Bankruptcy 101 –It’s Not Just For Beginners

56174994.3

Bruce S. Nathan, Esq.PartnerPhone: 212.204.6886bnathan@lowenstein.com

Andrew Behlmann, Esq.PartnerPhone: 973.597.2332abehlmann@lowenstein.com

Credit Research Foundation

Virtual August Forum

August 17-19, 2021

Presented by:

1

Bankruptcy Glossary: A Few Key Terms

BANKRUPTCY CODE

The Bankruptcy Code, a federal statute contained in Title 11

of the United States Code, is the core of all bankruptcy law

in the United States. The Bankruptcy Code is not

exhaustive. Courts have interpreted and expanded upon the

express statutory language through case law.

BANKRUPTCY COURT

Bankruptcy Courts are Article I federal courts with

jurisdiction over cases and proceedings under, or arising in

or related to cases arising under, the Bankruptcy Code.

Although the Bankruptcy Court’s powers are limited,

Bankruptcy Courts in practice wield enormous power.

CLAIM

The concept of a “claim” is the most fundamental building

block of the Bankruptcy Code. In essence, a claim is any

legal obligation of the debtor, no matter how remote,

contingent, or esoteric. Any right that could be enforced

against the debtor – now or ever – is probably a claim.

CLASS

Under a chapter 11 plan, claims and equity interests are

classified into classes – groups of substantially similar

claims and equity interests that receive the same treatment

under the plan. Creditors vote on chapter 11 plans

individually but their votes are tallied on a class-by-class

basis to determine acceptance or rejection of the plan.

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Bankruptcy Glossary: A Few Key Terms

PRIORITY

Every claim has a priority - its rank in the order in which

claims are entitled to be paid. In general, bankruptcy law

requires that senior classes of claims be paid in full before

junior classes. The priority hierarchy established by the

Bankruptcy Code prioritizes certain classes of claims

differently from non-bankruptcy law.

ADMINISTRATIVE

EXPENSE

Administrative expenses, frequently referred to as “admin

claims,” are liabilities incurred by a debtor in the

postpetition operation of its business. Congress has also

granted administrative expense priority to certain prepetition

claims, such as claims for goods received by the debtor

within 20 days before bankruptcy.

DEBTOR IN

POSSESSION (DIP)

Unlike chapter 7, where a trustee is appointed immediately, a

chapter 11 debtor remains in possession and control of its

assets (subject to limitations imposed by the Bankruptcy

Code) and continues operating its business unless the

Bankruptcy Court orders otherwise, which is extremely rare.

3

Overview of Business Bankruptcy ChaptersComparison of Business Bankruptcy Chapters

Chapter 7 Chapter 11

Purpose “Straight” Liquidation – § 704 Business Rehabilitation

Control of Assets

Trustee appointed immediately –

§ 701(a)

Trustee can be elected if

requested by holders of 20% of unsecured claims –§ 702(b)

Debtor remains in possession (DIP) of its

assets and in control of its business under

§ 1107(a)… unless a trustee is appointed under § 1104(a)

ContinuingOperations

Court “may authorize the trustee

to operate the business of the

debtor for a limited period” – §721

DIP or trustee has right to continue

operating the debtor’s business unlesscourt orders otherwise - § 1108

Conclusion Trustee liquidates all assets,

distributes the proceeds, closes the case – § 704

Plan confirmation (could be a joint plan and

disclosure statement) – § 1129

Conversion to Chapter 7 or Dismissal –

(could be structured and likely needs to

follow absolute priority rule) - § 1121(a) and (b)

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Other Bankruptcy Chapters

Chapter 9 – Municipalities

Chapter 12 – Family Farmers and

Fishermen

Chapter 13 – Individual Debt Repayment

Chapter 15 – Recognition of Foreign

Proceedings

Subchapter V / SBRA

5

Voluntary vs. Involuntary Bankruptcy Filing

VOLUNTARY

In a voluntary bankruptcy case, the debtor

files a voluntary bankruptcy petition to

commence the case on its own behalf.

The filing of a voluntary bankruptcy

petition constitutes entry of an order for

relief, pursuant to which the debtor

becomes subject to the jurisdiction of the

Bankruptcy Court and, in a voluntary

chapter 11 case, becomes a debtor in

possession.

