Corporate Bankruptcy 101 & Select Bankruptcy Issues

Corporate Bankruptcy 101 & Select Bankruptcy Issues Morris S. Bauer, Esq. Andrew Stein Larry K. Lesnik, Esq. The material provided herein is for informational purposes only and is not intended as legal advice or counsel.

Please help yourself to food and drinks Please let us know if the roomtemperature is too hot or cold Bathrooms are located past the reception desk on the right Please turn OFF your cell phones Please complete and returnsurveys at the end of the seminar

LOOK OUT! Bankruptcy Filings On The Rise

The Economic Indicators Unemployment, Interest Rates, Housing Market (Foreclosures), Stock Market, Consumer Spending,Bad Credit-Card Debt

Factors Leading toFinancial Distress • Liquidity Crisis • Asset-Based Loan Default • Loss of Major Client/Customer • Loan Maturity and Unable to Refinance • Drop in Revenue • Increased Operating Costs

The Chapters Of Bankruptcy Chapter 7 Chapter 9 Chapter 11 Chapter 13 Chapter 15

Utilization of the Chapter 11 Process • Reorganization • Sale as a Going-Concern • Orderly Liquidation

Who Can File a Chapter 11 Businesses Corporations, Limited Liability Companies, Partnerships Individuals

Commencement of a Chapter 11 Case • Minimum Documents Necessary to File a Case: • Petition, Corporate Resolution, Creditor List, List of Twenty Largest Unsecured Creditors, and List of Equity Interest Holders • Timing: • Minutes With the Advent of Electronic Filing

Commencement of aChapter 11 Case (Cont.) • Notice to Creditors: • Twenty Largest Will Receive Notice Within a Day of the Commencement Date (If Emergent First-Day Hearings Are Requested) • Other Creditors Will Receive Notice Within Approximately Two Weeks

Commencement Of a Chapter 11 Case (Cont.) • Effect of Filing: • Automatic Stay (Section 362 of the Bankruptcy Code) • Requirement for Court Approval of Any Action Outside of the Ordinary Course of Business • Jurisdiction of Court Over Debtor’s Assets

The Players What is a Debtor-in-Possession? My company is losing money. I get to stay in control and keep collecting the same compensation. What more can I ask for? Yippee!

Debtor’s Professionals Who are they? • Counsel • Special Counsel • Chief Restructuring Officer • Accountants • Investment Bankers • Environmental Engineers • Brokers (real estate or business)

Debtor’s Professionals How are they retained and how do they get paid? Retention Requirements Compensation (No such thing as a free lunch!)

United States Trustee’s Office • Role: Monitoring Chapter 11 Cases • Conducting Committee Formation Meeting • Conducting Meeting of Creditors • Professional Retention and Fee Application Oversight • Quarterly Fees

Types Of Creditors • Banks (Pre-Petition Lenders) • Equipment Lessors • Landlords • Trade Payables • Taxing Authorities (Priority Claim) • Priority Claims (Wages, Commissions, Benefits, including Union Claims) • Equity Holders (Shareholders)

Creditors’ Committee • Formation Process • Role of Committee • Committee Professionals • Compensation of Committee Professionals and Committee Members

Types of Notices Mailed to Creditors • Committee Formation Meeting • First Day Motions to Largest Unsecured Creditors • Notice of the Section 341 Meeting • Notice of Bar Date Along With a Proof of Claim Form • Notice of Sale of Assets • Notice of Settlements/Abandonment • Notice of Professional Fee Application Hearings • Notice of Disclosure Statement Hearing • Notice of Plan Confirmation

Representation of Creditors

In-House Monitoring of Chapter 11 Cases • Centralized Mailing Address for Bankruptcy Notices • Bankruptcy Department to File Proofs of Claim, Note Important Dates, and to Receive Any and All Bankruptcy-Related Documents • Outside Counsel • Forms and Letter Responses • Proof of Claim Form • Reclamation Demand Letter • Response to Preference “Dunning” Letters • Basic Knowledge of Preference Defenses • Bankruptcy Rights With Respect to Contracts with Debtor • Access to Pacer

General • Doing Business With a Debtor • Filing a Notice of Appearance • Serve Reclamation Demand, if Applicable • Adhere to the Deadline for Filing Proof of Claim • Analyze Potential Preference Exposure • Be Cognizant of the Debtor’s Viability and Continuing Operations • Motion Objecting to Claims

Should I Continue to Do Business With a Debtor?  Access to Financial Information of Debtor  Business Terms  Administrative Expense Claim  Emotions v. Profit

Available Information • Schedules of Assets and Liabilities and Statement of Financial Affairs • Monthly Operating Reports • Counsel to Creditors Committee • Other Creditors • The Web (Newspaper Articles, etc.) • Court’s Website – Pacers • Newspaper Articles, ect.

