A View From The Bench And Bar

Transcription

A View From The Bench
And Bar: A Discussion Of
Current Hot Bankruptcy
Issues Facing Trade
Creditors And The Future
Of Chapter 11 Following
BAPCPA’S 10TH
Anniversary
Speakers:
Honorable Laurel
Davis,
UNITED STATES
BANKRUPTCY JUDGE,
DISTRICT OF NEVADA
Wanda Borges, Esq.
BORGES & ASSOCIATES,
LLC
Bruce S. Nathan, Esq.
LOWENSTEIN SANDLER
LLP
Date:
June 14, 2016
Time:
2:00 pm – 5:00 pm
Session Number: 25056
45224422 v2
Section 503(b)(9) “20 Day” Administrative
Priority Claims
• Administrative Claim for the Value of Goods
Debtor Received Within 20 Days of Bankruptcy
Filing
• 20 Day Goods Must be Sold to the Debtor in the
Ordinary Course of Debtor’s Business
• Safety Net for Trade Creditors that Supply
Goods Not Services!
– Replaces reclamation as effective trade creditor
remedy
BORGES & ASSOCIATES, LLC
1
How To Assert “20 Day” Goods Administrative
Claims And Timing Of Payment?
• General Rule – Section 503(b)(9) Requests/Allowance
Require Notice and a Hearing
–
No automatic administrative claim without court
approval; cannot just file a proof of claim form (subject
to the below caveats)
• No Uniform Rule Specifying Manner In Which To
Assert Section 503(b)(9) Priority Claims
• No Deadline to Assert Section 503(b)(9) Claim in
Statute
–
Local Bankruptcy Rules May Create Deadline
• Timing of Payment - Most Courts Have Rejected
Immediate Payment Over Debtor’s Objection
2
Page 1
Court-Approved Provisions re Assertion Of
“20 day” Priority Claims
• Courts Are Setting Deadlines for Asserting Section
503(b)(9) Priority Claims
• Deadline Set to Assert (1) All Claims, Including
Section 503(b)(9) Claims or (2) Solely Section
503(b)(9) Claims
– Allows for assertion of Section 503(b)(9)
priority claim either
•
•
(1) on the same claim form as the creditor’s general
unsecured claim, or
(2) on a special proof of claim form solely related to
Section 503(b)(9) claims
3
One Of Section 503(b)(9)’s Litigated Issues:
Meaning Of Receipt Of Goods
• Section 503(b)(9) does not define “Receipt”
• Actual Possession (UCC)?
– UCC-2(103)(1)(c)
•
“Receipt of goods means taking physical
possession of them”
• Constructive Possession Through Receipt of
Goods by Third Party
4
Page 2
One Of Section 503(b)(9)’s Litigated Issues:
Meaning Of Receipt Of Goods
• Drop Shipment?
– Creditor ships goods to third party at
Debtor’s instruction
•
•
Debtor’s agent
Debtor’s customer
– Debtor lacks actual physical possession
of goods
5
Receipt Of Goods: Drop Shipment
• In re Plastech Engineered Products, Inc.;
Drop Ship Case
– Section 503(b)(9) requires that a Debtor receive
the goods and not just the value of such goods
– Court did not decide whether receipt includes
Debtor ’s “constructive receipt” of goods through
receipt by third party
– Parties subsequently settled on terms favorable
to seller
6
Page 3
• In re Momenta, Inc. – U.S. District Court New
Hampshire affirming U.S. Bankruptcy Court Decision–
–
Receipt includes buyer’s physical or constructive
possession of goods
–
Buyer does not obtain constructive possession of goods
that are delivered to buyer’s customer under drop shipment
arrangement
–
Constructive possession narrowly interpreted to occur upon
proof of receipt of goods by buyer’s agent
–
Adopted Black’s Law Dictionary definition of “drop shipment
delivery” as a “manufacturer’s shipment of goods directly to
the consumer rather than initially to a wholesaler”
7
• In re World Imports – U.S. Bankruptcy Court,
Eastern District of Pennsylvania
– Creditor “drop shipped” goods to debtor’s
customers
– Followed Momenta decision in holding that
debtor did not receive drop shipped goods
– Creditor’s section 503(b)(9) priority claim
for drop shipped goods denied
8
Page 4
• Can “Receipt” Be Defined in Parties’ Agreement to
Occur Upon Buyer’s Customer’s Receipt of the
Goods?
• Suggested Language: “Receipt of any product by
buyer shall immediately occur when buyer, buyer’s
bailee or other agent or designee receives either
actual or constructive possession of such product.
Constructive possession shall include, without
limitation, receipt by an entity or individual (including,
without limitation, buyer's customer) pursuant to a drop
ship instruction or other delivery instructions from
buyer. Constructive possession specifically does not
require actual possession by the buyer.”
