Bankruptcy Basics for Booming Businesses September 25, 2017

Bar Association of San Francisco

    Jennifer Hayes Jane Kim Thomas Rupp 

1. Introduction

2. Pre-Bankruptcy Planning a. Protection of interests

i. Obtain and perfect liens 1. But be aware of preference period and liability

ii. Improve payment terms or get agreement to COD iii. Escrow source code

b. If default in financial covenants: accelerate debt and exercise other contractual rights before bankruptcy (before the automatic stay)

c. If representing Debtor, consider conversion of property into exempt assets prior to filing (e.g. IRA)

3. Choice of procedure

a. Bankruptcy i. Voluntary

ii. Involuntary: potential creditor liability iii. State-law alternatives

1. Receivership 2. ABC 3. Dissolution

4. What Chapter are you in?

a. Chapter 11 b. Chapter 7 c. Chapter 13 d. Chapter 9 e. Chapter 15

5. Who are you?

a. Creditor i. Administrative

ii. Secured iii. Priority iv. Unsecured

b. Contract or lease counterparty c. Potential buyer

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6. Common issues for creditors a. Issues regardless of Chapter

i. The filing of bankruptcy creates a bankruptcy estate. What is property of the bankruptcy estate and what is not. E.g., who owns collective causes of action like fraudulent conveyance claims. What types of claims are owned by the estate can turn on where the Debtor is incorporated

ii. Automatic stay-e.g. relief needed to go after insurance policy owned by bankruptcy estate

iii. Treatment in schedules iv. Bar date, filing of proof of claim; jurisdictional issues around filing of

proof of claim v. Secured lenders – adequate protection; should a secured creditor file a

claim or not? vi. Deadline to file 727/523 action

b. Issues unique to Chapter 11 i. Creditors’ Committee: considerations in deciding whether to seek to

become member ii. Chapter 11 Plan – disclosure statement, voting, objecting to confirmation

iii. “Deemed filed” claims c. Issues unique to Chapter 7

i. Who is a chapter 7 trustee and what are the trustee’s duties ii. No “deemed filed claims”

iii. Late filed claims are still deemed allowed and are payable before return of equity to the Debtor; however, late-filed claims are subordinate to timely filed claims

iv. KVN: no carve-outs with secured creditor unless the proceeds from carve-out provide a “meaningful distribution” to creditors

7. Common Issues for contract and lease counterparties

a. Issues regardless of Chapter i. Treatment in schedules and asserting actual and potential claims

b. Issues unique to Chapter 11 i. Executory contracts: rejection and assumption/assignment

ii. Assignment without consent iii. Special rules for landlords, tenants, licensees, others

c. Issues unique to Chapter 7

8. For potential buyers a. Section 363 – essentially requires market test, i.e., almost always opportunity for

overbidding b. Stalking horse purchasers – bid protections and their limits c. Private and/or pre-negotiated sale d. Good faith/no collusion e. Ability to buy free and clear of liens, claims, encumbrances f. Ability to assume and assign contracts – payment of cure