Reclamations • Administrative Claim – Automatic Administrative Claim for any goods received by the Debtor within 20 days prior to the Petition Date. • Bar Date for filing Administrative Claim • Motion to Compel Payment of Administrative Claim • Reclamation Demand - Within 20 days of the Petition Date, Creditor may serve demand on the Debtor for the return of goods received by the Debtor within 45 days prior to the Petition Date. • Defenses to Reclamation Demand • Subject goods no longer in possession of Debtor as of the Petition Date • Lender with a Lien on all Inventory, including subject goods

Claims Process • Bar Date (Deadline to File a Claim) • Filing a Proof of Claim • Motion Objecting to Claims

Claims Trading • What is it? • Benefits of Selling Claim • Risks of Selling Claim

BANKRUPTCY CLAIM TRADING Andrew Stein General Attorney, AT&T

Bankruptcy claims are like junk in the attic. Which makes more financial sense – donating what you have to charity for a tax deduction, or trying year after year to sell it for pennies on the dollar at a garage sale?

REMEMBER! You may not write off an account automatically just because your customer has entered bankruptcy. For claims that are more than de minimus, the IRS requires objective evidence of worthlessness to support a full or partial write-off. In a bankruptcy, such objective evidence is usually not available early on.

IN A BANKRUPTCY CLAIM SALE, THE BUYER AND SELLER BOTH STAND TO WIN THE BUYER gets an opportunity to realize a healthy return on a cash investment. THE SELLER gets instant cash and an accelerated tax benefit that the IRS is not likely to challenge.

SELL OR HOLD?

ASSUMPTIONS $500,000 claim 14% cost of capital 40% effective tax rate No objective evidence of worthlessness until the final year of the bankruptcy

Sell for 2% in 2009? $206,000 Hold for 20% recovery in 2011? $200,000 Sell for 20% in 2009? $260,000 Hold for 60% recovery in 2012? $256,000 Sell for 1% in 2009? $203,000 Hold for 10% recovery in 2010? $202,000

CONTRACT SELLER Assumes risk that claim is valid BUYER Assumes risk of percentage payout

Preference ActionsAdding Insult to Injury • Preference Payments – Typically, any payment received within 90 days of the Petition Date • Dunning Letter from Debtor or Liquidating Trustee’s Counsel • Defenses • Contemporaneous Exchange • New Value • Ordinary Course of Business or financial affairs of the debtor and the transferee or made according to ordinary business terms

Personal Injury Claimants • Automatic Stay Stops Litigation • File Motion for Stay Relief to Seek Recovery from Insurance Carrier

Executory Contracts • An Executory Contract is a contract in which both parties still have continuing obligations • Examples: Residential or Commercial Leases, Certain Equipment Leases, Service Contracts, License Agreements, and Collective Bargaining Agreements • A non-Debtor party is required to continue with performance under the contract

Executory Contracts (Cont.) • Assumption/Rejection of a Lease • Motion to Compel Assumption or Rejection • Bankruptcy Code provides Debtor with a 120-day period to decide to assume or reject a non-residential lease, which period can be extended for an additional 90 days thereafter and further if consented to by the landlord.

Landlords • Debtor must assume or reject Non-Residential Lease within 210 days unless Landlord consents to further extension • Debtor required to make all lease payments in accordance with lease terms

Landlords(Cont.) • Motion to Compel Assumption • Relief From Stay to Terminate Lease • Motion Seeking Adequate Protection Payments

Landlords(Cont.) • Assumption of Lease • Adequate Assurance of Future Performance • Cure of Any Arrearages • Assignment of Lease • Adequate Finances of Assignee • Shopping Center Leases

Equipment LeasesEquipment Financing • True Lease vs. Disguised Security Interest • Motion for Stay Relief • Motion for Adequate Protection • Assumption of Lease • Sale of Equipment

Time Line of A Chapter 11 Case First Day Motions • DIP Financing/Use of Cash Collateral • Financial Reporting • Sale or Liquidation of Business • Plan of Reorganization/Plan of Orderly Liquidation

First Day Motions “I filed Chapter 11 and I am now told I can’t pay anyone (including employees) until the Court says I can. What is the delay?”

First Day Motions (Cont.) • Use of Cash Collateral or Debtor-in-Possession Financing • Payment of Wages and Other Employee Benefits • Customer Refunds and Rebates • Pre-Petition Critical Vendors • Payment of Sales, Use and Other Taxes • Maintaining Cash Management Systems • Utility Companies

First Day Motions (Cont.) Who is Served? How quickly does the Court hear the Motions? Can they be opposed? What is the likelihood of the Court denying the Debtor’s requested relief?

What is Cash Collateral? What is DIP Financing? How are creditors affected by DIP Financing versus Cash Collateral? DIP Financing vs. Cash Collateral

Corporate Bankruptcy 101 & Select Bankruptcy Issues