Web prepared, posted and Copyright © February 14, 2003, by the American Bankruptcy Institute.

Written by:
Sandra A. Larratt-Smith
Bid4Assets Inc.; Boston
slarratt@bid4assets.com

With the tremendous downturn in our economy, the recent surge in businesses filing for bankruptcy was inevitable. Bankruptcy filings for public companies increased 45 percent from 176 in 2000 to 255 in 2001, far surpassing the previous record of 123 filings in 1991. Based on this trend, and factoring in additional liquidations and chapter 11 filings expected by private companies, most experts agree that the number of filings is certain to be greater in 2002.

Credit executives will be tested once again, as they were in the early '90s, to determine the "right" approach for handling their bankrupt receivables. Fortunately, among the major differences between then and now, are the many technological resources that the credit executive can utilize today.

That Was Then

You might have received a letter from a vulture investor back in 1988, with a $.05 bid for your claim against LTV Corp. How did you know if this was a good price or a bad price? Did your company even have a process in place for determining whether to sell? Perhaps you flipped a coin, or chose inaction, rather than taking the risk of selling too low. If you had an abundance of resources at your disposal, you might have decided to go to the bankruptcy court, dig through the myriad court documents, query the attorneys, call a few brokers for bond prices, order financial statements and analyze them when received three weeks later, and even then decide to pass. As it turned out, $.05 was probably the right price for an LTV claim, considering a $0.20 recovery of cash and notes seven years later. But without the proper information readily available, the credit executive found great difficulty in determining the reasonableness of a $.05 bid.

On the other hand, "vulture investors" (claims purchasers) were willing to spend the time perusing all of the required documents to determine value and had the patience to wait many years for their recovery. The 30 percent expected yields were believed by them to be justified in exchange for taking on the laborious administration required in addition to the inherent investment risk. "Vultures" possessed a great amount of seemingly unobtainable knowledge that translated into a "take it or leave it" deeply discounted bid for a creditor's claim. It's not difficult to understand why many credit managers felt uneasy about selling their claims. Was there any way for a credit manager to have more control over this process?

In the early '90s, as new investors entered the marketplace with additional capital to invest, competition for claims increased. In addition, the advantages of monetizing bankruptcy claims were becoming more widely known and accepted. By selling their claims, credit managers saved time and money by not expending the resources required to follow the legal and financial intricacies of each bankruptcy case. And only through assigning a definitive sale price to an accounts receivable in bankruptcy could that claim be written off for tax purposes. These tax benefits, resource savings and the ability to convert non-working assets to working assets were quite meaningful in accounts-receivable management and became more of a standard practice in many businesses. Creditors had begun to feel more confident and seemed to be gaining more control of the bankruptcy claim sale process.

The Power Shift

By 1995, there was a definite shift from the buyer to the seller in the power of claims trading. With a lull in bankruptcy case filings and a multitude of "eager-to-spend" investors, when Caldor's and Bradlees filed for bankruptcy, the market entered a state of frenzy. Within the first month, bids for claims skyrocketed to the $0.50 and $0.60 levels. A creditor with a claim to offer this hungry bunch had the power to demand top dollar. I believe, however, that because of many creditors' generously high opinion of the distressed investor's intelligence, many claims went unsold. Potential sellers may have felt that since investors typically had better access to information, they should hold onto their "valuable" claim. Ultimately, claimholders in Bradlees's case received about $0.20, and in Caldor's, recoveries for pre-petition claims were non-existent. These were instances in which the investor's due diligence process was substandard and creditors were able to take advantage of an overly exuberant marketplace. Perhaps if creditors had been able to obtain the necessary knowledge, they might have discovered the extreme to which investors were overpaying, and elected to sell.

This Is NOW

Fortunately for all participants, the bankruptcy claims trading environment has evolved dramatically from the time of the first LTV Corp. bankruptcy. The investor groups have undergone a severe shake-out, as many funds folded due to imprudent investing techniques. Those distressed investors that survived are disciplined value investors who realize that their bids must be competitive and firm to attract a creditworthy seller. Most creditors today have a greater understanding of the bankruptcy cycle and the process and benefits of selling claims. They are proactive and may sell rather than hold to meet their own corporate goals, and they now better trust the claims-disposition procedure. Technology has helped to drive this evolution by dramatically improving a participant's access to information and competition.

Minutes of UTC Committee Meeting at the Winter Leadership Conference

The UTCC met on Saturday, Dec. 7, 2002, at ABI's Winter Leadership Conference in Tucson, Ariz. More than 40 people attended.