9
Is There A Different Meaning For Receipt
Re International Sales?
• In re World Imports, Ltd. – District Court, Eastern
District of Pennsylvania – 2016 Decision
• Court Held Receipt Occurs When Goods Are
Loaded On Carrier
• Court Relied on
– CISG – Convention on Contracts for International
Sale of Goods
– Incoterms
•
One of Incoterms is FOB – Free on Board
10
Page 5
Is There A Different Meaning For Receipt
Re Goods Shipped From Abroad?
• Court Held Buyer Received Goods When They Were
Loaded on the Carrier More than 20 Days Before
Bankruptcy Filing Based on FOB Port of Origin Terms
• Court Relied on Definition of FOB
–
“means that the seller delivers the goods on board the vessel
nominated by the buyer at the named port of shipment or procures
the goods already so delivered. The risk of loss of or damage to
the goods passes when the goods are on board the vessel, and
the buyer bears all costs from that moment onwards.”
• Once Seller Delivers the Goods, Risk of Loss or
Damage Passes to Buyer and Buyer Has
Constructively Received the Goods
11
Another Litigated Issue: Debtor’s Setoff Rights As
A Defense To Section 503(b)(9) Priority Claims
• Chapter 11 Debtors Have Successfully
Offset Pre-Petition Credits, Deductions,
Chargebacks, Overpayments, Rebates,
and Similar Claims Against a Creditor First
In Reduction of the Amount Owing to
Creditors on their More Valuable Section
503(b)(9) Priority Claims Instead of their
Less Valuable General Unsecured Claims
12
Page 6
Debtor’s Setoff Rights As A Defense To
Section 503(b)(9) Priority Claims
• Circuit City Stores (Eastern District of Virginia) and
very recent AWI (District of Delaware) Decisions
–
Debtor permitted to setoff pre-petition credits claims in
reduction of Section 503(b)(9) priority claims
–
The courts invoked a little known Bankruptcy Code
Section 558:
•
–
“The estate shall have the benefit of any defense
available to the debtor…”
The Debtor could offset pre-petition credits claims
against creditors’ unpaid post-petition administrative
claims — VERY DANGEROUS!
13
• Proposed Contractual Fixes
– “Buyer waives right to assert pre-petition credits,
deductions, chargebacks, overpayments,
rebates and similar claims if buyer is “not in good
standing” with Seller (i.e., Buyer is past due or
otherwise in default; out of business)”
– “Buyer waives the right to assert any right of
setoff, recoupment or any other defense with
respect to any credits, deductions, chargebacks,
overpayments, rebates and similar claims that
Seller owes Buyer to reduce Buyer’s
indebtedness to Seller”
14
Page 7
• Proposed Contractual Fixes (continued)
–
“Seller shall be permitted to apply all credits, deductions,
chargebacks, overpayments, rebates and similar claims
owed to the Buyer in reduction of indebtedness owing by
the Buyer to Seller as determined by Seller at its sole
discretion.” [e.g., apply credits against oldest invoices first]
–
Enforceability of proposed provisions on screens 14 and 15
in bankruptcy?
•
Note following caveat in AWI opinion:
“…I conclude that there is a presumption that the claimants’
prior course of dealing, industry standards and contract do not
operate as a waiver of the Debtors’ equitable remedies.
However, if a claimant believes that its course of dealing or
contractual language provide a good faith basis for arguing
that the Debtors have waived their equitable remedies, then
the claimant shall have the right to a hearing on the merits of
their claim to rebut the presumption.”
15
Another Litigated Issue: Preference Claim As a Defense
to Administrative Claim
• Is a Preference Claim Grounds For Disallowing An
Administrative Claim?
