Resolutions Every Business Bankruptcy Creditor's Lawyer Should Make

Insist on Getting Your Attorney's Fees Paid As a Condition of Assumption of Your Client's Executory Contract

There is limited case law regarding whether a creditor to an executory contract is entitled to recover as part of its “cure” costs the attorney's fees it has incurred in the bankruptcy proceeding. There is no statutory prohibition against the inclusion of attorney's fees as part of a cure, although very limited case law authority and deference to the American rule has deterred most from insisting on it. Buck the tide. The stronger argument is that contracts are to be assumed cum onere. Thus, if your executory contract provides for the recovery of collection costs and are costs in enforcing the contract, these costs should be compensated by a debtor as a condition of making your client whole. If you insist on and get full recovery of your attorney fees as part of the assumption process, your client will throw garlands at your feet. Beware, however, pushing this issue too far, which results in a rejection of such contract, further loss to the client and further exposure of the client to a preference risk. In that situation, your client is likely to throw something else at you.

Insist on Post-Petition Adequate Protection for Your Executory Contract

Remember many years ago when you could safely advise your client that an administrative claim in a Chapter 11 case was a safe bet, albeit one for which there might be a delay in payment? Well, those days are long gone. In spite of the claims of many debtors and their attorneys made with great fanfare in first-day pleadings, there is substantial risk that your client's administrative claim may not be paid in full or even close. Hell hath no fury like a creditor who has not only lost money pre-petition, but has deepened that loss under your watch as a voluntary post-petition lender in a bankruptcy case. Avoid that risk by insisting on adequate protection for your executory contract early in the case. Of course, debtor's counsel will be quick to tell you that the adequate protection provisions of ' 361 do not, by statute, include executory contracts under ' 365. Your response should be, “So what.” Don't let that deter you. Rely on Uniform Commercial Code principles of adequate assurance of payment in requiring more than the debtor's promise to pay your client at a later date. If you cannot negotiate a deal outside of the court hearing, don't be shy about explaining to the court the significant exposure your client faces upon non-payment, especially if your client bills in arrears and the payment is not in default until seven to nine weeks after the provision of goods and services has past. Argue for specific agreements with the lenders to carve out the expenses related to your contract on a post-petition basis. If the lenders balk, argue that such lenders have zero risk of having to honor that carve out if there really is sufficient equity in the estate. See how many of them really want to hear the judge's follow up response to that statement.

Put the 'Reclaim' Back in Reclamation Rights

While most practitioners know that the recent amendments to the Code have expanded the rights of reclamation to goods provided 45 days prior to the petition date (subject to all the other limitations on reclamation claimants), equally significant is that ' 546(c) of the Code pertaining to reclamation rights has seemingly omitted the ability of a debtor to, in the face of an otherwise valid reclamation claim, retain such goods without immediate payment. Instead, debtors still file pre-BAPCPA pleadings allowing generous time for reconciliation of reclamation claims and for payment of the claims as part of a confirmed plan of reorganization. If you have a valid reclamation claim, the lender with a security interest in the goods subject to the reclamation claim is oversecured, the goods are still in the possession or control of the debtor and, most importantly, such goods are as valuable in your client's hands as they are in the debtor's possession, consider pressing this issue to deny debtors the de facto flexibility they are asserting. You may need to be prepared to proceed with an immediate injunction to avoid the debtor mooting your reclamation claim in kind through consumption of the goods. If your client is frequently involved in bankruptcies, and the amount of reclamation is significant, pushing hard, fast and early on what would seem to be expansive reclamation protections as recognized by the Code may put both more money in your client's pocket faster and a smile on his/her face.

