Bad Debtor Owes Me Money! (Series: Restructuring, Insolvency & Troubled Companies)

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
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Thank You To Our Sponsor
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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
attorney or other appropriate professional to determine what may be best for your
individual needs. While Financial Poise™ takes reasonable steps to ensure the information
it publishes is accurate, Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
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MEET THE FACULTY
Moderator:
Whitney Fogelberg – Kirkland & Ellis LLP
Panelists:
Beau Hays – Hays, Potter & Martin LLP
Christopher Horvay – Sugar Felsenthal Grais & Helsinger LLP
Michael Riela – Tannenbaum Helpern Syracuse & Hirschtritt LLP
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ABOUT THIS WEBINAR:
Bad Debtor Owes Me Money!
Sometimes it begins when a client, tenant, or customer starts to slow-pay, with the result that your
accounts receivable start to accrue gradually. Other times the issue presents itself more
suddenly. Either way, you find your company owed a great deal of money that looks like it may not
be collected because your client/tenant/customer has filed bankruptcy, has commenced an
assignment for the benefit of creditors, has been put into receivership, or is otherwise just plain
insolvent. What do you do? What should you not do? The topics discussed in this webinar include
the pros and cons of putting a counterparty into involuntary bankruptcy; when and how you may be
able to pursue third parties (like guarantors, directors, or officers) for the amount owed; risks
related to preference attack; pros and cons of sitting on a “creditors’ committee” in a Chapter 11;
how to negotiate for “critical vendor” protection in Chapter 11; and practical guidance for continuing
to provide goods or services to an insolvent counterparty.
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ABOUT THIS SERIES: Restructuring,
Insolvency & Troubled Companies
Companies fail all the time, for all sorts of reasons. Some companies become distressed, or even
insolvent, because of mismanagement; others because of fraud; others for myriad other reasons-
some intrinsic to the company and some extrinsic. Regardless of the cause, failing or failed
companies create a unique set of issues, risks, and even opportunities for all involved. This area of
law and finance has become so specialized that no fewer than five (American Bankruptcy Institute;
Association of Insolvency & Restructuring Advisors; Commercial Law League of America; National
Association of Federal Equity Receivers; Turnaround Management Association) national
organizations exist to help those who specialize in the field to stay up to date on the latest
developments, strategies, and tactics in the area.
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EPISODES IN THIS SERIES
3/19/19 Episode #1:
Help, My Business is In Trouble!
4/16/19 Episode #2:
Opportunity Amidst Crisis- Buying Distressed Assets, Claims, and
Securities for Fun & Profit
5/14/19 Episode #3:
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #3:
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PREVENTATIVE MEASURES
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PREVENTATIVE MEASURES (cont’d)
• Monitor the debtor’s solvency:
• Several financial services firms provide credit opinions regarding commercial
companies and their ability to meet their debts as they become due
• If, for instance, your company extends trade credit to a particular customer whose
business represents a significant source of your company’s revenue, it would be
prudent to request such an opinion from time to time in order to hedge against the
injuries you might incur should that customer file for bankruptcy
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CUSTOMER/SUPPLIER DEFAULTS-NOW WHAT?
• Creditor Remedies:
• Send to collections
• Stop performing
• Sue/Evict customers/guarantors
• Appoint Receiver
• Seek involuntary bankruptcy
• Setoff deposit or collect on LOC
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DEBTOR PROTECTIONS
• Debtor may seek to protect itself by:
• Commencing Assignment for Benefit of Creditors (“ABC”)
• Filing for Bankruptcy
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ADDITIONAL CREDITOR REMEDIES: HITTING THE DEBTOR
WITH ITS OWN SHIELD
• Involuntary bankruptcy
• Creditors can file Chapter 7 or 11 petition against a debtor
• If debtor has 12+ creditors, 3 creditors required to collectively file
involuntary petition
• If debtor has less than 12 creditors, only 1 creditor required
• Debtor can contest the petition; to overcome, creditors must
establish:
oDebtor not paying debts as they come due, or
oDebtor has substantially all assets seized by a custodian within 120 days
before filing
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BANKRUPTCY IN BRIEF
• Bankruptcy court is a unit of federal district court.
• A Petition, filed with the bankruptcy court, commences case and triggers
automatic stay.