• Majority View: Administrative Claim Not Subject to
Disallowance Based on Preference Risk
– Ames Department Stores – U.S. 2d Circuit Court of
Appeals
•
–
Did not address Section 503(b)(9) priority claims
Delaware: In re CM Holdings and In re Lids Corporation
• Contrary Minority View: Administrative Claims Subject to
Disallowance Based on Preference Exposure
– In re MicroAge – 9th Circuit Bankruptcy Appellate Panel
•
Did not address Section 503(b)(9) priority claims
16
Page 8
Another Litigated Issue: Preference Claim As a Defense
to Section 503(b)(9) Administrative Priority Claim
• Preference Claim Not Grounds for Disallowance of
Section 503(b)(9) Priority Claim
–
In re Energy Conversion Devices, Inc. and Plastech Engineered
Products, Inc. – Bankruptcy Eastern District of Michigan
decisions
–
In re TI Acquisition LLC – U.S. Bankruptcy Court, Northern
District of Georgia
–
In re Momenta, Inc. – U.S. Bankruptcy Court, New Hampshire
• Contrary View: Debtor could assert preference claim as
basis for temporarily disallowing Section 503(b)(9)
priority claim
–
In re Circuit City – U.S. Bankruptcy Court, Eastern District,
Virginia
17
Preference: Elements Of Claim
• Any Transfer of an Interest of the Debtor in Property;
• To or for the Benefit of a Creditor;
• For or on Account of an Antecedent Debt Owed by the Debtor
Before Such Transfer Was Made;
• Made While the Debtor was Insolvent;
–
–
On or within 90 days before bankruptcy filing; or
Between 90 days and one year before bankruptcy filing for transfers
to insider creditors; and
• That Enables Such Creditor to Receive More Than Such
Creditor Would Receive if:
–
–
–
–
The case were a Chapter 7 case
The transfer had not been made
Such creditor received payment to the extent provided by other
provisions of Title 11
The greater than liquidation recovery requirement
18
Page 9
Preference Elements
• Any Transfer of an Interest of the Debtor in
Property;
– Trust Funds not property of estate
•
Tracing obligation?
19
TRANSVANTAGE SOLUTIONS, INC.
Delaware Bankruptcy Court
• Trustee Sued More Than 500 Companies, Mainly
Transportation Carriers For a Combined Total of Almost
$1/2 Billion
• Suits Were Brought Under Three Statutes
– 11 USC 547 for preference recoveries
– 11 USC 548 for fraudulent transfers under the
Bankruptcy Code
– New Jersey State Statute for fraudulent transfers
•
Resulted in substantially higher claims because the claw
back period was extended from 2 years to 4 years
20
Page 10
Transvantage Current Activity
• Defendants Joined in a Motion to Dismiss the Complaint
on Multiple Grounds
• Most Cases Have Been Settled For a Very Small
Percentage of the Original Claimed Amount
– Most recent round of settlements is 2%
• Only a Handful of Defendants Remain Who Refuse to
Settle on Principle
– Oral argument is set for June 21st
21
Transvantage Bases For Dismissal Motion
• Property Received By Carriers Was Not
Property of the Estate
• Carriers are Trust Beneficiaries
• Claims are Preempted and Time-Barred Under
Federal Law
22
Page 11
Preference Elements – Greater Than
Liquidation Recovery Requirement
• Creditor Whose Executory Contract
Was Assumed by Debtor or Assigned
by Debtor Is Not Subject to Preference
Risk
– Caution – Trustee may still assert a
preference
• Quebecor
• NewPage
23
Preference Defenses: New Value
• Creditor Extending Unsecured Credit to Debtor After
Payment Not Paid by Otherwise Unavoidable Transfer
• New Value Cannot Be Applied to Subsequent
Payments
• Paid New Value –
– Courts are divided on applicability
– Recent Delaware decision – AFA Investment –
paid new value counts
– Recent Delaware decision – AE Liquidation, Inc. –
post-petition new value does not count
24
Page 12
Hot New Value Issue: Critical Vendor
• Does Critical Vendor’s Receipt of Post-Petition Payment
of Pre-Petition Claim Result in Loss of Section 547(c)(4)
New Value Defense to Preference Claim?
– Yes and No!
– U.S. Court of Appeals 3rd Circuit Decision – In re
Friedman’s counts new value paid post-petition pursuant to
court order because new value is determined as of
bankruptcy filing date
– Other courts have disqualified new value paid post-petition
– Suggestion: Critical vendor order should either release
preference claims against vendor or preserve new value
defense
25
Ordinary Course Of Business
Preference Defense
• Transfer Was in Payment of a Debt Incurred by the
Debtor in the Ordinary Course of Business or Financial
Affairs of the Debtor and the Creditor; and
• Subjective Test – Made in the Ordinary Course of
Business or Financial Affairs of the Debtor and the
Creditor; OR
• Objective Test – Made According to Ordinary Business
Terms
• Creditor Can Choose Most Beneficial (Subjective or
Objective) Prong of Ordinary Course of Business
Defense
26
Page 13
Ordinary Course of Business:
Subjective – Litigated Issues
• Range of Views
– How long of a payment history?
• 1 Year?
• 2 Years? U.S. Bankruptcy Court,
Southern District, New York decision:
Quebecor World
• Longer?