Challenge the Ability of a ' 363(F) Sale to Cut Off
Successor Liability Rights Against Purchasers

Section 363 is often touted as having the curative benefits of penicillin in transferring otherwise tainted property. Unfortunately, many creditors accept that the mantra “free and clear” prominently displayed in the caption of ' 363(f) motions, as well as the language included therein insulating the purchaser from potential successor liability as a consequence of the sale, is a foregone conclusion. Do not make that assumption. It is far from established that ' 363(f) sales eliminate successor liability to purchasers who, outside of the
' 363(f) context, would under many state laws risk exposure as a successor of the debtor seller. While the cases are mixed on the ability of a ' 363(f) sale to eliminate successor liability, creditors wishing to avail themselves of this argument should take heart in the recent decision of the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals, In re PW, LLC (“Clear Channel”) 391 B.R. 25 (9th BAP. 2008) (holding that ' 363(f) sales do not automatically eliminate junior lien interests). Beware that while courts may be divided on the ability of ' 363(f) to eliminate successor liability claims, you will not do yourself any favors if you fail to raise this issue prior to the hearing on the motion to approve the sale (which may constitute a waiver) and your failure to do so may subject you and not the potential purchaser for the value of your client's claim.

Can't Wait for the Debtor to Do The Right Thing and File? Pull The Trigger Yourself with an Involuntary Petition

The BAPCPA amendments have made pursuing involuntary petitions against recalcitrant debtors far more beneficial. For relatively high-wealth individual debtors, the ability to shield that wealth through homestead exemption planning has been severely restricted by limitations imposed by the Code for equity interests acquired within the 1,215 days prior to the bankruptcy petition. Furthermore, to the extent such transfers were part of a scheme to hinder, delay or defraud a creditor, the look back is even further at 10 years. These changes effectively eliminate the ability of a debtor to shield substantial wealth in homesteads in contemplation of a bankruptcy filing. However, these changes have also made it ill advised for such debtors to choose to file bankruptcy in the first place so you will have to pull the trigger for them by filing an involuntary bankruptcy petition. Such a filing may put money in your client's pocket that would be otherwise beyond its reach given the more generous state law exemptions available to a non-filing debtor in certain states. Know your jurisdiction before you file an involuntary petition because the standards for what constitutes a permissible claim for the purpose of filing an involuntary petition have changed. Presently, to file or participate in the filing of an involuntary petition such claim must not be the subject of bona fide dispute “as to liability or amount.” While in many cases, there is no dispute as to liability, for those same claims there can be a bona fide dispute as to the exact amount of such claim. The courts are split on whether a claim is able to participate up to the amount that is not subject to bona fide dispute or whether a bona fide dispute as to a portion of the claim eliminates the entirety of it from functioning as a participating claim for an involuntary petition. Thus, a very restrictive reading of ' 303(b)(1) could permit the debtor to invalidate your claim as a participating claim if only a portion of it is disputed and subject your client to costs, attorney's fees and even punitive damages for what may be deemed a bad-faith filing. See how happy your client, partners and carrier are with that result. Beat the debtor to the punch. For the purposes of filing, to the extent possible, plead only the non-objectionable portion of your claim with a reservation to amend the claim at a later date. Also, make sure you are protected by developing a well-documented paper trail with your client outlining the benefits/risks of an involuntary filing.

Learn to Like Kiwi ' It Is Good for the Preference That Ails You

As everyone knows, with respect to executory contracts, a precondition to assumption is that all the monetary defaults under the contract must be cured. Unfortunately, some holders of executory contracts whose contracts have been assumed have found, to their chagrin, that they can also be targeted for preference claims asserted by the estate based on pre-petition payments made on the very same contract. The Third Circuit Court of Appeals in Kiwi International Airlines, Inc., 344 F.3d. 311 (3rd Cir. 2003), held that recovery of preferential payments under assumed contracts was inconsistent with the concept of a cure. Kiwi appears to be the majority position. Thus, take the pledge in the new year to review possible preference exposure in your client's executory contracts and balance that exposure with the benefits of distributions on unsecured claims if your client's contract is rejected and your client is left with a pre petition claim. If your client is upside down, encourage your client's business people to contact the debtor or purchaser and lobby them to assume your client's contract even if it means compromising your pre-petition arrearage. This will most likely inoculate you from the likely preference and allow your client to profit off of a business deal it would not otherwise have. Counterpoint. Why are not more creditor's committees challenging designation rights in purchase agreements and/or basic assumptions and assignments of executory contracts? Should there not be more of an analysis of the value of the potential recovery lost to the estate versus the benefits of the purchase agreement to the estate, especially where such purchase agreement will yield very little benefit to unsecured creditors? Come on, be the skunk at the garden party and object!