INVOLUNTARY

Creditors can also force a debtor into

bankruptcy by filing an involuntary

bankruptcy petition and satisfying the

requirements of Bankruptcy Code § 303:

• Petitioning Creditors must hold

unsecured claims totaling at least

$16,750 in amount that

• are not contingent, and

• are not subject to a bona fide

dispute as to liability or amount.

• There must be 3 petitioning creditors if

the debtor has 12+ unsecured

creditors.

• Only need one petitioning creditor if the

debtor has fewer than 12 unsecured

creditors.

Courts are divided as to the meaning of

bona fide dispute.

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Contested Involuntary Bankruptcy

Petition/Sanctions Risk

Petitioning Creditors on Contested Involuntary Petition

Must Prove the Debtor is Generally not Paying Debts Not

Subject to Bona Fide Dispute as They Become Due

Unsuccessful Petitioning Creditors Could be Directed to

Pay a Debtor’s Costs and Attorneys’ Fees in Defending

an Involuntary Petition – No Bad Faith Prerequisite

Petitioners’ Bad Faith Filing – Large Damage Risk

Intent is to Discourage Creditors From Joining in an

Involuntary Petition Without Doing Appropriate Diligence

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Automatic Stay of Creditor Actions

11 U.S.C. § 362: Automatic stay arises

automatically upon filing of the petition and

immediately prevents, among other

things…

● Commencing or Continuing Lawsuits

● Terminating an agreement

● Setoff

● Foreclosure

● Entering/Enforcing Judgment

● Taking Collateralized Property Under the UCC

● Taking Back Creditor’s own Property

8

Automatic Stay

Does not Apply to Actions Against Non-Debtors, but

Under Certain Limited Circumstances it can be

Extended (Typically by Court Order)

● Drawing on letter of credit

● Claims vs. guarantors that are not debtors

- Personal guarantors and non-debtor affiliate guarantors

Consequences of Stay Violation

● Contempt of court

● Sanctions

- Including legal fees

● Judgments obtained in violation of the stay are

generally void ab initio (as if they didn’t exist at all)

9

Review First Day Pleadings In Chapter 11 Cases

Affidavit or Declaration in Support of First day Motions Provides Detailed Information Useful to Creditors

● What caused the chapter 11 proceeding

● What the Debtor intends to do in the immediate future

● Capital Structure and financing arrangements

Chapter 11 Financing/use of Cash Collateral

● Critical for creditors continuing to sell to chapter 11 debtor

● Importance of budget

● Sets important case deadlines

● Usually contains many onerous lender friendly provisions

● Interim and final orders/credit agreements filed with Bankruptcy Court

Critical Vendor and § 503(b)(9) Claim Treatment

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File Preservation/Info Gathering

● Preserve credit and other files – paper/electronic, including

emails

● Preserve telephone logs, recorded phone calls, if any, cell

phone texts and instant messages

● Information gathering regarding proof of claim

- Invoices, bills of lading and delivery receipts for goods

received by Debtor in the ordinary course of business

within 20 days of bankruptcy filing in support of § 503(b)(9)

20 day goods priority claim

- Common carriers only keep records for a maximum period

of nine (9) months so obtain these records immediately

upon learning of a bankruptcy proceeding

Bankruptcy Checklist – What Should Creditors Be

Doing When They Hear Their Customer Filed Chapter 11

11

Obtaining Bankruptcy Court Filings

Download Documents Filed With the Bankruptcy Court From

Court’s Website Generally via PACER Electronic Case Filing

(ECF) Online Service

● www.pacer.gov

● Must create an account and pay (currently $.10 per page)

If Claims Agent has Been Appointed, Agent’s Website Usually

Contains Court Docket – Free Access to Court Filings and

Claims Register

In-House or Outside Counsel can File a Notice of Appearance

With the Court and Request Receipt of All Notices in the Case

You Can Always ask Lowenstein Sandler for any Relevant

Documents

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Notice of Commencement

Upon the Filing of a Chapter 11 Petition, the Clerk of the

Bankruptcy Court will Send a Notice of Commencement of Case

to all Creditors

The Notice Will Generally Contain the Following Information:

● Proposed counsel for the debtor

● The deadline for filing proofs of claim, if any. In larger chapter 11

cases, the deadline will generally be set at a later date through a

separate motion.

