Basic Bankruptcy For Bankers - Amazon S3...debtor's attorney. - Take action against unlawful...

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RRussell©2016

Basic Bankruptcy For Bankers

Robin Russell

Andrews Kurth LLP

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RRussell©2016RRussell©20162

Robin Russell

ROBIN RUSSELL Robin is a fellow in the American College of Bankruptcy. She combines a depth of experience in

bankruptcy restructuring and litigation with financial transactions. She has represented corporate debtors, liquidating

trustees, bondholders, unsecured creditors' committees, bank groups, private equity funds, landlords, trade creditors and

bidders for estate assets in Chapter 11 and Chapter 7 bankruptcy proceedings and has litigated fraudulent conveyance

and preference claims in bankruptcy and district court. She has also represented banks, institutional lenders and

corporate borrowers in commercial loan transactions and debt restructurings. Robin is the principal author of Thomson

Reuters’ Texas Practice Guides for both Creditors’ Rights and Financial Transactions and the Texas Bankers

Association’s Texas Secured Lending Guide, Texas Real Estate Lending Guide, Texas Problem Loan Guide and Texas

Account Documentation Guide. She is a frequent speaker on banking, bankruptcy and financial restructuring related

topics, an elected member of the American Law Institute and has served as a Chapter 7 Trustee. Robin received her

LL.M. in Banking Law from Boston University and her J.D. from Baylor University where she was Editor in Chief of the

Baylor Law Review and the highest ranking graduate in her class. Prior to joining the firm she clerked for the Texas

Supreme Court.

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Notice

This presentation is designed to provide accurateand authoritative information in regard to the subjectmatter covered. It is provided with theunderstanding that neither the presenter nor yourState Bankers Association is engaged in renderinglegal, accounting or other professional advice orservice. If legal advice or other expert assistance isrequired, the services of a competent professionalperson should be sought — from a Declaration ofPrinciples Adopted by the American Bar Associationand a committee of Publishers and Associations.

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Bankruptcy is filed in federal court with the following:

• A petition

• A list of creditors

• A schedule of the debtor’s assets and liabilities, and a schedule of executory contracts and unexpired leases

• A statement of financial affairs

• A statement of (current) income and expenditures

• A filing fee

The Bankruptcy Filing

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• Individuals and businesses seeking liquidation generally file under Chapter 7.

• Under Chapter 7, an individual’s nonexempt assets orbusiness’ assets are liquidated by a trustee and the proceeds distributed to creditors.

• Most Chapter 7 consumer cases are “no asset” cases—i.e., no dividend will be paid to unsecured creditors.

• The primary goal of individuals filing under Chapter 7 is to obtain a discharge of their debts.

• A discharged debt may not be collected or enforced by the Bank.

• An individual who has “means” (monthly income) may be ineligible for Chapter 7 so may be converted to a Chapter 13.

Chapter 7

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Chapter 9 is intended for use solely by a

municipality to adjust its debts.

Chapter 9

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• Chapter 11 is primarily intended for the reorganization of

businesses (although individuals not engaged in business are

also eligible for Chapter 11 relief).

• Businesses usually file under Chapter 11 rather than

Chapter 7 because the debtor is allowed to remain in

possession of its assets, and the same management may

continue to operate the business.

• A plan of reorganization is proposed, accepted by the

creditors and confirmed by the court.

• The majority of Chapter 11 cases are dismissed or converted

to Chapter 7 cases.

Chapter 11

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• Chapter 12 is intended for the reorganization of a family farmer with regular annual income.

• Chapter 12 is modeled after Chapter 13, but permits a family farming operation whose debts exceed the limits permitted under Chapter 13 to reorganize without having to comply with all of the Chapter 11 requirements.

Chapter 12

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• Chapter 13 filings are sometimes referred to as “wage earner” cases. They have the “means” to pay back some debt.

• Chapter 13 may be used only by individuals who have no more than a specified amount of unsecured debt and a specified amount of secured debt.

• A plan must be proposed and confirmed by the court.

• The debtor is allowed to keep or use all of his property, whether exempt or not.

• If the plan is completed, the debtor is given a discharge broader than that obtained in a Chapter 7 case.

Chapter 13

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• The United States Trustee appoints and supervises the Chapter 7 trustees who administer consumer debtors' bankruptcy estates.

• In Chapter 7 cases, the United States Trustee litigates issues that affect the integrity of the bankruptcy system. For example, the United States Trustee might:

- Argue that granting the debtor a bankruptcy discharge would constitute a "substantial abuse" of the bankruptcy process.

- Object to excessive fees requested by the debtor's attorney.

