From Cradle to Grave

Accordingly, around 20 years ago, I suggested to a long-term client that he bring me in when new deals are being negotiated and drafted, particularly, deals covering extended periods of time where the other party may suffer a change in fortune, and/or where a default, litigation, or bankruptcy might cause a delay in enforcement of the contract that would have a disastrous impact on the client's ability to meet key deadlines, causing him to suffer huge losses. After two decades of doing so, I have learned some key issues with respect to which bankruptcy lawyers can use their special skills to assist clients from the outset, both before and after disaster strikes, from “the cradle to the grave.” These are rules for reviewing transactions that bankruptcy attorneys are uniquely suited to apply, and are set forth below in no particular order of importance:

Rule One

Give Your Client a Way Out of the Contract Before It Gets Entangled in a Bankruptcy Case

Bankruptcy lawyers uniquely know from experience that once entangled in a bankruptcy case, a creditor cannot exercise its remedies or terminate a contract without obtaining relief from the automatic stay. This relief may be difficult to secure, especially in the early stages of a Chapter 11 case. Using the occurrence of bankruptcy or insolvency as a default is too late. Such ipso facto clauses are unenforceable under Sections 363, 365 and 541 of the Bankruptcy Code, but nevertheless appear in almost every commercial contract as the major “protection” against bankruptcy. What the client needs is an “early warning system” to get out before the bankruptcy occurs.

Lenders typically use financial covenants as an early warning system, giving them the ability to call a default and pull out before insolvency or bankruptcy ensues. There is no reason why other creditors cannot use such covenants to protect themselves as well. Another mechanism may be using cross-defaults — if the debtor's lenders call a default, leaving the debtor without financing, that is good time for other creditors to extricate themselves as well.

Rule Two

Don't Let Default Cure Periods Delay Termination

Many contracts have default provisions that give the debtor a substantial cure period before the creditor can exercise its remedies. Bad idea. Pursuant to Section 108 of the Bankruptcy Code, if the debtor files for bankruptcy relief before the cure period expires, this period automatically is extended, making any automatic termination based on failure to cure ineffective. As a result, a long cure period gives the debtor an incentive to file for bankruptcy to prevent the creditor from exercising its remedies. In addition, the debtor can use the bankruptcy courts, often a friendly forum, to litigate whether such default or cure occurred.

Therefore, consider creating defaults that provide for automatic termination, with no cure period. This of course would only be practical where the default goes to the heart of the contract and certainly will not be easy to obtain from the debtor, who always will want the chance to cure. However, where time is of the essence, dragging out the time to cure and then possibly litigating over whether the cure was sufficient can lead to disaster.

In addition, any notice of termination or default should be effective when sent by the client, not when received by the debtor. The latter can lead to disputes over when receipt took place, a fact that may not be known to the client. Think about using e-mail or fax as a means of giving notice, with service being deemed to occur on the date of transmission by the client. Make sure that notices received by the client from the debtor are copied to you and are sent to a specific address and person at the client, so it does wander around a huge corporation until the right party is located.

Rule Three

Own It

Since the automatic stay can cause great delay and expense, the first line of defense is to try to structure a transaction so that the subject matter is not property of the estate to which the stay applies. This is not easy because the definition of property of the estate is much broader than under traditional state property law concepts. In addition, not setting forth clearly who owns the subject matter or proceeds of the contract can lead to the debtor trying to sell or use it free and clear of your client's interests. Finally, if all your client has is an executory contract, its interest can be rejected, leaving the client with nothing more than an unsecured claim payable, if at all, in “little bankruptcy dollars.”

One way to deal with ownership is to expressly define in the contract who owns the subject matter, products and proceeds. Although that may not be binding on a bankruptcy court, which “will not exalt form over substance,” it at least shows the parties' intent. In addition, if you are dealing with intellectual property, make sure that all registrations and other formalities showing ownership in the client's name have been obtained. This will bolster the client's claim of ownership plus provide additional remedies, such as infringement can be used to seek an injunction.

