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AMERICAN INSTITUTE

JOURNALIssues and Information for the Professional claim (subject to many caveats, which we use taxes, customer obligations and other Chapter 11 - won’t discuss here).1 obligations depending on the nature of the ’s . In most cases, the “101” The Role of the Unsecured bankruptcy court will grant these motions in Chapter 11 where it is shown that the payment of such Conversely, all other are claims is critical to maintaining the debtor’s dependent on unencumbered assets of an ongoing operations and going-concern value. What Every for payment. The priority for payment Also usually included among the first- of these claims is generally as follows: first, day motions is the debtor’s request to use costs of (including cash and/or obtain debtor-in- professional fees and expenses and post- possession (DIP) financing. Once approved, Should Know About petition expenses of operating the debtor’s such financing orders have a huge impact on business), followed by a host of unsecured the priority scheme for recovery in the claims that Congress has determined deserve bankruptcy case, as they usually involve Chapter 11 a special high priority (again, see ¤507; see, priming and replacement , intricate Contributing Editors: also, ¤503), and finally general unsecured service requirements and carve-outs for Prof. John D. Ayer pre-petition obligations. By virtue of their specific types of claims.3 University of California at Davis; Chico, Calif. last-in-line position, general unsecured Unsecured creditors and/or their advisors [email protected] creditors might be viewed as having the should read these motions to consider the Michael L. Bernstein most to lose should a chapter 11 debtor’s potential impact on their rights. If Arnold & Porter LLP; Washington, D.C. reorganization fail. It is for this reason that appropriate, they should file an objection (or [email protected] unsecured creditors may be most benefited if there isn’t enough time to file something, by a thorough monitoring of the debtor’s show up at the hearing and object). If you Jonathan Friedland affairs during the case. don’t protect your rights, you may find that Kirkland & Ellis LLP; Chicago the game is half over just after it starts. [email protected] Steps to Take Immediately Upon Obtaining Information About the Case. Notice of a Chapter 11 Filing Also Written by: Upon the initial bankruptcy filing, the debtor First-day Hearings Can Impact Rights. Ryan Blaine Bennett is required to serve all known creditors with Upon the filing of a debtor’s bankruptcy Kirkland & Ellis LLP; Chicago notice of the commencement of the chapter case, the bankruptcy court will typically hear [email protected] 11 case. Beyond that, it is up to the individual a series of motions filed by the debtor in creditor to take steps to gather additional Editors’ Note: This month, we address which the debtor requests certain authority information about the case and the treatment issues of concern to unsecured creditors of a that it is not automatically entitled to receive of your claims therein. One surefire way to chapter 11 debtor. By paying attention to the under the Bankruptcy Code. In almost all stay in the loop is to file and serve a request issues discussed below, an unsecured cases, some of these motions include pursuant to Bankruptcy Rule 2002 to be creditor can guard against unnecessary requests to treat certain creditors’ claims added to the service list and receive copies of pitfalls, assert and effectively monitor its differently than they might otherwise be all filings in the bankruptcy case. Although claim and maximize the amount of its treated by the Bankruptcy Code’s priority this may open a floodgate of mail, it is recovery. scheme. traditionally the best way to monitor a case. reditors in a bankruptcy case and the Specifically, these “first-day” motions To cut down on document costs, some courts priority of payment for their claims often include requests for authority to permit service by e-mail and electronic are distinguished by the type of immediately pay some or all of certain types document retrieval. Depending on the nature C of unsecured claims in advance of other claims they hold. The Bankruptcy Code sets of the claim and your level of technical forth a priority scheme for creditors’ claims unsecured claims. These include, inter alia, savvy, this may be a better option as opposed motions to pay pre-petition and to receiving reams of documents, many of in ¤507. In general, creditors whose claims 2 are secured by assets of the estate (a.k.a. benefits, critical vendor claims, sales and which are irrelevant to protecting a particular secured creditors) are in a superior position creditor’s . 1 See, generally, Ayer, J., Bernstein, M. and Friedland, J., “What Every (and such claims are outside the gambit of (and Its ) Should Know About Chapter 11,” Another good source of information is ABI J. (Nov. 2003) (surveying a series of issues related to protecting a the Office of the U.S. (UST). In ¤507 entirely). Should a chapter 11 debtor secured creditor’s rights in bankruptcy). fail in its attempt to reorganize, a secured 2 Depending on the applicable jurisdiction and the particular almost all cases, the UST is briefed by the product/service sold by the creditor, a critical-vendor order can elevate debtor in advance of the bankruptcy filing as creditor may generally look to the mere general unsecured claims to a significantly higher priority, of its collateral for payment of its sometimes resulting in the full and immediate payment of the creditor’s 3 In the near future, this