What to Expect and Do When Your Customer Becomes Insolvent

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WHAT TO EXPECT AND DO WHEN YOUR CUSTOMER BECOMES INSOLVENT

RESTRUCTURING, INSOLVENCY & TROUBLED COMPANIES 2016 SERIESPremier date: April 8, 2016

Premier Date: April 8, 2016

RESTRUCTURING, INSOLVENCY & TROUBLED COMPANIES 2016 SERIES

WHAT TO EXPECT AND DO WHEN YOUR CUSTOMER BECOMES INSOLVENT

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 2

WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS



meet the facultyPANELISTS

Jeff Pomerantz Pachulski Stang Ziehl & Jones LLPHamid RafatjooVenable LLPMichael Schwarzmann Crowe Horwath LLP

MODERATOR

Jonathan Friedland Sugar Felsenthal Grais & Hammer LLP


Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

http://www.financialpoise.com/


about this webinarSometimes it begins when a client, tenant, or customer starts to slow-pay, with the result that your accounts receivable start to accrue gradually. Other times the issue presents itself more suddenly.

Either way, you find your company owed a great deal of money that now is at risk your lient/tenant/customer has filed bankruptcy, has commenced an assignment for the benefit of creditors, has been put into receivership, or is otherwise just plain insolvent.

What do you do? What should you not do?

This webinar’s topics include the pros and cons of putting a counterparty into involuntary bankruptcy; when and how you may be able to pursue third parties (like guarantors, directors, or officers) for the amount owed; risks related to preference attack; pros and cons of sitting on a “creditor’s committee” in a Chapter 11; how to negotiate for “critical vendor” protection in Chapter 11; and practical guidance for continuing to provide goods or services to an insolvent counterparty.

about this series

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

Companies fail all the time, for all sorts of reasons. Some companies become distressed, or even insolvent, because of mismanagement; others because of fraud; others for myriad other reasons- some intrinsic to the company and some extrinsic.

Regardless of the cause, failing or failed companies create a unique set of issues, risks, and even opportunities for all involved.

This area of law and finance has become so specialized that no fewer than five (American Bankruptcy Institute; Association of Insolvency & Restructuring Advisors; Commercial Law League of America; National Association of Federal Equity Receivers; Turnaround Management Association) national organizations exist to help those who specialize in the field to stay up to date on the latest developments, strategies, and tactics.

Join some of the leading experts in World, from among the membership of these organizations, as they discuss- in plain English for the non-expert- the basics and the latest in Restructuring, Insolvency & Troubled Companies.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.

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episodes in this series

EPISODE #1 Help, My Business is in Trouble! 2/5/2016

EPISODE #2 Opportunity Amidst Crisis – 3/4/2016Buying Distressed Assets, Claims, and Securities for Fun & Profit

EPISODE #3 What to Expect & Do When Your Customer Becomes Insolvent4/8/2016

EPISODE #4 A Distressed Company and its Secured Lender 5/6/2016

EPISODE #5 Federal Equity Receiverships - 101

6/3/2016 Dates above are premier dates All webinars also available On Demand through West LegalEd Center and Vimeo



PROPHYLACTICSGuarantees

Letters of Credit

Collateral

Credit Insurance

COD

CIA

???

???


CUSTOMER/SUPPLIER DEFAULTS- THEN WHAT?

• Send to collections • Stop performing• Sue/Evict• Apppoint Receiver


DEBTOR PROTECTIONS

• Commence ABC

• File Bankruptcy


Hitting the debtor with its own shield• Involuntary bankruptcy

• Creditors may file Chapter 7 or 11 petition against a debtor

• If debtor has 12+ creditors, three creditors required

• If debtor has fewer >12 creditors, one creditor is required

• Debtor may contest the petition; creditors must establish:

-Debtor not paying debts as they come due, or-Debtor has substantially all assets seized by a custodian within prior 120 days


Bankruptcy in brief• Bankruptcy court is a unit of federal district court.

• Petitions, filed in bankruptcy court, commence case.

• Rather, bankruptcy court appeals may go to the district court or a Bankruptcy Appellate Panel. A party may opt out of a BAP appeal and go the district court.