● An explanation of the automatic stay, which prevents creditors

from taking any actions to collect their debts.

● Notice of the Section 341 meeting of creditors

Unsecured Creditors may Also Receive a Solicitation From the

U.S. Trustee Regarding Their Potential Interest in Serving on

the Creditors’ Committee.

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Creditors’ Committees

Larger Creditors Contacted By United States

Trustee Regarding Possible Appointment to

Committee

What Is a Creditors Committee? Pros and

Cons of Service

Committee Formation Process/Questionnaire

Committee’s Role in Case/Issues Addressed

14

The Section 341 Meeting of Creditors

Section 341 of the Bankruptcy Code Provides That the

United States Trustee Must Convene a Meeting of Creditors

Generally, 341 Meetings Occur Within 30 days After the

Bankruptcy Petition is Filed

The Debtors Must Produce a Representative for Examination

All Creditors may Attend and ask Questions

In Practice (with Certain Exceptions), Creditors Rarely

Appear and the 341 Meeting is Usually not Substantive

15

Risks of Doing Business With a Chapter 11 Debtor

Do not do any Business With Your Customer Post-

Petition Until the Court has Entered an Order Approving

Financing/use of Cash Collateral!

Check for interim DIP financing approval / cash collateral

approval order

Check later for subsequent interim orders and final order

Review budget – a debtor’s post-petition cash

disbursements are typically constrained by a

DIP / cash collateral budget

11th Circuit Delco Oil decision demonstrates the risks

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Bankruptcy Schedules and Statements of Financial Affairs

Every Debtor is Required to File Schedules and a Statement of

Financial Affairs (SOFA), Which may be Supplemented From

Time to Time

The Schedules and SOFA Provide Detailed Disclosures About

the Financial Condition of the Debtor as of the Petition Date and

Certain Pre-Petition Transactions

These Documents Include, Among Other Items:

● Information about the Debtor’s business, assets, liabilities (claims

against the Debtor)

● Executory contracts

● Pending lawsuits

● Payments made within the 90 day preference period to trade and

other creditors

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Proofs of Claim

A formal proof of claim does not need to be filed in a Chapter 11 case unless you disagree with the amount or priority of your claim as set forth in the debtor’s schedules of assets and liabilities, or your claim is listed as unliquidated, disputed or contingent

Nevertheless, it is almost alwaysa good idea, out of an abundance of caution, to file a proof of claim in every bankruptcy case in which you are a creditor, absent a compelling reason otherwise

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Practical Tips for Proofs of Claim

BE SAFE: File Your Proof of Claim as

Soon as the Information Upon Which it is

Based can be Accurately Determined

You do not Want to be in a Position

Where you are Scrambling the day

Before the bar Date to File Your Claim as

Claims Must be Received by the Bar

Date, not Postmarked by that Date

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Practical Tips for Proofs of Claim

Attach Supporting Documentation, e.g., Statement of Account to

Your Proof of Claim (if Voluminous, Indicate That Documents are

Available Upon Request)

Claims are Public Record - Do Not File Confidential Documents

● Invoices, contracts, statements of work, and other documents might

include confidential information

File the Original Proof of Claim, Include a Copy of the Claim and a

Self-Addressed Stamped Envelope, and Request That it be File-

Stamped as Received and Returned to you for Your Records

File / Send Your Proof of Claim by Overnight Delivery (NOT Email or

fax), Oftentimes to the Debtor’s Claims Agent or the Clerk of the

Bankruptcy Court.

Some Courts and Claims Agents now Also Offer Online Submission

of Proofs of Claim. In those Instances, the Bar Date Notice will

Contain Instructions for Accessing the Online System

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Notice of Deadline to File Proofs of Claim

At a Certain Point During the Case, the Court will fix a Deadline by

Which Creditors Must File Proofs of Claim

● In Chapter 11 cases, the debtor often requests, through a motion, that the

court set a deadline (the “bar date”) by which prepetition proofs of claim,

oftentimes including section 503(b)(9) claims, need to be filed.

