor were liquidated

20 Limitations on Preference Claims Not apply to payments made outside 90 days Not apply to secured creditors Not apply to prepayments/cod Not apply where payments less than $6,425 Must be filed within two years of bankruptcy Claims less than $12,475 filed where defendant has principal place of business

21 Preference Claim Defenses Two primary defenses Ordinary course (547(c)(2)) New value (547(c)(4)) Defenses not mutually exclusive can argue alternatively or in tandem

22 If after receipt of preference payment, creditor extends more credit for product, amount of new credit can be used to reduce liability Test is mathematical computation e.g., Jan. 1 - $5,000 payment received Jan $4,000 more goods provided on credit Feb bankruptcy filing New Value Defense Potential preference reduced to $1,000 Issue - Does it matter if $4,000 in new credit extended Jan. 15 is paid before or after bankruptcy?

23 Sample New Value Chart Payment Received Date Check Amount New Value Invoice Date New Value Amount Net Preference Exposure 1/1/16 $5,000 $5,000 1/2/16 $4,000 $1,000 1/3/16 $2,000 $0 1/8/16 $3,000 $3,000

24 Payments made in ordinary course of business can be exempt from preference laws Test Subjective / not mathematical Two parts Ordinary Course Defense 1. Whether 90 day payments were consistent with prior history in timing and manner Timing of payments most important and is analysis of days to pay Manner of payments means way transmitted (e.g., check, wire, handdelivery) 2. Whether collection efforts consistent

25 Other Preference Claim Strategies Resist paying full amount demanded Almost always have some defense Can get 15/20% discount even if no defenses Be cautious with an early settlement Might get new more reasonable opponent Might be challenge to insolvency which if successful eliminate claim entirely Might get an end of case deal Leverage 502(h) claims

26 Practice Pointers Remember you have statutory defenses Always negotiate; never pay 100% High percentage of preferences settle

27 V Fraudulent Transfers

28 In a bankruptcy case, fraudulent transfers are governed by Section 548 but there are state fraudulent transfer statutes that could be applicable. 2 year look back period for transfers from petition date. State fraudulent transfer statutes could extend the lookback period. A transfer will be fraudulent if made with actual intent to hinder, delay, or defraud any creditor. Thus, if a transfer is made with the specific intent to avoid satisfying a specific liability, then actual intent is present. Two types of fraudulent transfers: Fraudulent Transfers Actual: typically involves a debtor who, as part of an asset protection scheme, donates his assets, usually to an "insider", and leaves himself nothing to pay his creditors. Constructive: when the fraud doesn t rely on the intent, but looks to the underlying economics of the transaction, if it took place for less than reasonably equivalent value at a time when the debtor was in a distressed financial condition.

29 Defenses to Fraudulent Transfers Timing of transfers Transfer made in good faith and for reasonably equivalent value Beyond statute of limitations Most defenses are subjective Intense analysis of transaction at issue Forensic accounting experts sometimes required for right case

30 Fraudulent Transfers v. Preferences 90 day lookback for Preferences v. 2 year lookback for Fraudulent Transfers Intent of transaction and economic measurements key in Fraudulent Transfer analysis Preference case analysis more focused on timing of payments from debtor to creditor and less about intent Creditor or Trustee can initiate Fraudulent Transfer action; only Trustee can initiate a Preference

31 VI Pre-Bankruptcy Strategy

32 Issue: Increase in collection efforts can affect preference claim defenses First priority should still be to get money in door Why: Continue to Seek/Accept Payments Debtor may never file bankruptcy in which case never have to address preference claims Even if debtor files bankruptcy, typically only have to return portion of payments, and not for months/years

33 Consider Requesting/Requiring Security Examples Letter of credit (LOC), Guaranty Why: Protection in event of debtor financial trouble or bankruptcy Bankruptcy not affect right to recover on LOC or guaranty from person/entity not in bankruptcy

34 Option for financially troubled customer is to require pre-payment/cod Why: Protects those payments from preference claims, and so limits further preference exposure Allows L&P to continue to generate business Issue: Considering Requesting/Requiring Prepayment for Product May not be feasible or acceptable to customer May impact ability of customer to stay out of bankruptcy and pay older debt

35 Payment Negotiation Considerations Two considerations related to preference claims 1. Impact of the negotiations on the ordinary course of business defense 2. Impact of the negotiations on the new value defense

36 Negotiations / Ordinary Course Best - hold customer to terms/prior history A change in terms/collection could affect preference exposure, but not necessarily No set rules/guidelines for what is ordinary The closer payments are to terms/prior history the better, but some change can still be ordinary Some increased collection efforts can still be ordinary Be aware of/consider ordinary course, but priority still be standard term and collection decisions

37 Negotiations / New Value Impact of extending new credit on new value defense May help or at least not hurt preference exposure Will increase potential bad debt exposure Option extend new credit at most to extent of payment received Not increase loss/preference exposure May help debtor remain in business/continue to pay Be aware of/consider new value issues, but priority still be standard credit decisions

38 Practice Pointers Counsel internal clients that vendor/customer filing bankruptcy, while not ideal, should not completely change business relationship Educate internal clients about potential bankruptcy issues so they consider involving in-house counsel early if vendor/ customer mentions filing bankruptcy Use post-mortem case review with internal clients as opportunity to help avoid bankruptcy issues in the future

39 When company files bankruptcy, creditors hold claims Bankrupt will eventually distribute money to creditors (x cents on dollar) Before $ is distributed buyers contact creditors about purchasing claims (paying lump sum to buy their claims) Buyers only purchase priority and unsecured claims No purchases of secured claims Only buy claims believed to be undisputed Only buy larger claims Bankruptcy Claim Sales Practice began in 1990 s

40 Importance of Claim Sales Used to be that claims just sat until bankruptcy resolved Only option was to spend time and money in bankruptcy trying to force or negotiate a payment With the emergence of claims buying, there is now another option for creditors Guaranteed monies Much sooner than would be paid from bankruptcy

41 Not individual buyers Professional claims traders Investment banks Capital funds Who are Buyers?

42 How Do Buyers Reach Creditors? Review bankruptcy schedules Review filed proofs of claim Send written proposals to creditors ID claims to be purchased ID percentage to be paid Can be as high as 90 or 95% More likely to be 25% or less

43 ü Benefits to Selling ü Claimants get set amount now and avoid risk of no or less payment ü Avoid risk of getting paid in stock ü Avoid further delay in getting paid some bankruptcies can last years ü Not have to spend further time/fees monitoring bankruptcy

44 Cons to Selling x Uncertainty about value of the claim Can research possible payout in bankruptcy but costly and difficult Can call other counsel in bankruptcy about payout but often they either not know or not willing to speculate Might be selling claim short In most (not all) cases bankrupt entity will pay out higher percentage than what claims are selling for Could be taking on new risks/liabilities depending on terms of claim sale agreement

45 Claim Sale Agreements Buyer sends draft agreement Need to carefully review Make sure agreed on percentage Make sure payment made on date claim sold Avoid taking on new liability If claim is objected to Buyers will want refund with interest Buyers will want reimbursement of their fees in defending claim Indemnity obligation

46 Bankruptcy laws require buyers to file a notice of claim purchase Fee per claim Filing of Claim Sale Notice Puts debtor on notice of new owner of claim Know where to send objections Know where to send distributions

47 Practice Pointers Don t accept the first purchase offer Research claim value before sell Review bankruptcy docket Internet searches Call other attorneys involved in the bankruptcy Review claim sale agreement to avoid taking on liabilities

48 VII Questions?

49 Contacts Ryan Foley Partner Mike Zito Partner