Frequently Asked Questions
What is a Chapter 11 bankruptcy case?
A Chapter 11 bankruptcy case is a reorganization. Both businesses and individuals are eligible for Chapter 11. In a Chapter 11 case, the debtor remains in possession and control of its assets. The debtor proposes a chapter 11 reorganization plan. If the plan is confirmed by the court, it becomes the new agreement between the debtor and all creditors, including dissenting creditors. An individual may be required to file a chapter 11 case if his or her income and level of debt is higher than certain thresholds.
What is a chapter 11 plan of reorganization?
The ultimate goal of a chapter 11 bankruptcy case is usually to confirm a chapter 11 plan of reorganization. This is a multi-step process. First, a written disclosure statement must be approved by the court before creditors vote on the chapter 11 plan. The disclosure statement must provide “adequate information” concerning the debtor’s financial affairs to enable a creditor to make an informed decision about how to vote on the plan. Ordinarily, votes on the plan cannot be solicited before approval of the disclosure statement. Following approval of the disclosure statement, the debtor or other plan proponent can solicit acceptances of the plan, and opponents can solicit rejections. On the most basic level, the debtor simply sends out the disclosure statement and plan for a vote, but the debtor is entitled to do more, including by sending letters and making phone calls. Only impaired classes of claims and interests are entitled to vote on the plan. An impaired claim is one that is not going to be paid in full, will be paid over time or some other right is being altered. A class of claims accepts the plan if creditors holding at least two-thirds in amount and more than one-half in number of the allowed claims in that class vote in favor of the plan. If at least one impaired class of creditors votes “yes” and another class votes “no,” the debtor can still confirm the plan if it meets certain requirements, which are listed in Bankruptcy Code Section 1129(b). This is called a “cramdown.” If the vote comes back in favor, or at least good enough to permit a cramdown, the plan goes to a confirmation hearing. The mandatory provisions of a chapter 11 plan are listed in Bankruptcy Code Section 1123(a), and the optional elements of a plan are listed in Section 1123(b). Also, the requirements for confirmation are listed in Bankruptcy Code Section 1129(a) for consensual plans and 1129(b) for cramdown. There are about 30 requirements, and we cannot go into them now, but I want you to be aware that they exist. One key requirement is that the plan must be feasible, meaning that the debtor’s strategy makes sense and it is not likely to be followed by liquidation or the need for more financial reorganization. If a creditor objects to confirmation of the plan, an evidentiary trial on some or all of those 30 requirements may be set. There are some requirements that individual debtors must meet that do not apply to corporations. Specifically, an individual debtor must usually pay all of his or her disposable income over five years or the plan payment period, whichever is longer. In both individual and corporate cases, the debtor has the exclusive right to propose a chapter 11 plan for the first 120 days of the case, and the debtor has 180 days after the bankruptcy filing to gather votes. This is called the “exclusivity period,” and it may be extended up to a maximum of 18 months for filing a plan and 20 months for gathering votes. After the exclusivity period terminates, the committee or a creditor can file a plan, which may be the only plan proposed or it may compete with the debtor’s plan. The debtor may also file a plan jointly with a third party at any time. Confirmation of a plan does not close the case. After confirmation, the court can hear and resolve claim objections and lawsuits. The debtor must also continue to file financial reports, although on a quarterly rather than monthly basis, and pay US Trustee fees. In order to terminate the reporting and payment requirements, the debtor must apply for entry of a final decree following full administration of the case and substantial consummation of the plan. This usually means that there are no more pending proceedings before the bankruptcy court and the debtor has made its first distribution to creditors.
What is a Chapter 7 bankruptcy case?
A Chapter 7 bankruptcy case is a liquidation. Both business and individuals can file a Chapter 7 case. In a Chapter 7 case, the debtor and its assets are protected by the automatic stay, which prohibits creditors from taking action to collect or enforce claims. Certain individuals may not be eligible for Chapter 7 because of his or her level of income; however, individuals whose debts are primarily business debts are eligible regardless of their income.
