1. Protecting Your Company in Bankruptcy Court …especially in New York and Delaware March 21, 2013 Robert L. LeHane Gilbert R. Saydah Jr.

2. Overview  Bankruptcy 101  The Importance of Attending the First Day Hearing  Serving on the Creditors’ Committee  Relief From the Automatic Stay  Accelerated Auctions and Sales of Assets  Setoff, Recoupment, Reclamation & 503(b)(9)  Claims, Bar Dates & Cure Amounts  Disclosure Statement & Plan of Reorganization/Liquidation  Administrative Insolvency  Selling Claims  Defending Preference Actions  Pre-Bankruptcy Planning 2

3. 3 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware Bankruptcy 101

4. Types of Business Bankruptcy Filings 4  Chapter 7 – Liquidation – Management is replaced by a trustee and operations usually cease immediately. The trustee liquidates the assets.  Chapter 11 – Reorganization/Liquidation – Management stays in place and continues to operate the business a “Debtor-in-Possession.” The company can emerge from bankruptcy or liquidate.  Chapter 15 – Ancillary Proceedings – Allows a foreign entity in an insolvency proceeding outside the U.S. to commence a proceeding in a U.S. Bankruptcy Court to obtain the benefit of the automatic stay and protect assets located in the U.S.

5. The Bankruptcy Line-Up  The Debtor/Debtor-in-Possession  Official Committee of Unsecured Creditors  The United States Trustee  Chapter 11 and Chapter 7 Trustees  Secured Creditors  Administrative Creditors  Priority Unsecured Creditors  General Unsecured Creditors  Equity Holders 5

6. 6 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware The Importance of Attending the First Day Hearing

7. The First Day Hearing Affects Many Substantive Matters  Generally held within 24-48 hours of the bankruptcy filing.  The Creditors’ Committee has not yet been formed.  Notice is generally given to the largest creditors, but may not be received prior to the hearing.  The relief granted, even interim relief, can determine the outcome of the case for many parties, including lenders and critical vendors.  Familiarity with the judges, the rules and procedures of the bankruptcy court, and counsel for the key parties can be very valuable, and save clients time and money  Attending the hearing in person can be very important  Many issues and objections are resolved outside the courtroom immediately prior to the hearing  Effective advocacy over the phone can be very difficult 7

8. First Day Motion – DIP Financing and Use of Cash Collateral  Before filing for bankruptcy, a Debtor typically arranges postpetition financing for its operations, often with its prepetition lender.  The Debtor may also seek authority to use its lender’s cash collateral.  Postpetition DIP lender receives numerous protections, including first liens, superpriority claims, releases, etc., and often “rolls up” prepetition loans into the DIP financing.  May attempt to invalidate provisions in leases and contacts that prevent liens or access to collateral – often with no basis in the Bankruptcy Code.  The DIP financing order often limits parties’ rights to pursue claims against the lender and sets a limited period for the Creditors’ Committee and others to investigate and commence actions.  Generally requires the Debtor to waive its right to surcharge the lender’s collateral.  Often contains deadlines for reorganization or sale of assets. 8

9. First Day Motions – Critical Vendor Motion  Allows Debtor to pay all or a portion of prepetition claims.  Disrupts the priority scheme of the Bankruptcy Code.  Generally accepted in New York and Delaware.  Debtor may require critical vendors to return to ordinary business terms and extend credit during the bankruptcy.  Benefits of being a critical vendor:  Payment of some or all prepetition claims  Likely preference waiver  May allow vendor to stop performing if Debtor defaults 9

10. 10 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware Serving on the Creditors’ Committee

11.  The Creditors’ Committee is appointed by the Office of the U.S. Trustee.  Committee members select counsel and financial advisors to perform services for the Committee, with the fees and expenses of those professionals paid for by the Debtor’s estate.  The Committee oversees the Debtor’s postpetition operations.  Committee members have access to non-public information regarding the Debtor, its business and its bankruptcy proceedings.  Most meetings are conducted telephonically and Committee members rarely attend hearings.  Expenses of Committee members incurred performing duties for Committee are also reimbursed by the Debtor’s estate.  The Committee wields considerable influence over Debtor and formulation of a plan of reorganization or liquidation. 11