- Take action against unlawful practices by bankruptcy petition preparers--generally, non-lawyers who receive a fee to prepare a consumer debtor's bankruptcy papers.

Roles of the U.S. Trustee in Chapter 7 Cases

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In Chapter 13 bankruptcy, the United States Trustee supervises the private trustees who administer Chapter 13 cases.

• Most Chapter 13 cases are administered by "standing trustees" appointed by the United States Trustee to administer all cases filed in a particular geographic area.

• the United States Trustee supervises the Chapter 13 standing trustees' administration of individual bankruptcy estates; monitors the trustees' financial record-keeping; and imposes other requirements to ensure that the trustees carry out their fiduciary duties. The United States Trustee's supervisory actions include:

- Periodically reviewing the trustees' case reports, budget reports, bank account information, management skills, court performance, and similar information.

- Ensuring that trustees are bonded.

- Ensuring that trustees are independently audited.

- Determining trustees' maximum annual compensation and actual necessary expenses.

- Providing training for trustees.

- Monitoring trust account funds.

Roles of the U.S. Trustee in Chapter 13 Cases

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• First Day Orders. Reviewing the debtor's requests for emergency orders early in a bankruptcy case, and ensuring that the requested relief is tailored to the circumstances.

• Official Committees. Determining what official committees should be established to serve in the case; appointing committee members; and engaging in oversight of committee actions.

• Reorganization Plans, Disclosure Statements. Reviewing reorganization plans and disclosure statements filed by parties in the case to make sure they provide adequate and accurate information.

• Ensuring Compliance. Ensuring that all required reports, schedules, and fees are timely filed, and that the debtor manages money and assets consistent with the Bankruptcy Code and with its fiduciary duty to creditors. Required documents include the debtor's monthly operating reports, tax returns, schedules of income and expenses, and proof of insurance. These documents allow parties to monitor the debtor's progress toward reorganization.

• Preventing Delay. Taking action to prevent undue delay.

• Professional Employment. Reviewing and, if appropriate, objecting to applications filed by professionals seeking employment in the case, payment of compensation, and/or reimbursement of expenses. Professionals who serve in the case--and receive payment from the bankruptcy estate.

• Fraud. Investigating criminal, fraudulent, or abusive conduct for possible civil or criminal prosecution. The U.S. Trustee pursues civil (non-criminal) penalties, and refers cases of apparent criminal fraud to the U.S. Attorney for investigation and criminal prosecution.

The U.S. Trustee’s Role inChapter 11 Bankruptcy Cases

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• Most creditor actions against a debtor are immediately and automatically stayed upon the filing of a bankruptcy petition.

• The automatic stay prevents creditors from attempting to collect any prebankruptcy claim or from enforcing any prebankruptcy judgment.

• Creditors are also barred from creating, perfecting or enforcing liens against property of the Bankruptcy estate

• A secured creditor is prevented from foreclosing on the debtor’s real or personal property, even if such property was in the creditor’s possession when the Bankruptcy petition was filed.

• The Bank can and should file a UCC-3 continuation during a bankruptcy proceeding.

Automatic Stay

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• Any individual who is injured by a willful

violation of the automatic stay must be

awarded actual damages (including costs

and attorney fees) and, where appropriate,

punitive damages.

• The bankruptcy court has discretion in

dealing with violations against entity debtors.

Violations Of Automatic Stay

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• The Bank may file a motion for relief from the

automatic stay.

• Creditors may obtain relief from the automatic stay

upon a showing of “cause” or that the debtor has no

equity in the property.

• “Cause” exists whenever there is a lack of adequate

protection for the property interest of the creditor

seeking relief.

Motion to Lift Stay

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• The court can order the debtor to make periodic cash

payments to the creditor to compensate for any decrease in value of the property due to the stay.

• The debtor may compensate for any loss in value caused by the stay by giving the Bank an additional or

replacement lien on other additional collateral in which the estate has some equity.

• The debtor can give the Bank protection by any other means, so long as the creditor obtains the indubitable

equivalent of its position.

Adequate Protection

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• In a “single asset real estate” case the court must grant relief from the stay to creditors whose claims are secured by an interest in such real property if, after 90 days following entry of the order for relief (or such later date as determined by the court for cause), the debtor has not filed a plan with a reasonable possibility of being confirmed with a reasonable time; or

• begun making monthly interest-only payments on the value of the secured creditors’ interest in the real estate.

Single Asset Real Estate Cases

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• An after-acquired property clause in a prepetition

security agreement does not create a security interest in

property acquired by the debtor of the estate after the

filing of the Bankruptcy petition.

