1. © White and Williams LLP 2006 “Bankruptcy Primer For In-House Counsel” Presented To The Delaware Valley Association of Corporate Counsel of America on October 17, 2006 By: Robert A. Kargen, Esquire WHITE AND WILLIAMS LLP 1800 One Liberty Place 1650 Market Street Philadelphia, PA 19103 Ph: (215) 864-7134 Email: Kargenr@whiteandwilliams.com

2. © White and Williams LLP 2006 Definitions Arcane:secret; hidden; mysterious Esoteric:confined to a select circle; confidential; designed for or understood by an initiated and enlightened few; abstruse; profound Bankruptcy Law:Arcane and Esoteric Bankruptcy Petition Date Pre-PetitionPost- Petition

3. © White and Williams LLP 2006 Constitutional Authority for Congress to Pass Uniform Laws Regarding Bankruptcy Article I, § 8, provides: “To establish an uniform Rule of Naturalization, and Uniform Laws on the subject of bankruptcies throughout the United States;”

4. © White and Williams LLP 2006 What’s Odd About Congress? Title 11 of the United States Code contains the statutory provisions of the Bankruptcy Code. Chapter 1 – General Provisions Chapter 3 – Case Administration Chapter 5 – Creditors, the Debtor and the Estate Chapter 7 – Liquidation Chapter 9 – Adjustment of Debts of a Municipality Chapter 11 – Reorganization Chapter 12 – Adjustment of Debts of a Family Farmer or Fisherman with regular annual income (why is this an even number?) Chapter 13 – Adjustment of Debts of an Individual with regular income Chapter 15 – Ancillary and Cross-Border Cases

5. © White and Williams LLP 2006 Differences Between Chapter 7 and Chapter 11 Chapter 7 – Liquidation Commencement of a Case Voluntary Involuntary Order for Relief Appointment of a Trustee Duties of a Trustee Collect and Reduce to Money Property of the Estate Investigate Financial Affairs of the Debtor Examine Proofs of Claim If advisable, oppose discharge of the Debtor Furnish information concerning the Estate and Estate’s administration as requested by a party in interest Make a final report Miscellaneous provisions regarding domestic support, transfer of patients from a health care business, consumer issues, child support issues and other non-business provisions

6. © White and Williams LLP 2006 Chapter 7 Liquidation (continued) Distribution of Property of the Estate Secured Creditors will receive their collateral or the proceeds of the collateral Administrative Expenses Trustee’s fees (statutory percentages) Counsel for the Trustee Other Professionals engaged by the Trustee Obligations to Vendors or Third Parties incurred in the course of administering the Debtor’s Estate

7. © White and Williams LLP 2006 Chapter 7 Liquidation (continued) Priority Unsecured Creditors Domestic Support, Child Support Allowed Administrative Expenses during the Involuntary Gap Period Claims of Employees, but only to the extent of $10,000 for each individual for wages, salaries and commissions earned within 180 days before the date of the filing of the Petition Allowed Unsecured Claims for contribution to Employee Benefit Plans for services rendered within 180 days before the filing of the Petition, limited for each such Plan to the number of employees covered by such Plan multiplied by $10,000, less the aggregate paid to such employees under the wage priority

8. © White and Williams LLP 2006 Chapter 7 Liquidation (continued) Claims for persons engaged in the production of grain against a Debtor who operates a grain storage facility, or fisherman against a Debtor who has acquired fish or fish products from a fisherman but each limited to the extent of $4,925 Deposits made by individuals to the extent of $2,225 for each such individual Allowed unsecured claims of a governmental unit for taxes General Unsecured Creditors Interest holders and equity holders

9. © White and Williams LLP 2006 Chapter 11 – Reorganization Case is commenced by the filing of a petition – either voluntary or involuntary Claims of creditors are treated in a Plan Plan will classify creditors with like claims Plan will propose treatment of creditors claims Acceptance of a Plan is obtained by an affirmative vote of more than 50% in number of creditors and more than 2/3 in amount of creditors in the class (only creditors whose claims are “impaired” get to vote)

10. © White and Williams LLP 2006 Chapter 11 – Reorganization (continued) Debtor’s exclusive period to file a Plan 120 days after the date of the Order for Relief unless extended by the Court Court may not extend the exclusivity period beyond a date which is 18 months after the date of the Order for Relief In a small business case, only the Debtor can file a Plan until 180 days after the date of the Order for Relief but the Plan must be filed not later than 300 days after the Order for Relief.

11. © White and Williams LLP 2006 Chapter 11 – Reorganization (continued) A small business Debtor is a person engaged in a commercial or business activity (excluding a person whose primary activity is the business of owning or operating real property) that has aggregate non-contingent liquidated secured and unsecured debts as of the date of the Petition or the date of the Order for Relief in an amount not more than $2,000,000 and in which case a Trustee has not been appointed. In a small business case, the Court must confirm a Plan that complies with all of the provisions of the Bankruptcy Code not later than 45 days after the Plan is filed unless the time for confirmation is extended by the Court.