If feasible, have the property irrevocably assigned or transferred by the debtor to the client, but make sure that these are not subject to avoidance as preferences or fraudulent conveyances. Be aware that “escrow accounts” may still be property of the estate and subject to the automatic stay.

Rule Four

Get Third-Party Credit Enhancements

Having a solvent third party to pursue not only may provide a source of recovery, but also can have an in terrorum effect — the principal of a corporation may take extra pains to avoid a default if he/she/it is personally on the line due to a guarantee.

Accordingly, try to get a guarantee from an insider — the parent, affiliates, or majority shareholder. As part of that guarantee, get an agreement that the parent will not cause assets of the debtor to be upstreamed or side-streamed to related entities. A secured guarantee is even better. Since the DePrizio case was overturned by legislation, in whole or in part, the risk of preference liability due to an insider guaranty significantly may have been reduced. In addition, make sure you get all of the waivers possible under state law to preclude exoneration of the guarantee. California, for example, has express statutory provisions relating to waivers by sureties.

A letter of credit from a financial institution also enhances the chances of payment or performance. However, if the lender providing the LC becomes secured by the debtor's assets within 90 days prior to bankruptcy, there could be a risk of preference liability.

Rule Five

Get a Broad Attorneys' Fee Clause

Bankruptcy cases can be very expensive, even if only monitoring of the cause is involved, especially in “mega-cases” where hundreds of motions and pleadings can be filed each month. Nevertheless, a motion can have an adverse affect on the client even if it is not named specifically as a target, and the client's bankruptcy counsel should review the docket and upcoming motions even if only an indirect impact could result.

As such, standard form attorneys' fees clauses, such as those providing that only the “prevailing party” gets reimbursed, may be totally inadequate. Ask for a broad provision that covers any attorneys' fees and expenses incurred to protect or enforce the clients' rights, even if no litigation is commenced, including monitoring a bankruptcy filed by or against the debtor or any third party that may have any direct or indirect effect on the subject matter of the contract; objecting to a disclosure statement and/or plan of reorganization; or objecting to a motion brought by the debtor or any third party such a reclamation procedures motion under Section 546, a sale motion, or motion for relief from the stay to foreclose on assets in which your client has an interest.

However, note that in some jurisdictions, such as California, if one party has an attorneys' fee clause, the other also can seek reimbursement of its fees even if that is not provided by the contract.

Rule Six

Get a Security Interest

Unsecured creditors may be last in line to get a distribution in a bankruptcy case, if any, and are unable to obtain relief from the stay to enforce their remedies. Secured creditors also get post-petition interest and attorneys' fees to the extent that the value of their collateral exceeds the amount of their pre-petition claim. They also are entitled to adequate protection if their collateral is used or sold, and have special protections in a cram down, giving them great leverage in a bankruptcy case. Accordingly, bankruptcy lawyers know that it is a good idea to find out what free assets a debtor has before the deal is done, and bargain for a first-priority security interest.

There is another area where a security interest might be beneficial. Under certain circumstances, the creditors of a debtor may assert an interest in assets that the client thinks it owns. For example, property that is subject to a consignment or bailment may be available to creditors of the bailee or consignee, even though, under state law, that property is owned by the client. An asset may be “property of the estate” simply because the debtor has a right to possession, not ownership. In reclamation proceedings, a creditor with a floating lien on the debtor's inventory may trump the supplier who provided the goods. Furthermore, in foreign legal systems, property ownership may have different rules. For example, in Germany, a manufacturer of products for a third party may be deemed to own those products, making them available to its trustee in bankruptcy and creditors, even though the contract expressly provided that the products were the property of the third party. A landlord may have a lien that applies to all property on the debtor's premises, even if the debtor does not own them.

Accordingly, although it seems counter-intuitive, the client might want to take a security interest in the subject matter, products and proceeds of the contract, even though under state law, it would own these assets. In the event that a court finds that the debtor, its trustee, or a creditor of the debtor holds an interest in those assets, the original owner at least will be first in line by holding a priority security interest.