• An exemption provides that if the security interest

includes collateral the debtor acquired prior to

bankruptcy and also the proceeds, rents, profits,

products or offspring of the collateral, then the security

interest is valid as to any such proceeds that the estate

obtains post-petition.

Post-Petition Effect of Security Interest

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Except in a Chapter 13, the automatic stay

generally does not prevent the creditor from

proceeding against guarantors, sureties and

other codebtors.

Collection Against Guarantors and Codebtors

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• Commencement of a bankruptcy case

creates an “estate” by operation of law.

• The estate consists of the various types of

property described in the Bankruptcy Code

as “property of the estate.”

The Bankruptcy Estate

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• The Bankruptcy Code sets forth a detailed

priority or order in which creditors are paid.

• As a general rule, secured creditors are first,

followed by domestic support obligations,

administrative expenses and finally,

unsecured claims.

Priorities

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The “Covered Dish Supper” Rules of Priority

EquityUnsecuredSecuredPMSIAdministrative Priority Claims

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Bankruptcy 101

Assets fmv 500,000

Liabilities 2,000,000

Bank Debt 500,000

Trade Debt 750,000

Judgment 750,000

___________________________________

• If Bank is secured and perfected - 100% recovery

• If Bank unsecured or unperfected - 25% recovery

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• In bankruptcy the Secured Party has a claim based upon the amount of its debt. Secured claims are paid first, unsecured claims are last.

• If the value of the collateral exceeds what is owed the Bank the Bank is oversecured and is entitled to post-petition interest.

• If the value of the Bank’s collateral does not exceed the amount of the debt, the Bank is undersecured

and has a secured claim up to the value of the collateral; and an unsecured claim for the amount by which the claim exceeds the value of the collateral.

Secured Claims

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If the debtor and creditor are indebted to each other

prior to commencement of the Bankruptcy case, the

creditor generally may set off against its claim the

amount it owes the debtor against the amount the debtor

owes the creditor.

Set-Offs Of Mutual Debts

Bank Borrower/DepositorDeposit account

Loan obligation

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In the context of Bankruptcy Code, an executory contract is a: "contract under which the obligation of both bankrupt and other party to contract are so far unperformed that failure of either to complete performance would constitute material breach excusing performance of either."

Source: Black's Law Dictionary (61" ed. 1991)

• Your borrower may have an important contract “rejected” by its account debtor

• Reject claim is typically prepetition unsecured claim

• Assume or Assume and Assign

cure defaults

provide adequate assurance of future performance

• Obligation to lend under loan agreement may be terminated without violation of automatic stay

Executory Contracts

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• Code establishes deadline by which a debtor must assume or reject its unexpired leases of non-residential real property. After deadline passes, such leases are deemed rejected.

• Deadline is earlier of (a) 120 days after petition date, or (b) entry of confirmation order.

• Court may only grant an additional ninety (90) days absent written consent of lessor.

• The deadline for other executory contracts and leases is 90 days in Chapter 7 or until confirmation in Chapter 11.

Time to Assume/Reject

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• Debtors may now be forced to assume leases

before reorganization and business plans are

finalized.

• If debtor subsequently rejects a previously assumed

lease the lessor’s administrative claim is capped at

the amount of all monetary obligations due for the

period of two (2) years following the later of the

rejection date or date of actual turnover of the

premises.

Assumption Followed by Rejection

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• Individuals may be consumer borrowers, business borrowers

or guarantors.

• Individuals seeking liquidation generally file under Chapter 7.

• Chapter 12 is intended for the reorganization of a family

farmer with regular annual income.

• Chapter 13 filings are sometimes referred to as “wage earner”

cases. Chapter 13 may be used only by individuals who have

no more than $336,900 of unsecured debt and $1,010,650 of

secured debt.

Consumer Bankruptcy

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• A “discharge” frees the debtor from personal

liability for his or her debts.

• For individual debtors, the purpose of a

Chapter 7 bankruptcy is to obtain a “fresh

start” through the discharge of pre-

bankruptcy debts.