● As indicated earlier, in certain cases a court may set the bar date and

notify creditors of the bar date in a notice of commencement of case

● If the case is initially filed under Chapter 7 the bar date is 70 days after the

petition filing date, or a later date included in a separate notice.

Any Claim not Actually Received by the Required Date will be

Disallowed (Subject to Certain Extensions)

Notice Must be Sent to all Creditors at Least 21 Days Before the

Deadline, but Oftentimes More Time is Given

It is Crucial That Creditors Read, Understand, and Follow any

Such Notice

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Late-Filed Proofs of Claim

If a Proof of Claim is not Timely Filed, it may Still be

Worthwhile to File a Late Proof of Claim

If you Establish That you Neither had Notice, nor Actual

Knowledge, of the Bankruptcy Filing (i.e., not Included

on Creditor Matrix or not Served bar Date Notice), you

may be Able to Have Your Claim Treated as Having

Been Timely Filed if the Estate’s Funds Have not yet

Been Distributed

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Claims Priority

Secured

Claims

“Superpriority”

Administrative

Expense Claims

Administrative Expense

Claims (503(b)(9) Goods

and Postpetition Trade,

Employees, Taxes,

Professionals, etc.)

Unsecured Priority

Claims (Certain Taxes,

Wages, etc.)

General Unsecured

Claims (Prepetition Trade)

Equity

Subordinated Claims

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Meltdown in Chapter 11: Administrative Insolvency

● Insufficient funds to pay all chapter 11

administrative priority claims in full

● hhgregg – appliance/consumer electronics retailer

● Toys “R” Us

● Sears

● Barneys

● Forever 21

Risk of Post-Petition Trade Credit: What If You Guess Wrong?

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Critical Vendor Orders

There is no Bankruptcy Code Provision That Expressly Authorizes

Critical Vendor Status

It is Court-Created Based on the Doctrine of Necessity

● Limited by the 7th Circuit Court of Appeals decision in Kmart

Corporation, but the doctrine is still alive and thriving in most

jurisdictions

Critical Vendor Status is Contingent Upon Court Approval Authorizing

(not Directing) a Debtor’s Payment of pre-Petition Claims of Creditors

Deemed “Critical” or “Essential” to a Debtor’s Ongoing

Business/Successful Reorganization

● Exception to claims priority rules

● Debtor designates critical vendors

● Frequently focused on § 503(b)(9) “20 day goods” priority claims,

which theoretically have to be paid in full anyways upon

confirmation of a plan

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Critical Vendor Orders

Standard for a Debtor Determining Critical Vendors

● The Debtor has very broad discretion, but courts

ultimately have the final say

● Courts have reached varying conclusions on when a

vendor is “critical”

- Some courts prohibit preferred critical vendor status

- Among those courts allowing critical vendor status, some

are stricter than others

- A vendor is less likely to be deemed critical if it is

obligated to continue selling to the Debtor via a pending

supply contract

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Critical Vendor Orders

No Assurance of 100% Payment of a Critical

Vendor’s pre-Petition Claim – Subject to Negotiation

Quid pro quo: Creditors Receiving Such Payments

Must Agree to Extend Post-Petition Credit (Entitled to

Administrative Priority Status) and Other Terms

● Oftentimes the most favorable terms provided within a

fixed period of time prior to the bankruptcy filings are

required.

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Critical Vendor Orders

Critical Vendor Agreement Should Be Reviewed

by Counsel

● Negotiate payment and other terms

● Be careful of fine print that prevents any change in

prices and other non-credit related terms including

credit limits

● Risk of disgorgement of critical vendor payments if the

creditor stops extending credit consistent with the

agreed upon terms

● Negotiate default provision that gives critical vendor

an out

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Administrative Claim for the Value of Goods the

Debtor Received Within 20 days of Bankruptcy Filing

20 day Goods Must be Sold to the Debtor in the

Ordinary Course of the Debtor’s Business

Safety net for Trade Creditors that Supply Goods not

Services!