Rule Seven

Get an Overview of Applicable Foreign Law

If the contract extends to countries other than the United States, get an overview of the law of that country as to bankruptcy, security interests, and enforcing foreign judgments. For example, in some European countries, the collateral of secured creditors can be invaded to pay administrative expenses or the claims of employees, which must be paid in full and cannot be restructured under a plan. In Germany, there is no recordation or registration of security interests, and a representation and warranty that no other security interests exist or will be granted may be useless if a bankruptcy ensues or the debtor becomes judgment-proof. Accordingly, a secured creditor must obtain a transfer or assignment of its collateral from the debtor in order to protect its secured position.

The best way to check this out is to retain counsel in the countries in which the contract will be performed. The client might be the best source of referrals because it may do business in those countries and have counsel it generally uses.

In addition, it is important to get an overview of the foreign legal system yourself to spot issues that a foreign lawyer might not catch because fundamental concepts may differ, causing them to miss an important factor. Discussions of foreign legal systems can be found using the Web sites of the American Bankruptcy Institute, www.findlaw.com, internal law Web sites, computer research services such as Westlaw, or online search vehicles, all of which can be used to find general and comparative articles on foreign legal systems. For example, demanding foreign registration of a security interest or copyright mortgage might not be “a hill worth dying for” in a country that has no reliable system of recordation, and may require a creative alternative to protect the client.

Rule Eight

Due Diligence

Decades ago, I was involved in a bankruptcy case where the debtor granted security interests in phony computer leases to major lending institutions in exchange for millions of dollars in financing. This issue recently resurfaced in a licensing deal in which I was involved, where the licensor demanded a huge upfront fee but had no concomitant duty to prove at that time that it owned the licensed products or had the ability to license the rights in the foreign jurisdictions at issue. Due diligence revealed that it did not have those rights, which were held by other entities in a tangled web of related partnerships, LLCs, and shell corporations with similar names.

This seems so fundamental, but it is imperative to verify the chain of title of any assets that are the subject matter of the transaction or that are being given as collateral; to do a UCC and lien search to make sure that there are no prior interests; to make sure that any entity that is providing services is a party to the contract and bound by its provisions, not just the parent that negotiated the overall transaction.

Rule Nine

Analyze How You Would Attack If You Represented the Other Side

On a daily basis, bankruptcy lawyers are faced with the task of dismantling transactions drafted by other attorneys pre-petition. This is not only a matter of using Bankruptcy Code provisions, but also using rules of contract interpretation. As a result, this ability provides bankruptcy lawyers with one of the best tools to prevent future disputes.

A bankruptcy lawyer effectively can vet a deal, to wit, plow through a prospective transaction from the viewpoint of how he/she would eviscerate its provisions in a bankruptcy case, including where is it ambiguous, how does it treat waivers, who drafted the documents and therefore how the presumption against the drafter can be used, is it usurious, does it violate any federal or state law, how would it be treated in bankruptcy? Then, the same lawyer can fix the flaws found, based on how he or she would like the contract to read if he or she were charged with its enforcement.

Rule Ten

If Your Client Is a Vendor or Service Provider, It Is Extending Credit. Treat the Transaction That Way

Financial institutions extend credit and protect themselves in ways that should be instituted for clients that also extend credit, such as vendors or service providers. Bankruptcy lawyers see how lenders protect themselves from the potential risks of bankruptcy and default. At the initiation of a transaction, lenders get a credit application from the debtor, including a financial statement. They find out about its assets and liabilities, its principal and affiliates. They get periodic financial reports. Others who extend credit, such as vendors and service providers, should think about adopting similar devices. In this regard, I drafted a system of credit applications for an industry that had never used them before, to provide an early warning that those to whom they extended credit might later default.

Bankruptcy lawyers also see economic and financial trends, which portend future trouble. They can do a quick overall analysis of the industry in which the debtor operates, based on prior experience — is it relying on the continued success of “buggy whips” that will be outdated by new products; could it be hurt by overbuilding and increased competition even though it is doing fine at the moment; is it dependent on the “new economy” like the Internet, which may be faced with a downturn? All of these factors could change a long-term deal over time from a winner into a disaster.

