common bankruptcy issues: how to mitigate risk

© 2010 Maslon Edelman Borman & Brand, LLP

Common Bankruptcy Issues:How to Mitigate Risk

Presentation to Association of Corporate Counsel (ACC)Small Law Department Committee

on May 13, 2010

by Amy Swedberg(612) 672-8367

[email protected]

Maslon Edelman Borman & Brand, LLP3300 Wells Fargo CenterMinneapolis, MN 55402

www.maslon.com


Pre-Bankruptcy Tools to Mitigate RiskPurchase Money Security Interest (PMSI)

Need signed security agreement or reservation of title in sales document

UCC § 9-324 governs perfection rules UCC filed within 20 days of deliveryAdvance written notice to blanket secured lender

if goods are inventory• Insider or Affiliate Guaranty, Letter of Credit,

Customer Deposit Agreement• Security Interest in Other Assets

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Pre-Bankruptcy Tools to Mitigate RiskPreference Risk (90 days)

TIP: Aggressive payment terms (due upon receipt) or collection action could create more risk; payment consistency is important for proof of the ordinary course of business defense

Vendor BankruptcyPrior to bankruptcy file precautionary UCC-1 on

tooling or other assets located at the vendorNo right to terminate executory supply or other

executory agreements after bankruptcy filing; bankruptcy termination or ipso facto clauses are unenforceable

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Locating a Bankruptcy Filing• Court info: www.uscourts.gov/courtlinks• TIP: www.nysb.uscourts.gov (all courts use 2

letter state code, followed by one letter code, e.g. “s” for southern,“w” for western, “c” for central, if applicable, then “b” for bankruptcy)

• Search for bankruptcy filings in states where debtor is “located” (incorporated or organized) or debtor’s principal place of business

• Register for PACER log-in and password at https://pacer.login.uscourts.gov

• Log on to websites at “ecf.” instead of “www.” https://ecf.nysb.uscourts.gov

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Types of Bankruptcy Filings• Chapter 11

Debtor remains in possession and control of its property and operates in the ordinary course of business

Debtor seeks confirmation of Ch. 11 plan (120 day exclusive right to file plan, can be extended for “cause” up to 18 months) or sells assets in § 363 sale followed by liquidating plan or conversion to Ch. 7

• Chapter 7Ch. 7 trustee has possession and control of assets and

liquidates and distributes according to priorities under bankruptcy code

Only individuals have property exemptions• Chapter 13

Debtor proposes Ch. 13 repayment plan upon filing

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Priority of Payment in Bankruptcy• Secured Claims (to extent of value of collateral)• Ch. 7 Priority Claims (after conversion from Ch. 11)

Ch. 7 trustee fees, expenses of liquidation and necessary to preservation of property

• Ch. 11 Priority ClaimsPost-petition administrative expenses necessary for the

debtor to operate in Ch. 11 under 11 U.S.C. § 503(b)Certain taxes/wages and other priority claims20-day claims under 11 U.S.C. § 503(b)(9)

• Unsecured Claims• Equity

Equity may keep interests and pay less than 100% to unsecured creditors under “new value” plan

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Common Bankruptcy Issues

Executory Contract Issues (11 U.S.C. § 365)Some performance remains due on both sides at the

time of the bankruptcy filing; debtor can assume or reject in bankruptcy

Non-debtor has duty to continue performing prior to rejection of executory contract; debtor generally controls timing of assumption / rejection decision

Non-debtor has right to adequate protection including post-petition payments/performance or may seek to compel rejection

Assumption requires full cure; must be assumed “as is”Contract may generally be assigned notwithstanding

anti-assignment clause; non-debtor has right of adequate assurances of future performance

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Common Bankruptcy IssuesFile Proof of Claim (POC)

Use POC form mailed to creditors or pull form from bankruptcy court website; mail copy with self-addressed, stamped envelope for proof of receipt

Most Ch. 7 case are filed as “no asset” cases, notice will state Please Do Not File a Proof of Claim Unless Instructed To Do So

Watch for Claims Agents and POC Bar Dates; last day to file claims is generally 90 days after Meeting of Creditors except larger Ch. 11 cases where the bar date is set by motion and court order

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Evaluate Preference RiskBankruptcy Code § 547(b) defines a preference as:

• a transfer of the debtor’s interest in its property,• to or for the benefit of a creditor,• on account of an antecedent or existing debt,• made while the debtor was insolvent, and• on or within 90 days prior to the petition date (or

one year for insiders) that enables the creditor to receive more than it would in a Ch. 7 liquidation

