Web prepared, posted and Copyright © April 1, 2002, by the American Bankruptcy Institute.
Written by: In the distressed arena, there is an increase in the use of involuntary petitions by unsecured creditors, especially bondholders, as a device to get troubled companies under the jurisdiction of a bankruptcy court—sometimes for proper purposes and other times for what appears to be ulterior motives. Involuntary petitions can be useful in certain situations such as fraud or gross mismanagement. However, they are often not helpful to unsecured creditors because forcing an insolvent company into bankruptcy may be a sure-fire way of kissing your money goodbye. The purpose of this article is not to debate the merits of the use of involuntary petitions against a company, but instead to focus on the situation where other creditors have already "pulled the trigger," and how this event affects your relationship with the company now facing an involuntary petition. The Gap PeriodThe time between the filing of an involuntary petition and the entry of an order for relief, which formally places the debtor into bankruptcy, is called the "gap period." Gap periods can vary from a few days to a couple of years in some unique cases. Generally speaking, the Bankruptcy Code allows an alleged debtor to conduct its business during the gap period as if the filing never occurred. For example, the alleged debtor may continue to operate, use, acquire and dispose of property while at the same time it is afforded the protections of the automatic stay. The Code allows a company to operate its business while it defends an improperly filed involuntary petition; otherwise, an involuntary petition would in and of itself paralyze a company and preordain its entry into a bankruptcy case. Because the automatic stay applies during the gap period, creditors are prohibited from taking any action to collect their debt. One other point should be noted here: There is nothing in the Code that directly requires an alleged debtor to notify all of its creditors that an involuntary petition has been filed against it. Therefore, a credit professional needs to stay apprised of developments affecting his or her credit exposure, such as involuntary cases, to the best extent possible. Claims Incurred and Claims Paid During the Gap PeriodDuring the gap period, alleged debtors are not prohibited from making payments on invoices that arose prior to the filing of the involuntary petition. However, if an order for relief is ultimately entered, these payments can be recouped by the estate as avoidable gap period transfers. Nevertheless, it is always better to get your money today subject to the possibility of having to return it (hopefully at a discount) two years later than never getting paid at all! The Bankruptcy Code specifically deals with the treatment of extensions of credit during the gap period. An allowed claim related to unsecured credit extended during the gap period will be afforded pre-petition priority status, so long as the credit is extended in the ordinary course of the alleged debtor's business and equal value is provided. The Bankruptcy Code treats the claim as if it arose prior to the filing of the involuntary petition, but elevates the claim ahead of general pre-petition unsecured claims. At the end of the day, gap period claims are better off than pre-petition unsecured claims; however, your claim may still be out of the money if the case is administratively insolvent or if secured creditors take 100 percent of any eventual distributions pursuant to the absolute priority rule. ConclusionBe attuned to your customers. If an involuntary petition is filed, you need to be proactive and evaluate all of your options and proceed with caution. A full analysis should be undertaken as to whether it is desirable to continue to extend credit to an involuntary debtor during the gap period based on your existing credit exposure and the protections (or lack thereof) provided by the Bankruptcy Code, or whether it is more desirable to implement better payment programs (c.o.d., letters of credit or prepayment) to attempt to avoid further credit risk.