Derive Gain for Your Client Through Filing Derivative Actions

Recently, the Eighth Circuit Court of Appeals in In Re Racing Services, Inc., 2008 WL 3981809 (C.A. 8) clarified the circumstances under which a creditor may sue derivatively if a trustee or debtor-in-possession fails or refuses to act. While the Court of Appeals does not suggest that the bankruptcy court may rubber stamp a creditor's request to sue derivatively it laid out reasonable guidelines for the circumstances under which a creditor might sue derivatively and of course, the ultimate decision was left in the discretion of the bankruptcy court. With this, the Eighth Circuit joins a growing number of circuits that have held that derivative standing is appropriate when a debtor in possession or trustee fails to act on claims that are likely to result in significant benefit to the estate but for one reason or another are not pursued. Creditors are now armed with an updated weapon to pursue insiders or other parties when a trustee or debtor-in-possession refuses or is dilatory in pursuing such claims. If you think a claim has particular merit consider taking it on a contingency fee basis and eliminating or reducing the “cost” in the cost/benefit analysis that the court will apply to all requests for derivative standing. At the very least, such requests will have the intended effect of nudging debtors or trustees to actually take on some of these claims anyway.

Richard M. Beheler is an attorney in Kansas City, MO, practicing primarily in the areas of business bankruptcy and creditors' rights. He may be reached at [email protected].

Admit it, the slow pace of business bankruptcy filings over the last couple of years, combined with a little “follow the herd” mentality, has caused you to get into a bit of a rut with respect to the creativity of your approaches in representing your clients with many issues that are standard fare in a business bankruptcy. Greet the new year and the coming (if you believe the headlines) financial apocalypse with a resolution to embrace non-conformity and to try one or more of following approaches, in the slew of new cases that will be filed in the new year. While I concede the value of each of these approaches is dependent on the facts and circumstances of your client's case, the debtor's case, and the amounts at stake or at risk, such approaches may yield significant tactical and strategic benefits if used properly.

Carpe Diem: Argue for the Recovery of Post-Petition Interest on Your Unsecured Claim

The Supreme Court decision in Travelers Cas. & Sur. Co. of America v. Pacific Gas & Elec. Co. , 127 S.Ct. 1199 (2007), opened a virtual Pandora's Box of possibilities with its holding that post-petition interest may be recoverable as part of an unsecured creditor's claim. Development of limitations on such recovery, however, was left to another day for development by aggressive lawyers to test the parameters of that decision. Sure, it seems counter-intuitive to allow unsecured creditors to get interest given that ' 506(b) of the Code would appear to foreclose that possibility to all but over-secured creditors (or through other provisions of the Code, to unsecured creditors where there are surplus funds in the estate); however, the Travelers decision could have taken the path of least resistance and so limited its holding. Its failure to do so has left the door open with respect to unsecured claims in a variety of contexts. Think how much fun you can add to a Chapter 11 case by arguing you are entitled to post-petition interest or else the absolute priority rule is violated. Consider the possibilities!

Insist on Getting Your Attorney's Fees Paid As a Condition of Assumption of Your Client's Executory Contract

There is limited case law regarding whether a creditor to an executory contract is entitled to recover as part of its “cure” costs the attorney's fees it has incurred in the bankruptcy proceeding. There is no statutory prohibition against the inclusion of attorney's fees as part of a cure, although very limited case law authority and deference to the American rule has deterred most from insisting on it. Buck the tide. The stronger argument is that contracts are to be assumed cum onere. Thus, if your executory contract provides for the recovery of collection costs and are costs in enforcing the contract, these costs should be compensated by a debtor as a condition of making your client whole. If you insist on and get full recovery of your attorney fees as part of the assumption process, your client will throw garlands at your feet. Beware, however, pushing this issue too far, which results in a rejection of such contract, further loss to the client and further exposure of the client to a preference risk. In that situation, your client is likely to throw something else at you.