12. 12 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware Relief from the Automatic Stay

13. Automatic Stay  The automatic stay is imposed immediately upon the filing of a Debtor’s bankruptcy petition.  The automatic stay does not extinguish a creditor’s claims, it just stops the “race to the courthouse” by creditors.  The automatic stay does not prevent the following actions:  Sending a reclamation letter  Collecting postpetition debts in Bankruptcy Court  Filing a claim against the Debtor  Drawing on a letter of credit (usually)  Enforcing rights against a non-Debtor (e.g. guarantees) 13

14. 14 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware Accelerated Auctions and Sale of Assets

15. Sale of Assets  It is increasingly common for Debtors to quickly sell assets pursuant to section 363 of the Bankruptcy Code instead of reorganizing.  Often favored by second-lien holders, as a sale allows them to avoid the requirements to confirm a plan.  Timeline is often extremely accelerated, with an auction, sale hearing and closing all within a matter of days. Meaningful discovery on the purchaser may be very difficult to obtain.  Assets are sold “free and clear” of any “liens, claims, encumbrances and interests” in such property – creditors cannot look to the property or the purchaser to satisfy the Debtor’s obligations. 15

16. Sale of Assets  363 Sales require an auction – the sale must be approved by the Bankruptcy Court, usually to the “highest and best” bidder.  Purchaser taking assignment of leases and executory contracts must demonstrate adequate assurance of future performance, and cure all defaults under those agreements.  Contract counterparties must be diligent. Purchasers often try to cap cure claims and cut off liability for obligations that relate to the pre-assignment period but that arise postpetition, including indemnification obligations and year-end adjustments.  Purchaser of going-concern may purchase avoidance actions to prevent claims against its new business partners.  After a sale, Debtor may file a plan of liquidation, convert the case to Chapter 7, or dismiss the case. 16

17. 17 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware Setoff, Recoupment, Reclamation & 503(b)(9) Claims

18.  Setoff – Allows a creditor to set off claims it has against a Debtor against claims the Debtor has against the creditor.  Both claims must be prepetition or postpetition obligations  Setoff right is a secured claim under the Bankruptcy Code  Recoupment – Similar to setoff, but obligations can be both prepetition and postpetition.  Limited - Claims and debts must arise under same transaction  Reclamation – the right to recover goods delivered to the Debtor within 45 days of Petition Date. Often worthless because of liens of prepetition lenders, largely supplanted by 503(b)(9) claims.  503(b)(9) claims – administrative claim for goods delivered to the Debtor within 20 days of the petition date. 18

19. 19 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware Claims, Bar Dates & Cure Amounts

20. Bar Dates and Proofs of Claim Bar Date  Chapter 11 – On a Debtor’s motion, the Bankruptcy Court will establish a bar date for filing proofs of claim.  Chapter 7 – Bankruptcy Court will establish a bar date if it expects assets will be available for distributions to creditors.  All creditors should receive notice of the bar date and a proof of claim form in the mail. Filing a Proof of Claim  If your claim is listed properly on Debtor’s schedules, filing a claim is not mandatory, but advisable as the schedules can be amended.  Filing a proof of claim to assert unliquidated or unknown claims may preserve a creditor’s right to amend the claim in the future once claims are known/liquidated.  Claims are generally filed with a claims agent in most large cases. 20

21. Deadlines For Asserting Cure Amounts  In a sale of assets, the Bankruptcy Court will establish a deadline for asserting cure amounts – usually about a week before the sale hearing. This is different from the general bar date, and can prejudice contract counterparties who do not respond.  Debtor will assert what it believes is the cure amount under an executory contract or lease.  The Debtor’s proposed cure amount is almost always incorrect for failure to include:  disputed obligations  unpaid postpetition obligations  attorney fees due  indemnification obligations and year-end adjustments  The sale order should always make provision for the payment of future unbilled obligations related to the pre-assignment period. 21

