Bankruptcy and Creditors Rights Advisor : Corporate Recovery Associates : Richard Feferman : Creditors Committee, Reclamation, Unsecured Creditors

    Chapter 11 is the known at the Reorganization Chapter; Chapter 7 is called the Liquidation     Chapter; and Chapter 13’s title is Adjustment of Debts Of An Individual With Regular Income.

    As I wrote earlier the goal of a Chapter 11 Case is more often than not the rehabilitation of a troubled business entity, although individual filers are not uncommon.

    Chapter 7. In a chapter 7 case a trustee is appointed, who gathers and sells the debtor’s nonexempt assets for the benefit of the creditors. The notion of chapter 7 is that creditors of the same class will be treated equally; and the debtor, who will retain limited exempt assets, will get a fresh start.

    Chapter 13. Chapter 13 is similar to chapter 11, as the goal is for an individual debtor to confirm a plan that repays all or a portion of the debtor’s obligations. Chapter 13 is available only to individuals (no corporations, LLCs, or partnerships). An individual that operates a business as a sole proprietor (a dba is OK) may be eligible to file for bankruptcy under chapter 13.
    To be eligible to file under chapter 13 the individuals unsecured debts must not exceed $307,675 and the debtor’s secured debts may not exceed $922,975. These thresholds are periodically adjusted for inflation.

    Chapter 11. The goal of a chapter 11 cases is for a rehabilitated debtor to emerge from bankruptcy through the confirmation and implementation of a plan of reorganization. The plan is basically a contract between the various interested parties (creditors, debtor, secured lenders) that controls how the debtor’s affairs are to be conducted.

    An advantage of chapter 11 is that by allowing an enterprise to continue in business, value will be maximized for the benefit of the debtor’s unsecured creditors. Generally a going concern is worth more than a business that is in a state of forced liquidation. Often chapter 11 will be used as a platform to sell an operating business. The proceeds are then used to repay creditors according to priority.

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This may be the understatement of a lifetime. The bankruptcy filings of Movie Gallery (aka Hollywood Video); Lillian Vernon; and The Sharper Image have started us off on what may be a robust year of retail failures. With consumers tapped out, what will fall next? Or can the slack be picked up by offshore money taking advantage of a cheap dollar?

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    Chapter 11 of the United States Bankruptcy Code is titled “REORGANIZATION”.

     The goal of a Chapter 11 case is to have the Court enter an order confirming a Chapter 11 Plan. It can be a plan of liquidation or a plan of reorganization. In either case it is a contract between the various parties in a chapter 11 case setting forth how the bankruptcy pie is going to be split up.

    A unique aspect of Chapter 11 is that usually there is not an appointed Bankruptcy Trustee. In most cases filed under Chapter 11 the Debtor plays the roll of Trustee. Many creditors that I get calls from are surprised. “Richard, the same management that got the Debtor into trouble in the first place is acting as the Trustee!” I’ll often hear. 

    The notion of Chapter 11 is the rehabilitation of the Debtor. To provide balance to the fact that the Debtor is acting as Trustee, the Bankruptcy Code provides for the appointment of an Official Committee of Creditors (“Creditors Committee”). I’ll write more about Creditors Committees latter, but suffice it to say that a Creditors Committee can play the roll of a very powerful watchdog.

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    My friend Bob Eisenbach over at Cooley Goodward has been writing about the potential for unsecured creditors to recover attorney’s fees in connection with claims in which the recovery of the fees is allowed by contract or statute outside of bankruptcy (see here).

    This is a complicated issue with conflicting court decisions, but Bob speculates that we may see more and more unsecured creditors including these fees in their proofs of claim.

    Bankruptcy attorney Scott Riddle states in his blog, “The bottom line in these cases is that unsecured creditors will (and probably should) include attorneys fees as part of their claim, at least until the other Circuit Courts rule on the issue.” See Scott’s article here.

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A a creditor from New York called and asked me if he needed to file a Proof of Claim.

First some background. The debtor in a Chapter 11 Bankruptcy case is required to file a list of its unsecured creditors on an official form called “Schedule F”. In addition to the amount owed the debtor may further classify a claim as disputed, contingent, or unliquidated.

According to the Bankruptcy Code, in a Chapter 11 bankruptcy case creditor whose claim is not scheduled; scheduled in the wrong amount; or scheduled as disputed, contingent, or unliquidated shall file a proof of claim before the deadline that will be set by the Court. Please note that requirements for the allowance of a claim under the Bankruptcy Code is not the same for cases under the other Bankruptcy Chapters.

In other words, if a creditor’s claim is listed in the correct amount and not classified as disputed, contingent, or unliquidated then the listing in the schedules by itself is evidence enough for the claim to be allowed. Also your lawyer may have a reason for you to file or not file a Proof of Claim.

Now please don’t throw out your vendor files, as at a latter date a party in the case may object to the claim and evidence of the validity of the claim may need to be provided. Also see me post How To File A Proof Of Claim.

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A credit manager in Tulsa, Oklahoma called me today and said a customer who is in chapter 11 owes her employer a bunch of money. She asked, “how do I find out what is really going on and how much is my company going to collect on that account?”

    I told her that in 2005 our friends in Congress added a new provision to the Bankruptcy Code to make things more transparent for creditors. The Bankruptcy Code now says that official creditors committees formed under the Code shall provide access to information for unsecured creditors that are not appointed to the committee.

    The provision is a little ambiguous, but I suggested that the caller send a couple of friendly letters to the committee chair and lawyer. She’ll probably have to follow-up with a couple more phone calls and letters; and she’ll want to let them know that she is writing pursuant to Section 1102 (b) (3) of the Bankruptcy Code. As the attorney is working by the hour, he should be happy to take her calls (at the expense of the Debtor most likely).

    Most of these professionals are actually very nice people. I suggested she ask what information can the committee provide to help her evaluate the prospects for recovery by unsecured creditors and can the committee provide an estimate of the timing of distributions?

    She can also ask what are the prospects for the rehabilitation of the Debtor, or will the customer’s business be sold as a “Going Concern” (bankruptcy lingo for an operating business as opposed to a closed business).

    In the future I’ll write more about this. And if you get notified that one of your customers has filed for chapter 11, please feel free to call or email my office right away.

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I frequently get calls from creditors asking how to file a Proof of Claim in a Chapter 11 Case. Beware; the rules and requirements are different in the other types of cases (cases filed under Bankruptcy Chapters 7, 9, and 13).

Your attorney may or may not recommend the filing of a Proof of Claim.

A Proof of Claim form will usually be sent out, but a copy of the form can be downloaded here.

Attach any necessary copies (not originals) of documents to support the validity and amount of the claim to the Clerk of the Court where the case is being heard.

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