Dischargeability Of Debts

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A creditor is not required to object or take any action to avoid the discharge of:

• Trust Fund Taxes

• Income Taxes unless

- not liened;

- return due more than 3 years earlier counting extensions;

- return actually filed by taxpayer more than 2 years earlier;

- tax assessed more than 240 days plus applicable extensions; and

- no attempt by debtor to evade taxes

• Creditor not listed in the schedules of an asset case

• Child support, domestic support obligations and divorce related obligations

• Student loans

• Death or personal injury from DWI or DUI

Debts Not Subject To Discharge

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• Fines, penalties and forfeitures to governmental unit

• Debts not discharged in prior bankruptcies

• FDIC claims against bank officers & directors

• Federal criminal restitution

• Debt incurred to pay non-dischargeable tax debt

• Certain condo fees

• Court fees under 1915(b),(h) or (f) of title 28

• Funds owed to pension, profit-sharing, stock bonus or other plans established under Internal Revenue Code under an ERISA or thrift savings plan

• Federal securities law violations

Debts Not Subject To Discharge in Chapter 7(Not applicable in Chapter 13)

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Creditor must object before Bar Date (60 days after the Section 341(a) first meeting of creditors) to claims based on:

• Fraud, false pretenses or false representation

- consumer debt of more than $650 for "luxury goods or services''

- credit card debt of more than $925 for cash advances within 70 days of bankruptcy entitled to presumption of fraud.

- False statement in writing (credit application, financial report).

• Fraud or defalcation by fiduciary

• Embezzlement

• Larceny

• Willful and malicious injury (Not applicable in Chapter 13)

Debts Which Require A Creditor Objection To Avoid Discharge

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Reasons the conduct of a debtor can lead to the denial of the discharge:

• Debtor not an individual

• Debtor fraudulently hidden, destroyed or transferred property of the estate or the debtor

• Debtor destroyed or concealed financial records

• Debtor lied in connection with the case

• Debtor failed to explain any loss of assets

• Debtor refused to obey order of court

• Debtor received discharge in chapter 7 commenced w/in 8 years

• Debtor received discharge in chapter 12 or 13 w/in 6 years

• Debtor has failed to complete the financial management course

• Debtor's debt arises from securities violations, civil rights violations, or criminal acts and torts

Objections To Discharge Of Debtor On Any Debt

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Once granted, a discharge can be revoked under certain circumstances:

• Moving party did not know of fraud in obtaining discharge at time of discharge

• Debtor knowingly and fraudulently failed to report acquired property

• Debtor has refused to obey order of court

• Debtor has failed to comply with audit

Revocation Of Discharge

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• A debtor filing bankruptcy may choose the state exemptions provided under applicable state law or an alternative set of federal exemptions in the Bankruptcy Code.

• To claim exemptions, the debtor must list the exempt property in the debtor’s schedules.

• Unless a party in interest timely objects to the debtor’s claimed exemptions, the property claimed exempt on the debtor’s schedules is exempt.

• Generally not worthwhile to object to a claimed exemption, except in extraordinary circumstances.

Individual Debtor Exemptions

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• Equity in homestead

- $22,975 for individual debtor

- $45,950 for married couple filing jointly

• $3,675 equity in motor vehicle per individual debtor

• Personal or household items (i.e. furnishings, goods, wearing apparel, appliances, books, animals, crops, musical instruments)

- $575 per item

- $12,250 per individual debtor

• $1,550 equity in jewelry for personal use per individual debtor

• Wildcard

- $1,225 per individual; plus

Federal Exemptions

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- up to $11,500 of unused homestead exemption per individual debtor

- married couple ranges from $2,450 to a maximum of $25,450

• $2,300 equity in "tools of trade" per individual debtor

• Unmatured life insurance contract

• $12,250 cash surrender value in life insurance per individual debtor

• Professionally prescribed health aids

• Social Security benefits, unemployment compensation, or local public assistance benefit

• Veteran's benefits

• Disability, illness, or unemployment benefit

• Alimony or support (to the extent reasonably necessary)

Federal Exemptions (cont’d)

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• Pension, profit sharing or annuity plans (to the extent reasonably necessary)

• Award under victim's reparation law

• Life insurance or wrongful death claim (to the extent reasonably necessary)

• $22,975 of bodily injury claim

• Compensation for loss of future earnings (to the extent reasonably necessary)

• Retirement funds exempt under Internal Revenue Code

• Dollar amounts are adjusted triennially

Federal Exemptions (cont’d)

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A partial list includes:

• Social security payments

• Railroad Retirement Act annuities and pensions

• Veterans benefits

• Civil service retirement benefits

• Injury or death benefits from

- War hazards

- Longshoremen’s and Harbor Workers’ Compensation Act

• Wages for fishermen and seamen

Federal Non-Bankruptcy Exemptions

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• 730 day residency requirement for utilization of state exemptions

• No exemptions are valid against:

- Claims for family support obligations;

- Debts secured by a lien that is

o not avoided pursuant to bankruptcy law or void; or

o a properly filed tax lien;

- Debts for fraud or defalcation while acting in a fiduciary capacity or willful and malicious injury if owed by a banking official; or

- Debts in connection with fraud in obtaining financial assistance for education at an institute of higher education.

