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Foiled by Bankruptcy Filing? Maybe Not!

Bankruptcy

By Kimberly S. Winick, Esq.

Every creditor faces the risk that someone who owes them money will file for bankruptcy relief. Whether the debtor is planning to liquidate or reorganize, the initial filing invariably delays creditor recoveries.  Upon the filing, an automatic stay takes effect, generally preventing actions to enforce then-existing claims or rights against the debtor or any of the debtor’s property.  Creditors eventually may receive some or even all of what they are owed, with secured creditors (eg: lenders, parties holding security deposits) and priority creditors (eg: employees, consumers who have made deposits) having the best recovery prospects.  General unsecured creditors (eg: vendors, contract parties) run a greater risk of non-payment.  However, not all general unsecured creditors face identical risks of loss.

A fundamental philosophical underpinning of our bankruptcy laws is that a debtor should be given a fresh start.  Another is that all like creditors should receive equal treatment in the debtor’s case. An individual debtor generally will receive a discharge of all pre-bankruptcy unsecured debt, without the need to actually pay it off.  Unsecured creditors who timely file proofs of claim (or whose claims have been properly scheduled in a Chapter 11 case) are likely to share pro rata in a modest pool of assets and recover far less than they are owed.  An attentive creditor may be able to take advantage of exceptions to these rules.

Excepting the Claim from Discharge

Not every obligation of an individual debtor is subject to discharge.  Creditors who file and prevail on appropriate “non-dischargeability” complaints get to have their claims share in the general pool, and also are permitted to continue to assert and collect on those same claims against the debtor and his/her post-bankruptcy assets as if the bankruptcy filing had not occurred.  Generally claims arising from fraud, embezzlement or larceny are not dischargeable.  Similarly, while judgments for post-marital property division may be subject to discharge, claims for domestic support obligations are not.  The grounds for denial of discharge as to a particular creditor’s claim must be alleged in a timely-filed complaint and proven in the bankruptcy case.

A creditor who obtained a judgment before the bankruptcy filing may still have to prove that the claim evidenced by the judgment is not dischargeable.  Oftentimes, a judgment will not clearly be based on non-dischargeable grounds, such as a judgment for damages on a complaint alleging fraud in the inducement and breach of contract.  Similarly, a stipulation settling a lawsuit that included claims about false pretenses or false representations likely will not be enough to establish that the stipulated claim cannot be discharged.  By timely filing a complaint to prevent discharge, a creditor holding a pre-bankruptcy judgement or stipulated judgment will be given the opportunity to submit evidence and argue against discharge of the claim.  The window for filing such a case is short, 30 days after a notice of the deadline is mailed, often within the first three months of the case.  Clearly it is important for a creditor to evaluate its potential rights promptly upon receipt of information about a bankruptcy filing.

Excepting the Debtor From a Fresh Start

Some debtors don’t deserve a fresh start, and the Bankruptcy Code makes that clear.  Where a court finds that a bankruptcy case was not filed in good faith, the case may be dismissed, denying the debtor all bankruptcy relief.  Alternatively, the court may retain the case so that creditors share in the available assets, but deny the debtor its fresh start.  This means that the debtor is not permitted to discharge any debts – all claims are treated as non-dischargeable.  Under this scenario, creditors share in whatever assets have come under the control of the court, and retain the right to continue to pursue the debtor until they have been paid all they are owed.  Debtors who have lied to the court about their assets, hidden assets, hidden records, or cannot explain major losses of assets or information are most likely to suffer this sanction.  While it may feel like vindication, this is generally not the best result for any given creditor, as all claims, not just the particular creditor’s, will survive to be asserted against the debtor after the bankruptcy case.

Pursuing Co-obligors and Guarantors

As a general rule, only an identified debtor is protected by the stay in a bankruptcy case. In individual cases, a co-debtor may be protected for a brief time, if the court finds cause.  A creditor who has claims against third parties should take care to monitor the case and oppose the imposition of any “co-debtor stay.”  Apart from this limited exception, guarantors and co-obligors are fair targets during the pendency of a debtor’s bankruptcy case, unless they are debtors in their own bankruptcy cases.  A creditor who initially opted to enforce its judgment against the debtor, should avail itself of all reasonable recovery opportunities.  Moreover, these co-obligors may not be responsible for paying the claims of the debtor’s other creditors, and so may provide a recovery source that has fewer claims against it.

Conclusion

Each bankruptcy case has its own twists and turns, but an alert creditor may be able to turn the debtor’s case to the creditor’s benefit, and thus avoid being foiled by a bankruptcy filing.  An experienced creditors’ rights lawyer can help you develop and implement effective strategies when the people who owe you money file bankruptcy.


Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interest relating to the subject matter covered by the blog.  If you have any questions about the treatment of creditors’ claims in bankruptcy, or about other creditors’ rights in bankruptcy, please feel free to email Kimberly S. Winick at kwinick@clarktrev.com or to call her at 213.629.5700. For more information about Clark & Trevithick’s Commercial Law and Insolvency practice, please visit our website at www.ClarkTrev.com

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Westinghouse in Bankruptcy! Do they owe you money?

Westinghouse Electric Bankruptcy

By Kimberly S. Winick, Esq.

Westinghouse Electric Company LLC and thirty of its affiliates filed for bankruptcy relief on March 29th – they are calling it a strategic restructuring.  The companies design, manufacture and maintain nuclear power plants.  In the course of their business they hire employees and independent contractors, buy and lease equipment and real estate, contract for casualty, liability, workmen’s comp, and a myriad of other forms of insurance, buy materials and supplies, and store and move them.  They hire catering services and buy food for work teams.  In short, thousands of other businesses and individuals across the USA, and across the world, will be affected by this filing.  We don’t know who, yet, because Westinghouse hasn’t filed the requisite lists and schedules of creditors, asset, contracts, and liabilities.  But those creditors, landlords, contract parties, and others have rights that are being affected now.  The Bankruptcy Court today held hearings on Westinghouse’s requests for special procedures and modifications of Bankruptcy laws and procedures.

The cases were filed in the Southern District of New York (New York City). However, lawyers from all around the country will be representing affected parties and participating in the case.  If you are doing or have done business with Westinghouse or an affiliate, now is the time to review your records, contact a business bankruptcy lawyer, and prepare to protect yourself.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum. Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions about the content in this legal alert, please feel free to contact the author by email at kwinick@ClarkTrev.com, or by telephone at 213-629-5700.

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Commercial Landlords in Bankruptcy – More Ways to Protect Payment Rights

Bankruptcy Payment

By Kimberly S. Winick, Esq.

When a commercial tenant files for relief under the Bankruptcy Code, its landlord may have both prepetition and post-petition claims. Prepetition claims, including unpaid rent as of the petition filing date, and claims for rent that would have been paid if the lease were not rejected in bankruptcy, are often paid at pennies on the dollar.  Post-petition claims, for rent coming due under the lease during the bankruptcy case and prior to lease rejection, are entitled to payment priority as “administrative claims,” and usually must be paid dollar for dollar before the debtor tenant’s chapter 11 plan of reorganization (or liquidation) can be confirmed.

Claims for damage to the rental property may arise before or after the bankruptcy filing. These claims are not always covered by insurance.  Unless a landlord can show that the damage occurred after the petition date, the damage claim likely will be treated as a prepetition claim and the landlord will absorb the brunt of any uninsured loss.

A diligent landlord will conduct a thorough inspection of leased premises, and create a photographic record of the inspection, as soon as practicable after learning that a tenant has filed bankruptcy. Any post-petition damage caused in connection with the operation of the tenant’s business, such as damage to loading docks and bay doors, should then give rise to an administrative claim, payable in full in connection with confirmation of the debtor tenant’s plan of reorganization.

It is always worthwhile for a landlord to preserve and make the most of its administrative claims. Even if the case is filed as or converted to a liquidating case under chapter 7 of the Bankruptcy Code, a landlord’s administrative claims will still enjoy payment priority, although they will not necessarily be paid in full.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions relating to the blog article, please feel free to contact Kimberly Winick by email at kwinick@ClarkTrev.com or telephonically at (213) 629-5700.

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Commercial Landlords With Tenants In Bankruptcy? Increase Your Right To Payment

Petition to File for Bankrptcy

By Stephen E. Hyam, Esq.

Recently, Clark & Trevithick addressed some of the issues that commercial landlords face when a tenant files for bankruptcy. This week, we will talk about how a commercial landlord may strengthen its right to payment out of the bankruptcy.

Know where you are on the list of priorities

In bankruptcy cases, creditors are paid pursuant to a schedule of priority that is set forth in the Bankruptcy Code. Generally, creditors are paid in the following order:

First, unpaid United States Bankruptcy Court fees are paid.

Second, secured creditors, such the debtor’s mortgage holder are paid.

Third, priority unsecured creditors, such as child support or alimony, taxes, and administrative claims are paid.

Fourth, unsecured creditors, which is everyone else are paid.

Unpaid rent due and owing before the bankruptcy filing is an unsecured claim. Being an unsecured creditor is an unenviable position because not only are there higher priority claims that are paid first, but there is typically a large pool of unsecured creditors who are paid only their pro-rata share of whatever cash is left in the bankruptcy estate. However, if the debtor in bankruptcy remains in possession of the nonresidential leased premises, there are two potential ways for a commercial landlord to claim an administrative claim for unpaid rent incurred after the tenant’s bankruptcy case is filed.