• 3 most common filings types:
• Chapter 7 = trustee appointed to liquidate assets; applies to companies and
individuals
• Chapter 13 = individuals only; trustee appointed to oversee debt repayment
plan
• Chapter 11 = debtor stays in possession of assets and administers case itself to
reorganize or conduct orderly liquidation
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THE AUTOMATIC STAY IN BANKRUPTCY
• Upon filing for bankruptcy, creditors are prevented from seeking to collect on
prepetition debts - an automatic injunction prohibiting creditors from starting or
continuing actions to collect debts
• Allows debtor “breathing room” to make decisions in time of crisis
• Prohibited actions include continuing litigation, enforcing or perfecting liens,
setting off mutual debts, and taking actions to obtain debtor’s property
• Creditors who knowingly violate automatic stay will be liable for damages
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RELIEF FROM THE AUTOMATIC STAY
• A creditor, typically secured, can obtain relief from automatic stay
• Creditor essentially has 2 options:
• Prove “cause,” which may include a lack of “adequate protection”
(discussed later); or
• Prove that:
o debtor has no equity in the property; and
o property is not necessary for an effective reorganization
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ADEQUATE PROTECTION
• Adequate protection applies to protect value of a creditor’s interest in property
• It is often applied when value of property is declining in value (e.g., debtor is
using cash collateral to sustain operations)
• Adequate protection includes:
• Periodic or lump sum payments to creditor holding the interest in the
property;
• Additional or replacement liens (e.g., a lien on cash proceeds of the sale of
property)
• Other relief resulting in indubitable equivalent of the creditor’s interest in
property
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CLASSES OF CLAIMS IN BANKRUPTCY
• Creditors in bankruptcy case distinguished by types of claims they hold & priority of
payment among them
• Administrative and priority claims get paid before unsecured claims (losing out only to
secured claims in the priority hierarchy).
• Often times administrative claims are “paid in full.”
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CLASSES OF CLAIMS IN BANKRUPTCY
(cont’d)
• Typical “good and services” creditors will have 2 important ways to have their pre-
petition claim (or a portion of the claim) given administrative priority:
• 20-Day Claims (aka “503(b)(9) Claims”) - “the value of any goods received by the
debtor within 20 days before” the date a bankruptcy petition was filed “in which the goods
have been sold to the debtor in the ordinary course of such debtor’s business” (e.g., invoices
related to shipments made during the 20 days prior to a bankruptcy).
• Reclamation Claims - reclamation demand for goods received by a debtor within 45 days
of its bankruptcy - provides some credit protection, additional negotiating leverage, and the
ability to recover some goods shipped during the 45 days prior to a bankruptcy filing.
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GETTING PAID IN BANKRUPTCY
• Debtor must file bankruptcy schedules and statements of financial affairs listing
all prepetition claims its records show as outstanding against it on the petition
date
• BUT: if creditor’s claim is not listed in Schedules, or debtor lists incorrect
amount of or basis for claim, creditor must file Proof of Claim to ensure it
receives distributions from Debtor’s bankruptcy estate, if any are made
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PROOF OF CLAIM
• Requirements for Proof of Claim:
• Court has form to be filled out showing amount, basis, and other information
relating to claim
• Must be supported by writing & signed by authorized representative of creditor
• Properly filed claims presumptively valid; burden then shifts to trustee or debtor to
object to claim
• Filing proof of claim arguably submits a creditor to bankruptcy court jurisdiction
• Must provide documentation supporting the claim, unless such supporting
documentation is voluminous
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PAYMENTS TO CRITICAL TRADE VENDORS IN
BANKRUPTCY
• Critical Trade Order grants debtor authority to settle and pay specific claims of
unsecured creditors
• Relief often sought as a first day motion
• Rationale: certain trade creditors are indispensable to debtor’s capacity to stay in
business
• Bankruptcy Code contains no explicit authority for this relief
• Some bankruptcy courts use equitable powers under the doctrine of necessity
(derived from § 105(a) of the Bankruptcy Code) to allow such payments
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GENERAL UNSECURED CREDITORS
• General unsecured creditors (“GUCs”) stand behind secured creditors and
priority unsecured creditors
• General unsecured creditors often viewed as having the most to lose in chapter
11 cases (sometimes referred to as the “fulcrum security” if parties ahead of the
GUCs are “in the money”)
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RECLAMATION RIGHTS
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PREFERENCES AND AVOIDANCE ACTIONS
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PREFERENCE AVOIDANCE: THE PRIMA
FACIE CASE
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COMMON DEFENSES TO PREFERENCE
CLAIMS
• The Bankruptcy Code lays out several statutory defenses to
preference claims, including:
• Ordinary course payment: transfers made in the ordinary course of
business, consistent with prior transfers in timing, amount and
circumstances
• Note – payment “in the ordinary course” is a legal term of art that
must be analyzed before asserting this defense
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CLAIMS (cont’d)
• Subsequent advance or new value: goods or services provided to
debtor on unsecured basis after receipt of a preference (e.g. using
value of goods shipped to debtor after debtor made an otherwise
preferential payment to offset liability)
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CLAIMS (cont’d)
• Contemporaneous exchange of new value: transfer that was made between parties was
intended by the debtor and the recipient to be a contemporaneous exchange, and was
actually made contemporaneously
• Example:
• Vendor and Debtor exchange emails agreeing to COD terms for shipment of goods
• Vendor delivers goods to debtor, & Debtor pays Vendor at the time of delivery
• Debtor files BK 10 days later
• The payment, despite being made during preference period, is protected as
contemporaneous exchange of new value
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ABOUT THE FACULTY
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Whitney Fogelberg – whitney.fogelberg@kirkland.com
Whitney Fogelberg is a restructuring associate in Kirkland’s Chicago office. Whitney
represents both debtor and creditor clients in complex Chapter 11 reorganizations; advises
purchasers and sellers in bankruptcy transactions and acquisitions; counsels boards of
directors and senior officers regarding fiduciary duties and restructuring strategies; and
advises financially troubled companies regarding the structure of various commercial
transactions outside of bankruptcy.