Replaces Reclamation as an Effective Value

Maximizing Trade Creditor Remedy

§ 503(b)(9) “20 Day” Administrative Priority Claims

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General Rule – § 503(b)(9) Request/Allowance Requires

Notice and a Hearing

● No automatic administrative claim without court approval

There is no Federal Bankruptcy Rule Specifying the

Manner in Which to Assert § 503(b)(9) Priority Claims

Timing of Payment - Most Courts Have Rejected

Immediate Payment Over a Debtor’s Objection

● Instead payment upon confirmation of a plan or earlier if a

motion to pay § 503(b)(9) claims is filed by the debtor,

usually in conjunction with a creditors’ committee

Assertion Of “20 Day” Goods Administrative Claims And Timing Of Payment

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No Deadline to Assert § 503(b)(9) Claim in the

Bankruptcy Code

Local Bankruptcy Rules may Create a Deadline

● U.S. Bankruptcy Court, Eastern District, Michigan

- Local Bankruptcy Rule 3003-1 – Deadline to file proof of

claim, or § 503(b)(9) motion in chapter 11 case: 90 days after

first date set for Section 341 meeting of creditors

● U.S. Bankruptcy Court, District of Massachusetts

- Local Bankruptcy Rule 3002-1 – Deadline to file request for

allowance of § 503(b)(9) claim: 60 days from first scheduled

341 meeting date

Deadline To Assert “20 Day” Goods Administrative Claims

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Courts Are Also Setting Deadlines for Asserting § 503(b)(9)

Priority Claims

● One deadline to file claims that includes §503(b)(9) priority claims

and all other general unsecured claims

● Alternate deadline: Separate deadline for asserting § 503(b)(9)

claims than general unsecured claims

Courts Are Also Prescribing the Manner of Asserting

§503(b)(9) Claims, Either

● On the same claim form as the creditor’s general unsecured claim

-or-

● On a special proof of claim form solely related to § 503(b)(9) claims

Deadlines/Assertion Of “20 Day” Goods Administrative Claims

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503(b)(9) Litigation Issues

What Does Receipt Mean?

Are Drop Shipment Claims Eligible for § 503(b)(9)

Priority Status?

Can the Debtor Set Off Pre-Petition Chargeback,

Deduction, Credits and Rebate Claims to Reduce a

Creditor’s § 503(b)(9) Priority Claim?

Should a Section 503(b)(9) Administrative Priority

Claim be Subject to Disallowance Based on Creditor’s

Preference Risk?

33

Chapter 11 Plans

A Plan proposes (and if confirmed and effective, establishes)

the classification and treatment of claims against a

Chapter 11 debtor

Bankruptcy Court must approve a Disclosure Statement and

Solicitation Procedures that the debtor uses to solicit votes

Disclosure Statement: Describes the plan and must provide

adequate information for voting creditors to make a choice

Plan ProposedVotes

SolicitedAccepted Confirmed Effective

34

Chapter 11 Plans

Once confirmed and effective, a plan is effectively a contract

between the debtor and its creditors

A confirmed, effective plan binds all creditors – even if they

voted to reject the plan or did not vote at all

The obligations of the “Reorganized Debtor” under the plan

take the place of its obligations that existed pre-confirmation

The Bankruptcy Code prescribes a number of legal standards

that a plan must meet to be confirmable

If a class of creditors votes to reject the plan but another

impaired class accepts the plan, the plan can still be

confirmed so long as the Bankruptcy Court finds that the

plan is fair and equitable to and does not discriminate

against the rejecting class

35

Dual-Track: Simultaneous Plan and Sale Process

Many chapter 11 cases follow a dual-track strategy

● Nearly all retail chapter 11 filings start out this way

Debtor markets its business for sale while simultaneously

negotiating a plan of reorganization with lenders and other

key creditor constituencies

Stated goal is usually a going-concern sale, in which the

buyer continues operating the debtor’s business

Dual-track processes frequently result in an asset sale under

section 363 of the Bankruptcy Code (sale of assets free and

clear of claims and interest) followed by a plan of liquidation

that winds down the debtor after reconciling claims,

liquidating its remaining assets, and paying distributions

● Liquidation frequently involves pursuit of litigation claims

36

Chapter 11 Plans: Third-Party Releases

Included in many (perhaps most) Chapter 11 plans

Typically named “Release by Holders of Claims and Interests”

Releases claims of creditors against non-debtor third parties

such as directors, officers, shareholders, private equity sponsors,

affiliates, subsidiaries, etc.

