Cash, Creditors & Contracts - Short

Topics

• Small Business Ch.11 — Subchapter V
• Reporting cash on bankruptcy forms
• Secured vs. unsecured creditors
• Rejecting unwanted contracts
• Creditor clawbacks

Guest: Areya Holder — Private Practice, Dallas TX

This is an abridged version of the original episode. Feel free to go back and listen to the full version in our show feed.

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Transcript

SPEAKER_00 0:01

You are listening to Corporate Bankruptcy A to Z, a podcast that gives you the ins and outs of corporate bankruptcy. This is an abbreviated release of episode 7, where we will cover the bankruptcy petition, required filings and disclosures, how financial information is reported, and the importance of accuracy when preparing the case. If you are new to the show or want to hear the full conversation about this topic and more, we invite you to check out our full bankruptcy series found below in the show feed. There you will find an unedited version of each episode where we dig deeper and answer more questions. Corporate Bankruptcy A to Z is hosted by Neil Goldstein, a chief restructuring officer with over 30 years experience. He's joined by co-host and legal expert Steve Raven of Sol UI, a bankruptcy attorney with over 40 years in the field. If you are dealing with a situation now and need guidance, you can reach out to them directly. Call Neil at 940-808-9451 and Steve at 973-286-6713.

SPEAKER_03 1:09

For this episode, we have a special guest, ARIA Holder. We have arrived at the filing documents that validate it all for the court to review. For the listeners, please, please check the show notes to this episode to view all the forms necessary to complete a bankruptcy filing. This might give you some idea on how onerous the process can be and why the cost is so expensive. Can both of you explain filing a chapter 11 under subsection 5?

SPEAKER_01 1:45

That subchapter is geared exclusively for your small business debtor. It is a chapter 11 in the standard sense in that you are attempting to restructure your obligations as opposed to a liquidation. But again, this is an election that you make as part of the Chapter 11 and a little less expensive to administer and get through the process.

SPEAKER_02 2:09

Question to you, Aria, is since you're a Chapter 5 trustee, is Chapter 5 working and accomplishing what it's designed to do?

SPEAKER_01 2:21

They are your mom and pop shops, you know, whether it's a restaurant or, you know, name a small business, a convenience store, you know, a variety of things that a streamlined Chapter 11 process is very easy and workable, and they get in and out of the bankruptcy system very quickly. You don't have the absolute priority rule, you don't have unsecured creditors' committees. And so again, it lets you sort of enter and exit that process, that whole bankruptcy system very quickly.

SPEAKER_03 2:49

What is a voluntary petition and what is its purpose?

SPEAKER_01 2:54

So a voluntary petition is the document that originates the bankruptcy case. And so it's sort of like the lawsuit that gets filed to originate a case.

SPEAKER_03 3:05

The forms to be filed include a 201, 201A, and many more. Couldn't they just have put all the schedules under one named form?

SPEAKER_01 3:15

You have all of these forms and all of these things in an effort to make sure that when a debtor comes into the bankruptcy system, they are coming in with all of their information laid out. It's really different when you step into the bankruptcy arena because bankruptcy is all about disclosure. And so all of those forms are about disclosing different things that have happened to a debtor of their current assets and liabilities, as well as things that have happened in the one to two years leading up to the bankruptcy filing. Your bankruptcy schedules and your statement of financial affairs, that's your skeleton of your case. And so if you want to have a strong skeleton, then you need to be careful and thoughtful and conscientious when you're filling out that document or that group of documents, the schedules and the statement of financial affairs. Because if you don't, if you're haphazard, then you're starting your case with a weak skeleton.

SPEAKER_03 4:20

When the forms are completed, where and how are they filed?

SPEAKER_01 4:26

Bankruptcy schedules and statement of financial affairs are filed with the bankruptcy court. Normally we give a worksheet to our clients to complete. Again, that takes a while because there's a lot of information to disclose.

SPEAKER_03 4:40

When reporting cash, is this the amount in the bank or the book balance that includes unclear transactions?

SPEAKER_01 4:50

You know, that's a good question, Neil. And it's the amount in the bank. And so that's where timing is important. And so if you have outstanding checks, I always try to time the bankruptcy filing when I'm serving as debtor's counsel so that I don't have a bunch of uncleared items hanging out there. Because when it comes time to do your operating report, and we can talk about that a little more in a minute, but the U.S. trustees office is going to look at your bank balance on the date you filed, your cash on your schedules. And by cash, we mean cash and checking accounts, those amounts need to match your opening amount on your monthly operating report. And so for the listeners, a monthly operating report is something that all debtors in a chapter 11 are required to file every month. And that's where you know the debtor is saying, This is how much money came in, this is how much money went out, so these are our receipts, these are our disbursements, and here's our cash-ending balance.

SPEAKER_03 5:56

What if some of the data turns out to be wrong? Are there penalties?

SPEAKER_01 6:02

So once you file your schedules, it's not like that is set in stone and you can't go in and amend it. That's actually common to amend bankruptcy schedules. Sometimes you've missed a creditor, sometimes you've missed an asset. And so again, you try really hard to provide a whole litany of information. But again, we're talking about a lot of information that has to be disclosed as part of filing a bankruptcy case.