Insist on Post-Petition Adequate Protection for Your Executory Contract

Remember many years ago when you could safely advise your client that an administrative claim in a Chapter 11 case was a safe bet, albeit one for which there might be a delay in payment? Well, those days are long gone. In spite of the claims of many debtors and their attorneys made with great fanfare in first-day pleadings, there is substantial risk that your client's administrative claim may not be paid in full or even close. Hell hath no fury like a creditor who has not only lost money pre-petition, but has deepened that loss under your watch as a voluntary post-petition lender in a bankruptcy case. Avoid that risk by insisting on adequate protection for your executory contract early in the case. Of course, debtor's counsel will be quick to tell you that the adequate protection provisions of ' 361 do not, by statute, include executory contracts under ' 365. Your response should be, “So what.” Don't let that deter you. Rely on Uniform Commercial Code principles of adequate assurance of payment in requiring more than the debtor's promise to pay your client at a later date. If you cannot negotiate a deal outside of the court hearing, don't be shy about explaining to the court the significant exposure your client faces upon non-payment, especially if your client bills in arrears and the payment is not in default until seven to nine weeks after the provision of goods and services has past. Argue for specific agreements with the lenders to carve out the expenses related to your contract on a post-petition basis. If the lenders balk, argue that such lenders have zero risk of having to honor that carve out if there really is sufficient equity in the estate. See how many of them really want to hear the judge's follow up response to that statement.

Put the 'Reclaim' Back in Reclamation Rights

While most practitioners know that the recent amendments to the Code have expanded the rights of reclamation to goods provided 45 days prior to the petition date (subject to all the other limitations on reclamation claimants), equally significant is that ' 546(c) of the Code pertaining to reclamation rights has seemingly omitted the ability of a debtor to, in the face of an otherwise valid reclamation claim, retain such goods without immediate payment. Instead, debtors still file pre-BAPCPA pleadings allowing generous time for reconciliation of reclamation claims and for payment of the claims as part of a confirmed plan of reorganization. If you have a valid reclamation claim, the lender with a security interest in the goods subject to the reclamation claim is oversecured, the goods are still in the possession or control of the debtor and, most importantly, such goods are as valuable in your client's hands as they are in the debtor's possession, consider pressing this issue to deny debtors the de facto flexibility they are asserting. You may need to be prepared to proceed with an immediate injunction to avoid the debtor mooting your reclamation claim in kind through consumption of the goods. If your client is frequently involved in bankruptcies, and the amount of reclamation is significant, pushing hard, fast and early on what would seem to be expansive reclamation protections as recognized by the Code may put both more money in your client's pocket faster and a smile on his/her face.

Challenge the Ability of a ' 363(F) Sale to Cut Off
Successor Liability Rights Against Purchasers

Section 363 is often touted as having the curative benefits of penicillin in transferring otherwise tainted property. Unfortunately, many creditors accept that the mantra “free and clear” prominently displayed in the caption of ' 363(f) motions, as well as the language included therein insulating the purchaser from potential successor liability as a consequence of the sale, is a foregone conclusion. Do not make that assumption. It is far from established that ' 363(f) sales eliminate successor liability to purchasers who, outside of the
' 363(f) context, would under many state laws risk exposure as a successor of the debtor seller. While the cases are mixed on the ability of a ' 363(f) sale to eliminate successor liability, creditors wishing to avail themselves of this argument should take heart in the recent decision of the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals, In re PW, LLC (“Clear Channel”) 391 B.R. 25 (9th BAP. 2008) (holding that ' 363(f) sales do not automatically eliminate junior lien interests). Beware that while courts may be divided on the ability of ' 363(f) to eliminate successor liability claims, you will not do yourself any favors if you fail to raise this issue prior to the hearing on the motion to approve the sale (which may constitute a waiver) and your failure to do so may subject you and not the potential purchaser for the value of your client's claim.

Can't Wait for the Debtor to Do The Right Thing and File? Pull The Trigger Yourself with an Involuntary Petition

