Resources - Shipman, Shaiken & Schwefel, LLC

Business Bankruptcy:

Questions Frequently Asked By Creditors

I’ve heard that my customer might file for bankruptcy. Is it ok for me to accept payment of past due invoices?

Yes, but for payments received within 90 days before bankruptcy, you might end up having to pay it back.

I received a notice that my customer filed for bankruptcy. What should I do?

Cease all collection efforts for goods or services provided, or loans made, pre-bankruptcy. File a proof of claim in the bankruptcy court.

I received a notice that my customer filed for bankruptcy. Should I go to the Section 341 meeting?

Attending the Section 341 meeting probably is not a good use of time, unless you want to serve on a Chapter 11 creditors’ committee.

I have an open account relationship with a customer who filed for bankruptcy. If the customer is a business, is it o.k. to continue filling orders and on what credit terms?

If your customer filed a Chapter 11 bankruptcy case, it is o.k. to continue to fill orders, subject to your credit underwriting policies. The credit terms you require may be influenced by what type of financing the debtor has obtained to fund its post-bankruptcy operations, and your assessment of the likelihood that the company will emerge from Chapter 11 instead of being liquidated. That said, there is a risk of nonpayment, so underwrite carefully.If your customer is a corporation, partnership or limited liability company and filed a Chapter 7 bankruptcy case, then it should not be operating, so you should not be filling orders.If your customer is an individual and filed a Chapter 7 bankruptcy case, you can fill orders, subject to your credit underwriting policies, because post-bankruptcy debts are not discharged in Chapter 7. There could be further credit risks, however, if the customer converts his case to Chapter 13.If your customer is an individual and filed a Chapter 13 bankruptcy case, there are some payment risks associated with continuing to extend credit. Further analysis will be required.

I shipped goods just before the bankruptcy. Can I get them back?

The answer is complicated, but here is a general answer to which additional exceptions apply. You may get the goods back after bankruptcy only if: (a) No one has acquired a lien on the goods between the time the debtor received the goods and the bankruptcy filing; (b) the debtor was insolvent when it received the goods; (c) the debtor received the goods within 45 days before bankruptcy; and (d) you make a written demand to reclaim the goods (i) no later than 45 days after the debtor received the goods, or (ii) no later than 20 days after the bankruptcy case starts, if the 45-day period expires after the bankruptcy case starts.You are going to have to file a motion or a lawsuit in the bankruptcy court to actually get the goods back. Self-help remedies are not permitted in this context.Note that different rules apply if the customer does not go into bankruptcy. Under Connecticut law, if the customer does not go into bankruptcy, you may reclaim the goods provided that you make written demand within 10 days after delivery. The 10-day limit under Connecticut law does not apply if the customer made a misrepresentation to you regarding its solvency in writing within 3 months before delivery. Important: If you can meet the 10-day deadline, do so.

I shipped goods before the bankruptcy. What happens if I don’t send a timely reclamation notice?

You get a priority claim in the bankruptcy case as long as (a) the debtor received the goods within 20 days before bankruptcy; and (b) the debtor purchased the goods in the ordinary course of its business.

I have a long-term contract to supply my customer. How does my customer’s bankruptcy affect the contract?

In a Chapter 11 bankruptcy, the contract continues in effect, so you are either going to have to continue to perform the contract or get permission from the bankruptcy court to terminate it (unless your customer terminates the contract in bankruptcy, in which case you get a claim for damages).

My key supplier filed for bankruptcy. Do I have to pay for goods I ordered before it filed?

Yes.

How certain can I be that my source of supply will continue after my supplier files for Chapter bankruptcy?

If the supplier files for Chapter 11, the answer depends on (a) how confident you are that the company will continue in business, and (b) on what type of post-bankruptcy credit facilities have been put in place. If the supplier files for Chapter 7 it is out of business and no longer will supply you.

I have a long-term contract with my supplier. How does the supplier’s Chapter 11 bankruptcy affect the contract?

You have to continue to honor the contract, or get permission from the bankruptcy court to terminate it.

My supplier is in bankruptcy, and its creditors’ committee or its bankruptcy trustee has demanded that I pay back money the supplier paid me before bankruptcy. Should I pay?

If the amount of the demand merits paying legal fees, then this is one of those times that you need a lawyer. The demand almost certainly will be based on a claim that the money you received was a preference. There are numerous defenses to a preference demand.

I was invited to serve on a bankruptcy creditors’ committee. What does that mean and what should I do?