By doing such an analysis, they can advise clients to consider getting a credit enhancement of a guaranty, collateral or a letter of credit, putting in place an early warning system, or utilizing some of the other suggestions set forth above.

Rule Eleven

Get the Right to Offset and Recoupment

Pursuant to Bankruptcy Code Section 502, the holder of the right to setoff is a secured creditor. In addition, the debtor or a trustee cannot obtain a turnover of the amount subject to setoff unless the creditor is given adequate protection. Accordingly, bankruptcy lawyers are aware of the value of expressly providing for setoff rights in every contract. Recoupment also is a right that has great value. The right to recoup may not be subject to the automatic stay in bankruptcy. Therefore, this also should be provided in every contract.

Rule Twelve

If the Debtor Is the Licensor of Intellectual Property, Make Sure the Contract States It Is Covered By Section 365(n) of the Bankruptcy Code

Section 365(n) of the Bankruptcy Code provides unique rights to licensees of intellectual property from a licensor that is a debtor in a bankruptcy case. As such, bankruptcy lawyers can assist in structuring and drafting an intellectual property transaction so as to maximize the ability to use these special protections.

Rule Thirteen

Protect the Purchaser of Assets from Successor Liability and Fraudulent Conveyance Liability

The purchaser of assets from a financially troubled company can be the target of lawsuits asserting successor liability or seeking to avoid the purchase as a fraudulent transfer. Bankruptcy lawyers are attuned to these risks and can suggest alternatives such as using a bankruptcy case as a way to “wash the assets” through a sale or a plan, so as to reduce or eliminate these risks.

Rule Fourteen

Hunt for Hidden Assets

Bankruptcy lawyers are used to searching for and finding hidden assets. Thus, when a debtor asserts that it has no free assets to provide collateral or is financially unable to provide the payments to which it had agreed, bankruptcy lawyers have the skills to test those contentions and provide the client with a true picture of the debtor's financial condition, making negotiations by the client more effective and its “wish list” more comprehensive.

Rule Fifteen

Bankruptcy Is the Last Resort

A client may be considering a settlement agreement on disadvantageous terms because it is faced with litigation that is time-consuming or expensive; a corrupt or hostile judge that is prejudiced against the client or unwilling to take into account facts and law in the client's favor; or may be unable to post a supersede as bond in order to perfect an appeal. In those situations and others of similar import, bankruptcy might be a viable alternative. Although the debtor might face a motion to dismiss based on bad faith filing, Manville and others have used bankruptcy successfully for this purpose. A debtor need not be insolvent to file for bankruptcy protection. Therefore, before entering into such a settlement agreement, this alternative should be weighed. Even after it is signed, it could be avoidable as a preference or fraudulent conveyance if a bankruptcy is filed within the requisite time periods.

Conclusion

The foregoing is only a brief summary of the ways in which bankruptcy lawyers effectively can assist their clients “from cradle to grave” by utilizing their unique expertise and experience. I invite others to contribute their views and suggestions on this topic.

Bankruptcy lawyers may not get involved in their clients' transactions until it is too late. They may be called in only upon the occurrence of a default, litigation, or the commencement of a bankruptcy case. At that point, they are faced with deals that have been “set in stone” — drafted and structured by lawyers specializing in the front-end, who may have looked at the transaction from an overly optimistic viewpoint, especially in the case of a long-term deal with another party that presently is in good financial health.

The clients' focus at the outset of a transaction is on making sure that the deal gets done and that their business points are addressed. Unfortunately, as a result, when disaster subsequently hits, their bankruptcy lawyers may be faced with litigating and enforcing contracts that may fail to address or define defaults, remedies, ownership, security interests, attorneys' fees and bankruptcy, except for unenforceable ipso facto clauses. At that point, there may be little a bankruptcy lawyer can do to protect a client that is relying on a contract that leaves out key terms; is riddled with ambiguities that can be construed in the opponent's favor; or fails to incorporate any strategies for protecting the client from the risk of default, litigation and bankruptcy.