Limitations On Exemptions

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• Debtor may avoid a judicial lien on property or a nonpurchase money, nonpossessory security interest in personal property (e.g., household goods, jewelry, tools of trade, etc.) to the extent the lien impairs an exemption to which the debtor would have been entitled but for the lien.

• Judicial liens securing alimony, maintenance or support obligations generally cannot be avoided.

• Household goods which include:

Avoiding Liens On Exempt Property

• Clothing • Linens • Furniture exclusively for use of minor children or elderly

• Furniture • China • Personal Effects

• Appliances • Crockery • 1 Personal Computer and Related Equipment

• 1 Radio • Kitchenware • Educational Materials

• 1 Television • 1 VCR • Medical Equipment and Supplies

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• Household goods on which a lien cannot be

avoided include:

- Works of Art

- Electronic Entertainment Equipment worth more than $500

- Antiques worth more than $500

- Jewelry worth more than $500 (except wedding rings)

- Computer other than above, motor vehicle, boat, or

motorized recreational device

Avoiding Liens On Exempt Property

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There is a “Means Test” formula that the Court must apply in

determining whether an individual debtor’s chapter 7 case should

be dismissed or if the debtor should be allowed to convert to a

case under Chapter 11 or Chapter 13. A presumption of

“abuse” of Chapter 7 exists where the debtor’s current monthly

income, less certain reductions, multiplied by 60 is equal to or

more than (i) the greater of 25% of its general, unsecured claims

or $7,475; or (ii) $12,475 whichever is greater.

The “Means Test”

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• Presumption of Abuse Where:

(CMI* - REDUCTIONS) x 60 > (the lesser of)

i. (the greater of)

a. $7,475; or

b. TOTAL UNSECURED, NONPRIORITY CLAIMS X 25%

or

ii. $12,475

*CMI = Current Monthly Income


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• “Means Test” Example:

John Smith’s monthly net income exceeds the median of his home state of Texas. After deducting allowed expenses, John has $300 net monthly income. John owes $50,000 in unsecured nonpriority debt.

John is not eligible for Chapter 7. Over a 5 year period, John could repay $18,000 of his debts ($300 x 60). Abuse would be presumed because John could repay at least 25% of $50,000 or $12,500. If instead John’s net monthly income is $100, then John would be eligible for Chapter 7 because he could only repay $6000 of his debts which is less than $12,475 and 25% of his debts ($12,500).


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• Redemption means the debtor pays the holder of a lien the fair market value of the property in return for a release of the lien, regardless of the amount of indebtedness secured thereby.

• An individual debtor may redeem for cash personal property intended primarily for personal, family or household use if such property is claimed as exempt.

• The debtor’s time within which to begin performance of its intention to retain or surrender property ends 30 days after the first date set for the Section 341 creditors’ meeting, unless otherwise enlarged by the Court for cause prior to the expiration of the 30-Day period.

Redemption

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• The Bankruptcy Code allows for voluntary reaffirmation of a debt by debtor and creditor agreement.

• A reaffirmation makes the debtor liable on both the secured portion of the debt and any unsecured deficiency allowed by state law.

• Reaffirmation agreements are most commonly used for vehicles, motor homes, boats, etc. where the debtor wishes to retain the property and pay the creditor in installments instead of redeeming in one lump sum.

• An individual debtor in a chapter 7 case is prohibited from retaining possession of personal property in which the Bank has an allowed PMSI, unless the debtor enters into a reaffirmation agreement with respect to the secured claim or redeems the property from the security interest within 45 days after the first Section 341 creditors’ meeting.

Reaffirmation

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• Verify

- Who?

- What?

- Where?

- When?

- Why?

- How?

• Official notice from bankruptcy court clerk;

• Notice from newspaper listings, a credit bureau, or the debtor’s attorney

• Investigate rumors of a bankruptcy filing and verify with bankruptcy court clerk.

Step #1

News of the Filing

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All areas of Bank should be notified:

• Accounts

• Loan

• Collections (including agencies)

• Legal (in house and outside)

• IT

Step #2

Notify Your Team

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• Obtaining a list all deposit, credit, and loan

accounts with debtor

• Collecting pertinent data about accounts

such as balances, payments, collateral,

cash advances, withdrawals, and maturity.

Step #3Determine Bank’s relationships with debtor

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• Cease efforts to repossess collateral; to

create, perfect, or enforce a lien; or to collect

a debt.

• Observe automatic stay protecting co-

debtors in Chapter 13 consumer bankruptcy

cases.