The meeting began with reports from the various project leaders. There was a lively discussion about the status of an ad hoc committee, led by Douglas Fox (Bosch Rexroth Corp.; Lehigh Valley, Pa.) and Bruce Nathan (Davidoff & Malito LLP; New York), regarding their attempts to promote more interaction and involvement between trade creditors and the UTC Committee. Doug reported that he is making arrangements for a cocktail party to be held by the ABI UTCC and the NACM Oregon office at the NACM Legislative Conference in March 2003.

Steven Kortanek (Klehr, Harrison, Harvey, Branzburg & Ellers LLP; Wilmington, Del.) has stepped down as publications director. David Wheeler (Moore & Van Allen PLLC; Charleston, S.C.) will take on that position and will be in charge of editing four issues in 2003Üone per quarter. Steve and the two co-chairs of the committee will be working with ABI to transform the newsletter to an electronic newsletter over the course of the year.

Daren Brinkman (Brinkman & Associates PC; Los Angeles) discussed his project, a proof-of-claim manual, and advised it should be ready to publish by spring 2003. Dean Rallis (Sulmeyer, Kupetz, Baumann & Rothman PC; Los Angeles) discussed his project, a manual on chapter 11 voting, and asked for people to volunteer. Please contact him if you would like to help with that project. Deborah Thorne (Barnes & Thornburg; Chicago) will be heading a new project, a manual on preference defenses. Please contact her if you are interested in that project.

Sandra Larratt-Smith (Bid4Assets Inc.; Boston) spoke at the meeting about claims trading. She was very informative about the claims-trading process and provided thoughtful answers to the many questions posed to her.

Notes of Interest

(a) The ad hoc committee on Preference Payment Defense Analysis is immediately seeking volunteers. This analysis will be organized by circuit and allow practitioners to compare the circuits' approaches to preference defenses. It will also provide unique holdings or arguments related to preference defenses that practitioners may be able to apply in other jurisdictions. It is a goal that the analysis be prepared for use at ABI's Annual Spring Meeting, and the analysis may be published as an ABI handbook.

The deadline for submitting materials to be prepared for the Annual Spring Meeting is Feb. 7. Accordingly, we would like to receive materials by Feb. 4, if at all possible. If interested, please immediately send an e-mail to kurt.winiecki@btlaw.com.

(b) Scott Blakeley (Blakeley & Blakeley LLP; Irvine, Calif.) and Doug Fox are seeking volunteers for a three-month project something along the lines of: "Task Force to Examine Unsecured Trade Creditor Recoveries in Large Public Company Bankruptcies Involving Significant Asbestos Claims." The urgency of the project is due to the recent heightened awareness of bankruptcy and asbestos issues. It is hoped that this project will enhance the discussions that will take place in the first half of 2003 in industry, government and the media.

Specifically, Scott and Doug are looking for practitioners who have been working on the "asbestos users" bankruptcies of the past two or three years. If interested, please immediately send an e-mail to doug.fox@boschrexroth-us.com.

(c) The following 2003 Annual Spring Meeting seminar topics should be of particular interest to unsecured trade creditors:

1. The New World of Examiners: Their Power and Their Place
2. Recharacterization of Debt: Now You See It Now You Don't (What Happened to Equitable Subordination?)
3. Everything You Need to Know About First-day Orders
4. PreferencesÜPushing the Envelope on Defenses
5. Out-of-court Alternatives to Bankruptcy: ABCs, Recei-verships, Creditor Composition, Statutory Dissolution, Liquidating Trusts, New Legislative Developments

A New Preference Defense?

David B. Wheeler
Moore & Van Allen PLLC; Charleston, S.C.
davidwheeler@mvalaw.com

A decision issued last September by the U.S. Bankruptcy Court for the District of Delaware may provide creditors with one more line of defense in the face of a preference claim. In the case of In re LaRoche Industries Inc.,¹ visiting Judge John C. Akard granted summary judgment in favor of the preference defendant, GATX Financial Corp., in a preference action brought by the debtor, LaRoche Industries. GATX was granted summary judgment because the court found that since GATX's claim had been previously litigated and allowed, §502(d) of the Bankruptcy Code precluded a subsequent recovery under §547 of the Code.

During the course of the case, GATX filed a timely proof of claim in the amount of $117,215.84. The debtor objected to the claim, seeking to reduce the allowed amount to $103,977.42. GATX did not oppose the objection to claim, and as a result, the GATX claim was allowed in the amount of $103,977.42 and paid pursuant to the distribution plan of the debtors. Post-confirmation and post-distribution, the debtor commenced preference actions, including one against GATX, seeking recovery of $84,271.38.