Opt-In vs. Opt-Out vs. Nonconsensual Releases

● Modern trend is toward “opt-out” releases

● Failure to take affirmative steps to opt out is deemed consent

● Nonconsensual releases – no opportunity to opt out, typically

reserved for extraordinary circumstances

FAILURE TO OPT OUT OF A THIRD-PARTY RELEASE WILL

PROBABLY RELEASE (AMONG OTHER THINGS) ANY CLAIMS

YOU MAY HAVE AGAINST NON-DEBTOR GUARANTORS!

37

Post Confirmation/Objection to Claims Distributions are Only Made to Creditors Whose Claims are “Allowed”

● Claim scheduled by debtor (i) in a liquidated amount, (ii) not disputed, and (iii) non-contingent,

or

● Proof of claim filed by claimant and no party-in-interest objects to allowance thereof

Debtor/ Trustee Generally has 90-180 days From the Chapter 11 Plan Effective Date to Object to Claims, Subject to Likely Multiple Extensions

Objection to a Claim Could Seek Full or Partial Disallowance

If your Claim is Objected to, you will Receive Notice at Least 30 Days Prior to the Hearing

● Carefully review the objection and any exhibits to determine the basis for the objection to your claim

● Many objections are “omnibus” objections, which may include objections to many claims on the same grounds

● If you disagree with the grounds stated in the objection, the first step is to contact the party that filed the objection

38

Post Confirmation - Payment of Allowed Claims

Distributions are Generally Paid by a Distribution Agent or

Liquidation Trustee

Unless Creditors Receive an Objection or Other Notice, They do

not Need to do Anything to Protect Their Claim

However, a Distribution Agent or Liquidation Trustee may Require a

W-9 or Other Tax Documentation as a Prerequisite to Receiving a

Distribution, Which Should be Sent Promptly

Creditors Should Also Provide Prompt Notice of any Change of

Address

Creditors may Receive one or more Distributions, Depending on

the Recovery Provided in the Plan and the Course of the Claims

Reconciliation Process

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Any Transfer of an Interest of the Debtor in Property;

To or for the Benefit of a Creditor;

On Account of an Antecedent Debt Owed by the Debtor Before a Transfer:

● Cash in advance payments are not preferences

Made While the Debtor was Insolvent;

● On or within 90 days before a bankruptcy filing; or

● Between 90 days and one year before a bankruptcy filing for transfers made 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; and

● Such creditor received payment to the extent provided by other provisions of Title 11.

● Critical Vendor Defense?

Preference: Elements Of Claim

40

Small Business Reorganization Act of 2019 Changes To Preference Law

Effective February 19, 2020

Section 547(b) Amended to add the Following due

Diligence Requirement for Filing Preference

Litigation:

● “(b) Except as provided in subsections (c) and (i) of this

section, the trustee may, based on reasonable due

diligence in the circumstances of the case take into account

a party’s known or reasonably knowable affirmative

defenses under subsection (c), avoid any transfer of an

interest of the debtor in property….”

● Preference defendants still have the burden of proving the

preference defenses

41

Transfer was Intended by the Debtor and the

Creditor to be a Contemporaneous Exchange for

new Value; and

Transfer was in Fact a Substantially

Contemporaneous Exchange

Examples:

● COD transaction: payment tendered for delivery of

goods

- Risk of bounced COD check/ACH payment; replacement

payment not protected by this defense

Preference Defenses: Contemporaneous Exchange For New Value (COD)

42

Preference Defenses: New Value

Creditor Selling Goods/Providing Services on Credit Terms to

a Debtor After a Payment, that was not Secured and not Paid

by an Otherwise Unavoidable Transfer, Reduces Preference

Exposure

Goods Shipped/Services Provided on Credit Terms Following

Payment Reduce Preference Exposure

New Value Cannot be Applied to Subsequent Payments

Frequently Litigated New Value Defense Issues:

● Does the new value defense apply to invoices that were:

- repaid prior to the bankruptcy filing?

- repaid post-petition pursuant to a critical vendor order?