The December meeting of the UTC Committee was outstanding, both in terms of the number of people in attendance and the incredible response of those attending. At the meeting, the committee's former co-chairs, Judy Thompson (Poyner & Spruill; Charlotte, N.C.) and Sandra Shirmang (Kraft Foods Inc.; Northfield, Ill.), were recognized and thanked for their past excellent leadership. Doug Fox (Bosch Rexroth Corp.; Lehigh Valley, Pa.) and Lynnette Warman (Jenkens & Gilchrist PC; Dallas) were introduced as the new co-chairs. Steve Kortanek (Klehr, Harrison, Harvey, Branzburg & Ellers LLP; Wilmington, Del.) was named as the new Publications Director for the committee. Please contact him at skortane@klehr.com for information about submitting articles for News & Views. The committee then discussed existing projects. Bruce Nathan (Davidoff & Malito L.L.P.; New York) gave an update on the reclamation project and advised that the reclamation manual should be published shortly. (The Manual on Trade Creditors' Rights of Reclamation & Stoppage of Delivery of Goods is now available from ABI and can be ordered by calling (703) 739-0800 or visiting "/AM/Template.cfm?Section=Home" and ordering it online.) The committee discussed the fact that this is an excellent publication and that all of us should make a concerted effort to send our clients as many of the manuals as possible. David Wheeler (Moore & Van Allen PLLC; Charleston, S.C.) gave an update on the preference project and has agreed to circulate the finished product for final edits by committee members and to submit it to the ABI review board. Lastly, we discussed the Ad Hoc Task Force on Trade Creditor Involvement; Bruce Nathan agreed to act as co-chair with Tom Grace (Locke Liddell & Sapp; Houston) on the project, and Doug Fox agreed to join the team. If anyone would like to join this project, please contact Bruce Nathan or Doug Fox. As for new projects, the members agreed that expanding membership in the committee by adding new trade members is the primary goal of the committee this year. To that end, many new projects have been launched. Laura Portello (Brinkman & Associates; Los Angeles) headed the subcommittee to organize a cocktail reception at the NACM Legislative Conference. The NACM Legislative Conference is a wonderful opportunity to meet senior credit people. Please contact her at (213) 532-8772 x207 to join her team. Darin Brinkman (Brinkman & Associates; Los Angeles) has agreed to chair a subcommittee to prepare a hands-on guide for creditors about proofs of claim and avoiding the common pitfalls. This is a great project. Contact Darin Brinkman if interested. Finally, Dean Rallis (Sulmeyer Kupetz Baumann & Rothman; Los Angeles) has agreed to head a subcommittee that will prepare a how-to manual about the chapter 11 voting process. This should be well-received by trade creditors. Please contact Dean Rallis if you are interested in getting involved in this project. The next meeting of the UTC Committee will be at the ABI Annual Spring Meeting, April 21, 2002, 8:30-10:00 a.m. Thanks for getting the UTC Committee off to a great start for 2002! —Lynnette R. Warman
The Nuts & Bolts Column will not be included in this edition. In its place is an overview and minutes of the cocktail reception held at the NACM Legislative Conference in Arlington, Va., on March 9, 2002. For the second year, the UTC Committee hosted a reception in conjunction with the National Association of Credit Managers (NACM) Legislative Conference held at the Crystal Gateway Marriott located in Crystal City (Arlington), Va. The reception was held on Saturday, March 9, 2002, from 5:00-6:30 pm. There was a terrific turnout of both NACM and ABI members at the reception. More than 50 conference attendees were there, including several members of the NACM leadership. NACM Chair Val Venable, NACM Executive Vice President Robin Schauseil, Director of Educational Program Jill Leimbach and NACM Mid-Atlantic Region President Bill von Hagel were some of the NACM leaders who attended. A number of ABI members were also in attendance, including UTC Committee Co-chairs Doug Fox and Lynnette R. Warman, News & Views Editor Steve Kortanek, Paul McIntosh, Bruce Nathan, Laura Portillo and Daren Brinkman. At the reception, the newly released Manual on Trade Creditors' Rights of Reclamation & Stoppage of Delivery of Goods was presented to Bruce Nathan by Lynnette R. Warman (see top right photo), and his efforts in bringing the reclamation project to fruition were applauded. Bruce Nathan, who was set to speak at the conference on the subject of reclamation, said he was pleased with the publication and its timely delivery. The reception was designed to promote the UTC Committee, awareness of ABI and the benefits of membership to NACM members in an informal setting. The UTC Committee made available to all attendees information about the committee, ABI and a number of its publications. After the reception, a short meeting was held to discuss its success and to discuss future events. The UTC Committee plans to hold a reception next year at the NACM Legislative Conference and urges all members to make plans to attend. The NACM Legislative Conference is generally held the second weekend of March at the Crystal Gateway Marriott Hotel in Arlington, Va. Contact Doug Fox if you are interested in obtaining more information about the conference or the UTC Committee reception to be held there in 2003.
The UTCC will meet at the 2002 Annual Spring Meeting in Washington, D.C., on Sunday, April 21, 2002, from 8:30-10:00 a.m. I. Review of existing projects and publications
The UTC Committee will meet at the upcoming conferences: • Sunday, April 21, 2002: ABI Annual Spring Meeting—J.W. Marriott, Washington, D.C., from 8:30-10:00 a.m. • December 5-8, 2002: Winter Leadership Conference—The Westin La Paloma, Tucson, Ariz. The next issue of News & Views will be published in the summer. Call Steven Kortanek at (302) 426-1189 or e-mail skortane@klehr.com for more information. |