Thomas Califano, DLA Piper LLP (US) E: Daniel Gluck, Simon Gluck & Kane LLP E:

 Filing the case ◦ Case commenced by filing a voluntary petition with the bankruptcy court ◦ Upon filing, bankruptcy court will have jurisdiction over all assets of and claims against the debtor, regardless of where assets are located or claims arise ◦ In a voluntary proceeding, no requirement that debtor be insolvent ◦ Need first day relief to take certain actions and make necessary payments at the outset of the case  E.g., pay prepetition employees wages, continue customer programs, pay insurance obligations and tax obligations, continue cash management system, pay shippers and warehousemen, provide adequate assurance deposits for utility companies, obtain use of cash collateral and DIP financing ◦ Critical Vendors  Courts may allow a debtor to pay all or a portion of the prepetition claims of certain essential vendors that (a) cannot be readily replaced, (b) would stop doing business with the debtor if not paid on their prepetition claims, and (c) if such vendor stopped doing business with the debtor, the debtor and its operations would be irreparably harmed

 Bankruptcy Judge  United States Trustee  Debtor in Possession (or Trustee, if one is appointed)  Creditors’ Committee  In addition to the above, parties in interest include-  any creditor;  any interest holder;  any indenture trustee; and  the Securities and Exchange Commission

◦ As soon as practicable after the filing, a committee of creditors holding unsecured claims (typically between 3 and 7 separate creditors) is appointed by the United States Trustee. ◦ A creditors’ committee ordinarily consists of persons or entities, willing to serve, holding the largest claims or interests of the kind represented by that committee. A committee may retain attorneys, accountants or other agents, and whose compensation, after court approval, is paid from the debtor’s estate.

◦ A committee may-  consult with the debtor;  investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business and the desirability of continuation of such business and other matters relevant to the case or formulation of a plan;  participate in the formulation of a plan;  request the appointment of a trustee or examiner;  perform such other services as are in the interests of those represented; and  provide information to creditors who hold the kinds of claims represented by the committee and solicit comments from such creditors and as may be required by the Court

◦ The Bankruptcy Code facilitates an equality of distribution of a debtor’s assets among similarly situated creditors in accordance with priority scheme among different classes of creditors and interest holders ◦ DIP lender  subject to negotiated “carve out” for professionals and the U.S. Trustee ◦ Secured parties to extent of security interest in collateral ◦ Administrative claims  Claims for the value of any goods sold to the debtor in the ordinary course of the debtors’ business and received by the debtor within 20 days before the commencement of the bankruptcy case are considered administrative claims under the Bankruptcy Code (503(b)(9) claims) ◦ Priority claims ◦ Unsecured claims ◦ Equity interests

 Automatic stay – Sec. 362, one of the most fundamental protections available to a chapter 11 debtor ◦ Statutory injunction preventing any act to collect on prepetition obligations (e.g., trade creditors cannot demand payment on their past obligations)  Includes litigation, collection efforts, lien enforcement actions and foreclosure- related actions ◦ Sec. 362 also stays actions that would affect or interfere with property of the estate, property of the debtor or property in the custody of the estate and prohibits the unilateral termination of contracts with the debtor  “Property” is defined very broadly by the Bankruptcy Code as: ◦ All legal and equitable interests (e.g., the right to file a lawsuit) of the debtor as of the commencement of the case, wherever located and by whomever held ◦ Executory contracts also considered “property of the estate.” Thus, unilateral termination of contracts by non-debtor parties is prohibited by the automatic stay notwithstanding the debtor’s defaults.

 Automatic stay is effective immediately upon filing of the bankruptcy case  Automatic stay may be lifted for cause by order of the bankruptcy court ◦ Most often filed by secured creditors for lack of adequate protection (i.e., the value of the property securing the lien is declining in value while it is being held by the debtors) or that the debtor lacks equity in the property

 Relief from automatic stay granted when creditor can demonstrate that there is “cause” for granting relief ◦ A creditor shows "cause" by showing that the creditor’s interest in a particular property is not “adequately protected”, or showing that the debtor has no equity in the property and that the property is not needed for a reorganization. ◦ The court may give relief to the creditor in the form of periodic cash payments or an additional or replacement lien on the property.