22. 22 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware Disclosure Statement & Plan of Reorganization/Liquidation

23. The Disclosure Statement  Before voting on the plan, creditors receive a disclosure statement, explaining the treatment of their claims.  Must contain information about how each class of claims will be treated under the plan.  Must provide sufficient information to allow creditors to make an informed decision on whether to vote for or against the plan.  Must be approved by the Bankruptcy Court. 23

24. Plan of Reorganization/Liquidation  Debtor may reorganize or liquidate.  Establishes treatment of claims and equity interests, and may affect rights against Debtor or related entities of Debtor.  Establishes procedures for satisfying allowed claims and objecting to disputed claims.  Often contains broad releases and injunctions protecting Debtors, insiders, lenders, directors, officers, etc.  Releases may be non-consensual.  Creditors generally may opt-out of releases; however, failure to vote for or against plan may constitute consent to releases.  Injunctions generally continue protections of the automatic stay.  All administrative claims must be paid in full unless administrative creditors agree otherwise. 24

25. 25 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware Selling Claims

26. Claims Trading  Selling a claim in the secondary market allows a creditor to get paid quickly on its claim.  Creditor should consider the projected recovery in the case and the timing of distributions.  Large cases attract many claims traders. A creditor often may auction its claim to the highest bidder to maximize the purchase price.  If the Debtor objects to the claim after the sale, the creditor may still have to defend the objection at its own cost.  If the claim is allowed (usually by stipulation), the sale may be final and non-recourse to the seller.  Form agreements for the sale of claims are heavily biased in favor of the claims trader – consultation with counsel is advisable. 26

27. 27 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware Administrative Insolvency

28.  Occurs when a Debtor is unable to pay the costs of administering its bankruptcy and cannot confirm a plan.  High administrative expenses are often blamed on 503(b)(9) claims, unpaid stub rent, or professional fees.  Committee and creditors should closely monitor a Debtor’s postpetition operating performance, availability under DIP financing, and accrued but unpaid administrative expenses.  If administrative insolvency seems likely, vendors may wish to stop selling to Debtor (if possible).  Often observed following a quick 363 sale.  May result in conversion of the case to a liquidation under Chapter 7, or, if no assets remain for unsecured creditors, the case may be dismissed. 28

29. 29 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware Defending Preference Actions

30. Preference Actions  Debtor’s power to invalidate and recover certain prepetition payments made to third parties in the ninety days prior to the petition date.  Often pursued when no other source of funds is available for distribution to unsecured creditors.  Defendants often still have claims against the Debtor.  Defenses:  Ordinary Cause of Business  New Value  Contemporaneous Exchange 30

31. 31 Protecting Your Company in Bankruptcy Court …especially in New York and Delaware Pre-Bankruptcy Planning

32. Incorporate protections into contracts and normal terms  Obtain security interests, guarantees, letters of credit and cash deposits to protect against default.  Consider tightening or suspending credit terms.  Shorter credit terms may mean less potential exposure.  If possible, stay within net-20 day terms to get benefit of 503(b)(9) administrative claims.  However, changing terms to anything but pre-pay or COD during the ninety days prior to bankruptcy may cause some preference exposure.  Include self-effectuating triggers for termination or modification of contracts that are not based on bankruptcy or insolvency. 32

33. Pre-Bankruptcy Planning Knowledge and Organization  Know your customer’s business and financial health.  Know your customer relationships.  Who are their point people?  Know your contracts.  What contracts do you have? Any amendments?  Are there any purchase orders? Invoices?  Other communications (letters, emails, notices, etc.)?  Know your receivables and payables.  Formulate an internal action plan.  Identify short and long term strategies and goals.  Identify key internal personnel and external counsel. 33

34. Contact Information 34 Robert L. LeHane PARTNER Bankruptcy & Restructuring Phone: (212) 808-7573 rlehane@kelleydrye.com Gilbert R. Saydah Jr. ASSOCIATE Bankruptcy & Restructuring Phone: (212) 808-7612 gsaydah@kelleydrye.com