- entitled to priority status under section 503(b)(9) and repaid

post-petition?

43

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 the Ordinary Course of Business

Defense

Ordinary Course Of Business Preference Defense

44

Courts Have Been Inconsistent and Unpredictable in Applying Subjective

Component of Ordinary Course of Business Defense

Evaluating pre-Preference Payment History.

● How long?

● Full range?

● Modified range?

● Only when Debtor is financially healthy?

● Deviation off an average or mean?

● Comparison of average days to pay in pre-preference and preference

history?

● Bucket Analysis?

Consistency in Timing of Payments Before and During Preference Period Alone Might not Be Sufficient to Prove Subjective Component of Defense

Fact-Specific Threats to Subjective Component

Subjective Component of Ordinary Course of Business Defense Encourages Litigation

45

Ordinary Course Of Business Preference Defense –Ordinary Business Terms Alternative: Objective Component

Proof Requirement is Currently Evolving

● General Standard? Transfer was not so unusual or

idiosyncratic as to render it an aberration in the relevant

industry – Seventh Circuit Court of Appeals decision

Which Industry to Consider? Creditor’s? Debtor’s?

Variation?

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

46

NEW “COVERED PAYMENT” EXCEPTION TO PREFERENCE LIABILITY

TEMPORARY SUBSECTION 547(J)

Consolidated Appropriations act of 2021 Created a New Preference

Exception: “Covered Payment of Supplier Arrearages”

● Payment made in connection with an agreement or arrangement made or

entered into on and after March 13, 2020 (onset of COVID) between a

debtor and a supplier of goods or services to delay or postpone payment

of amounts due under an executory contract

Payment Cannot Exceed the Amount due Under the Executory

Contract Before March 13, 2020

Does not Include Fees, Penalties and Interest in an Amount Greater

Than That Scheduled to be Paid Under the Contract or Which the

Debtor Would owe if the Debtor had Made all Payments on Time and

in Full Before March 13, 2020

Sunsets on December 27, 2022, but Continues to Apply to Bankruptcy

Cases filed Before December 27, 2022

47

SBRA’s Increased Venue Limits On Small Claims

The Venue Provision That Forces a Trustee or Debtor-in-

Possession to Commence Litigation on Smaller Claims in

the District Court Where the Defendant Resides (Corporate

Headquarters or Principle Place of Business) has Been

Increased From $13,650 to $25,000

● Impact: Trustees/debtors-in-possession may be less likely

to commence suit on preference and other claims seeking

recovery of less than $25,000

Does the Increased Venue Limit Apply to Bankruptcy Cases

Filed Before SBRA’s Effective Date of February 19, 2020?

SBRA Change Ignores Prior Conflicting Decisions Over

Applicability of Venue Limit to Preference/Other Avoidance

Actions

48

DO NOT IGNORE DEMAND

Request a List of all Checks That Make up the Claim and Copies of

Cancelled Checks or Proof of Wire Transfers With Remittance

Instructions

Confirm all Payments Received Within 90 Day Preference Period

● If payment is not actually received immediately demand proof of

payment

● No preference if payment received more than 90 days before filing

Statute of Limitations: has it Expired or is it About to Expire?

Can the Trustee Actually Sue You:

● LESS THAN $6,825 IN THE AGGREGATE? NO

- Trustees most likely to send demand letter anyway

● Where can the Trustee sue you? Venue limitation

React and Respond To Initial Preference Demand Letter

49

Preference Checklist Review Defense Strategy With Management

Create Preference Defense Analyses, Including new Value and Subjective Ordinary Course of Business Defenses

Was the Debtor Insolvent at the Time of the Bankruptcy Filing?

● Check the Bankruptcy Schedules

● Check any Financial Statements you may Have Received From the Debtor

Develop a Game Plan and Negotiation Thresholds

Communicate Preference Defenses to the Trustee

Consult With your Bankruptcy Attorney, Particularly After Commencement of Litigation

● Determine your answer deadline (often 30 days from issuance of a summons), unless there is a procedures order entered in the case which could extend the deadline

- DO NOT ALLOW A DEFAULT JUDGMENT TO BE TAKEN AND TIMELY CONTACT YOUR BANKRUPTCY ATTORNEY IF AN EXTENSION IS NOT GRANTED

50

Bruce S. NathanPartner, Bankruptcy & Restructuring

With more than 35 years of experience in the bankruptcy and insolvency field, Bruce

is a recognized leader nationwide in trade creditor rights and the representation of

trade creditors in bankruptcy and other legal matters. He has represented trade and

other unsecured creditors, unsecured creditors' committees, secured creditors, and

other interested parties in many of the larger Chapter 11 cases that have been filed.