27
Ordinary Course of Business: Subjective – Baseline for
Comparing Preference vs. Prior Payments
• Range of Payments
–
All payments? [American Home Mortgage Bankruptcy
Court decision in Delaware]
–
Modified range? [Philadelphia Newspapers Bankruptcy
Court decision in Eastern District, Pennsylvania]
–
Payments only when Debtor is healthy? [Circuit City
Bankruptcy Court decision in Eastern District, Virginia]
• Bucket Analysis – Examining Payments by Grouping –
Accepted – Quebecor World, U.S. Bankruptcy Court,
Southern District of New York
–
Risk of skewed analysis
28
Page 14
Ordinary Course of Business: Subjective – Baseline
for Comparing Preference vs. Prior Payments
• Comparison of Average Days to Pay/Days Late Prior
to and During Preference Period
• Archway Cookies Bankruptcy and District Court
decisions in Delaware –
–
Payments subject to subjective ordinary course defense,
notwithstanding approximately 5 day difference in average
days to payment during historical period (42.3 days)
compared to preference period (47.2 days)
• Quebecor World, U.S. Bankruptcy Court, Southern
District of New York –
30 days off average [27.56 average days outstanding prior
to preference period vs. 57.16 average days outstanding
during preference period] too much
29
Recent Ordinary Course of Business Defense –
Subjective Component Decision: In re Conex
Holdings LLC Bankruptcy Court Delaware
• Summary Judgment Dismissing Preference Complaint Based
on Subjective Ordinary Course Defense
• Okayed 16 Month Payment History Prior To Preference
Period
• Okayed 7 Day Difference in Average Days to Pay [61 Days
Prior to Preference Period vs. 54 Days During Preference
Period] When Including All Historical Payments Prior To
Preference Period
• Court Rejected Trustee’s Weighted Average Analysis
Showing 79 Days Prior To Preference Period vs. 60.6 Days
During Preference Period
–
Contrary view: In re Sparrer Sausage Co. – Bankruptcy, Northern
District Illinois relied on weighted average days to payment
30
Page 15
Subjective Component Decision:
Candy Fleet LLC v. Goodman, United States District
Court, Western District Louisiana
• Relied on 16 Month Historical Payment Period When
Debtor Had Adequate Capital
–
Average days to pay – 14.6 days
• Average Days to Pay During Preference Period –
22.5 Days – Almost 50% increase – Did Not Support
Subjective Ordinary Course Defense
• Court Did not Consider Additional 8 Month Payment History
Immediately Prior to the Preference Period – Average Days
to Pay Increased to Approximately
112 Days
• Court Limited Historical Payment Period to When Debtor
was Adequately Capitalized
• Shades of Circuit City?
31
Subjective Component Decision: In re Affiliated Foods
Southwest Inc. (U.S. 8th Circuit Court of Appeals)
• Summary Judgment Dismissing Preference Claim
Based on Subjective Ordinary Course Defense
• Length of Time Parties Did Business
–
–
2 years prior to preference period (rejecting 1 year period)
Period could vary by case
• Consistency of Timing of Payments – Preference vs
Prior Payments
–
–
Days to pay from invoice date
Preference Payment – 26 days from invoice date
consistent with 35.43 average days to pay prior to the
preference period
32
Page 16
Very Recent Ordinary Course of Business Defense –
Subjective Component Decision: In re Sierra Concrete
Design Inc.; United States Bankruptcy Court, Delaware
• Defendant Proved Subjective Ordinary Course
of Business Defense After Trial
– Did not matter that debtor paid invoices 27.9 days
faster during preference period
• Average days-to-pay prior to preference period
was 55.22 days
• Average days-to-pay during preference period
was 27.3 days
33
Very Recent Ordinary Course of Business Defense –
Subjective Component Decision: In re AFA Investment,
Inc.; United States Bankruptcy Court, Delaware
• Defendant Did Not Prove Subjective Ordinary Course of
Business Defense on Summary Judgment Motion based
on expert testimony
– Average days-to-pay prior to preference period was
22.43 days
– Average days-to-pay during preference period was
43.95 days
– Court found for the Debtors because payments
during preference period were made twice as late as
pre-preference period payments
– The Court awarded pre-judgment interest to Debtors
34
Page 17
First Time Transactions May Fall Within
Subjective Ordinary Course of Business Defense
• Recent Decision of U.S. Court of Appeals for
10th Circuit – In re C.W. Mining Co.
– Payment on account of first time transaction
between debtor and creditor might satisfy the
subjective part of ordinary course of business
defense
• Payment made 2 days before due date
(within terms)
• No evidence of creditor collection activity
• 6th, 7th and 9th Circuits Agree
35
Subjective Ordinary Course of Business Preference
Defense – Facts That Defeat Subjective Ordinary Course
of Business On the Numbers
• Consistency In Timing of Payments Prior to and During
Preference Period Alone Might Not Be Sufficient to
Prove Subjective Component of Ordinary Course of
Business Defense
• Threats to Subjective Component
–
–
–
–
–
–
Change in the form of payment during preference period
(regular check to wire)
Change in method of invoicing (electronic to paper)
Change in credit terms
Imposition of credit limit/enforcement of existing credit limit
Threats to stop shipment; imposition of credit holds
Change in mode of delivery (regular mail to Federal Express)
36
Page 18
Ordinary Course Of Business Preference Defense –
Ordinary Business Terms Alternative: Objective
Component
•
Transfer Not Unusual or Idiosyncratic In The Relevant Industry
•
Which Industry to Consider?