What is a Chapter 13 bankruptcy case?
A Chapter 13 bankruptcy case is a personal reorganization. Business entities are not eligible for Chapter 13. As in Chapter 11, the debtor retains possession and control of its assets and proposes a reorganization plan, but not voted upon by creditors. Instead, a Chapter 13 trustee will review the plan and may request changes. The discharge in a Chapter 13 case is broader than a Chapter 7 discharge in some situations, and individuals may be required to file Chapter 13 (as opposed to Chapter 7) because of the individual’s level of income.
How is a bankruptcy case commenced?
The beginning of the case is similar for both chapter 7 and 11, in general. First, the debtor must prepare a bankruptcy petition, schedules of assets and liabilities and a statement of financial affairs disclosing certain transactions going back between 90 days and 10 years, depending on the type of transaction. The disclosure must be full and accurate or risk having the discharge denied, having the case converted or dismissed or sanctions. We will cover those topics later. For a corporation or LLC – by the way, I will refer to all separately organized business entities interchangeably as a corporation – for a corporation, the board of directors (or the members of an LLC) must pass a resolution to file bankruptcy. The corporate resolution itself is usually filed with the petition. In both an individual chapter 7 and individual chapter 11 case, the debtor must take an approved credit counseling course – corporations do not. The credit counseling course is often done on the internet or over the phone. The credit counseling certificate gets filed with the petition. After the case is filed, the debtor must take another credit counseling course and file another certificate of completion. This must be filed in order to get a discharge, which we will discuss later. A bankruptcy case is commenced by filing the petition with the bankruptcy court. The petition is time stamped, and as of that very minute, the automatic stay goes into effect immediately.
What is the automatic stay?
The automatic stay is a worldwide injunction barring virtually all actions against the debtor and its assets, and it is effective immediately, with or without notice. In other words, all lawsuits against the debtor and all collection attempts must stop. This is one of the most powerful injunctions under the law, and it is one of the debtor’s most important tools. Basically, it provides breathing space for the debtor to reorganize. The automatic stay is provided in Bankruptcy Code Section 362(a), and there is a list of exceptions – proceedings and acts that are not barred by the automatic stay – provided in Section 362(b), which are too numerous to cover. They key takeaway here is that violations of the automatic stay are void, and willful violations are subject to sanctions. If in doubt, a creditor’s best course is to request relief from the automatic stay.
What is relief from the automatic stay?
If a creditor wants to proceed against the debtor or collect its collateral, the creditor ordinarily files a motion for relief from the automatic stay to foreclose on its collateral. The grounds for relief from stay are listed in Bankruptcy Code Section 362(d). The most common are (a) that the debtor has no equity in the property and (b) the property is not necessary for an effective reorganization. The creditor must prove both of those elements, but only the first element is at issue in a chapter 7 case because it is a liquidation – there is no reorganization. Relief from the automatic stay may also be granted for cause, including lack of “adequate protection,” which the debtor may provide under Bankruptcy Code Section 361. The creditor is entitled to adequate protection – which can be in the form of periodic payment – only if the value of its collateral is diminishing over time. On the other hand, if there is a significant equity cushion because the collateral is worth significantly more than the lienholder’s claim, then courts usually find that the equity cushion itself provides adequate protection.
What is the Section 341 Meeting of Creditors?
A meeting, called the Section 341 Meeting of Creditors, will be set between 21 and 40 days after the petition is filed in a chapter 7 or chapter 11 case. In a chapter 7 case, the trustee conducts the meeting. We will talk about the chapter 7 trustee later. A different entity, namely the United States Trustee, conducts the meeting in a chapter 11 case. At the meeting, the trustee question the debtor regarding assets, liabilities and financial affairs under oath. Creditors also have an opportunity to question the debtor on the same topics. Although the meeting is recorded under oath, it is not a hearing – the bankruptcy judge is not present – and nothing is decided.
What is a receivership?
