Bankruptcy: Advanced Skills for In-house Attorneys

What Is Bankruptcy? Bankruptcy is a court-supervised process pursuant to which debtors (individuals and businesses) are able to adjust their debts and legal obligations. Bankruptcy is intended to provide a fresh start for debtors. Bankruptcy is also intended to promote fair treatment among creditors and other interested parties. Note, this does not mean that creditors will be treated in an objectively fair manner as concerns their rights against the debtor.

Bankruptcy Types: Chapters 7, 11, 9, 12, 13 and 15 Chapter 7: Personal or corporate liquidation of assets. Chapter 11: Corporate (or personal) reorganization. Chapter 9: Adjustment of debts of a municipality. Chapter 12: Adjustment of debts of family farmers and fishermen with regular incomes. Chapter 13: Adjustment of debts of individuals with regular incomes. Chapter 15: Ancillary and other cross-border cases. Chapter 9 and Chapter 15 are the proceedings most likely to be encountered by corporate clients. Many Chapter 15s files in NY and DE for foreign entities. Chapter 9s in the news because of Detroit, Michigan, San Bernadino and Stockton, CA, and Chicago, IL (just kidding).

Alternatives to Bankruptcy Out of court workout/forbearance Exchange offer or trade composition Asset ‎Sales Foreclosure - differs for personal property versus real property  Loan to Own/Purchasing Distressed Debt Receivership or Assignment for the Benefit of Creditors ‎State Law Dissolution

Bankruptcy Notices Commencement of Case/Section 341 Meeting of Creditors Formation of Chapter 11 Creditors Committee Bar Dates Section 363 Free and Clear Sales Assumption and Assignment of Contract or Lease and Proposed Cure Cost Amount Chapter 11 Disclosure Statement Hearing Chapter 11 Plan Confirmation Hearing and Ballot Closing Case/Chapter 7 Final Report Preference Demand Letter Summons in an Adversary Proceeding Rule 2004 Discovery

Automatic Stay One of the most important aspects of bankruptcy. Allows the debtor “breathing room” to make decisions in time of crisis. In both Chapter 7 and 11 cases, the automatic stay applies. It arises immediately upon filing a petition. Generally, the automatic stay is an automatic injunction prohibiting creditors from starting or continuing actions to collect debts. Prohibited actions including court cases, enforcing or perfecting most liens, setting off mutual debts, and taking actions to obtain debtor’s property. Actual and/or punitive damages may be assessed against creditors for violating the automatic stay.

Relief from the Automatic Stay A creditor, typically secured, can seek to obtain relief from the automatic stay. The creditor essentially has two options: Prove “cause,” which may include lack of adequate protection (collateral declining in value during bankruptcy case); or Prove that the debtor has no equity in the property; and the property is not necessary for an effective reorganization. An automatic stay request involves seeking relief to complete a state or federal court proceeding. Parties most often seek stay relief to foreclosure against collateral (like real property) or to continue already filed litigation to conclusion (i.e., personal injury claims which normally cannot be tried by a bankruptcy court).

Executory Contracts Assume as Debtor, Assume and Assign to Third Party or Reject Generally have until Chapter 11 plan time to decide Counterparty obligated to perform until rejected If assumed or assigned, generally entitled to cure costs (if timely asserted) If rejected, generally prepetition unsecured claim (if timely asserted) Negotiated cure amounts

Executory Contracts (Continued) Most anti-assignment or consent to assignment clauses are overridden Bankruptcy or insolvency based defaults generally not enforceable Special Rules for IP Licenses Personal Services Contracts Damage Claims for Rejection of Employment Agreement Equipment leases prior to Assumption or Rejection

Non-Residential Real Estate Leases Most rules similar to Executory Contracts Initial 120 Day Period to Assume or Reject Can extend decision period one time for additional 90 days Further extensions require landlord consent In tenant bankruptcy, tenant needs to pay post-petition rent at contract rate until rejects In landlord bankruptcy, rejected tenant has option for holdover rights If tenant rejects a lease in tenant bankruptcy, then rejection damages claim is generally unsecured and is capped at the greater of (i) (a) one year's future rent or (b)15%, not to exceed three years, of the remaining term of the lease plus (ii) past due amounts owned on lease

Pre Filing Protections for Counterparties to Contracts and Leases Letters of credit Guarantees Security Deposits Objective criteria for eligible assignees may be enforceable in some courts Special language in IP licenses may also be desirable from the IP licensee's perspective

Proactive Strategies to Protect Against Preference and Fraudulent Transfer Exposure Cash in Advance or Cash on Delivery or CIA/COD Plus Paydown Purchase money or other security interest (additional steps needed to perfect) Apply payments on antecedent debt consistent with prior payment pattern Consistent method of payment (checks consistently, wire/ACH consistently, etc.) Keep payment terms for goods to less than 20 days and enforce Written reclamation claims (if goods are on hand when demand is made) New value (new extensions of credit (usually unpaid)) (unlikely to receive 100 cents on the dollar on such claims)

Fraudulent Transfer Document reasonably equivalent value paid Marketing process/broker on seller side helps Holdback note/earn out or other offset-recoupment leverage Careful with seller insiders as part of buyer Solvency or fairness opinions (for larger deals) If possible, document seller solvency Require seller to use proceeds to pay creditors or retain proceeds for a period of time

Family Owned Business Scenario Fiduciary Duty to Creditors Zone of Insolvency Personal Liability of Officers and Directors Interaction with Vendors 

Creditors Committee Represent unsecured creditors as a whole Typically selected from largest 20 or 30 unsecureds. Also consider types of claims (bond, trade, landlord, union, pension, etc.)  Committee members get better information and ability on influence the Chapter 11 exit Committee members owe a duty to all unsecureds. Can be an issue if buying or selling claims or bidding for assets Committee Professionals Paid by Bankruptcy Estate

FACULTY Sajida Mahdi Ali Associate General Counsel & Vice President, BMO Financial Group Sajida.Ali@bmo.com 312-461-3164 Robert E. Richards Co-chair of Dentons' US Restructuring, Insolvency and Bankruptcy Practice, Dentons robert.richards@dentons.com 312-876-7396 Gulam Zade General Counsel, LogicForce gzade@logicforce.com 615-238-3539