While waiting for the lease to be assumed or rejected, your claim is an administrative claim

As discussed in the prior clarktalkblog article Commercial Landlords – Don’t Fear Tenant Bankruptcies!, leases of nonresidential real property must be assumed or rejected. Until the lease is assumed or rejected, the tenant’s obligations under the lease must be performed. As a result, if the debtor fails to pay rent on nonresidential real property that is incurred after the bankruptcy case is filed, the landlord can claim that the unpaid rent is an administrative claim until the lease is rejected. The lease does not need to provide a benefit to the bankruptcy estate. However, if the lease is rejected, the landlord has an unsecured claim dating back to the date the bankruptcy case was filed. The security deposit can be an offset to rent that was unpaid prior to the bankruptcy case, but is not an offset for administrative claims.

A creditor who provides a benefit to the bankruptcy estate has an administrative claim

A creditor has the right to assert an administrative claim for the actual and necessary costs and expenses in preserving bankruptcy estate assets. Although this alternative path is not specific to rent, there is an argument that the debtor’s post-bankruptcy use of leased nonresidential property forms the basis for a claim that the rent is an allowable administrative expense, so long as the debtor’s use of the leased property confers a benefit to the estate. For example, if the debtor remains in possession of a warehouse that contains estate assets, a landlord may argue that the unpaid rent confers a benefit to the estate by preserving estate assets, justifying an administrative claim for the post-bankruptcy rent.

Facts matter and so does prompt action

While no landlord wants a bankrupt tenant, commercial landlords may have arguments to strengthen their claim. Upon being given notice of a tenant’s bankruptcy filing, the landlord should act promptly to evaluate the facts and identify options for strengthening its position in the case.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions about how a commercial landlord may strengthen its right to payment out of the bankruptcy, please feel free to contact Stephen Hyam at shyam@ClarkTrev.com or telephonically at (213) 629-5700.

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COMMERCIAL LANDLORDS – DON’T FEAR TENANT BANKRUPTCIES!

Tenant Bankruptcy

By Leslie R. Horowitz, Esq.

The Problem

The term “bankruptcy” usually strikes fear in the hearts of Landlords, sometimes for good reason. Tenants who file for bankruptcy may stop paying rent, and prevent Landlords from regaining possession in order to re-let the premises. Most creditors hear the words “automatic stay” and are concerned they have no recourse. The automatic stay in bankruptcy does stop all proceedings against the Debtor and the Debtor’s property. However, with regard to commercial, non-residential leases, the Landlord is in a stronger position than one might think.

Assumption of Lease

In a Chapter 7 (liquidation), the Trustee, or in a Chapter 11 (reorganization), a Debtor has 120 days from the date of the bankruptcy petition (or a plan is confirmed whichever is earlier) to assume a non-residential lease. Prior to the expiration of the 120 days, the Trustee or Debtor or sometimes even the Lessor may request the court to extend this period an additional 90 days. If the lease is assumed, the Trustee or Debtor is required to cure any defaults and make current payments throughout the bankruptcy case.

Rejection of Lease

If not assumed within 120 days, the lease is deemed rejected.

During the time that a Debtor or Trustee occupies the premises, the Landlord is entitled to administrative rent which places the Landlord pari parsu with other administrative claimants, including the Trustee and the Trustee’s lawyer. Most judges require post-petition rent to be kept current as a condition to staying in Chapter 11.  However, if the Debtor or Trustee rejects the lease, the Landlord is not entitled to an administrative claim for any remaining balance due under the lease. The Landlord is entitled to an unsecured claim as if there was a pre-petition breach of the lease/contract. However, the Landlord’s damages are limited by the Bankruptcy Code to the following formula:

“The claim may not exceed the rent stated by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of the date of the filing of the petition and the date on which such lessor repossessed or the lessee surrendered the leased property, plus any unpaid rent due under such lease, on the earlier of such dates.”

In other words, the longer the lease, the less the Landlord will be able to recover in damages beyond three years. In theory, the Landlord would re-let the premises long before such damages would be realized. If the lease has less than three years left on the term, the Landlord has a greater chance of recovering close to the entire claim.

Under most circumstances, the Landlord is entitled to administrative rent even after rejection if the Trustee or Debtor continue to occupy and use the premises. The majority of Trustees do surrender the premises, but occasionally the Trustee wants to sell the Debtor’s personal property on the premises, which often takes a few months and may result an administrative claim for the Landlord.

Surrender Property

If rejection of the lease occurs, the Bankruptcy Code states that the Trustee or Debtor must immediately surrender the premises to the Landlord. If the Trustee or Debtor does not surrender the premises, the Landlord may file a motion in the Bankruptcy Court to compel surrender. Furthermore, the law provides that the Landlord may seek a writ of possession directly from the Bankruptcy Court. Thus, the Landlord is not required to return to state court, file a notice to pay or quit, file a complaint and litigate.

For Commercial Landlords, all is not lost when a Tenant files for bankruptcy.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions about the article, please feel free to contact Les Horowitz at lhorowitz@ClarkTrev.com or telephonically at (213) 629-5700.