A receiver may be appointed in state court to take possession of an asset. Generally, a creditor may move for the appointment of a receiver as a preliminary remedy early on in a case, although a receiver may also be available to aid in the enforcement of a judgment. The receiver may collect rents and profits, conduct sales and otherwise administer assets. A bankruptcy case may displace the receiver under certain circumstances.
What is an assignment for the benefit of creditors (ABC)?
An assignment for the benefit of creditors (ABC) is a state-law process that a debtor (generally a business) conducts out of court. Specifically, the debtor selects a general assignee, assigns substantially all of its assets to the assignee and instructs the assignee to proceed to liquidate the assets, review claims and make distributions.
What are avoidable transfers?
A key tool is that a trustee or debtor in possession is entitled reverse prior transactions under the so-called “strong-arm powers.” In particular, the trustee may sue to avoid transfers made to creditors within 90 days before the petition (or one year if to insiders) when the debtor was insolvent, under certain circumstances. This is called a “preference,” and it applies to involuntary as well as voluntary transfers. For example, if a creditor obtained a judgment lien less than 90 days before bankruptcy, the debtor can strip off the judgment lien. The debtor can also avoid security interests and transfers that were not perfected under -bankruptcy law. This usually means that you can avoid a lien or a sale that was not timely or properly recorded, regardless of actual knowledge. Also, the debtor can avoid actual and constructive fraudulent transfers. An actual fraudulent transfer requires proof of actual fraudulent intent, whereas a constructive fraudulent transfer is generally a transfer for less than reasonably equivalent value when the debtor was insolvent.
What is a preference action?
Bankruptcy Code Section 547 generally provides that a trustee or debtor-in-possession (a Chapter 11 debtor) may recover transfers to a creditor that enabled the creditor to receive more than it would in a liquidation and was made when the debtor was insolvent. A creditor has several defenses, including that the transfers were made in the ordinary course of business or according to ordinary business terms or that the creditor provided subsequent new value (later unpaid good or services) to the debtor. A preference is unique to bankruptcy; preferences are generally permissible under state law.
What is a fraudulent transfer action?
An action for fraudulent transfer is available under Bankruptcy Code Section 548 as well as most state laws, including California. Generally, a constructive fraudulent transfer is one in which the debtor transferred something of value to a third party and received less than adequate consideration (less than reasonably equivalent value) for the transfer when the debtor was insolvent. An intentional fraudulent transfer is one in which the debtor made a transfer with the actual intent to hinder, delay or defraud creditors.
What is a chapter 7 trustee?
In a Chapter 7 case (both business and individual cases), a Chapter 7 trustee is appointed to administer the estate. The trustee is appointed from a rotating panel of professional trustees. The trustee will review the debtor’s assets and claims, can sell or abandon assets and may object to disputed claims.
What is the United States Trustee?
The United States Trustee’s Office, which is a part of the Department of Justice. Although the United States Trustee performs certain tasks that are similar to a chapter 7 trustee and the names are similar, the US Trustee is not a liquidator and does not take control of assets like a chapter 7 trustee does. The US Trustee’s main job is to monitor chapter 11 cases. In particular, the US Trustee reviews monthly operating reports, which are basically balance sheets and profit and loss statements that the debtor files with the bankruptcy court on a monthly basis. The US Trustee also reviews and may object to applications to employ professionals, including the debtor’s counsel, and applications for approval of compensation and reimbursement of expenses of professionals. The US Trustee may also appear on and oppose disclosure statements, chapter 11 plans and other motions. Creditors’ committees are appointed by the United States Trustee, and we will discuss that more later on. In a chapter 11 case, the US Trustee requires the debtor to establish new bank accounts, known as debtor-in-possession accounts. The basic distinction is that the bank must post additional collateral for this kind of account. The court may excuse the requirement of opening new accounts under some circumstances. The DIP account must be opened right away. Although most major banks can do this, they are often confused and slow, which can really hold you up. It is best to start this process right away and keep a tight leash on it. The debtor must pay quarterly fees to the US Trustee until a final decree is entered following confirmation of a chapter 11 plan. The amount of the fee depends upon the level of disbursements and expenses during each quarter. If the debtor fails to pay US Trustee fees or file a monthly operating report, the United States Trustee may – and usually does – file a motion to convert the case to chapter 7 or to dismiss the case, which we will discuss more later.
