Articles Posted in Business Bankruptcy

On April 30, 2009, Chrysler and its affiliates filed a chapter 11 case in the U.S. Bankruptcy Court for the Southern District of New York. On June 1, 2009, GM and its affiliates also filed a chapter 11 case in the U.S. Bankruptcy Court for the Southern District of New York.

People and companies who are owed money from these companies have questions about what are their rights now that these companies have filed for bankruptcy. In a prior posting ( Help I am Owed Money By a Company that Has Recently Filed for Bankruptcy in New York) we have discussed the different types of claims in bankruptcy cases. In this post we will focus more specifically on the rights of creditors of Chrysler and GM.

1. Automatic Stay Prevents Collection, Litigation & Judgment Enforcement
Upon the commencement of a bankruptcy case the automatic stay goes into effect. The automatic stay is a mandatory injunction of the Bankruptcy Court that arises automatically by operation of law upon the filing of a bankruptcy case. The territorial reach of the stay is nationwide (and in theory at least — worldwide — although creditors in foreign jurisdictions will not always honor U.S. Bankruptcy Court orders). The stay is automatic because no prior notice or hearing is required before the stay goes into effect.

The stay prevents dunning and collection activity by suppliers and vendors to collect unpaid pre-bankruptcy invoices. The automatic stay prevents filing of lawsuits against the debtor relating to bankruptcy claims. If a creditor has a judgment against the debtor the automatic stay prevents efforts by the creditor to perfect (such as by filing judgment liens) or enforce a judgment (such as by execution through a sheriff).
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A question we often get from clients and prospective clients is what can they do if they are owed money by a company that has filed for bankruptcy protection in New York. The answer depends on why they are money, when the debt arose, and what type of bankruptcy the company has filed.

1. Hierarch of Claims — Administrative, Secured, Priority & Unsecured

In bankruptcy cases not all claims are created equal. There is a hierarchy or rank order of claims that determines who comes first in the cash waterfall.

a) Administrative Claims. These are claims related to the administration of the debtor’s case. In a chapter 11 case administrative claims includes claims for goods sold or services provided to the debtor company after the date of bankruptcy filing. In addition, administrative claims in a chapter 11 case include post-bankruptcy use and occupancy charges related to the debtor’s real estate leases, and post-bankruptcy equipment and vehicle lease fees.

b) Secured Claim. A secured claim is a claim that is secured by collateral (i.e., a claim that has a lien on property of the debtor). Some common examples of secured claims are a mortgage secured by real estate, a vehicle loan secured by a vehicle, or a bank loan secured by the debtor’s assets or accounts receivable. In addition to these examples of voluntary secured claims, a debtor may be subject to involuntary secured claims, such as for tax liens or judgment liens.

c) Priority Claims. These are certain claims incurred prior to the debtor’s bankruptcy filing that are given priority (i.e., get paid ahead of other claims) as specified in the Bankruptcy Code. Common examples of priority claims are certain pre-bankruptcy wage and commission claims, certain taxes and other obligations to the government, and spousal and child support.
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This is a question that we get asked a lot by our clients and prospective clients. The answer is “that depends” – it depends on what chapter (type) of bankruptcy we are talking about.

1. Duration of a Chapter 7 Bankruptcy Case
When someone asks how long will a bankruptcy take, they really mean how long is my involvement as debtor (person filing bankruptcy) going to be. The goal of a personal bankruptcy case is to get a discharge. From the debtor’s perspective that can be viewed as the end of the typical bankruptcy case, although the actual case may continue on without affecting the debtor (as discussed further below).