– Creditor’s? Debtor’s?
– Industry based on companies similar to creditor selling to
companies similar to Debtor?
•
Includes Range of Industry Terms
– No need to prove single set of business terms within an
industry
– Ordinary Business Terms may vary widely across industries
•
Creditor’s Changing of Business Terms Does Not Necessarily
Result in Loss of Objective Ordinary Course of Business Defense
– Are new terms frequently used in industry?
37
Ordinary Course Of Business:
Objective (Ordinary Business Terms)
• Proper Methodology For Determining A Payment’s
Consistency with Industry Practices is Evolving
• Example: In re Waterford Wedgewood, Inc.
(Bankruptcy Court, Southern District of New York)
–
Proper method for determining whether a payment is made
in accordance with ordinary business terms: whether
payment occurred within one standard deviation of the
industry average
• Contrast with Hayes Lemmerz International Inc.
(Bankruptcy Court Delaware)
–
Court rejected expert testimony proffered by Trustee limiting
industry practice to median range of payments for middle
50% of surveyed companies
38
Page 19
State Law Preference Claims
• Prerequisites Vary From State to State
• Some States (e.g., California) Have Preference
Statutes Like Section 547
• Some States (e.g., Wisconsin, New Jersey, New
York) Have Preference Statutes Like Bankruptcy
Act of 1898
– 4 month reachback
– Intent to prefer
– No new value/ordinary course of business
defense
• Some States Have No Preference Statute at All
39
Use Of State Laws To Pursue Preferences and
Fraudulent Transfers
• New Trick being used by Trustees
• Generally expands the time frame for the
claw back period
• May also eliminate new value and
ordinary course of business defenses
40
Page 20
JORDAN-CHILES, INC.
Kentucky Bankruptcy Court
• Trustee sued multiple defendants for preference
recoveries
• Suits were brought under three statutes
– 11 USC 547 for preference recoveries
– Kentucky State Law Preference Claims
•
•
Alleged the payments were transfers in contemplation of
insolvency
Alleged intention was to prefer payment recipients
41
JORDAN-CHILES, INC.
547 Defenses were asserted
• Defendants asserted new value defense anyway
– The continued extension of credit disproves the
trustee’s theory that the transfers were intentional
preferences
•
Debtor’s records indicated that payments were made
because creditor pushed debtor to pay it before others
• Case was settled for about 25% of the preference
demand
42
Page 21
Consignment Issues
• Since the 2001 revisions of UCC
Article 9, Consignments treated
under Article 9 in addition to
Article 2 of the UCC
43
Consignment Definition – UCC Article 9
• A Transaction, Regardless of Form, in Which a Person
Delivers Goods to a Merchant For the Purpose of Sale
and:
– The merchant deals in goods of that kind under a
name other than the person making delivery, is not
an auctioneer; and is not generally known by its
creditors to be substantially engaged in selling the
goods of others;
44
Page 22
Consignment Definition (cont’d)
• With respect to each delivery, the aggregate
value of the goods is $1,000 or more at the
time of delivery
• The goods are not consumer goods
• The transaction does not create a security
interest that secures an obligation
45
Article 2 of the UCC
• UCC § 2-401(a): Any retention or reservation by
the seller of the title (property) in goods shipped or
delivered to the buyer is limited in effect to
reservation of a security interest.
• UCC § 2-326: If goods conforming to contract are
subject to return by buyer, the transaction is a
“Sale or return” if the goods are delivered primarily
for resale and the goods are subject to the claims
of buyer’s creditors while in buyer’s possession.
46
Page 23
Necessary Steps To Perfect And Obtain Priority
Re A Consignment Interest
• Enter into a properly written consignment agreement
with customer
• Run a UCC search to determine any UCC liens against
the goods to be sold under consignment
• File a UCC Financing Statement to perfect the
consignment interest.
