Corporate Bankruptcy 101

Sponsored by New Jersey Corporate Counsel Association & Norris McLaughlin & Marcus, P.A.

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LOOK OUT!

Economic Indicators Forecast a Rise in Bankruptcy Filings 2

The Economic Indicators

Unemployment, Interest Rates, Housing Market, Stock Market, Bad Credit-Card Debt 3

The Economic Indicators

• Stock Market/Dow Jones – Oct 14 – 9,311 – YTD Change – (3,877) – YTD % Change – (29%) 4

The Economic Indicators

• Unemployment Rate at 6.1% – Worst in 5 Years – 760,000 year-to-date job losses – Job losses in retail, manufacturing, construction and leisure/hospitality – Job gains in government, education and health services 5

The Economic Indicators

• Interest Rates – Fed Fund Rate – WSJ Prime Rate Oct 14 1.50% 4.50% Year Ago 4.50% 7.75% • Housing – • Bad Credit-Card Debt – 2008 – $40 Billion vs. 2009 – $95 Billion • Budget Deficit at $454.8 billion 6

Factors Leading to Financial Distress

• Liquidity Crisis • Asset-Based Loan Default • Loss of Major Client/Customer • Loan Maturity and Unable to Refinance • Drop in Revenue • Increased Operating Costs 7

The Chapters Of Bankruptcy

Chapter 7 Chapter 9 Chapter 11 Chapter 13 8

Recent Bankruptcy Filings

• • Retail – Sharper Image – Goody’s Family Clothing – Mervyn’s – Linens ‘N Things – Lillian Vernon – Friedman’s Jewelers – Whitehall Jewelers – Boscov’s – Steve & Barry’s Distribution – Leiner Health Products – Mrs. Fields Cookies • • Real Estate/Finance – Lehman Bros.

– Washington Mutual – WCI Communities – Home Banc Mortgage – American Home Mortgage Other – Jevic Transportation (Logistics) – Semgroup (Energy) – Skybus (Airline) 9

Utilization of the Chapter 11 Process

• Reorganization • Sale as a Going-Concern • Orderly Liquidation 10

Who Can File a Chapter 11

Businesses

Corporations, Limited Liability Companies, Partnerships

Individuals

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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 12

Commencement of a Chapter 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 13

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 14

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!

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Debtor’s Professionals Who are they?

• • • • • • •

Counsel Special Counsel Chief Restructuring Officer Accountants Investment Bankers Environmental Engineers Brokers (real estate or business)

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Debtor’s Professionals How are they retained and how do they get paid?

Retention Requirements Compensation (No such thing as a free lunch!) 17

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) 18

Creditors’ Committee

• Formation Process • Role of Committee • Committee Professionals • Compensation of Committee Professionals and Committee Members 19

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 20

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?”

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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 22

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?

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DIP Financing vs. Cash Collateral

What is Cash Collateral?

What is DIP Financing?

How are creditors affected by DIP Financing versus Cash Collateral?

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Types of Notices Mailed to Creditors

• Committee Formation Meeting • 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 25

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, and License Agreements • A non-Debtor party is required to continue with performance under the contract.

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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.

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Executory Contracts

(Cont.)

Equipment Leases Is it a True Lease vs. Disguised Security Financing? Does it matter?

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Executory Contracts

(Cont.)

• License Agreements • Intellectual Property • Union Contracts 29

Sale of Assets in a Chapter 11 Case

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Types of Sales

• Asset Sale vs. Stock Purchase • Section 363 vs. Plan of Reorganization • Higher and Better Offers • Secured Creditor Sale/Foreclosure Sale 31

Chapter 11 Bankruptcy Sale Process

• Retention of an Investment Banker/Business Broker • Motion to Fix Bidding Procedures – Bidding Procedures Hearing – Standard Asset Purchase Agreement – Stalking Horse Agreement – Break-Up Fees – Minimum Bids/Overbid 32

Impact of a Chapter 11 Sale

• Sale Free and Clear of All Liens, Claims and Encumbrances – Successor Liability • Assumption and Assignment of Executory Contracts – Payment of Arrearages – Adequate Assurance of Future Performance 33

Plan of Reorganization and Disclosure Statement Process

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Exclusivity

The Debtor has the exclusive right to file a plan for a period of 120 days, which may be extended up to 18 months.

Competing Plans – Plan filed by Creditors 35

Plan Negotiations

• Treatment of Secured Creditor, who is primary lender to the Debtor • Negotiations with Creditors’ Committee 36

Plan Negotiations from Committee Stand-Point

• Is the Debtor viable?

• What would unsecured creditors receive in a liquidation?

• Are there claims against Insiders (leverage)?

• Are there claims against the Lenders, i.e. lender liability (leverage)?

• Are there avoidance claims against vendors?

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Plan of Reorganization

• Contents of Plan • Classification of Claims • Treatment of Claims 38

Disclosure Statement

• Content: Similar to a Prospectus • Provide Sufficient Information for a Reasonable Person to Vote on the Plan • Notice of Disclosure Statement Hearing • Objections to Disclosure Statement • Approval of Disclosure Statement 39

Requirements for Approval of Plan of Reorganization

• Consent of Impaired Classes of Creditors • Fair Treatment of Creditors – Class of Creditors Must Receive More Than What They Would Receive in a Liquidation – Absolute Priority Rule -Junior Class of Creditors Cannot Receive Anything Until the Senior Class of Creditors is Paid in Full Unless Senior Class Consents – New Value – LaSalle – Is Equity Paying Fair Value to Retain Ownership?

• Feasibility • Cram-Down 40

Representation of Creditors

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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 42

General

• 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 43

Reclamations

   Administrative Claim Date.

– Automatic Administrative Claim for any goods received by the Debtor within 20 days prior to the Petition – 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 44

Claims Process

• Bar Date (Deadline to File a Claim) • Filing a Proof of Claim • Motion Objecting to Claims 45

Claims Trading

• What is it?

• Benefits of Selling Claim • Risks of Selling Claim 46

Personal Injury Claimants

• Automatic Stay Stops Litigation • File Motion for Stay Relief to Seek Recovery from Insurance Carrier 47

Landlords

• Debtor must assume or reject Non Residential Lease within 240 days unless Landlord consents to further extension • Debtor required to make all lease payments in accordance with lease terms 48

Landlords

(Cont.)

• Motion to Compel Assumption • Relief From Stay to Terminate Lease • Motion Seeking Adequate Protection Payments 49

Landlords

(Cont.)

• Assumption of Lease – Adequate Assurance of Future Performance – Cure of Any Arreages • Assignment of Lease – Adequate Finances of Assignee – Shopping Center Leases 50

Equipment Leases Equipment Financing

• True Lease vs. Disguised Security Interest • Motion for Stay Relief • Motion for Adequate Protection • Assumption of Lease • Sale of Equipment 51

Preference Actions

Adding 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 52

Doing Business With a Debtor

   Business Terms Administrative Expense Claim Emotions v. Profit 53

Discussion and Q&A

www.acc.com/chapters/njcca [email protected]

MORRIS S. BAUER, ESQ.

908-252-4345 | [email protected]

LARRY K. LESNIK, ESQ.

908-252-4347 | [email protected]

BRUCE J. WISOTSKY, ESQ.

908-252-4347 | [email protected]

Norris McLaughlin & Marcus, P.A.

Somerville, NJ

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