Unfortunately, bankruptcy lawyers are rarely, if ever, given the opportunity to get involved in structuring or drafting a new transaction because clients shortsightedly may relegate or typecast them as the “undertakers” of the legal profession, rather than those who should be called upon to review deals that are in their infancy. However, bankruptcy lawyers may be the best able to protect their clients from the outset because it is in bankruptcy courts and other litigation arenas that these transactions are tested, and found to be lacking. As a result, after years of fighting over the interpretation and enforcement of transactions drafted by others, bankruptcy lawyers have developed a key expertise in analyzing how those transactions should be supplemented or enhanced from the outset to protect their clients from subsequent disasters.

Accordingly, around 20 years ago, I suggested to a long-term client that he bring me in when new deals are being negotiated and drafted, particularly, deals covering extended periods of time where the other party may suffer a change in fortune, and/or where a default, litigation, or bankruptcy might cause a delay in enforcement of the contract that would have a disastrous impact on the client's ability to meet key deadlines, causing him to suffer huge losses. After two decades of doing so, I have learned some key issues with respect to which bankruptcy lawyers can use their special skills to assist clients from the outset, both before and after disaster strikes, from “the cradle to the grave.” These are rules for reviewing transactions that bankruptcy attorneys are uniquely suited to apply, and are set forth below in no particular order of importance:

Rule One

Give Your Client a Way Out of the Contract Before It Gets Entangled in a Bankruptcy Case

Bankruptcy lawyers uniquely know from experience that once entangled in a bankruptcy case, a creditor cannot exercise its remedies or terminate a contract without obtaining relief from the automatic stay. This relief may be difficult to secure, especially in the early stages of a Chapter 11 case. Using the occurrence of bankruptcy or insolvency as a default is too late. Such ipso facto clauses are unenforceable under Sections 363, 365 and 541 of the Bankruptcy Code, but nevertheless appear in almost every commercial contract as the major “protection” against bankruptcy. What the client needs is an “early warning system” to get out before the bankruptcy occurs.

Lenders typically use financial covenants as an early warning system, giving them the ability to call a default and pull out before insolvency or bankruptcy ensues. There is no reason why other creditors cannot use such covenants to protect themselves as well. Another mechanism may be using cross-defaults — if the debtor's lenders call a default, leaving the debtor without financing, that is good time for other creditors to extricate themselves as well.

Rule Two

Don't Let Default Cure Periods Delay Termination

Many contracts have default provisions that give the debtor a substantial cure period before the creditor can exercise its remedies. Bad idea. Pursuant to Section 108 of the Bankruptcy Code, if the debtor files for bankruptcy relief before the cure period expires, this period automatically is extended, making any automatic termination based on failure to cure ineffective. As a result, a long cure period gives the debtor an incentive to file for bankruptcy to prevent the creditor from exercising its remedies. In addition, the debtor can use the bankruptcy courts, often a friendly forum, to litigate whether such default or cure occurred.

Therefore, consider creating defaults that provide for automatic termination, with no cure period. This of course would only be practical where the default goes to the heart of the contract and certainly will not be easy to obtain from the debtor, who always will want the chance to cure. However, where time is of the essence, dragging out the time to cure and then possibly litigating over whether the cure was sufficient can lead to disaster.

In addition, any notice of termination or default should be effective when sent by the client, not when received by the debtor. The latter can lead to disputes over when receipt took place, a fact that may not be known to the client. Think about using e-mail or fax as a means of giving notice, with service being deemed to occur on the date of transmission by the client. Make sure that notices received by the client from the debtor are copied to you and are sent to a specific address and person at the client, so it does wander around a huge corporation until the right party is located.