• Notify each prior secured party of the intended
consignment
47
Recent Consignment Issues In Bankruptcy
• Sports Authority Case has Challenged Validity of
Consignments
• Most of Inventory is Consigned Goods
• 170 Consignment Vendors
• Only a Handful of Consignment Vendors Have Validly
Perfected Priority “Security Interests” in the Consigned
Goods
• Adversary Proceedings Commenced Against Each
Consignment Vendor To Void Alleged Consignment Interest
– Term Lender has intervened in each adversary
proceeding
48
Page 24
Sports Authority Consignment Issues Ongoing
•
Debtors Sought to Sell Consigned Goods and Escrow Payments
for Consignment Vendors
– Consignment Vendors Objected insisting that Consignment
Vendors were to be paid from sale proceeds
– Objection by Term Lender
•
Court Granted Debtors’ Motion to Sell Consigned Goods and
Directed Payment to Consignment Vendors Pursuant to terms of
Consignment Agreements
•
Term Lender has Appealed and Sought Stay of the
“Consignment Order”
•
Both Bankruptcy Court and United States District Court have
Denied Term Lender’s Request for a Stay
•
Consignment Vendors have Appealed as Well
49
Sports Authority Consignment Issues Ongoing
• Sale Under 11 U.S.C. 363 of Debtors’ Assets is
Proceeding but Appeals by Term Lender and
Consignment Vendors are ongoing
• Appeals will be sent to Mediation
50
Page 25
Piercing The Corporate Veil
• Generally the owner(s) of a business will adhere
strictly to the corporate structure specifically in order
not to be sued individually
• The requirements to be proven in order to have the
court Pierce the Corporate Veil are numerous and
complex. It is not common that the appropriate facts
will be able to be proved
51
Requirements To Pierce The Corporate Veil
• Owner of the corporation “exercised complete
domination of the corporation in respect to the
transaction attacked”
• “such domination was used to commit a fraud or
wrong against the plaintiff which resulted in injury.”
•
“The party seeking to pierce the corporate veil must
establish that the owners, through their domination,
abused the privilege of doing business in the
corporate form to perpetrate a wrong or injustice
against that party such that a court of equity will
intervene.”
52
Page 26
• Defendant breached his duties of good faith and fair
dealing with Plaintiff
• Defendant improperly used Plaintiff’s money for his
personal benefit
• Defendant exercised unauthorized dominion over
Plaintiff’s money
• Defendant’s breach proximately caused monetary
harm to Plaintiff
• These, taken together, constituted a tort of conversion
53
• Absence of the formalities and paraphernalia that
are part and parcel of the corporate existence i.e.,
issuance of stock, election of directors, keeping of
the Corporate records and the like,
• Inadequate capitalization,
• Whether funds are put in and taken out of the
corporation for personal rather than corporate
purposes
54
Page 27
• Overlap in ownership, officers, directors, and
personnel,
• Common office space, address and telephone
numbers of corporate entities,
• The amount of business discretion displayed by the
allegedly dominated corporation,
• Whether any related corporations or principals deal
with the dominated corporation at arm’s length,
55
Plan Confirmation and Cramdown Requirements
– Re Unsecured Claims
•
•
•
Section 1129 Contains 16 Requirements For Confirmation of Plan
– All requirements must be satisfied
Confirmation Requirements Include the Following With Respect to Each
Class of Claims:
– Such class has accepted the plan or
– Such class is not impaired under the plan
– If neither requirement is satisfied, cramdown requirements must
be satisfied: the plan does not discriminate unfairly and is not fair
and equitable with respect to each non-consenting impaired class
of claims
Unsecured Creditor Cramdown Requirement: A Chapter 11 Plan is Fair
and Equitable With Respect to a Class of Unsecured Creditors if
– The plan provides that each unsecured creditor in the class
receives property with a value equal to the allowed amount of the
creditor’s unsecured claim on the effective date of the plan or
– No lower class gets paid unless unsecured creditors are paid in
full (Absolute Priority Rule)
56
Page 28
Special Plan Confirmation Requirements In
Individual Chapter 11 Cases
• Special Plan Confirmation Requirement in an
Individual Chapter 11 Case: Section 1129(a)(15)
Where the Holder of an Allowed Unsecured Claim
Objects to the Confirmation of the Plan:
–
The value, as of the effective date of the plan, of the
property to be distributed under the plan on account of
such claim is not less than the amount of such claim; or
–
The value of the property to be distributed under the plan is
not less than the projected disposable income of the debtor
(as defined in section 1325(b)(2) to be received during the
5-year period beginning on the date that the first payment
is due under the plan, or during the period for which the
plan provides payments, whichever is longer
57
Special Plan Confirmation Cramdown
Requirements In Individual Chapter 11 Cases
• General Cramdown Rules Apply to Unsecured
Claims, Except As Follows:
–
Section 1129(b)(2)(B): An individual debtor cramming down
a plan over the objections of unsecured creditors may
retain property included in the estate under Section 1115
–
Section 1115(a) says that if the debtor is an individual,
“property of the estate includes, in addition to the property
specified in section 541 — (all property as of
commencement of case) (1) all property…the debtor
acquires after the commencement of the case…and (2)
earnings from services performed by the debtor after the
commencement of the case….”