In the typical chapter 7 case involving an individual there are really only three dates we care about. The first is the date the bankruptcy petition is filed with the Bankruptcy Court because that starts the case (and the automatic stay). The second important date is the meeting of creditors, which is usually scheduled about four week after the meeting of creditors. The third date is sixty days from the date first scheduled for the meeting of creditors. That is the very earliest that a debtor is eligible to get her or her discharge (order wiping out debts). However, in actual practice the discharge order takes the Clerk time to process so that the discharge is routinely entered 70-90 days after the date first set for the meeting of creditors. So this means that the length or duration of a typical chapter 7 bankruptcy case is about 100 – 120 days Continue reading

Consignment arrangements are very common in certain industries that are active in New York City, such as for sale of jewelry, fine art and antiques. In a consignment transaction the consignor (owner) of the merchandise gives it on consignment to the consignee for resale. The consignee does not have to pay the consignor until the goods are actually sold and the consignee has received payment. Some common example of this are a wholesale jeweler who consign loose stones or jewelry to a retail jewelry store, an artist who consign a painting to an art gallery, or an antique furniture owner who consign it to an antique shop for resele.

1. What is a consignment?

Under a consignment arrangement the consignor retains title and ownership of the consigned goods until they are sold by consignee. Unlike a regular sale the consignee does not have an obligation to pay for the goods until they are actually sold. In addition, in a consignment arrangement if the goods do not sell the consignee can usually return them to the consignor. The goods received on consignment do not form part of the assets of the consignee – and remain property of the consignee.
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This is the third in a three part series of postings in which we examine preference claims in detail. In prior posts we discussed what is a preference claim (Help I’ve Been Sued by a Bankruptcy Trustee in New York, What Do I Do Now?) and the new value defense to a preference claim (New Value Defense to Preference Adversary Proceeding Filed in the U.S. Bankruptcy Court for the Southern District of New York). In this post we will look at the ordinary course defense.

The ordinary course defense is intended to permit creditors to continue doing business with financially troubled debtors without fear that a bankruptcy trustee will later be able to recover such payments as preferential.

Elements of the Ordinary Course Defense

The ordinary course defense requires that the creditor/defendant show:

a) payment by the debtor
b) to or for the benefit of the creditor
c) made in accordance with the course of dealings between the parties, or

d) made in accordance with applicable industry practices.

The way this works is as follows – image a company in the business of selling machine parts. The company has a course of dealings with the debtor over a long enough period of time, so that there is an established payment history. The company sells machine parts to the debtor on net 30 day terms. The debtor routinely pays the company’s invoices within 30-40 days.
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This is the second in a three part series of postings in which we examine preference claims in detail. In a prior post (Help I’ve Been Sued by a Bankruptcy Trustee in New York, What Do I Do Now?) we discussed what are bankruptcy preference claims. In this post we will examine the new value defense to a preference claim. In a subsequent post we will look at the ordinary course defense.

Elements of the New Value Defense

One of the potential defenses that a creditor/defendant can raise to a preference adversary proceeding commenced by a trustee or debtor in possession in the U.S. Bankruptcy Court for the Southern District of New York is the ordinary course defense. The elements of this defense are:

a) after receipt of what would otherwise be a preferential payment;

b) the creditor extended new value to the debtor in the form of additional goods or services;

c) for which the creditor/defendant has not be paid by an unavoidable transfer.
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We often get calls and e-mails from people who have been sued by a trustee or debtor-in-possession in a chapter 11 case pending in the United States Bankruptcy Court for the Southern District of New York and United States Bankruptcy Court for the District of Delaware.

1. What is a preference claim?

In bankruptcy cases a trustee has the ability to file a lawsuit in the Bankruptcy Court – called an adversary proceeding – seeking to recover certain payments made by the debtor prior to bankruptcy as preferential.

The elements of a preference claim are:

a) a payment by a debtor to a creditor made within 90 days of bankruptcy filing (1 year in the case of payment to “insiders”);
b) for a debt that was owed to the creditor prior to the time the payment was made;
c) made while the debtor was insolvent; and d) that allowed the creditor to receive a greater recovery than if the payment had not been made and the debtor had instead been liquidated in a chapter 7 bankruptcy case and the creditor received payment as allowed by law in a chapter 7 case.