Bruce also handles letters of credit, guarantees, security, consignment, bailment,

tolling, and other agreements and legal credit issues for the credit departments of

institutional clients.

Among his various legal recognitions, Bruce received the Top Hat Award in 2011, a

prestigious annual award honoring extraordinary executives and professionals in the

credit industry. He was co-chair of the Avoiding Powers Committee that worked with

the American Bankruptcy Institute's (ABI) Commission to Study the Reform of Chapter

11, participated in ABI's Great Debates at their 2010 Annual Spring Meeting–arguing

against repeal of the special BAPCPA protections for goods providers and commercial

lessors–and was a panelist for a session sponsored by ABI. He is a frequent presenter

at industry conferences throughout the country, as well as a prolific author regarding

bankruptcy and creditors' rights topics in various legal and trade publications.

Bruce is a co-author of "Trade Creditor Remedies Manual: Trade Creditors' Rights

under the UCC and the U.S Bankruptcy Code," published by ABI at the end of 2011.

He has also contributed to ABI Journal and is a former member of ABI's Board of

Directors and former co-chair of ABI's Unsecured Trade Creditors Committee.

Tel: 212.204.8686 | Fax: 973.442.6851 | E-mail: bnathan@lowenstein.com

Education

University of Pennsylvania Law School (J.D. 1980)

Wharton School of Finance and Business (M.B.A. 1980)

University of Rochester (B.A. 1976)

Bar Admissions

New York

51

Andrew BehlmannPartner, Bankruptcy & Restructuring

Andrew Behlmann is a partner in Lowenstein Sandler’s Bankruptcy &

Restructuring Department. Andrew leverages his background in corporate

finance and management to approach restructuring problems, both in and

out of court, from a practical, results-oriented perspective. With a focus on

building consensus among multiple parties that have competing priorities,

Andrew is equally at home both in and out of the courtroom, and he has a

track record of turning financial distress into positive business outcomes.

Clients value his counsel in complex Chapter 11 cases, where he represents

debtors, creditors' committees, purchasers, and investors.

Andrew writes and speaks frequently about bankruptcy matters and financial

issues. Before becoming a lawyer, he worked in senior financial

management at a midsize, privately held company.

Tel: 973.597.2332 Fax: 973.597.2333 | E-mail: abehlmann@lowenstein.com

Education

Seton Hall University

School of Law (J.D.

2009), magna cum

laude; Order of the

Coif

University of Missouri-

Saint Louis (B.S.

2005), Business

Administration-

Finance and

Accounting; Beta

Gamma Sigma

Bar Admissions

New Jersey

|

52

Recent Publications

June 1, 2021

Preference Defense in the Wake of the Pandemic: A Primer, Lowenstein Sandler LLP

Bruce S. Nathan, Andrew Behlmann, Michael Papandrea, Arielle B. Adler

May/June 2021

Second Circuit Dismisses Appeal of Critical Vendor Order in Windstream Holdings, Business Credit

Bruce S. Nathan, Michael Papandrea

March/April 2021

Additional Preference Protection in Recent Stimulus Legislation: Reality or Illusion?, Business Credit

Bruce S. Nathan, Eric Chafetz, Michael Papandrea

Q1 2021

The Recent COVID-19 Legislation’s Bankruptcy Code Amendments of Interest to Trade Creditors, Perspective by CRF

Bruce S. Nathan, Michael Papandrea

February 2021

A Primer on Selling Bankruptcy Trade Claims, Business Credit

Bruce S. Nathan, Scott Cargill

January 2021

Reclamation Rest in Peace? The Eighth Circuit Will Soon Weigh In, Business Credit

Bruce S. Nathan, Michael Papandrea

53

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