–
Does absolute priority rule apply to individual chapter 11’s?
58
Page 29
Does Absolute Priority Rule Apply To Individual
Chapter 11’s?
• Majority View
–
Based on Section 1129(b)(2)(B), Modified Absolute Priority
Rule applies to individual Debtors
–
An individual debtor can retain post-petition earnings and
property acquired post petition, included in Section 1115, but
NOT pre-petition property of the Estate included in Section 541
–
Followed by 4th, 5th, 6th, (most recently) 9th, and 10th Circuit
Courts of Appeal
• Minority View
–
Absolute Priority Rule does not apply to individual chapter 11
debtors
–
Individual debtors can retain most pre-petition and postpetition property
59
Chapter 11 Trends: Speedier Chapter 11s
• Increased Frequency of:
– Section 363 sales
•
•
Sale of business
Liquidation vehicle
– Prepackaged chapter 11s
– Prenegotiated chapter 11s
– Traditional chapter 11 restructurings
•
•
•
Exception rather than the norm
Fix business/operational problems first
Followed by Chapter 11 Plan Process
60
Page 30
Reasons For Speedier Chapter 11s
• Change in Nature of Lenders
– In the past, primarily money center banks and
asset-based lenders
– Increase in hedge fund/private equity lending,
less patient
– Increased desire for loan to own
• Less Costly
– Quicker chapter 11 process
61
“Prepackaged” Chapter 11 Cases
• Debtor Files Chapter 11
• Prior to Filing, Debtor Has Agreement In Place with
Creditors, Usually Holders of Significant Amount of
Secured and/or Bond Debt
• Creditors Solicited and Vote on Prepackaged Plan Prepetition
• Combined Hearing on Prepackaged Plan and Disclosure
Statement Between 30 – 60 Days After Chapter 11 Filing
• Trade Creditors Usually Paid in Full Upon Approval of Plan
or Earlier Pursuant to Court Order in Exchange for Trade
Credit
• Recent Example:
–
Fairway Market
62
Page 31
“Pre-negotiated” Chapter 11 Cases
• Bankruptcy Filed Before Plan Negotiations Concluded
–
Debtor reached agreement with certain stakeholders (e.g.,
largest secured creditor(s)) on treatment of their claim(s) to be
included in chapter 11 plan
•
–
Plan support agreement spells out treatment and binds
stakeholder(s) to vote for plan
No agreement with other creditor classes, such as trade
creditors
• How are Trade Creditors Treated?
–
–
–
–
Payment in full of pre-petition claims?
No or de minimis recovery on unsecured claims?
Critical vendors treated better than other trade creditors?
Are preference claims preserved or waived?
• Recent Example:
–
Caesars Entertainment Operating Company
63
Advantages and Disadvantages of Chapter 11 Sale
over Chapter 11 Plan
• Advantages
–
–
–
–
–
–
Generally faster than Plan
Free and clear/not subject to liens, security interests, creditors’
claims, fraudulent conveyance risk
“no shop” protections
Assign leases/contracts
Similar to M&A deal
Generally does not have to address resolution of claims
• Disadvantages
–
–
–
Plan is best protection from successor liability
Bankruptcy sale might be subject to attack as sub rosa plan
Cannot generally deal with resolution of claims or equity
interests
64
Page 32
Quickie Section 363 Sales
• Debtor Uses Section 363 to Sell (Subject to
Bankruptcy Court Approval)
–
–
–
–
Entire Business
Groups of Assets
Business Lines
Liquidation vehicle – All Assets Through Going
Out of Business Sales (“GOB’s”)
• No Requirement For a Plan or Solicitation of
Votes for Sale Approval
65
Quickie Section 363 Sales
• Proposed Sale Negotiated Between Debtor and “Stalking
Horse” Buyer Before or After Bankruptcy
–
Increased frequency of acquisition by stakeholder via “loan
to own”
• Debtor and Stalking Horse Bidder Sign Asset Purchase
Agreement
• Buyer Purchases Specific Assets and Assumes Certain
Liabilities
–
Leaves estate with assets not purchased and liabilities not
assumed
• Asset Purchase Agreement Usually Contains Schedule of
Contracts/Liabilities to be Assumed
• Standard for Court Approval – Easy to Satisfy Business
Judgment
66
Page 33
Assignment For The Benefit Of Creditors
(“ABC”) – Overview
• Formal Out-of-Court Liquidation – State
Alternative to Chapter 7 Bankruptcy
– Governed by state law
– Statutory authority and common law
– ABC procedures vary from state to state
• Increasingly Used As An Alternative to
Liquidating Chapter 11 Case
67
ABC’s – Overview
• ABC Arises by Contract
– Agreement between Debtor/Assignor and
Assignee
– Assignee is selected by Debtor/Assignor
• Assignee bias in favor of Debtor/principal?