Rule Three

Own It

Since the automatic stay can cause great delay and expense, the first line of defense is to try to structure a transaction so that the subject matter is not property of the estate to which the stay applies. This is not easy because the definition of property of the estate is much broader than under traditional state property law concepts. In addition, not setting forth clearly who owns the subject matter or proceeds of the contract can lead to the debtor trying to sell or use it free and clear of your client's interests. Finally, if all your client has is an executory contract, its interest can be rejected, leaving the client with nothing more than an unsecured claim payable, if at all, in “little bankruptcy dollars.”

One way to deal with ownership is to expressly define in the contract who owns the subject matter, products and proceeds. Although that may not be binding on a bankruptcy court, which “will not exalt form over substance,” it at least shows the parties' intent. In addition, if you are dealing with intellectual property, make sure that all registrations and other formalities showing ownership in the client's name have been obtained. This will bolster the client's claim of ownership plus provide additional remedies, such as infringement can be used to seek an injunction.

If feasible, have the property irrevocably assigned or transferred by the debtor to the client, but make sure that these are not subject to avoidance as preferences or fraudulent conveyances. Be aware that “escrow accounts” may still be property of the estate and subject to the automatic stay.

Rule Four

Get Third-Party Credit Enhancements

Having a solvent third party to pursue not only may provide a source of recovery, but also can have an in terrorum effect — the principal of a corporation may take extra pains to avoid a default if he/she/it is personally on the line due to a guarantee.

Accordingly, try to get a guarantee from an insider — the parent, affiliates, or majority shareholder. As part of that guarantee, get an agreement that the parent will not cause assets of the debtor to be upstreamed or side-streamed to related entities. A secured guarantee is even better. Since the DePrizio case was overturned by legislation, in whole or in part, the risk of preference liability due to an insider guaranty significantly may have been reduced. In addition, make sure you get all of the waivers possible under state law to preclude exoneration of the guarantee. California, for example, has express statutory provisions relating to waivers by sureties.

A letter of credit from a financial institution also enhances the chances of payment or performance. However, if the lender providing the LC becomes secured by the debtor's assets within 90 days prior to bankruptcy, there could be a risk of preference liability.

Rule Five

Get a Broad Attorneys' Fee Clause

Bankruptcy cases can be very expensive, even if only monitoring of the cause is involved, especially in “mega-cases” where hundreds of motions and pleadings can be filed each month. Nevertheless, a motion can have an adverse affect on the client even if it is not named specifically as a target, and the client's bankruptcy counsel should review the docket and upcoming motions even if only an indirect impact could result.

As such, standard form attorneys' fees clauses, such as those providing that only the “prevailing party” gets reimbursed, may be totally inadequate. Ask for a broad provision that covers any attorneys' fees and expenses incurred to protect or enforce the clients' rights, even if no litigation is commenced, including monitoring a bankruptcy filed by or against the debtor or any third party that may have any direct or indirect effect on the subject matter of the contract; objecting to a disclosure statement and/or plan of reorganization; or objecting to a motion brought by the debtor or any third party such a reclamation procedures motion under Section 546, a sale motion, or motion for relief from the stay to foreclose on assets in which your client has an interest.

However, note that in some jurisdictions, such as California, if one party has an attorneys' fee clause, the other also can seek reimbursement of its fees even if that is not provided by the contract.

Rule Six

Get a Security Interest

Unsecured creditors may be last in line to get a distribution in a bankruptcy case, if any, and are unable to obtain relief from the stay to enforce their remedies. Secured creditors also get post-petition interest and attorneys' fees to the extent that the value of their collateral exceeds the amount of their pre-petition claim. They also are entitled to adequate protection if their collateral is used or sold, and have special protections in a cram down, giving them great leverage in a bankruptcy case. Accordingly, bankruptcy lawyers know that it is a good idea to find out what free assets a debtor has before the deal is done, and bargain for a first-priority security interest.