Step #4Stop all collection activity

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• Place hold on (or freeze) debtor’s account

pending further action)

• Notify debtor if action is taken.

Step #5Decide whether to take action on

the debtor’s bank account

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Recover credit cards through the debtor’s

attorney.*

*If you approach debtor be careful to avoid words that might be construed

as collection activity in violation of stay.

Step #6Retrieve the debtor’s credit cards

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• What’s in your file?

− Collect records and documents

− Evidence of loading up or false financial statements

• Who is the Bank contact with Debtor?

• What’s in your head (or someone else’s)?

• Who else is a creditor?

• Compare the debtor’s Schedules with information in your file.

• How large is the case?

• How large is your claim?

Step #7Assemble Information

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Make certain that

• debtor’s loans were properly documented

• disclosures were properly made

• liens were correctly recorded

Step #8Review the all loan documentation

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• Determine:

- whether collateral is insured

- where it is

- its condition and use

- its value and

- whether payments are current

• Determine whether loan is adequately secured (collateral value should exceed loan balance).

Step #9Obtain information about the collateral

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• Consumer Deadlines:

- To File Claims

- To Object to Discharge

- To Object Exemptions

• Chapter 11 deadlines

Step #10

Get a Handle on Deadlines

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Weigh the Bank’s options with regard to the debtor’s property that is neither returned to Bank, redeemed, or retained as exempt or through avoidance of a nonpossessory, nonpurchase-money lien

• seek abandonment of property from bankruptcy estate;

• seek relief from automatic stay or Adequate Protection;

• file motion to prohibit collateral use;

• enter into Reaffirmation Agreement;

• accept voluntary repayments without reaffirmation;

• consider objecting to the exemptions claimed;

• do nothing until automatic stay terminates, then proceed to enforce lien rights negotiate with trustee to sell property free of liens.

Step #11Determine Bank’s course of action

regarding collateral in a Chapter 7 case

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If circumstances seem to warrant, file objection

to general discharge of debts prior to hearing

date set by bankruptcy court.

Step #12Decide whether to object to discharge of

debtor in a Chapter 7 case

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• Determine whether debtor made false written statements to obtain loan or otherwise engaged in false pretenses, false representation, or fraud.

• Determine whether loading up occurred.

• Weigh possibility that court will find the objection not substantially justified and may order Bank to pay debtor’s attorney’s fees and costs.

Step #13Decide whether to object to discharge of a

particular debt in a Chapter 7 case

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Weigh the Bank’s options with regard to debtor’s plan for modifying security interests and making repayments:

• do not accept plan that fails to continue creditor’s lien

• in a cram-down, consider objecting to specific aspects like valuation of collateral

• file motion for relief from stay

• challenge plan for curing defaults in real property that is debtor’s principal residence and

• seek protection against delinquency of payments made outside plan.

Determine whether grounds exist for objecting to confirmation.

Determine whether debtor proposed plan in good faith.

Step #14Determine course of action regarding

collateral in a Chapter 13 case

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Request copies of court papers such as:

• debtor’s statement of current income and

current expenses

• statement of intent to retain or give up

collateral.

Step #15Collect bankruptcy case papers

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Unsecured creditors who do not contemplate action in a no-asset case may not wish to attend.

• Secured and unsecured creditors, especially those noticing abuses or discrepancies in case or those contemplating action, should attend to gather information and question debtor under oath.

• In Chapter 13 cases, it is important to attend to learn how claim will be treated in the repayment plan.

• If contemplating litigation, Bank’s counsel should attend.

Step #16Decide whether to attend first §341

meeting of creditors

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• File your claim

- File it in the right case

- Send it to the right place (not the debtor’s lawyer)

- Get a file-marked copy

- Attach appropriate documents

• For secured claims, determine value of collateral to be declared, if necessary be accurate and complete in filing out form, and attach required loan documents.

• Amend when necessary

• Objection to claims of others, if appropriate

Step #17File a proof of claim

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• Role of the united States Trustee’s Office

• Role of a committee

• Obligations of the members of the committee

• Unofficial committees and groups of creditors

• The dilemma of a small creditor in a big case

Step #18Consider serving on a committee

in a Chapter 11

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• In a Chapter 7 case, pursue guarantors, endorsers, sureties, and collateral owned by third parties if no restraining order has been issued.

• In a Chapter 13 case, observe automatic stay protecting co-debtors and decide whether to request court to lift co-debtor stay.