• Assignee bias in favor of secured lender?
• Sometimes, unsecured creditors have a role
in selecting assignee
68
Page 34
• An ABC Vests Title to All Debtor’s/ Assignor’s
Property to an Assignee
– All personal property
– All real property
– All causes of action
– Creditors share based on priority status
69
• Assignee is a Fiduciary for All of Debtor’s/Assignor’s
Creditors
– Liquidates Debtor’s/Assignor’s property
– Notifies creditors of ABC; claims bar date; other
matters
– Investigates/pursues claims vs. third parties
– Reconciles claims vs. Debtor/Assignor
– Distributes cash proceeds to Assignor’s creditors
according to recognized state law priorities
– Provides final accounting at conclusion of case
70
Page 35
• Court Supervision
– Some states provide for court supervision
of the ABC and assignee
– Other states provide little, if any, oversight
• No court supervision
• Assignee could follow state law
applicable to liquidating
business/assets
71
ABC’s – Assignee’s Avoidance Powers
• UCC § 9-309 Gives Assignee Rights of a
Perfected Secured Creditor as of Date of
Assignment
– Similar to Chapter 7 trustee’s status as a
hypothetical lien creditor
• Creditors Cannot Enforce Unperfected
Security/Lien Interest Against
Debtor’s/Assignor’s Assets
72
Page 36
ABC’s – Claims Priorities
• Similar to Bankruptcy
• First in Priority: Properly Perfected Secured Creditor
Gets First Position on Collateral
• Next In Line: Costs of Administering ABC
• State Law Priorities are Next Level in Priority
• Bottom of Claims Priority Ladder: General Unsecured
Claims
– No distribution to unsecured creditors until all
secured administrative claims, taxes, priority wage
and other claims with priority have been paid in full
73
ABC’s – Claim Reconciliation
• Assignee Required to Establish Claims Bar Date by
Which Creditors May Assert Claims Against
Debtor/Assignor and Provide Notice to Creditors
– Creditors that fail to timely file proof of claim may
not share in distribution
– Assignee can question any filed claim that
exceeds amount reflected in Debtor’s/ Assignor’s
books and records
•
No right to interest accruing during ABC of insolvent
debtor
74
Page 37
Receiverships
• State or federal
• Commenced by court proceeding
– e.g., Secured creditor seeking to protect
collateral
– Generally unavailable to trade creditors
• Receiver is Fiduciary Appointed to Administer
and/or Liquidate a Business or Specific Asset
75
Receiverships
• Receiver’s Duties Prescribed by Statute or Court Order
– Take possession of and dispose of/sell Debtor’s
assets
– Collect accounts and other sums due the Debtor
– Manage and operate the Debtor’s business and
property to the extent necessary until sold
– Employ, compensate and discharge employees
necessary to manage or control the Debtor’s
assets
• Most Frequently Used by Mortgage Lenders to Protect
Real Property Prior to Foreclosure
76
Page 38
Receiverships – What Trade Creditors Should
Look For
• Check For Court Order Granting Injunction
Preventing Creditor Collection Activity
• Check For Claims Bar Date and Method for
Asserting Proof of Claim, Which is
Determined by
– Statute or
– Court Order
77
Receiverships
• Some States Refer to Assignee in an ABC as a
“Receiver” – Different From Court Appointed Receiver
– Example: Wisconsin
• Role of Receiver Is Often More Limited Than
Assignee in ABC
– Scope of Receivership often limited to specific
assets
– Receiver’s actions more closely monitored by
court
78
Page 39
Other State Law Non-Bankruptcy Alternatives
• Uniform Commercial Code
Article 9 Sale
• Debtor’s Announcement to
Close Its Doors Without Fully
Paying Claims
79
Creditor Response
• Demand Transparency
• Otherwise, Solicit Creditor Participation in an
Involuntary Petition
• Formation of Out of Court Creditors’ Committee
80
Page 40
QUESTIONS?
81
Speaker Contact Information
Honorable Laurel Davis,
United States Bankruptcy Judge
DISTRICT OF NEVADA
Wanda Borges, Esq.
Telephone: (516) 677-8200, x 225
E-Mail: [email protected]
Bruce S. Nathan, Esq.
LOWENSTEIN SANDLER LLP
Telephone: (212) 204-8686
E-mail: [email protected]
82
Page 41

A View From The Bench And Bar

Transcription

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