• Three main types:

• Chapter 7= trustee appointed

• Chapter 13= people only; trustee appointed

• Chapter 11= debtor stays in possession


Bankruptcy in brief- con’t

• Debtor/debtor-in-possession

• Secured creditor

• Unsecured creditors

• U.S Trustee

• Case Trustee (in Ch. 7 & 13)

• Creditors’ Committee


U.S. TRUSTEE• In Chapter 7, U.S. Trustee:

– Appoints & supervises Chapter 7 trustee

– Monitors professional fee requests

– Reviews the case for crimes, abuse and bad faith filings

– Determines eligibility of individual debtors

• In Chapter 11, U.S. Trustee:

– Conducts initial debtor interview and meeting of creditors (a/k/a 341 meeting)

– Reviews monthly operating reports

– Reviews professionals’ applications for employment and fees

– May request dismissal, conversion or appointment of Chapter 11 trustee


GETTING PAID

• To receive a portion of debtor’s estate, creditor must file a proof of claim

• Claims based upon writing must be supported by the writing.

• Properly filed claims are presumptively valid & burden shifts to trustee or debtor to object

• Filing proof of claim submits a creditor to bankruptcy court jurisdiction


Creditors in a bankruptcy case are distinguished by the types of claims they hold and the priority of payment among them

• Administrative and priority claims get paid before “normal” unsecured claims (losing out only to secured claims in the priority hierarchy). Often times administrative claims are “paid in full.”

• Typical “good-and-services” creditors will have two important ways to obtain administrative priority:

– 20 Day Claims - “the value of any goods received by the debtor within 20 days before” the date a bankruptcy petition was filed “in which the goods have been sold to the debtor in the ordinary course of such debtor’s business” (e.g., invoices related to shipments made during the 20 days prior to a bankruptcy).

– Reclamation Claims - reclamation demand for goods received by a debtor within 45 days of its bankruptcy - provides some credit protection, additional negotiating leverage, and the ability to recover some goods shipped during the 45 days prior to a bankruptcy filing.


BANKRUPTCY CODE § 507

The Bankruptcy Code sets forth a priority of payment

scheme for creditors’ claim at § 507.

In general, creditors whose claims are

secured by assets of the estate (a/k/a

secured creditors) stand above the §

507 priority scheme.

Creditors in the priority scheme depend upon unencumbered assets of the estate for payment.


GENERAL UNSECURED CREDITORS

Standing behind secured creditors and priority unsecured

creditors, general unsecured creditors might be viewed as

having the most to lose should a chapter 11 debtor’s

reorganization fail.


FIRST DAY HEARINGS CAN AFFECT RIGHTS

In its First Day motions, a DIP often requests authority to

immediately make payment for certain types of unsecured claims

(payment for other unsecured claims must await distribution

under a plan).

Other common First Day motions include is the DIP’s request to use cash collateral and/or obtain DIP financing. Once approved, such financing orders typically have a significant impact on the priority

scheme.


CRITICAL TRADE PAYMENTS• Critical Trade Order grants debtor authority to settle and pay unsecured creditor claims

• Rationale is that those creditors are indispensable to debtor’s capacity to stay in business

• Bankruptcy Code contains no explicit authorization for this

• Some bankruptcy courts have used equitable powers under the doctrine of necessity to allow such payments

-The doctrine of necessity, which is derived from § 105(a) of the Bankruptcy Code

• Kmart determined a critical vendor order cannot be upheld solely by equitable provisions of Bankruptcy Code § 105(a)

• Kmart suggested that only way a debtor in the Seventh Circuit may be justify a critical vendor order is through § 363(b)


OBTAINING INFORMATION ABOUT THE CASE

One way to stay in the loop is to file and serve a request pursuant to Bankruptcy Rule 2002

to be added to the service list and receive copies of all filings in the bankruptcy case.

The DIP is required to file certain periodic

reports on its financial status, both as of the

petition date and throughout the chapter

11 case.


SERVING ON COMMITTEE CARRIES ITS BURDENS & ITS REWARDS

Shortly after the filing of a chapter 11 case, the UST will hold a meeting (at least in larger cases) to form an official committee of unsecured creditors.

Once selected, the committee can engage legal counsel and other professionals, such as a financial advisor.

The committee has standing to be heard on any issue in the bankruptcy case, and its views tend to be taken seriously by the court.

Committee members owe fiduciary duties to all unsecured creditors, not just those creditors with similarly situated interests.


MORE ABOUT RECLAMATION RIGHTS

In or out of bankruptcy,

reclamation refers the right of a seller to reclaim goods sold to the debtor while the debtor was insolvent.

Bankruptcy Code § 546(c) focuses on that right in the context of a sale that took place

immediately before the debtor filed for

bankruptcy.


PROOF OF CLAIM AND BAR DATES

The proof of claim bar date is probably the most critical from a

creditor’s perspective.

A late claim may be allowed if the creditor can show “excusable

neglect,” but no creditor – and especially no

lawyer – wants to be in that position.