There is another area where a security interest might be beneficial. Under certain circumstances, the creditors of a debtor may assert an interest in assets that the client thinks it owns. For example, property that is subject to a consignment or bailment may be available to creditors of the bailee or consignee, even though, under state law, that property is owned by the client. An asset may be “property of the estate” simply because the debtor has a right to possession, not ownership. In reclamation proceedings, a creditor with a floating lien on the debtor's inventory may trump the supplier who provided the goods. Furthermore, in foreign legal systems, property ownership may have different rules. For example, in Germany, a manufacturer of products for a third party may be deemed to own those products, making them available to its trustee in bankruptcy and creditors, even though the contract expressly provided that the products were the property of the third party. A landlord may have a lien that applies to all property on the debtor's premises, even if the debtor does not own them.

Accordingly, although it seems counter-intuitive, the client might want to take a security interest in the subject matter, products and proceeds of the contract, even though under state law, it would own these assets. In the event that a court finds that the debtor, its trustee, or a creditor of the debtor holds an interest in those assets, the original owner at least will be first in line by holding a priority security interest.

Rule Seven

Get an Overview of Applicable Foreign Law

If the contract extends to countries other than the United States, get an overview of the law of that country as to bankruptcy, security interests, and enforcing foreign judgments. For example, in some European countries, the collateral of secured creditors can be invaded to pay administrative expenses or the claims of employees, which must be paid in full and cannot be restructured under a plan. In Germany, there is no recordation or registration of security interests, and a representation and warranty that no other security interests exist or will be granted may be useless if a bankruptcy ensues or the debtor becomes judgment-proof. Accordingly, a secured creditor must obtain a transfer or assignment of its collateral from the debtor in order to protect its secured position.

The best way to check this out is to retain counsel in the countries in which the contract will be performed. The client might be the best source of referrals because it may do business in those countries and have counsel it generally uses.

In addition, it is important to get an overview of the foreign legal system yourself to spot issues that a foreign lawyer might not catch because fundamental concepts may differ, causing them to miss an important factor. Discussions of foreign legal systems can be found using the Web sites of the American Bankruptcy Institute, www.findlaw.com, internal law Web sites, computer research services such as Westlaw, or online search vehicles, all of which can be used to find general and comparative articles on foreign legal systems. For example, demanding foreign registration of a security interest or copyright mortgage might not be “a hill worth dying for” in a country that has no reliable system of recordation, and may require a creative alternative to protect the client.

Rule Eight

Due Diligence

Decades ago, I was involved in a bankruptcy case where the debtor granted security interests in phony computer leases to major lending institutions in exchange for millions of dollars in financing. This issue recently resurfaced in a licensing deal in which I was involved, where the licensor demanded a huge upfront fee but had no concomitant duty to prove at that time that it owned the licensed products or had the ability to license the rights in the foreign jurisdictions at issue. Due diligence revealed that it did not have those rights, which were held by other entities in a tangled web of related partnerships, LLCs, and shell corporations with similar names.

This seems so fundamental, but it is imperative to verify the chain of title of any assets that are the subject matter of the transaction or that are being given as collateral; to do a UCC and lien search to make sure that there are no prior interests; to make sure that any entity that is providing services is a party to the contract and bound by its provisions, not just the parent that negotiated the overall transaction.

Rule Nine

Analyze How You Would Attack If You Represented the Other Side

On a daily basis, bankruptcy lawyers are faced with the task of dismantling transactions drafted by other attorneys pre-petition. This is not only a matter of using Bankruptcy Code provisions, but also using rules of contract interpretation. As a result, this ability provides bankruptcy lawyers with one of the best tools to prevent future disputes.

A bankruptcy lawyer effectively can vet a deal, to wit, plow through a prospective transaction from the viewpoint of how he/she would eviscerate its provisions in a bankruptcy case, including where is it ambiguous, how does it treat waivers, who drafted the documents and therefore how the presumption against the drafter can be used, is it usurious, does it violate any federal or state law, how would it be treated in bankruptcy? Then, the same lawyer can fix the flaws found, based on how he or she would like the contract to read if he or she were charged with its enforcement.