What is a discharge of debts?
A discharge in bankruptcy generally eliminates all pre-bankruptcy unsecured debts. Business entities may obtain a discharge in a Chapter 11 case. Individuals may obtain a discharge in Chapter 7, Chapter 11 and Chapter 13 cases. A creditor may sue to eliminate a debtor’s discharge in general or as to a specific debt.
What is conversion, dismissal or appointment of a trustee?
There are other ways that a bankruptcy case can be terminated, including dismissal or conversion to another chapter. In a chapter 7 case, the debtor must cooperate with the trustee and provide any financial records requested. If not, and under certain other circumstances, the trustee may request that the case be converted to another chapter of the Bankruptcy Code or dismissed. A chapter 7 case can only be converted to chapter 11, unless the debtor consents to conversion to chapter 12 or 13. The debtor may also voluntarily convert the case to another chapter. In fact, the debtor can convert the case to chapter 7 once as a matter of right, but it does not work in reverse. By contrast, there is no absolute right to dismiss the case. The debtor or a party in interest may bring a motion to dismiss a chapter 11 case or convert it to chapter 7 for cause. The two remedies are always in the alternative – you cannot just move to dismiss, and the court has the discretion to choose the best remedy. As an alternative remedy, the court may appoint a chapter 11 trustee or examiner. The court must order the appointment of a trustee for cause, including fraud, dishonesty, incompetence, or gross mismanagement, or if a trustee is in the best interests of creditors. Also, the US Trustee is compelled by statute to request the appointment of a trustee if there are reasonable grounds to believe that anyone in control of the debtor participated in actual fraud, dishonesty or criminal conduct. A chapter 11 trustee takes possession of assets and operates the debtor’s business, although usually with the help of the debtor. The debtor becomes a debtor out of possession, although it can and should appear and assert its rights in court. The appointment of a trustee terminates the exclusivity period for filing a chapter 11 plan, and the trustee is entitled to file a plan. This might compete with the debtor’s plan, or the debtor and the trustee might propose a joint plan. In the alternative, a bankruptcy court may order the appointment of an examiner, who investigates the financial affairs of the debtor and reports to the court. The court may also order the examiner to perform additional duties that a trustee would perform, and this can get very close to the status of a trustee but not all the way.
What is an exemption?
Exemptions are laws that prevent creditors from collecting from certain assets. Exemptions can be used only by individuals, not business entities. Although the Bankruptcy Code provides a set of exemptions, it allows states to opt-out. California has opted out but created two parallel exemption schemes – one that mirrors the bankruptcy code and one that provides for California’s ordinary non-bankruptcy exemptions – and debtors are entitled to elect which one will apply.
What is the difference between a secured and an unsecured claim?
An unsecured claim is generally any debt that is not backed (or “secured”) by a lien against specific collateral. For example, trade debt, professional fees, operating lines of credit and credit cards all generally represent unsecured debt. By contrast, a mortgage, deed of trust, automobile loan, business loan or factoring agreement are all generally secured by a lien. Although it is common to say that a debt is “secured” by a guarantee, in fact a personal guarantee does not create a security interest unless it is independently secured by a lien.
What is a priority claim?
A priority claim is an unsecured claim that is entitled to priority by statute under the Bankruptcy Code. Unpaid wages and benefits, post-petition professional fees and certain taxes are examples of priority claims. There are several categories of priority claims, including administrative priority claims, superpriority claims and many sub-categories.
What is an administrative priority claim?
Administrative priority claims include the professional fees, post-petition rent and post-petition trade debt, and certain other claims that Congress has accorded high priority as a matter of public policy. These must be paid in full upon confirmation of a chapter 11 plan.
How are claims handled in bankruptcy?