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Common Bankruptcy IssuesEvaluate Preference Defenses

Ordinary Course of Business (OCB) subject or objective test

Subsequent New Value “paid for” new value, emerging view recognized in

most jurisdictionsContemporaneous Exchange of ValueAssumption of Executory Contract / Critical VendorSmall Preference Safe Harbor (<$5,475)Venue limitation (<$10,950)TIP: Ignore demand letters, you may not be sued, but

watch for summons & complaint to arrive by regular mail

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Immediately Pursue Reclamation RightsBAPCPA expanded rights under 11 U.S.C. § 546(c)• Seller may not reclaim goods unless such seller

demands in writing reclamation of such goods—• not later than 45 days after the date of receipt of

such goods by the debtor; or• not later than 20 days after the date of

commencement of the case, if the 45-day period expires after the commencement of the case

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Reclamation Rights (continued)• Requires written reclamation notice• Goods must still be in existence and

identifiable• May receive return of goods• Reclamation procedures sometimes

addressed in “first day” orders• Secured lender will almost always have

priority which diminishes the effectiveness of most reclamation claims

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Common Bankruptcy IssuesIntellectual Property IssuesNon-debtor as Licensor / Debtor as Licensee• Customer may assign its licensee rights to a third-

party notwithstanding anti-assignment clause non-debtor should object if licensee rights are non-

exclusive; non-exclusive rights are viewed as personal and generally cannot be assumed and assigned

• TIPS: non-debtor should demand immediate payment of post-petition royalties instead of administrative expense claim due to risk of administrative insolvency

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Common Bankruptcy IssuesIntellectual Property Issues (continued)Debtor as Licensor / Non-Debtor as Licensee• Non-debtor may elect to retain licensee rights,

including exclusivity, for duration of contract and any extension under Bankruptcy Code § 365(n)

Does not apply to trade names or trademarks Requires non-debtor to make all ongoing royalty

payments• TIPS: Support licensee rights with lien on IP; place

source code in escrow; distinguish between maintenance and royalty payments; avoid high up front payments or anything that encourages rejection

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Secured Lien Rights• Secured creditor has right to “adequate protection” of

its lien in collateral valued as of the petition date • Secured creditor can seek relief from the automatic

stay to foreclose on its collateralFor “cause” including lack of adequate protectionNo equity in collateral and collateral not necessary to an

effective reorganization• Secured creditor entitled to lien on sales proceeds,

return of collateral or “indubitable equivalent”• Junior secured creditor may have leverage even with

“out of the money” junior lien under recent 9th Circuit Clear Channel decision, 391 B.R. 25 (9th Cir. BAP 2008)

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Common Bankruptcy IssuesEvaluate Priority Admin. Expense Claims• Code § 503(b): Priority administrative expense claim

for post-petition goods or services necessary for continued operation or preservation of estate assets

• §503(b)(9) Claim: Available if client supplied goods in the ordinary course of business 20 days prior to petition date Generally client must file motion for allowance of 503(b)(9) claim

if no alternate procedure is specified• Procedures or deadlines for asserting may be addressed in

“first day” or other Bankruptcy Court orders• Watch for deadline earlier than general claims bar date• 503(b)(9) claim may not be paid until plan confirmation

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Setoff Rights (11 U.S.C. § 553)• Preserves non-debtor’s common law right to offset

mutual debtsAvailable only if mutual obligations are both pre-petition

or both post-petitionRequires relief from the automatic stay and must be

exercised prior to any sale “free and clear” under § 363

Equitable RecoupmentDebts must arise out of same transaction or occurrenceNo stay relief necessary and may be asserted post-sale

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Amy J. SwedbergPartner

Maslon Law Firm

Phone: 612.672.8367 Email: [email protected] www.maslon.com

AREAS OF EMPHASIS• Banking and Financial Services• Creditor’s Rights and Bankruptcy• Indenture Trustee Representation• Secured Lending

Amy Swedberg is a partner in Maslon's Financial Services Group. Her practice focuses primarily on the representation of financial institutions, secured creditors and equipment lessors in workouts, collection litigation and bankruptcy, as well as indenture trustees in complex Chapter 11 proceedings. She also assists corporate counsel on bankruptcy and collection related issues and asset-based lenders in preparing and negotiating commercial loan documentation. Prior to joining the firm in 2000, Amy gained valuable experience practicing as a civil and commercial litigator.

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