Rule Ten

If Your Client Is a Vendor or Service Provider, It Is Extending Credit. Treat the Transaction That Way

Financial institutions extend credit and protect themselves in ways that should be instituted for clients that also extend credit, such as vendors or service providers. Bankruptcy lawyers see how lenders protect themselves from the potential risks of bankruptcy and default. At the initiation of a transaction, lenders get a credit application from the debtor, including a financial statement. They find out about its assets and liabilities, its principal and affiliates. They get periodic financial reports. Others who extend credit, such as vendors and service providers, should think about adopting similar devices. In this regard, I drafted a system of credit applications for an industry that had never used them before, to provide an early warning that those to whom they extended credit might later default.

Bankruptcy lawyers also see economic and financial trends, which portend future trouble. They can do a quick overall analysis of the industry in which the debtor operates, based on prior experience — is it relying on the continued success of “buggy whips” that will be outdated by new products; could it be hurt by overbuilding and increased competition even though it is doing fine at the moment; is it dependent on the “new economy” like the Internet, which may be faced with a downturn? All of these factors could change a long-term deal over time from a winner into a disaster.

By doing such an analysis, they can advise clients to consider getting a credit enhancement of a guaranty, collateral or a letter of credit, putting in place an early warning system, or utilizing some of the other suggestions set forth above.

Rule Eleven

Get the Right to Offset and Recoupment

Pursuant to Bankruptcy Code Section 502, the holder of the right to setoff is a secured creditor. In addition, the debtor or a trustee cannot obtain a turnover of the amount subject to setoff unless the creditor is given adequate protection. Accordingly, bankruptcy lawyers are aware of the value of expressly providing for setoff rights in every contract. Recoupment also is a right that has great value. The right to recoup may not be subject to the automatic stay in bankruptcy. Therefore, this also should be provided in every contract.

Rule Twelve

If the Debtor Is the Licensor of Intellectual Property, Make Sure the Contract States It Is Covered By Section 365(n) of the Bankruptcy Code

Section 365(n) of the Bankruptcy Code provides unique rights to licensees of intellectual property from a licensor that is a debtor in a bankruptcy case. As such, bankruptcy lawyers can assist in structuring and drafting an intellectual property transaction so as to maximize the ability to use these special protections.

Rule Thirteen

Protect the Purchaser of Assets from Successor Liability and Fraudulent Conveyance Liability

The purchaser of assets from a financially troubled company can be the target of lawsuits asserting successor liability or seeking to avoid the purchase as a fraudulent transfer. Bankruptcy lawyers are attuned to these risks and can suggest alternatives such as using a bankruptcy case as a way to “wash the assets” through a sale or a plan, so as to reduce or eliminate these risks.

Rule Fourteen

Hunt for Hidden Assets

Bankruptcy lawyers are used to searching for and finding hidden assets. Thus, when a debtor asserts that it has no free assets to provide collateral or is financially unable to provide the payments to which it had agreed, bankruptcy lawyers have the skills to test those contentions and provide the client with a true picture of the debtor's financial condition, making negotiations by the client more effective and its “wish list” more comprehensive.

Rule Fifteen

Bankruptcy Is the Last Resort

A client may be considering a settlement agreement on disadvantageous terms because it is faced with litigation that is time-consuming or expensive; a corrupt or hostile judge that is prejudiced against the client or unwilling to take into account facts and law in the client's favor; or may be unable to post a supersede as bond in order to perfect an appeal. In those situations and others of similar import, bankruptcy might be a viable alternative. Although the debtor might face a motion to dismiss based on bad faith filing, Manville and others have used bankruptcy successfully for this purpose. A debtor need not be insolvent to file for bankruptcy protection. Therefore, before entering into such a settlement agreement, this alternative should be weighed. Even after it is signed, it could be avoidable as a preference or fraudulent conveyance if a bankruptcy is filed within the requisite time periods.

Conclusion

The foregoing is only a brief summary of the ways in which bankruptcy lawyers effectively can assist their clients “from cradle to grave” by utilizing their unique expertise and experience. I invite others to contribute their views and suggestions on this topic.