The BAPCPA amendments have made pursuing involuntary petitions against recalcitrant debtors far more beneficial. For relatively high-wealth individual debtors, the ability to shield that wealth through homestead exemption planning has been severely restricted by limitations imposed by the Code for equity interests acquired within the 1,215 days prior to the bankruptcy petition. Furthermore, to the extent such transfers were part of a scheme to hinder, delay or defraud a creditor, the look back is even further at 10 years. These changes effectively eliminate the ability of a debtor to shield substantial wealth in homesteads in contemplation of a bankruptcy filing. However, these changes have also made it ill advised for such debtors to choose to file bankruptcy in the first place so you will have to pull the trigger for them by filing an involuntary bankruptcy petition. Such a filing may put money in your client's pocket that would be otherwise beyond its reach given the more generous state law exemptions available to a non-filing debtor in certain states. Know your jurisdiction before you file an involuntary petition because the standards for what constitutes a permissible claim for the purpose of filing an involuntary petition have changed. Presently, to file or participate in the filing of an involuntary petition such claim must not be the subject of bona fide dispute “as to liability or amount.” While in many cases, there is no dispute as to liability, for those same claims there can be a bona fide dispute as to the exact amount of such claim. The courts are split on whether a claim is able to participate up to the amount that is not subject to bona fide dispute or whether a bona fide dispute as to a portion of the claim eliminates the entirety of it from functioning as a participating claim for an involuntary petition. Thus, a very restrictive reading of ' 303(b)(1) could permit the debtor to invalidate your claim as a participating claim if only a portion of it is disputed and subject your client to costs, attorney's fees and even punitive damages for what may be deemed a bad-faith filing. See how happy your client, partners and carrier are with that result. Beat the debtor to the punch. For the purposes of filing, to the extent possible, plead only the non-objectionable portion of your claim with a reservation to amend the claim at a later date. Also, make sure you are protected by developing a well-documented paper trail with your client outlining the benefits/risks of an involuntary filing.

Learn to Like Kiwi ' It Is Good for the Preference That Ails You

As everyone knows, with respect to executory contracts, a precondition to assumption is that all the monetary defaults under the contract must be cured. Unfortunately, some holders of executory contracts whose contracts have been assumed have found, to their chagrin, that they can also be targeted for preference claims asserted by the estate based on pre-petition payments made on the very same contract. The Third Circuit Court of Appeals in Kiwi International Airlines, Inc., 344 F.3d. 311 (3rd Cir. 2003), held that recovery of preferential payments under assumed contracts was inconsistent with the concept of a cure. Kiwi appears to be the majority position. Thus, take the pledge in the new year to review possible preference exposure in your client's executory contracts and balance that exposure with the benefits of distributions on unsecured claims if your client's contract is rejected and your client is left with a pre petition claim. If your client is upside down, encourage your client's business people to contact the debtor or purchaser and lobby them to assume your client's contract even if it means compromising your pre-petition arrearage. This will most likely inoculate you from the likely preference and allow your client to profit off of a business deal it would not otherwise have. Counterpoint. Why are not more creditor's committees challenging designation rights in purchase agreements and/or basic assumptions and assignments of executory contracts? Should there not be more of an analysis of the value of the potential recovery lost to the estate versus the benefits of the purchase agreement to the estate, especially where such purchase agreement will yield very little benefit to unsecured creditors? Come on, be the skunk at the garden party and object!

Derive Gain for Your Client Through Filing Derivative Actions

Recently, the Eighth Circuit Court of Appeals in In Re Racing Services, Inc., 2008 WL 3981809 (C.A. 8) clarified the circumstances under which a creditor may sue derivatively if a trustee or debtor-in-possession fails or refuses to act. While the Court of Appeals does not suggest that the bankruptcy court may rubber stamp a creditor's request to sue derivatively it laid out reasonable guidelines for the circumstances under which a creditor might sue derivatively and of course, the ultimate decision was left in the discretion of the bankruptcy court. With this, the Eighth Circuit joins a growing number of circuits that have held that derivative standing is appropriate when a debtor in possession or trustee fails to act on claims that are likely to result in significant benefit to the estate but for one reason or another are not pursued. Creditors are now armed with an updated weapon to pursue insiders or other parties when a trustee or debtor-in-possession refuses or is dilatory in pursuing such claims. If you think a claim has particular merit consider taking it on a contingency fee basis and eliminating or reducing the “cost” in the cost/benefit analysis that the court will apply to all requests for derivative standing. At the very least, such requests will have the intended effect of nudging debtors or trustees to actually take on some of these claims anyway.

Richard M. Beheler is an attorney in Kansas City, MO, practicing primarily in the areas of business bankruptcy and creditors' rights. He may be reached at [email protected].