What does a creditor do to enforce its claim? The automatic stay bars you from suing in state court, so what do you do? The most basic and direct option is to file a proof of claim. A creditor must file a proof of claim in a chapter 7 case in order to receive a distribution. By contrast, in a chapter 11 case, a proof of claim is not necessary if the creditor agrees with the way the debtor scheduled the claim. But if there is any discrepancy – for example, if the amount is wrong, or if the debtor schedules the claim as disputed, contingent or unliquidated – the claim will be deemed disallowed unless you file a proof of claim. There is another exception. A secured creditor need not file a proof of claim to preserve its security interest (lien). However, they often do file a proof of claim, especially if the amount or the terms are disputed. If a proof of claim is timely filed, it will be deemed allowed with no further effort. However, the debtor may challenge the claim by filing a claim objection under Bankruptcy Code Section 502(b). Probably the most common claim objection is brought under Bankruptcy Code Section 502(b)(1), which is that the underlying claim is unenforceable as a matter of agreement or law. Another important claim objection is Section 502(b)(6), which places a special cap on a landlord’s damages. Specifically, the landlord’s claim for damages resulting from termination of the lease is capped at the greater of the remaining rent for one year or 15 percent (but not to exceed three years) of the remaining term of the lease. This can be a great advantage for commercial tenants.
How are secured claims handled in bankruptcy?
There are several classes of claims that get paid in a descending order of priorities. First, secured claims are entitled to be paid in full over time, in general, although it is possible for a debtor to bifurcate the secured portion if the claim down to the value of the collateral and modify the interest rate. The deficiency becomes a general unsecured claim. We should pause on this point because it is counterintuitive. Imagine that you have a warehouse worth $1 million that is collateral for a $1.5 million loan at 17% interest. You can strip the lien down to the value of the collateral, which is $1 million, and you might be able to reduce the interest rate. The remaining $500,000 becomes a general unsecured claim. But there are some interesting exceptions, especially in Bankruptcy Code Section 1111(a) and (b), which we will not get into. But one thing you should know about Section 1111(a) is that it makes all non-recourse claims into recourse claims in chapter 11. In other words, it wipes away state anti-deficiency laws for the purposes of the chapter 11 case only.
What is a single asset real estate (SARE) case?
A single asset real estate case is a special kind of case. This is where the debtor’s only asset is a single property or project on which no substantial business is being conducted other than leasing and incidental activities. This includes apartment buildings, office buildings, parking lots and hotels, but there is an exception that is particularly applicable to hotels. If any business other than leasing is going on, like a hotel gift shop or café, then that is enough to take it out of the single asset real estate rules. The key restriction on single asset real estate cases is that a secured creditor can obtain relief from the automatic stay in ways that are not available in ordinary cases. Specifically, the court will grant relief from stay unless the debtor (a) files a plan of reorganization that has a “reasonable possibility of being confirmed within a reasonable time” or (b) begins making interest payments within 90 days after the petition date at the non-default contract rate of interest.
What is the difference between an individual and a business?
For most purposes the Bankruptcy Code treats individuals (human beings) differently from separately organized entities (generally, corporations, limited liability companies and similar organizations). If you are an individual doing business in your own name or under a fictitious business name or “DBA” (which stands for “doing business as”), the law will treat you as an individual; however, it is very important to carefully prepare and actively manage the case of a person in business in order to keep the business operating.
What is a first-day motion?
In the first few days of the case, it is critical for the debtor to be able to operate and there is not usually time to set motions on several weeks’ notice. Accordingly, the debtor needs to bring several motions on an emergency basis, known as “first day motions.” Some examples include motions for authority to use cash collateral, debtor-in-possession financing motions and critical-vendor motions. You can also take care of other issues with first-day motions. For example, you might want to be able to pay priority pre-petition sales and use taxes, or you might need to bring a motion to prevent utilities from turning off the lights. Utilities providers receive special protections under Bankruptcy Code Section 366, which is important to be aware of but we do not have time to go into.
What is a motion for authority to use cash collateral?