 Subject to certain limitations, executory contracts and unexpired leases may be assumed (and assigned), or rejected by a debtor at any time before confirmation of a chapter 11 plan  A counterparty to a contract must continue to perform so long as the debtor honors its post-petition contractual obligations  Debtor is required to cure defaults as a condition of assuming a contract  With the exception of personal service contracts and intellectual property licenses, executory contracts generally may be assumed or assigned even if the non-debtor party objects to such assumption or assignment and even if the provisions in the contract prohibit assignment (e.g., anti-assignment clauses)

 Preferences are certain transfers of a debtor's property made by an insolvent debtor prior to bankruptcy that favor certain creditors over others. Elements of a preference are - ◦ A transfer of an interest of the debtor in property ◦ Made to or for the benefit of a creditor ◦ Made on account of pre-existing debt ◦ Made while the debtor was insolvent ◦ Made within 90 days before the filing of the bankruptcy petition  (or within one year, if made to an Insider, e.g., a director or officer of the debtor) ◦ That enabled the creditor to receive more than it would have received in a chapter 7 liquidation

 Voidable in bankruptcy, so that a debtor (or trustee) can bring an action against a creditor to bring property transferred preferentially (or the value thereof) back into the estate.  If preferentially transferred property is successfully recovered by the estate, it is distributed to other creditors in accordance with the priority scheme under the Bankruptcy Code.  Defenses ◦ Contemporaneous exchange for new value ◦ Ordinary course of business or financial affairs of the debtor and the transferee or made according to ordinary business terms

 Priority Treatment of Governmental Customs Duties Claims ◦ Section 507(a)(8)(F) of the Bankruptcy Code  Customs duties owing by a debtor “to a governmental unit” have priority over general unsecured claims in bankruptcy ◦ Section 507(d) of the Bankruptcy Code  “An entity that is subrogated to the rights of a holder of a claim of a kind specified in subsection... (a)(8)... of this section is not subrogated to the right of the holder of such claim to priority under such section.” (emphasis added) (reference to section (a)(8) added in Bankruptcy Reform Act of 1994)

 In re International Engineers, Inc. (2d Cir. 1987) ◦ Broker voluntarily paid customs duties to U.S., and argued that such payment effected an assignment of the U.S.’s priority claim ◦ Court denied priority and found that there was no manifestation of an intention by the U.S. to assign its priority status ◦ Court also stated that “customs brokers are free to negotiate for such an assignment when the duties are paid.”  R.J. Saunders & Co. v. Vincent (2d Cir. 1962) ◦ Broker executed surety bond (as principal) in favor of U.S., paid customs duties as obligated, and sought priority claim under subrogation theory ◦ Court denied priority and noted that Congress has allowed subrogated priority in only one situation – where a surety on a bond given to the U.S. discharges the debt on behalf of the principal

 I.C. Herman & Co. v. Taub, Hummel & Schnall, Inc. (2d Cir. 1974) ◦ Importer executed bond (as principal) in favor of U.S., but broker did not execute as either principal or surety ◦ Broker voluntarily paid customs duties and sought priority claim under subrogation theory ◦ Court denied priority, citing to same rationale used in R.J. Saunders, but stated that “all a customs broker need do to gain priority is to go surety on the importer’s customs duty bond.”  In re Chalk Line Mfg. (Bankr. N.D. Ala. 1995) ◦ Broker paid customs duties to U.S. and sought priority under assignment and subrogation theories ◦ Court rejected both arguments, finding legislative intent precluded subrogation and that the Secretary of Treasury acted beyond its authority in promulgating a federal regulation (19 CFR § 141.1) purporting to assign priority status to brokers

 Possessory Lien o Include language in agreement with customer providing for continuing lien on goods coming in to the broker’s possession  Advance of Funds o Include language in agreement with customer providing that customer needs to advance funds for all fees and expenses that broker pays or incurs on behalf of client (e.g., duties, freight, taxes and storage)  Negotiate an express assignment of priority claim with U.S. o Recommendation of court in International Engineers  Shippers, Common Carriers and Warehousemen Motion o Debtors often seek payment of prepetition amounts owing to customs brokers under a first day shippers, common carriers and warehousemen motion to avoid disruption in flow of goods o E.g., In re Loehmann’s Holdings Inc., Case No (Bankr. S.D.N.Y. Jan. 16, 2014); In re DSI Holdings, Inc., Case No (Bankr. D. Del. June 28, 2011); In re Jennifer Convertibles, Inc., Case No (Bankr. S.D.N.Y. Aug. 4, 2010); In re Uno Restaurant Holdings Corp., Case No (Bankr. S.D.N.Y. Feb. 17, 2010)