Step #19Proceed against guarantors andcollateral owned by third parties

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• To help avoid consumer bankruptcies and improve the Bank’s procedures when they do occur, collect and analyze data on bankruptcy experience. Analyze credit applications and test the credit-scoring system using comparative data about known bankrupts.

− Disregard potentially exempt property when evaluating a prospective borrower’s financial statement.

− Do not rely on nonpossessory, nonpurchase-money liens on household goods as security.

− Do not use purchase-money collateral to cross-collateralize other indebtedness.

− Document loans fully and accurately, making sure that all liens are properly perfected.

− Take new collateral to secure a prior unsecured debt, even if the transfer happens to take place in the 90 days prior to a bankruptcy filing and may later be deemed a preference by the trustee.

Avoiding Consumer Bankruptcies

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− Do not rely on a lien arising from a consent judgment because a debtor has the ability to set aside judicial liens if they impair an exemption.

− Through regular monitoring, make certain that the value of collateral does not depreciate below the amount of the lien.

− On indirect loan contracts, evaluate dealer repurchase agreements and consider making Chapter 13 cases an exception to the lender’s delivery requirement.

− Consider the benefits and costs of a prebankruptcy set-off of bank accounts held by borrowers in failing circumstances.

− Avoid weak guarantors on loans because of the automatic stay that protects both debtors and co-debtors in Chapter 13 plans.

− Consider referrals to credit counseling services.

− Create a bankruptcy early warning system that flags for review all problem loans, frequent overdrafts, late payments, and excessive borrowing.

− Encourage alternatives to bankruptcy, including work-out arrangements, by sponsoring public awareness and customer projects that stress the personal disadvantages and costs of bankruptcy.


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− Assert the Bank’s interests aggressively by making it known that, in appropriate circumstances, the Bank will protect its rights, object to questionable practices by debtors, and challenge discharges.


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• A commercial bankruptcy is filed under either Chapter 7 or Chapter 11 of the U.S. Bankruptcy Code.

• Under Chapter 7 a business’ assets are liquidated by a trustee who is either appointed by the court or elected by the creditors, and the proceeds distributed to creditors.

• The ultimate goal of a Chapter 11 bankruptcy filing is to reorganize the debtor’s business.

• The majority of Chapter 11 cases are

- dismissed,

- converted to Chapter 7 for liquidation or

- confirm liquidating Chapter 11 plans.

Commercial Bankruptcy

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RRussell©2016

General Chapter 11 Timeline

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• Day 1

• A chapter 11 case is commenced by the

filing of a chapter 11 petition.

Filing of Petition

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• On the same day the chapter 11 petition is filed, a company

usually files several “first day motions” with the bankruptcy court.

• The court considers the first day motions at a “first day hearing”

that is usually held on the first or second day of a chapter 11

case.

• The court issues “first day orders” approving the first day

motions.

• In some instances, the court issues first day relief on an interim

basis until a final hearing is held within a few weeks (as is usually

the case for DIP financing). In other instances, the court issues a

final order without the need for a final hearing.

Filing of First Day Motions and First Day

Hearing

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• Usually within the first two weeks of filing

• After the company files to restructure under

chapter 11, a government agency, the Office

of the U.S. Trustee, appoints an official

creditors’ committee. The creditors’

committee typically includes about seven of

the company’s largest unsecured creditors.

Appointment of Official Creditors’ Committee

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• Usually within the first month or two of filing

• A meeting of company representatives and creditors typically

takes place within the first month or two after a case under

chapter 11 is commenced.

• This meeting is called the 341 meeting because it is required

under section 341 of the bankruptcy code and typically occurs

approximately 30-65 days after a chapter 11 filing.

• A notice of the 341 meeting, along with notice of the

commencement of the case, will be mailed to all known

creditors within the first few weeks after the filing.

§ 341 Meeting of Creditors

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• Usually within 4-6 months of filing

• Another major step in the chapter 11 process is when the court sets a date by

which anyone who believes he/she is owed money must assert those claims.

• Notice procedures, which normally include newspaper advertising, are

established.

• Notice is given to people with claims alerting them that their claims must be

brought forward by filing a “proof of claim” by a certain date that is referred to

as the “bar date.”

• Claimants are provided with a period of time from the date of the notice to file

their proofs of claim.

• Failure to file a “proof of claim” by the “bar date” may mean that the claim is

forever waived.

Bar Date for Proofs of Claim

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• Timing varies from case to case

• The “plan of reorganization” is the document that sets forth

how the company is to be reorganized and what creditors will

receive on account of their claims.

• The company has the exclusive right by law to propose a plan

of reorganization during the first 120 days of the chapter 11

process.

• If the company is proceeding in good faith, the exclusive

period may be, and usually is, extended by the court.