The first thing to understand about a preference claim is that the trustee (or debtor in possession in a chapter 11 case) is not challenging that you, the creditor, actually provided the goods or services for which you were paid. Instead, the preference recovery provisions of the Bankruptcy Code are intended to promote the Bankruptcy Code’s goal of “equality of distribution” among similarly situated creditors. The bankruptcy law, as drafted by Congress, views it as unfair that you had your invoices paid in the 90 days prior to the debtor’s bankruptcy filing while other creditors did not. The preference avoidance provisions of the bankruptcy law allow the payment to you to be potentially recaptured by the trustee (or debtor in possession in a chapter 11 case).
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We are often contacted by former and prospective clients in Manhattan and other boroughs of New York City, and elsewhere, who are faced with a potential eviction involving a commercial or residential lease and wonder what their bankruptcy options are.

1. Bankruptcy Filing Creates Automatic Stay

A bankruptcy filing by the tenant (whether residential or commercial) creates an “automatic stay.” This is a mandatory injunction that arises by operation of law without the need for a hearing or order of the Bankruptcy Court. The automatic stay operates like a legal “Stop Sign” to freeze a creditor’s efforts to pursue collections, litigation or judgment enforcement. The automatic stay operates to protect the debtor and the property of the debtor’s bankruptcy estate.

In the case of a lease, whether commercial or residential, the critical issue is whether a writ of eviction has already been issued from the landlord-tenant court. There is a significant body of case law from the U.S. Bankruptcy Court for the Southern District of New York and U.S. Bankruptcy Court (covering Manhattan, Bronx and White Plains) and U.S. Bankruptcy Court for the Eastern District of New York (covering Brooklyn, Queens, Staten Island and Long Island) that once a writ of eviction has issued from the landlord-tenant court the interest of the tenant in the lease has terminated.
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A creditor can start an involuntary bankruptcy case in New York City against a debtor (either a person or business) who owes the creditor money. An involuntary bankruptcy case is a bankruptcy case started by creditors. If a debtor has more than 12 creditors who are owed at least $13,475 as a group, those creditors can file an involuntary bankruptcy case against the debtor if they can establish that the debtor is not paying his, her or its debts as they become due. Also the debts must be fixed and liquidated in amount and not contingent (meaning that nothing else has to happen to fix liability – such as a judgment in a personal injury case resulting from an accident). In addition, the claims cannot be subject to bona fide dispute as to liability or amount — if there is a valid and legitimate dispute about the debt it can’t be the basis for an involuntary bankruptcy case.

If a debtor has less than 12 creditors in all, one petitioning creditor owed at least $13,475 can commence an involuntary bankruptcy petition against the debtor.
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As a result of the current economic conditions many business owners in New York City have decided that they will need to shut down their businesses. They are faced with the decision of how to best do this. Essentially, the options are to liquidate the business in chapter 7 bankruptcy, to liquidate the business by an assignment for the benefit of creditors in state court, or to liquidate the business outside of bankruptcy. For businesses with greater resources another option is liquidating the business in chapter 11 bankruptcy.

1. Chapter 7 Business Liquidation
This involves filing a chapter 7 bankruptcy petition, with supporting schedules of assets, debts and other information with the Bankruptcy Court. A chapter 7 trustee is then appointed to administer the assets of the business and liquidate them to raise cash to pay creditors’ claims.

One major benefit of a chapter 7 bankruptcy is that, immediately upon filing of the bankruptcy case, the automatic stay goes into effect. This stops all further collection activity against the debtor, as well as any pending litigation, foreclosures or judgment enforcement.

Another positive of a chapter 7 bankruptcy for a business is it is a fairly straightforward process to prepare the bankruptcy papers. Our law firm handles these types of cases on a flat fee basis so the business owners know in advance what their legal fees will be.

One of the negatives is that a trustee is appointed to liquidate the assets of the company, and he or she has the ability to investigate financial transactions involving the company and bring lawsuits against insiders to seek to avoid or recover certain transactions. This topic is discussed further in the Frequently
Asked Questions (FAQs) on our website.
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