SPEAKER_03 6:28

Can you explain what a secured creditor is and their rights in a bankruptcy?

SPEAKER_01 6:34

Sure. So secured creditors are creditors that have a lien or claim on a particular asset. So, in other words, it is someone who is owed money and then to support that claim of money, they have an attachment to a particular asset. Sometimes it's a blanket lien, meaning you could have a creditor who's asserting a lien on all of the company's assets. If the company did not pay, then the creditor could foreclose on those assets and take and liquidate those assets in order to have their claim satisfied. And so a very common example of that is a mortgage. The person or company has borrowed money to buy a piece of land, and the mortgage company has a claim because that mortgage company is owed money, because that mortgage company advanced money to the person or company to buy the land. If the company or person doesn't pay back that loan, then the mortgage company will foreclose and take that asset back and sell it in order to satisfy the claim. And so there are different types of secured creditors. You can have creditors again that have a lien on inventory, they could have a lien on equipment, they could have a lien on land, they could have a lien on bank accounts, a whole variety. And so in bankruptcy cases, you generally have secured creditors and unsecured creditors, meaning creditors who have a lien or attachment to certain items, and then unsecured creditors who are owed money, but they don't have a lien or attachment to a certain asset to insure payment.

SPEAKER_02 8:31

Another common secured creditor is through a car loan where the car lender has a lien on the car and they have the ability to repossess the car if the owner is not making payments.

SPEAKER_03 8:47

Well, just to confuse the process, the next section refers to priority unsecured claims. Can you describe why this class of creditor gets special privileges over their sister class, the unsecured creditor?

SPEAKER_01 9:03

Congress, when it enacted the bankruptcy code, carved out certain types of creditors that have priority. There is a hierarchy, if you will, of creditors. And so if you kind of think of it as a waterfall, you've got creditors that are on the top, creditors in the middle, and creditors on the bottom. Your general unsecured creditors are on the bottom.

SPEAKER_03 9:29

This is the section where most of the creditors fall and usually takes a few pages to detail. My experience has shown that many balances on the company's accounts payable are wrong. How does this get corrected?

SPEAKER_01 9:44

That's a good question. The debtor, when it files the case, estimates the amount of those claims. Because otherwise the court and the debtor, everyone is looking to the bankruptcy of schedules and assumes those are correct. So if the debtor lists a non-secured creditor as undisputed and lists a certain dollar amount, then everybody's sort of going with that amount unless the creditor comes in and files a claim. With that said, it is very common for the claim amounts that are listed to be incorrect because those change frequently on a daily basis.

SPEAKER_03 10:40

How about company contracts and unexpired leases? Does the company necessarily have to keep contracts and leases it does not want to continue with?

SPEAKER_01 10:52

No. It needs to keep copies of those documents because it makes it very difficult for the lawyer to assume or reject those leases if the company doesn't know what it has. And the bankruptcy provides a very good mechanism for rejecting those leases so you can keep some of the stores, you know, locations that are benefiting the company and reject and slough off the ones that aren't.

SPEAKER_03 11:21

The form probes the company's disbursements for the previous 90 days from the filing date. Would you explain why this request is made and its consequences to the company and creditors?

SPEAKER_01 11:34

Depending on what type of creditor we're talking about. But if you're talking about the 90 days, the court wants to be able to look back and see who has the company been paying in the 90 days prior to the bankruptcy filing, and have there been preferential payments during that 90-day period? Because if there have been, there is a mechanism to sort of go back and take those payments back potentially in an effort to redistribute some of that money through the bankruptcy process more fairly.

SPEAKER_02 12:24

And the concept of equally has stretched to the point where creditors that were paid within this 90-day period are considered preferential.

SPEAKER_03 12:36

Ariar, I was going to ask you for any closing thoughts, but I think you already summed it up with one word, disclosure.

SPEAKER_01 12:44

I mean, that's it, Neil. Disclosure, disclosure, disclosure. As a lawyer, I can deal with almost anything. There are lots of things I can do. There are lots of tools available to debtors, to creditors under the bankruptcy code. But if a debtor fails to disclose information, you're setting yourself and your lawyer up for failure. And you're setting your company up for either conversion to chapter seven or the appointment of a chapter 11 trustee.

SPEAKER_03 13:14

Steve, any closing thoughts?

SPEAKER_02 13:16

They say bankruptcy is 95% disclosure. And it may even be more than that. So that's really the key to avoiding a quick downfall.

SPEAKER_00 13:29

Do you have a question about bankruptcy? Why not ask the experts? Emails for Neil and Steve can be found in the show notes below. And remember, the first call is always free. Call Neil at 940-808-9451 and Steve at 973-286-6713. You can also find more resources on our websites. Go to corporatebankruptcy a to Z.com or elementary business.com. You can also find links to those in the show notes down below. Corporate Bankruptcy A to Z podcast and YouTube channel are produced by me, Sir Isaac Smith. Be sure you subscribe and share the episode, and we will see you next time.