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Beau Hays – beau@hpmlawatl.com
Beau Hays is a 1986 graduate of the North Carolina School of Law, after receiving a B.A. in Political
Science from UNC in 1983. He is admitted in Georgia, all three federal districts in Georgia and
various other districts around the country. He has acted as lead counsel in litigation matters for
almost thirty years, specializing in commercial disputes and bankruptcy law. He is a Past President
of the Commercial Law League of America and an Associate Member of the National Association of
Bankruptcy Trustees; he has been a presenter to that organization and numerous credit groups on
creditors’ rights issues. He has served as Legislative Liaison for the Georgia Bar’s Creditor’s Rights
Section and as an editor for the National Association of Credit Management’s “Handbook of Credit
and Commercial Laws,” chapters related to materialman’s liens and construction bonds. An Atlanta
native, Mr. Hays is a long-time patron of the arts and has written scripts for one-man and full stage
performances of Dicken’s “A Christmas Carol” and an adaptation of Shakespeare’s “Hamlet.”
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Christopher Horvay – chorvay@sfgh.com
With more than 36 years experience, Christopher J. Horvay has represented senior creditors and asset-based
lenders in complex litigation, workout and bankruptcy matters across the country. His practice also involves the
representation of asset-based lenders in the documentation of complex loan transactions and in litigation disputes
as well as the representation of creditor committees and liquidation trustees in litigation relating to fraudulent
conveyances. Chris has consistently been recognized as an Illinois Super Lawyer since 2006, as well as an Illinois
Leading Lawyer for the last two years in commercial bankruptcies and workouts. Chris’s recent creditor
representations include senior secured lenders in Clark Retail Enterprises and United Airlines, significant landlord
interests in K-Mart Corporation, and as special counsel to plaintiffs in Price v. Phillip Morris. He also served as
debtor’s counsel in a number of significant business bankruptcy cases, including Ben Franklin Stores in the
Northern District of Illinois. Chris has represented numerous asset purchasers, including Newport News, Inc. and
Spiegel Catalog, Inc., and sellers in transactions involving troubled companies as well as assignees for the benefit of
creditors in out-of-court liquidations. He recently defended former directors and officers of troubled companies in
litigation brought against them by bankruptcy trustees. Chris has undertaken a leadership role in the Turnaround
Management Association’s Chicago/Midwest chapter since its inception. He previously served as a TMA National
Director from 1999 through 2002, as well as president of the Chicago/Midwest chapter in 1997 and 1998. In 2004,
Chris was recognized by the Chicago chapter as its Educator of the Year. From 2014 through 2016, he has served as
President of the Chapter’s Scholarship Foundation Board. In November, 2016, he received the Chapter’s Legend
Award for outstanding service to the Chapter and the profession.
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Michael J. Riela – Riela@thsh.com
Mike Riela is a partner in Tannenbaum Helpern’s Creditors’ Rights and Business Reorganization practice. With
more than 15 years of experience, Mike advises companies on complex restructuring, distressed M&A, loan
transactions and bankruptcy related litigation matters. Mike has in-depth experience in advising clients on
corporate and real estate bankruptcies, workouts, Chapter 11 and Chapter 7 bankruptcy cases, debtor-in-
possession (DIP) and bankruptcy exit loan facilities, secondary market trading of distressed debt and trade
claims, Section 363 sales and bankruptcy retention and fee agreements and disputes. His clients include banks,
administrative agents, indenture trustees, hedge funds, private equity firms, professional services firms, trade
creditors, contract counterparties, shareholders, debtors and investors.
Mike has represented buyers of assets in Section 363 and out-of-court sales from sellers such as Evergreen
Solar, Inc., Sonic Telecommunications International, Ltd, Urban Communicators PCS Limited Partnership, US
Aggregate, Inc., and Vectrix Corporation, as well as representing lenders, trustees and administrative agents in
major Chapter 11 cases and workouts such as Delta Air Lines, Inc., Extended Stay Inc., Buffets Inc., Legends
Gaming LLC, Nortel Networks, Premier International Holdings Inc., and many others.
To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/michael-riela/
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QUESTIONS OR COMMENTS?
If you have any questions about this webinar that you did not get to ask during
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not hesitate to email us at info@financialpoise.com with any questions or
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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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Bad Debtor Owes Me Money! (Series: Restructuring, Insolvency & Troubled Companies)

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