column will feature a more in-depth discussion entire pre-petition claim. of chapter 11 financing. The American Bankruptcy Institute 44 Canal Center Plaza, Suite 404, Alexandria, VA 22314-1592 • 703 739 0800 to the debtor’s first-day motions and general heard on any issue in the bankruptcy case, Protecting/Collecting Your Claim intentions for the . As the and its views tend to be taken seriously by Proof of Claims and Bar Dates. Of all “watchdog” for the debtor’s creditors, the the court. deadlines in a bankruptcy case, the proof-of- UST is often helpful in providing Of course, along with the benefits of claim bar date is probably the most critical information to creditors that might otherwise membership, there is some measure of from a creditor’s perspective. Missing a bar be difficult to decipher from the case burden. The committee is charged with date is a serious matter. A late claim may be documents themselves. This is important monitoring and scrutinizing the debtor’s allowed if the creditor can show “excusable because, in most cases, many of the first-day chapter 11 process from start to finish. neglect,” but no creditor—and especially no motions will have already been heard before These obligations often involve numer- lawyer—wants to be in that position. you’ve been able to serve out your Rule ous meetings, conference calls and At some point in the bankruptcy case, 2002 request. negotiations. This process can be very the bankruptcy court will enter an order In addition, not long after the case time-consuming, particularly where the setting the bar date. Shortly thereafter, the begins there will be an opportunity to meet case drags on for months or years. debtor is required to send notice of the with an attorney for the UST at the initial Moreover, committee members owe claims bar date to all known creditors. and/or ¤341 meetings of creditors. At each duties to all unsecured creditors, Attached to the bar date notice will be a of these meetings, the UST will provide not just those creditors with similarly sample proof-of-claim form that can be used general details regarding the chapter 11 situated . This responsibility can for filing your proof of claim. A copy of process and the particular case, and invite be particularly vexing when a committee the general form is also available at your questions. Debtor’s counsel will also be member is required to balance his own www.uscourts.gov/bkforms/official/b10.pdf. on hand at these meetings to provide a case self-interests with the competing interests Given the uncertainty of the postal status summary and answer questions as of other creditors. A committee member service, it is not a good idea to just sit back well, and a representative of the debtor will may also be restricted in trading in the and wait for a bar date notice to arrive. Once appear and testify under oath. debtor’s securities. Consequently, like any you are aware of the bankruptcy case, you Finally, the debtor is required to make other financial decision, the decision to should monitor the case docket to identify certain and periodic filings as to its financial serve on the committee should be the bar date for your claim(s). Although the status, both as of the petition date and carefully considered and eventually debtor is required to serve all known throughout the bankruptcy case. Among determined by weighing both the costs creditors with actual notice, if the debtor can these are the debtor’s schedule of assets and and the benefits. show that the notice was mailed to any of liabilities and statement of financial affairs. Understand Reclamation Rights. As your business addresses, for example, you’ll These filings can provide an initial within the non-bankruptcy context, recla- face a steep burden to prove that such notice indication of the debtor’s position regarding mation refers to the right of the seller to was never actually received. It’s best to a particular creditor’s claim(s)—the amount reclaim goods sold to a debtor while the avoid this argument altogether and simply the debtor thinks it owes, whether it disputes debtor was insolvent. Section 546(c) focuses seek out the bar date of your particular case the claim, etc. They will also list the debtor’s on that right in the context of a sale that took on your own without waiting for the notice assets, secured and unsecured , place immediately before the debtor filed for to arrive. the debtor is party to, and much bankruptcy. In such cases, timing is a critical In chapter 11 cases, you do not need to additional information. As with general factor. There is a narrow window within file a proof of claim if you agree with the pleadings, these documents can usually be which the seller must act to protect its rights. way the debtor listed your claim in its found on the bankruptcy court’s web site Specifically, the seller must make a written schedules and your claim is not listed as and/or obtained from the debtor’s notice and reclamation demand: contingent, unliquidated or disputed. claims agent. As an additional source of 1. within 10 days of receipt of the goods However, it is usually a good idea to file a information, the debtor is also required to by the debtor, or proof of claim in any event, even if your file monthly operating reports (MORs), each 2. if the 10-day period expires after the claim is included in the debtor’s schedule of of which reflects the debtor’s financial commencement of the bankruptcy case, unpaid debts. The proof of claim does not position and cash distributions made during within 20 days after the debtor received need to reflect a liquidated amount in order the applicable