The debtor is generally entitled to use, sell, or lease property in the ordinary course of business without court approval. However, a debtor may not use “cash collateral” – in or outside the ordinary course of business – without a court order or the consent of the lienholder. This is an absolutely critical point. Until the court approves the proposed use of cash collateral or the lienholder consents – and consent cannot be implied from silence – the debtor cannot use and must segregate and account for all cash collateral. So the most critical first day motion in most cases is a motion for authority to use cash collateral. Cash collateral means cash and any cash equivalents that is subject to a lien. This includes the proceeds, products and offspring of other collateral. For example, if a creditor holds a deed of trust with an assignment of rents against your apartment building, all rent is cash collateral. If a bank line of credit comes with a lien against accounts receivable, probably all of your business income is cash collateral and cannot be used until you get a court order. Restaurants are an interesting case – some aggressive creditors argue that their lien on supplies extends to sales, but many bankruptcy courts hold that the value is mostly attributable to labor and not subject to a lien. Some courts split the lien between the value of the supplies and the value of labor, usually one-third two-thirds.
What is a critical-vendor motion?
The debtor also needs to be able to pay employees and order supplies. The debtor can go forward in the ordinary course of business, but the debtor cannot pay any pre-petition claims. That means that you can order new goods from a supplier and pay for the goods, but you cannot pay any past invoices. So is there anything you can do for an important supplier? And what if you filed in the middle of a payroll period? By contrast with certain other circuits, co-called “critical vendor” motions – which is a motion to pay certain vendors whose ongoing business is critical to the success of the debtor – they are generally not permitted in the Ninth Circuit. However, courts will generally allow the debtor to pay certain priority claims early. These typically include wages and benefits within the priority amount (which was $12,475.00 at the time of this writing) accrued within 180 days prior to the bankruptcy filing. So what about vendors? As I said, there are no “critical vendor” motions, but in 2005 Congress created Bankruptcy Code Section 503(b)(9), which confers administrative expense priority on claims for goods delivered to the debtor within 20 days prior to the bankruptcy. So you can bring a first day motion to pay back pay to employees and pay vendors for goods delivered within 20 days before bankruptcy. These early payments are generally approved because a debtor in possession with a viable exit strategy will eventually pay them ahead of other creditors in a chapter 11 plan, and the early payment does not upset the Bankruptcy Code’s order of priority.
What is debtor-in-possession financing?
Another common first day motion is the debtor-in-possession financing motion, or “DIP Financing.” Specifically, the debtor may be able to obtain cash to operate by obtaining a new loan in bankruptcy under Bankruptcy Code Section 364. Unsecured debts can be incurred in the ordinary course of business – that usually means buying supplies on credit or terms – but a new loan must be approved by the court. In order to entice people to make loans to bankruptcy debtors and recognize the risk they are taking, the bankruptcy court is empowered to grant the new creditor enhanced protection, including “superpriority” status ahead of other general unsecured creditors and a new lien on assets. The court also has the power to “prime” existing liens, meaning that the new loan is secured by a lien senior to existing liens, but in practice this is rarely done. Conventional financing is typically not available to a debtor in possession, and the most common sources of DIP financing are the debtor’s existing major creditors (who may have a significant stake in a successful reorganization), or the debtor’s insiders (for example, the business owner may lend into the company on a protected basis) and also hard money lenders, who charge a high rate of interest.
How are assets used, sold and leased in bankruptcy?