AUTOMATIC STAY

• Allows debtor “breathing room” to make decisions in time of crisis

• In both Chapter 7 and 11 cases, automatic stay arises immediately upon filing a petition

• Is an automatic injunction prohibiting creditors from starting or continuing actions to collect debts

• Prohibited actions including court cases, enforcing or perfecting liens, setting off mutual debts, and taking actions to obtain debtor’s property

• Damages assessed against creditors for knowingly violating automatic stay.


RELIEF FROM AUTOMATIC STAY

• A creditor, typically secured, can obtain relief from automatic stay

• Creditor essentially has two options:

– Prove “cause,” which may include lack of adequate protection; or

– Prove

• that debtor has no equity in the property; and

• property is not necessary for an effective reorganization


ADEQUATE PROTECTION

• Adequate protection applies to protect value of a creditor’s interest in property

• It is often applied when value of property is declining in value (e.g., debtor is using cash collateral to sustain operations)

• Adequate protection includes:

– Periodic or lump sum payments to creditor holding the interest in the property;

– Additional or replacement liens (e.g., a lien on cash proceeds of the sale of property)

– Other relief resulting in indubitable equivalent of the creditor’s interest in property


BANKRUPTCY ISSUES FOR LANDLORDS

Section 365 says the debtor “may assume or reject” an unexpired lease. A motion to assume or reject requires court approval, but in practice standard is a fairly deferential one – most often articulated as “business judgment test”

If debtor-tenant rejects lease, landlord may assert a “rejection damage” claim (which will often be less that remaining rent provided in lease)

Assumption of lease by debtor is, essentially, a decision to retain lease. If debtor is in default as of petition date, debtor may not assume the lease unless it can cure defaults (including paying up) and provide adequate

assurance of future performance under leaseDebtor who can assume lease may also be able to assign it (transfer to a third

party) -- see § 365(f) – even if lease bars assignments. A bankruptcy assignment terminates obligation of the original assignor (i.e., the debtor).


PREFERENCE AVOIDANCE

Bankruptcy Code § 547 allows the debtor to avoid a transfer to

a creditor made during a period just before the petition

date; § 550 empowers a debtor to recover

the value of an avoided transfer.

§ 547(b) sets for the prima facie case the

debtor needs to present in order to avoid a transfer as

preferential.

If the debtor can prove the affirmative

elements of preference avoidance under subsection (b),

then you look at whether any defenses -- listed at § 547 (c) –

apply.


THE PRIMA FACIE CASE:

a transfer made to or for the benefit of a creditor;

made on account of an antecedent debt (that is, a debt that existed prior to the time of the transfer);

made while debtor was insolvent (there is a rebuttable presumption of insolvency for the 90-day period prior to the bankruptcy filing);

made within 90 days immediately prior to the bankruptcy filing date, or one year if the transferee was an insider (“insider” is defined in § 101(31)

of the Bankruptcy Code); andthe transfer enabled the recipient to receive more than it would have

received if the transfer had not been made and the debtor were liquidated under chapter 7.


COMMON DEFENSES TO PREFERENCE ATTACK

• Ordinary course payment: transfers made in the ordinary course of business, consistent with prior transfers in timing, amount and circumstances

• Subsequent advance or new value: goods or services provided to debtor on unsecured basis after receipt of a preference is offset

• Contemporaneous exchange: transfer intended to be a contemporaneous exchange and, in fact, was


PURSUING THIRD PARTIES

Did owners or others provide guarantees?

Did owners or others act in a way that will

enable a piercing of the corporate veil?

Did owners or others receive

any preferential payments, fraudulent

transfers, or are there other

actions that may be asserted?

More About The Faculty: JONATHAN FRIEDLAND

[email protected] Friedland is a partner with Sugar Felsenthal Grais & Hammer LLP. He regularly represents parties in the purchase and sale of businesses and counsels businesses and their owners in their everyday affairs. Jonathan is also a nationally recognized expert in matters related to financially distressed companies.

Jonathan holds the highest possible rating from Martindale-Hubbell (AV® Preeminent™) and AVVO (10/10), has been repeatedly recognized as an Illinois “superlawyer” in the areas of Business/Corporate Law and Bankruptcy & Creditor/Debtor Rights, and has received several other similar distinctions. He is licensed to in Arizona, Illinois, New Jersey and New York.

Jonathan has been profiled, interviewed, and/or quoted in numerous publications, including Buyouts Magazine; Smart Business Magazine; The M&A Journal; Inside Counsel; LAW360; Business Week.com; The Bankruptcy Strategist; Dow Jones Daily Bankruptcy Review; Bankruptcy Court Decisions; Dow Jones LBO Wire; and The Daily Deal. He has authored three books and more than a hundred articles, and has spoken on more than 100 panels.