monthly period. the goods. to be timely filed. The debt can be con- Serving on the Committee Carries Its In many large chapter 11 cases, even tingent upon an event to occur in the future Burdens and Its Rewards. Shortly after the when a seller makes a timely and proper and, upon such occurrence, the proof of filing of a chapter 11 case, the UST will hold reclamation demand, the bankruptcy court claim can be amended after the bar date to a meeting (at least in larger cases) to form an will often grant the seller a priority claim reflect the liquidated, non-contingent official committee of unsecured creditors, instead of ordering a return of the goods. amount due. Unlike requests to file a late and will usually select candidates from the Such an order is a compromise between the proof of claim, amendments to timely filed list of the 20 largest unsecured creditors filed reclaiming seller’s rights under non- proofs of claim are freely granted and by the debtor at the outset of the case. Once bankruptcy (¤2-702 of the UCC) to seldom opposed on timeliness grounds. selected, the committee can engage legal claim its goods and the debtor’s interests in Monitoring the ’ Chapter 11 counsel and financial advisors to assist it in maintaining its going-concern value by not Plan and Proposed Distribution Timeline. carrying out its duties. Because the fees for disrupting its supply chain. Some large For most unsecured creditors, payday will these professionals are paid by the chapter commercial debtors will seek to streamline come after the chapter 11 debtor’s plan is 11 debtor’s estate, membership on the this process by filing a “reclamation submitted and approved by the bankruptcy unsecured creditors’ committee is probably procedures motion,” requesting that this court. Timing for this process varies the most cost-effective way for individual claim-substitution process occur auto- significantly from case to case, with some unsecured creditors to influence the outcome matically without the need to make debtors filing plans on the first day of the of a bankruptcy case and protect their individual requests for each reclamation bankruptcy and others not filing until interests. The committee has standing to be claim. The American Bankruptcy Institute 44 Canal Center Plaza, Suite 404, Alexandria, VA 22314-1592 • 703 739 0800 to receive it. The circumstances vary from bankruptcy protection, you can significantly case to case; the applicable provisions, if reduce your exposure by initiating certain ultimately confirmed, have generally been payment alternatives that will protect your vetted by the committee (and sometimes the interests in the event of a filing. These UST) with the interests of the general alternatives include obtaining advance unsecured creditors in mind. If you don’t payment or cash on delivery (COD) for want to wait until confirmation to get paid, shipments, establishing an evergreen retainer you may be able to sell your unsecured or cash deposit, obtaining letters of claim to a “claim trader.” This is a valuable and entering into third-party guarantees. ■ source of liquidity for creditors that are willing to take a discount in exchange for Reprinted with permission from the ABI early recovery. Journal, Vol. XXIII, No. 5, June 2004. Preventive Maintenance The American Bankruptcy Institute is a Counseling creditor clients before a multi-disciplinary, non-partisan orga- bankruptcy can be a good way to win nization devoted to bankruptcy issues. friends. As the old adage goes: “an ounce of ABI has more than 10,000 members, prevention is worth a pound of cure.” This representing all facets of the insolvency saying is quite appropriate in the bankruptcy context, where proper preventive steps, if field. For more information, visit ABI taken pre-petition, can significantly reduce a World at www.abiworld.org. particular creditor’s exposure and improve its standing in a bankruptcy case. Avoiding Preference Liability. Many creditors don’t realize it, but in addition to being left on the hook for their unpaid pre- petition claims, they may also be liable to the debtor’s estate for receiving pre-petition preferential payments (a.k.a. preferences). Essentially, the Bankruptcy Code permits a debtor to sue creditors to recover payments made by the debtor shortly before the bankruptcy filing where the payment gave the creditor more than other similarly situated creditors would get through the bankruptcy process.4 The creditor/defendant, however, is not without defenses to these actions. For example, payments will be safe from recovery if they constitute contemporaneous exchanges, payments made in the ordinary course of business, and/or security interests that secure debts that bring new value to the debtor. By keeping accounts current and following ordinary billing practices, you can limit your exposure. Do not allow accounts to slip beyond customary payment terms. Monitor the Debtor’s Solvency. A number of financial services firms provide credit opinions regarding commercial companies and their ability to meet their debts as they become due. If, for instance, your company extends credit to a particular customer whose business represents a significant source of your company’s revenue, it would be prudent to request such an opinion from time to time in order to hedge against the injuries you might incur should that customer file for bankruptcy. Establish Protective Payment Alter- natives. As mentioned briefly above, if you become aware that a particular company is a and may potentially seek The American Bankruptcy Institute 44 Canal Center Plaza, Suite 404, Alexandria, VA 22314-1592 • 703 739 0800