Once the case is up and running, the debtor will need to use its assets to operate. The debtor pays post-petition expenses in the ordinary course of business, and the debtor can use, sell or lease assets in the ordinary course without court approval. However, a court order is required to sell assets outside the ordinary course of business. Sales can be done under a confirmed chapter 11 plan, or they can be done prior to confirmation pursuant to Bankruptcy Code Section 363. You can sell assets, pay liens and deposit the balance to the debtor-in-possession account. Or, under Section 363(f), assets can be sold free and clear of liens under certain circumstances. This is a very powerful tool, because if you have a dispute with a lienholder, you do not have to wait for the litigation to wrap up – you can sell the asset now and hold the disputed funds. Assets can also be sold free and clear of a co-owner’s interest under certain circumstances pursuant to Section 363(h). Bankruptcy sales are their own specialized topic, but for now you should know that the sale can be conducted as a private sale or as an auction, depending on the circumstances. It is often advantageous to go into the auction with a “stalking horse” bidder, which is a buyer who has already agreed to buy and agreed on terms but is subject to overbid. Because the buyer has already done due diligence, other bidders are more confident, and the debtor is also protected because you already know the lowest bid.
How are contracts and leases assumed or rejected in bankruptcy?
Under Bankruptcy Code Section 365, the debtor has the power to assume or reject executory contracts and unexpired leases. An executory contract is one where substantial performance is remaining on both sides. In order to assume a contract, the debtor must cure all arrears or provide adequate assurance of prompt cure. The debtor can assume and assign a contract or lease to a third party, effectively selling the contract. This is a great advantage, for example, for a commercial tenant with a below market lease who needs to leave that location. The debtor can also reject contracts and leases, leaving the other party with a claim against the bankruptcy estate. This is also a great advantage for commercial tenants with burdensome leases – the lease can be rejected, and the landlord’s damages will be capped under Bankruptcy Code Section 502(b)(6).
Do you represent debtors and creditors out of state?
Yes. Although we are admitted only to the California bar, we are able to appear pro hac vice in virtually every federal jurisdiction throughout the country. This generally requires the payment of a small administrative fee (e.g. $25.00 for New York) or the retention of local counsel to review and sign off on pleadings. For example, we represent local creditors in defending preference, fraudulent transfer and other actions arising out of Delaware, New York and other states. We also represent debtors and creditors throughout California and out of state.
Do you handle matters outside of bankruptcy court?
Yes. We can handle lawsuits and other matters that involve the competing rights of creditors and debtors outside of bankruptcy court throughout California. Among other things, we can handle assignments for the benefit of creditors (ABC’s), represent general assignees, obtain the appointment of or represent receivers, enforce the claims of creditors and minority shareholders, prosecute and defend fraudulent transfer actions and other matters.
What is an Official Committee of Unsecured Creditors?
In larger chapter 11 cases, the US Trustee will appoint a committee of unsecured creditors. The committee is entitled to appear on all matters and investigate the debtor’s financial affairs. In particular, the committee consults with the debtor in possession on administration of the case, investigates the debtor’s conduct and operation of the business and participates in formation of a chapter 11 plan.
How are professionals employed and paid in bankruptcy?
One of the first things a debtor needs to do in a chapter 11 case is get court approval to hire attorneys and other professionals. The debtor (and also the creditor’s committee) can hire attorneys and other professionals, but only with bankruptcy court approval. Typical professionals hired in a chapter 11 case can include the bankruptcy attorney, special counsel to handle non-bankruptcy litigation and an accountant to prepare monthly operating reports and file tax returns. A key takeaway here is that the professional must be disinterested, meaning, among other things, that they cannot hold a pre-petition claims. For example, an accountant who has an unpaid bill as of the filing of the bankruptcy case cannot be employed unless the accountant waives the claim. Compensation can be paid only upon court approval after filing what is known as a fee application. Professionals may be paid at the conclusion of the case, or they can apply for interim compensation at intervals of no less than 120 days. In large cases, the court may permit more frequent fee applications.
What is an adversary proceeding?
An adversary proceeding is the name for a lawsuit in a bankruptcy case. A bankruptcy case itself is a federal case. A lawsuit within that bankruptcy case is called an adversary proceeding. An adversary proceeding is very similar to a typical federal lawsuit. There will be one or more plaintiffs and one or more defendants. The defendant is sometimes the debtor in the bankruptcy case, and sometimes the plaintiff is a creditor in the bankruptcy case, but not always. Anyone can sue or be sued in an adversary proceeding to resolve issues that need to be litigated in bankruptcy court.