Jonathan is also the founder and chairman of DailyDAC, LLC, d/b/a Financial Poise™, an on-line provider of continuing education, information, and business intelligence for business owners, investors, and their trusted advisors. Jonathan graduated from the State University of New York at Albany, magna cum laude, in 1991 after three years of study and from the University of Pennsylvania Law School in 1994. He clerked for a federal judge before entering private practice, spent several years teaching MBA candidates as an Adjunct Professor of Strategic Management at the University of Chicago Booth School of Business, and was the 2006 Clayton Center for Entrepreneurial Law Visiting Professor of Business Law at the University of Tennessee College of Law. Jonathan was a partner with Kirkland & Ellis LLP before joining SugarFGH.



More About The Faculty: D

JEFF [email protected]

Mr. Pomerantz is a member of the management committee at Pachulski Stang Ziehl & Jones and is resident in its Los Angeles office. He also serves as President of the American Bankruptcy Institute.

Mr. Pomerantz's practice includes representing companies, creditors' committees, and private equity funds in complex financial restructurings and merger-and-acquisition transactions both in and out of court. Mr. Pomerantz has particular expertise in restructurings in the restaurant and retail sectors.

Mr. Pomerantz also has an active creditors' committee practice, having represented more than 20 creditors' committees during the last several years, including Circuit City. Mr. Pomerantz also frequently represents private equity funds in asset-acquisition transactions. His practice is generally focused on middle-market companies with annual revenues ranging from $50 - $300 million.

Mr. Pomerantz is a graduate of New York University (1986 Phi Beta Kappa), where he also received his J.D. (1989, Order of the Coif). He holds an AV Preeminent Peer Rating, Martindale-Hubbell's highest recognition for ethical standards and legal ability; has been named a "Super Lawyer" in the field of Bankruptcy & Creditor/Debtor Rights every year since 2009 in a peer survey conducted by Law & Politics and the publishers of Los Angeles magazine, an honor bestowed on only 5% of Southern California attorneys; and was selected by Best Lawyers in America. Mr. Pomerantz has also been recognized as an outstanding lawyer by the preeminent publication Chambers USA every year since 2007.

More About The Faculty: D

HAMID [email protected]

Mr. Rafatjoo represents clients in complex transactions and reorganizations throughout the United States. He counsels companies and individuals in a variety of industries, including healthcare, retail, manufacturing, entertainment, real estate development, building contractors and hospitality. In addition, Mr. Rafatjoo advises corporate clients on a wide array of matters including business formation and corporate restructuring, debt and equity transactions and workouts, acquisitions and sales, and structuring and amending key contracts. He has extensive experience assisting clients across a broad spectrum of legal issues relating to corporate transactions, shareholder disputes, and litigation management. Mr. Rafatjoo is recognized as an aggressive results-oriented practitioner. He has also served as the court appointed Chapter 11 trustee in various cases in the Central District of California.

Mr. Rafatjoo holds an AV® Preeminent Peer Rating, Martindale-Hubbell's highest recognition for ethical standards and legal ability. He has also been named a "Super Lawyer" every year since 2007 in a peer survey conducted by Law & Politics and the publishers of Los Angeles magazine, an honor bestowed on only 5% of Southern California attorneys. Mr. Rafatjoo has been ranked by the preeminent publication Chambers USA since 2012 for his work in the field of Bankruptcy/Restructuring in California.

He is a former Assistant Editor of the Norton Bankruptcy Law and Practice and former contributing author of the Wiley Bankruptcy Law Update. 30


mailto:[email protected]

More About The Faculty: MICHAEL SCHWARZMANN

D

[email protected] Schwarzmann is a Director at Crowe Horwath LLP. Michael has over 20 years’ experience providing advisory services to lender groups, companies, bondholder groups, unsecured creditors committees, and other stakeholders on financial, operational and strategic issues affecting underperforming, stressed, and distressed companies. Michael ‘s advisory and consulting work experience focuses on assisting distressed companies, revitalizing underperforming businesses, marketing troubled companies and advising their creditor constituents. In addition, he is a licensed bankruptcy attorney.

Michael has assisted clients in developing and evaluating business and turnaround plans, analyzing financial and operational performance, and formulating successful workout, restructuring or bankruptcy strategies to preserve or improve asset values for stakeholders. Michael’s industry experience includes: health care, manufacturing, agricultural, construction, restaurants and franchising, energy, travel, and investment banking.

He has experience in identifying and implementing positive near term and long term change for clients, including identifying opportunities, negotiating with constituents, and building consensus where possible. © 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 28© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 37

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Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

What to Expect and Do When Your Customer Becomes Insolvent

Education

Transcript of What to Expect and Do When Your Customer Becomes Insolvent