12. © White and Williams LLP 2006 Chapter 11 – Reorganization (continued) The “Cram Down” The Plan must not discriminate unfairly and it must be fair and equitable with respect to each class of claims or interest that is impaired under, and has not accepted, the Plan Fair and equitable with respect to secured creditors: i. Secured creditors must retain their liens securing their claims; and ii. Secured creditors must receive, on account of their claim, deferred cash payments totaling at least the allowed amount of the claim with a value, as of the effective date, of at least the value of the creditor’s interest in the Estate’s interest in such property (is this Greek?) or

13. © White and Williams LLP 2006 Chapter 11 – Reorganization (continued) Secured creditors must realize the “indubitable equivalent” of their claims Fair and equitable with respect to unsecured creditors: The unsecured creditors receive property of a value, as of the effective date of the Plan, equal to the allowed amount of their claim (they are paid in full) or The holder of any claim or interest junior to the claims of the unsecured creditors will not receive or retain anything on account of such junior claim or interest (the “Absolute Priority Rule” and the so-called “New Value Corollary or Exception”). In addition, with respect to each impaired class of claims or interests, each holder of a claim or interest has to receive at least what they would receive on account of their claim if the Debtor were liquidated under Chapter 7 of the Bankruptcy Code.

14. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know The Automatic Stay The filing of a Petition (including an Involuntary Petition) operates as a stay, applicable to all entities, of: the commencement or continuation, including the issuance or employment of process, of any judicial, administrative or other action against the Debtor to recover on a claim that arose prior to the commencement of the case the enforcement of a judgment obtained before the commencement of the case any act to obtain possession of property of the Estate or to exercise control over property of the Estate any act to create, perfect or enforce a lien

15. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) any act to collect, assess or recover a claim that arose before the commencement of the case the set-off of any debt owing to the Debtor that arose before the commencement of the case the commencement or continuation of a proceeding before the tax court concerning a corporate debtor’s tax liability for a taxable period which the Bankruptcy Court may determine

16. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Statutory exceptions to the automatic stay: Very limited – primarily dealing with domestic relations issues such as the establishment of paternity, child support, visitation, alimony and certain actions involving the government under certain federal statutes and arcane and esoteric provisions regarding commodities brokers, stockbrokers, commodity contracts, swap agreements and the like. The stay generally exists until the case is closed or the case is dismissed or if it is a Chapter 7 liquidation at the time a discharge is granted or denied.

17. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Relief from the Automatic Stay Motion for Relief For Cause, including lack of adequate protection of an interest in property With respect to a stay of an act against property, if a Debtor does not have equity in the property and the property is not necessary to an effective reorganization The Court will grant relief from the stay with respect to a stay of an act against a single asset real estate by a creditor whose claim is secured by an interest in such real estate unless, not later than a date that is 90 days after the entry of the Order for Relief, the Debtor has filed a Plan of Reorganization with a reasonable possibility of being confirmed or the Debtor has commenced monthly payments that may, in the Debtor’s sole discretion, be made from rents or other income generated from the property and are in an amount equal to interest at the then applicable non-default contract rate of interest.

18. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Executory Contracts ● What is an Executory Contract? A contract in which both parties still have something to do to perform (other than the payment of money) and where the failure to perform would constitute a breach of the contract. ● Assumption - a Trustee or Debtor-in-Possession may assume an executory contract ● Conditions to Assumption: The Trustee must cure or provide adequate assurance that it will promptly cure any existing defaults (other than bankruptcy defaults) Compensate or provides adequate assurance that the Trustee will promptly compensate a party for any actual pecuniary loss, and Provides adequate assurance of future performance under the contract or lease.

19. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Executory Contracts (continued) Assignment If a Trustee assumes a contract, he may then assign the contract even if the contract specifically prohibits assignment (Is this Wonderland?). In order to assign the contract, the Trustee must first assume it and provide adequate assurance of future performance by the assignee of such contract. The decision to assume or reject executory contracts is based on the business judgment rule Note: There are special provisions in the Section dealing with assumption or assignment of executory contracts for shopping center leases, intellectual property licenses, timeshare interests and contracts for the sale of real property among others. Status of an executory contract not assumed or rejected Non-Debtor party must take affirmative action to resolve the question

20. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Sales of Goods to Debtors-in-Possession C.O.D. C.B.D Credit Terms Administrative Claims

21. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Right of Reclamation The Bankruptcy Code has some protections for individuals who deliver goods to a debtor shortly before bankruptcy: A seller of goods, who has sold goods to the Debtor in the ordinary course of the seller’s business has a right to reclaim such goods if the Debtor received them while insolvent, within 45 days before the date of the commencement of the case. However, the seller may not reclaim the goods unless it demands, in writing, reclamation of the goods not later than 45 days after the date of receipt of such goods by the Debtor, or not later than 20 days after the date of commencement of the case if the 45 day period expires after the commencement of the case.

22. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Right of Reclamation (continued) In addition, if a seller fails to provide notice in the manner set forth above, the seller may still assert a right to an administrative claim equal to the value of any goods received by the Debtor within 20 days before the date of the commencement of a case as long as the goods were sold to the Debtor in the ordinary course of the Debtor’s business. Thus, companies that sell goods to Debtors and which are received by the Debtor within 20 days before the commencement of the case, will be entitled to an administrative claim (which are paid prior to unsecured claims) even if the Seller fails to request reclamation.

23. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Proofs of Claim Always file a Proof of Claim Submission to jurisdiction of the Bankruptcy Court Claims objection process

24. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Preferences I don’t make the laws – if you don’t like them, write to your Congressman A preference is a transfer of property of the Debtor to a creditor subject to the ability of a Debtor or Trustee to recover such transfer for the benefit of the Estate In order to recover a preferential payment, the following elements must be proved – the transfer of property or granting of a lien, must have been made: 1. To or for the benefit of a creditor; 2. On account of an antecedent debt; 3. While the Debtor was insolvent (there is a presumption of insolvency); 4. Made within 90 days prior to the filing of a Petition or between 90 days and one year if the transferee was an insider; and 5. Which enables the creditor to receive more than the creditor would receive if the case were a case under Chapter 7 and the transfer had not been made (i.e., payments to fully secured creditors cannot be avoided).

25. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Preferences (continued) Defenses to Preference Action Contemporaneous exchange Ordinary course of business New value Nationwide jurisdiction – If the amount of the claim is $5,000 or greater and the Debtor’s debts are not primarily consumer debts.

26. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Fraudulent Transfers The Debtor-in-Possession or Trustee may avoid a transfer (recover the amount of money or property transferred) made within two years prior to the bankruptcy if: The transfer was made with actual intent to hinder, defraud or delay creditors; or The Debtor received less than a reasonably equivalent value in exchange for the transfer or obligation; and 1. was insolvent at the time of transfer; 2. was engaged in business with insufficient or unreasonably small capital; 3. intended or believed it would incur debts beyond its ability to pay them or 4. made the transfer for the benefit of an insider under an employment contract and not in the ordinary course of business

27. © White and Williams LLP 2006 Sales of Assets Free and Clear of Liens and Encumbrances The Bankruptcy Code allows a Debtor or Trustee, under certain circumstances, to sell assets free and clear of liens and encumbrances (the “363 Sale”): Trustee may sell such assets if the assets have a value greater than any liens on them or The Debtor-in-Possession may sell such assets in connection with a liquidating Chapter 11 proceeding

28. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Post-Petition Effect of Security Interest Property acquired by the Estate or by the Debtor after the commencement of the case is not subject to any lien from any security agreement entered into prior to the commencement of the case; If a security interest created prior to the filing of the case extends to property of the Debtor and to proceeds, products, offspring or profits of such property, then such security interest will extend to such proceeds, products, offspring or profits acquired by the Estate after the commencement of the case to the extent provided by the security agreements

29. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Set-Off The Bankruptcy Code does not affect the right of a creditor to offset a mutual debt owing by the creditor to the Debtor that arose before the commencement of the case However, relief from the automatic stay is required to effectuate a set-off.

30. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Recoupment The Bankruptcy Code does not specifically address recoupment, but the case law allows a non-debtor party to exercise its right of recoupment without requiring relief from the automatic stay.

31. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Creditors’ Committee Only applicable in a Chapter 11 proceeding, not a Chapter 7 The U.S. Trustee appoints a Committee of Creditors The Committee will ordinarily consist of persons willing to serve that hold the seven largest claims against the Debtor of the kinds represented on such Committee. In appropriate circumstances, the Trustee’s office may also appoint Committees of equity security holders Duties of a Creditors Committee 1. Consult with the Trustee or Debtor-in-Possession concerning administration of the case; 2. Investigate the acts, conduct, assets, liabilities and financial condition of the Debtor, the operation of its business and any other matter relevant to the case or to the formulation of a Plan; 3. Participate in the formation of a Plan

32. © White and Williams LLP 2006 What Entities Dealing with the Debtor Should Know (continued) Right to be Heard The Bankruptcy Code allows any “party-in- interest” to appear and be heard on any issue in a case.

33. © White and Williams LLP 2006 The Following Businesses or Entities are Often Involved in Bankruptcy Proceedings: Landlords Equipment Lessors Asset purchasers Vendors and suppliers Benefits providers to the Debtor’s employees Insurance companies dealing with debtors Creditors – secured and unsecured, including banks and financial institutions Professionals providing services to the Debtor and Creditors Committee There are diverse and often conflicting interests of the parties involved in a Bankruptcy case (all for one and one for all – NOT)

34. © White and Williams LLP 2006 Need for Counsel (this is an unpaid advertisement) Experienced bankruptcy counsel is essential to protect the claims and interests of a party- in-interest in a bankruptcy proceeding or under a Plan, asset sale, or adversary proceeding.