If you accept the invitation you will be part of a committee that has a voice and a say at all court hearings. If you serve on the committee, you will be required to act in the best interests of all creditors. An active creditors’ committee can maximize recovery to unsecured creditors, and serve as a watchdog on what the company is doing in bankruptcy. The time commitment can be substantial.

How do I file my claim against a bankrupt company?

You fill out a proof of claim form, sign it, and follow the instructions you have received about where and how to file it. Note that filing deadlines are for receipt by the court or claims processor, not date of postmark.

My commercial tenant filed for bankruptcy. What should I do?

If the lease has not terminated by its terms, then (a) stop all efforts to collect past due rent; and (b) stop any pending summary process case. If you want to evict the tenant for nonpayment of rent, seek bankruptcy court permission to start an eviction proceeding. Anticipate that the debtor is either going to seek to reject the lease, assume the lease, or assume and assign the lease. If the lease is rejected you will need to calculate your damages claim based on a formula in the bankruptcy law, and file a timely claim for that amount. If the lease is assumed, you are entitled to have all pre-bankruptcy and post-bankruptcy arrearages cured, and you are entitled to adequate assurance the debtor will stay current in the future. If the lease is assumed and assigned, you are entitled to have all pre-bankruptcy and post-bankruptcy arrearages cured, and you are entitled to adequate assurance that the new tenant will stay current in the future.If the lease has terminated by its terms before bankruptcy, or after the bankruptcy was filed, then stop all efforts to collect past due rent. If you want to evict the tenant for nonpayment of rent, you may commence or continue summary process without seeking bankruptcy court permission. File a proof of claim for the pre-bankruptcy past due rent. File a request for payment of an administrative priority expense claim for any unpaid post-bankruptcy rent for periods during which the debtor occupied the property.

I made an unsecured loan, or provided credit on open account, to an individual who has filed for bankruptcy. What should I do?

Take no further steps to collect the debt. File a proof of claim. Review your file and the bankruptcy court’s file to determine whether the individual gave you a false financial statement to induce you to extend credit. If so, consider suing to have your debt excepted from the discharge.

I made a secured loan (e.g., mortgage, car loan) to an individual who has filed for bankruptcy. What should I do?

Stop pending collection, repossession and foreclosure efforts. If you want to repossess a car that is collateral for a loan, and the debtor is in default, seek bankruptcy court permission to repossess. If you want to foreclose real estate that is collateral for a loan, and the debtor is in default, seek bankruptcy court permission to foreclose.

What should I do if I receive a ballot asking me to vote on a plan in Chapter 11?

Read the disclosure statement. Consider whether the plan makes sense. You may vote to accept or reject the plan. Follow the instructions for filling out the ballot and return it to the entity who is collecting the ballots.

What should I do if I receive a Chapter 13 plan?

Read the plan. Consider whether the plan makes sense. If you have concerns about how the plan treats your claim, consult an attorney.

Should I file an involuntary bankruptcy petition against someone who owes me money?

Usually no, unless you are absolutely certain that (a) you can find at least two other creditors who, combined with your claim, are owed $13,475 of noncontingent, undisputed, unsecured claims against the debtor; (b) you can prove at a trial that the debtor is not generally paying its debts as they become due; and (c) you are willing to suffer the consequences (sanctions) if (a) or (b) turns out not to be true. Usually, an involuntary bankruptcy petition makes sense only when you have significant concerns that the debtor is transferring assets of considerable value in order to hide the assets from creditors, or to prefer insiders or a few creditors, or that the debtor is being horribly mismanaged and that you will be better off if the company is subject to oversight by the bankruptcy court.

Commercial Litigation Foreclosure

In Connecticut, foreclosure of real estate (land, a home or a building) can be done only by court process. If you are an individual property owner a foreclosure case starts when a State Marshal either hands you a summons and complaint or leaves them in your front door. If your business entity, such as a corporation or a limited liability company, owns the property, the papers may be served on the person you registered at the Secretary of the State’s office as your agent for service of process, or other officers and managers of the business.

In a foreclosure case the party who is seeking to foreclose its mortgage or lien (the plaintiff) sues all those whose encumbrances are lower in priority than the plaintiff’s encumbrance, plus any tenants, the property owner and guarantors.