Reviewing the legislative history of §502(d), the court concluded that it stands for the proposition that if a claim was allowed there is no longer a voidable transfer due from that claimant. In essence, avoidable transfers, such as a preference, must be determined as part of the claims process and not at a later time, especially after distribution under the plan has been made.² As further support for its conclusion, the court cited Asousa Partnership v. Pennacle Foods Inc. (In re Asousa Partnership),³ as well as the pre-Code decision of the U.S. Supreme Court in Katchen v. Landy.⁴

The court specifically noted the statutory language of §502(d): "the court should allow any entity...that is a transferee of a transfer avoidable under...§547 of this title, unless the transferee has paid the amount, or turned over any such property, for such entity or transferee is liable under... §550...of this title." The court further noted that in Katchen, the Supreme Court held that under the predecessor to §502(d), §57(g), a claim could neither be allowed nor disallowed until the preference matter was adjudicated, thus requiring preference matters to be resolved before a claim could be allowed or disallowed. Accordingly, the court joined the decision of the court in In re Asousa Partnership that a preference action is "part and parcel" of the claims allowance process because to rule on the one issue would be to rule on the other issue as well.⁵

It is important to note that the court expressly excluded from the reach of its decision those instances in which claims were "deemed allowed" or merely scheduled by the debtor and not listed as disputed, contingent or unliquidated.⁶

Although the court made light of the fact that custom in the District of Delaware ran absolutely contrary to its holding, it noted the customs are no basis to ignore the mandates of the Bankruptcy Code and Rules and the principles of fairness.⁷

Footnotes

¹ 284 B.R. 405 (Bankr. D. Del. 2002). Return to article

² Id. at 408-409. Return to article

³ 276 B.R. 55, 73 (Bankr. E.D. Pa. 2002). Return to article

⁴ 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966). Return to article

⁵ 284 B.R. at 408-409. Return to article

⁶ Id. at 410. Return to article

⁷ Id. Return to article

ABI Preference Handbook Note

David B. Wheeler
Moore & Van Allen PLLC; Charleston, S.C.
davidwheeler@mvalaw.com

In June 2002, ABI released the ABI Preference Handbook, a publication geared toward trade creditors, credit managers and the professional with little experience in this area of bankruptcy law. The Handbook is broken down into four primary sections: (1) The Elements of a Preference, (2) Defending Preference Claims, (3) Preference Recovery and (4) Preference Tips.

The first section summarizes the statutory elements of a preference and addresses such issues as court procedure, venue and jurisdiction. It also includes a detailed analysis of the terms defining a preference and how these terms have been interpreted by the courts.

The second section addresses the all-important defenses to a preference claim. Both statutory defenses and the importance of analyzing the subject transfer to determine whether it falls outside the statutory preference definition are explored.

The third section addresses those who may be held liable for the recovery of a preferential transfer, as well as non-bankruptcy defenses to liability. The fourth section briefly relates various credit and record-keeping practices that should minimize preference exposure.

One of the more Herculean efforts involved in the preparation of the Handbook was the preparation of a state-by-state summary of individual state preference laws. When I was first asked to serve as editor for this project by Judy Thompson in 2000, I was fortunate to preside over the efforts of fellow committee members Jim Angell, Deborah Thorne, Ed Flint and Jim Langdon. All were instrumental in the drafting and preparation of the initial drafts of different sections of the Handbook. As this project neared completion, I was fortunate indeed to receive additional assistance from Committee Co-chairman Doug Fox and Committee Member Geoff Berman. John Penn, ABI's Vice President-Publications, wasÜthrough his "insistent encouragement"Üinstrumental in bringing this project to completion. Committee Co-chair Lynette Warman was most helpful in providing her support and encouragement to this project. Last, but not least, the committee's many volunteers who provided state preference law summaries have my sincere appreciation.

I have reviewed the various drafts leading to the final product of this Handbook, and I feel that all involved should be proud of their contributions. Available for only $7 to ABI members, the Handbook is an essential tool for any trade creditor doing business today.

Next UTCC Newsletter to Arrive in Your E-mail

Look for the next issue of News & Views in your e-mail inbox. ABI began launching committee e-newsletters in December, with the debut of the Business Reorganization Committee newsletter . ABI's Consumer Committee and the Public Companies and Claims Trading Committee both plan to introduce their e-newsletters this month.

The newsletter will provide the same in-depth stories and committee news, along with additional information of interest to UTC Committee members that is available at ABI World. If you would like to contribute to the next newsletter, contact David Wheeler at davidwheeler@mvalaw.com.

UTC Committee Calendar

The UTC Committee will meet at the upcoming conferences:

• March 16-18: NACM Legislative Conference—Crystal Gateway Marriott; Arlington, Va.
• April 10-13, 2003: Annual Spring Meeting—The Grand Hyatt; Washington, D.C.
• December 4-6, 2003: Winter Leadership Conference—La Quinta Resort and Club; La Quinta, Calif.

Contact David Wheeler at (843) 579-7000 or davidwheeler@mvalaw.com for News & Views publishing information.