• The exclusive period may only be extended up to 18 months.

Plan of Reorganization

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• Along with the plan of reorganization, a “disclosure statement”

is filed with the court.

• The disclosure statement explains the reasons for the filing,

describes the plan of reorganization in some detail and

describes what the creditors will receive on account of their

claims.

• The court must determine if the disclosure statement contains

“adequate information” for the creditors to decide whether to

vote to accept or reject the plan or reorganization.

Presentation of Disclosure Statement to

Bankruptcy Court

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• If the disclosure statement is approved by the court, the company will

then send it, along with the proposed plan of reorganization, to

creditors for voting.

• If the company receives the required votes from its creditors in favor

of the plan, it will then seek court approval, or “confirmation,” of its

plan of reorganization.

• If the plan of reorganization is confirmed by the court, the claims of

creditors will be satisfied as directed in the plan of reorganization.

• At this point, the company can emerge from chapter 11 as a

reorganized company and operate its business as described in its

plan of reorganization.

Voting on the Plan of Reorganization and

Confirmation

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• A secured lender may file a Motion to Lift Stay which, if

granted, allows the Bank to conduct a foreclosure sale

under state law.

• The Bank may credit bid at the foreclosure sale.

• If the Bank’s Motion to Lift Stay is not granted the debtor

may seek to sell the Bank’s collateral in a 363 Sale.

• The Bank may also credit bid at a 363 Sale.

Bank’s Common Course of Action

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• One of the first issues confronting a Bank, as a secured lender

in a Chapter 11, is the debtor’s ability to use cash collateral.

• If the Bank has a perfected security interest in inventory and

accounts receivable, the debtor cannot use any cash

generated by the sale of inventory or the collection of accounts

receivable.

• The Bank (and its counsel) need to prepare for negotiations

with the debtor (and debtor’s counsel) to determine the

conditions for the use of cash collateral.

Cash Collateral

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• When bankruptcy is filed, the Bank is no longer

obligated to fund under a prepetition credit

facility.

• “Debtor in Possession” or “DIP” financing is

post-petition credit extended to the debtor.

• A DIP facility must be approved by the Court.

DIP Financing

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• A “363 Sale” is a sale of assets in a

bankruptcy case.

• Assets may be sold pursuant to Section 363

of the Bankruptcy Code.

Section 363 Sales

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• The terms of the sale constitute the highest and best

offer for the assets to be sold;

• The negotiations concerning the terms and conditions

of the proposed sale were conducted at arm’s length;

• The sale is in the best interests of the Bankruptcy

estate and its creditors

• The purchaser has acted in good faith and the sale

itself is being made in good faith

Requirements of 363 Sale

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• The confirmation of a Chapter 11 Plan of Reorganization is the goal of the Chapter 11 bankruptcy case.

• The debtor revises its financial structure and business.

• A plan of reorganization in a Chapter 11 bankruptcy case is a new contract between the debtor and its creditors for payment of pre-petition debts.

The Debtor’s Plan Goals

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• A transfer of the debtor’s property

• The debtor received less than “reasonably

equivalent value” in exchange and

- The debtor was or became insolvent as a

result of the transfer; or

- Had unreasonably small capital; or

- Had debts beyond ability to pay

• Guarantees are commonly subject to attack

Elements of Fraudulent Transfer

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• Upstream Guarantees

• Cross-Stream Guarantees

• Downstream Guarantees

Guarantee Issues:

Parent

Sub #2

Downstream Upstream

Cross-streamSub #1

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• A transfer of property of the debtor (includes a lien)

• Transfer was to or for the benefit of a creditor

• Transfer was on account of an antecedent debt

• Transfer was made while the debtor was insolvent, and within 90 days prior to filing of the petition (or within one year if the transferee was an “insider”)

• Creditor receiving the transfer received more than the creditor would receive in a liquidation of the debtor’s assets

Elements of a Preference

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• Get Collateral, Guarantee or Letter of Credit

early

• Analyze Defenses

- Ordinary Course of Business

- No Antecedent Debt

- Contemporaneous Exchange for New Value

- Enabling Loans

New Liens can be Preferences

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• PMSI – Creditors have 30 days from the debtor’s

receipt of property to perfect a purchase money

security interest in the property, and be protected

from preference attack. 11 U.S.C. § 547 (c)(3).

• Other Liens – Lien perfection is deemed to have

occurred for preference analysis on the date that the

lien was created / granted if perfection occurs within

30 days (up from 10 days) of lien creation.

Lien Perfection Safe Harbor

HOU:3628129.2

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