Unless either the plaintiff or a defendant, such as the owner, a junior mortgagee or lienor, asks the court to order a sale of the property the foreclosure will be done by strict foreclosure. Strict foreclosure means that the court will enter a judgment that sets a date, called the law day, by which the owner has to redeem the property from foreclosure by paying the foreclosing lender’s mortgage in full. If payment in full is not made by the law day, the owner loses its ownership rights. Each defendant is given a law day in inverse order of priority. If none of them redeems then the plaintiff ends up with title to the property, free and clear of the owner’s interest in the property, and free and clear of all the mortgagees and lienors who were named as defendants.

If a party asks the court to order a sale, the court may (but does not have to) order a public auction of the property under court supervision. Generally, if there is significant equity after the foreclosing plaintiff’s mortgage or lien, the court is likely to grant a motion for a sale.

Foreclosure cases move quickly. You will lose your ownership and right to occupy your property if you do not respond timely. Therefore, it is imperative that you contact a lawyer immediately if you receive a foreclosure summons and complaint.

Lenders may be open to negotiation of arrearages, interest rates, maturity date and other terms. The sooner you explore these options the more likely it is you and your business can avoid foreclosure and bankruptcy. These types of renegotiated terms are often referred to as workouts, forbearance or debt restructuring agreements. Early consultation with a lawyer greatly increases the ability to plan and implement negotiated solutions to the problem.

Sometimes, a lawyer may be able to litigate defenses to a foreclosure case, or help plan a strategic bankruptcy filing to hold off foreclosure and use the bankruptcy process to restructure the mortgages and liens. In addition, both residential and commercial property owners, as well as mortgage co-signers and guarantors, face the possibility they will be liable for a deficiency judgment if the property is worth less than the mortgage debt. There are important tactical decisions to be made with your legal counsel regarding how to maximize the prospect for a favorable outcome, how to minimize the prospect for a deficiency liability and whether to try to save the property in bankruptcy.

In addition, defendants benefit from counsel’s assistance when formulating a strategy for redemption, bidding, seeking a foreclosure by sale, and litigating disputes among mortgagees and lienors as to who has priority over whom.

Regulatory Litigation: Connecticut Regulates For-Profit Debt Adjusters and Debt Negotiators

Debt Adjusters

On October 1, 2009, Connecticut Public Act 09-208 went into effect. Sections 23-28 amend the law concerning debt adjusters. “Debt adjustment” is defined in Section 23 of the Act as the receipt of a debtor’s money “for the purpose of distributing such money or evidences thereof among creditors in full or partial payment of obligations of the debtor.” In other words, a debt adjuster is someone who collects money from the client and uses the money collected to settle the client’s debts. This law only applies to debts incurred primarily for personal, family or household purposes, i.e., consumer debts. The Act amends Connecticut law to permit for-profit entities to act as debt adjusters, but requires them to be licensed by the Commissioner of Banking. Before October 1, 2009, Connecticut law only permitted nonprofit organizations to serve as debt adjusters.

Debt adjusters must provide credit counseling free of charge before entering into a fee agreement, comply with certain recordkeeping and record-retention requirements, and maintain a separate bank account for the deposit of clients’ funds.

Lawyers are exempt from regulation as debt adjusters.

Debt Negotiators

Sections 29-33 of the Act create a new kind of entity, called a “debt negotiator.” A debt negotiator is someone who assists “a debtor in negotiating or attempting to negotiate on behalf of a debtor the terms of a debtor’s obligations with one or more mortgagees or creditors of the debtor, including the negotiation of short sales of residential property or foreclosure rescue services.” This law applies only to consumer debts. Note that the law applies to entities and individuals who wish to represent homeowners on short-sale and other foreclosure avoidance strategies.

A debt negotiator’s fee agreement must contain a three-day right of rescission, and may not provide for payment in advance. Periodic payment of a debt negotiator’s fees is permitted as work is completed. A debt negotiator’s fees are subject to regulation by the Banking Commissioner, who has imposed a maximum fee schedule.

Lawyers are exempt from regulation as debt negotiators.

Licensing and Compliance

In each case, a two-year license costs $1,600.00. The licensee must post at least a $40,000 bond. In addition, the law regulates various aspects of the debt adjuster’s and debt negotiator’s business, including how it deals with consumers. For example, fee agreements must be in writing.

Take-Home Message

Professionals, such as accountants, real estate agents and consultants, sometimes offer debt negotiation (think short-sale negotiations) and debt adjustment as a new service line when their usual business is slow. If they decide to do so, they should make sure they get licensed, comply with the new debt adjuster and debt negotiator statutes, and seek legal advice if they need assistance with the application process and compliance issues.