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Creditors’ rights

ASK LLP is a national creditors’ rights law firm. We fight for your right to recover money that is owed to your company, and help you monetize your bad debt.

If you are owed money by a debtor or if you have been sued under section 542, 547 or 548 of the Bankruptcy Code, or if you anticipate being sued because you either owe a debtor money or you recently received payment from a debtor, contact ASK LLP immediately for a free consultation.

Things you need to know if you are owed money or are being sued by a debtor or trustee:

1. Experience.

Prior to the creation of ASK LLP, ASK attorneys worked on behalf of debtors and creditors in some of the largest, most complex bankruptcies, including, but not limited to: WorldCom, Parmalat, Atkins, Ames, and Vertis. This prized insider knowledge of the workings of a debtor’s estate, shared by very few outside large international restructuring practices, enables ASK LLP to help you recover as much as possible from a bankrupt debtor’s estate.

Select Creditor Representations.
ASK LLP attorneys represent a wide variety of corporate creditors in large bankruptcies. ASK attorneys represented Chinese conglomerate Heining Mengnu Group Co., Ltd. (Mengnu), the largest unsecured creditor of Jennifer Convertibles, Inc. (JC). Mengnu served as the DIP Lender and Plan Sponsor and ultimately acquired JC through a plan of reorganization, obtaining over 90% of JC's common stock. Most recently, ASK attorneys represented Royal Spirit Ltd., a Hong Kong company and the largest creditor of The Connaught Group, a leading manufacturer and retailer of women's designer clothing with over $100 million in annual revenue that filed for bankruptcy. We used Royal Spirit's leverage as the largest unsecured creditor to help it acquire The Connaught Group's assets through a joint venture with U.S.-based Tom James Company, a leading manufacturer and retailer of Men's apparel.

Select Creditors' Committee Representations.
ASK LLP attorneys skillfully represented the creditors' committees in the bankruptcy cases of jewelry manufacturer First Class Imports, Inc., We Recycle!, a large recycling company with locations in Connecticut and New York, the international jewelry designer Doris Panos Ltd., and TexStyle LLC, a large textile manufacturer. In each case, we obtained exceptional recoveries for the unsecured creditors.

2. If You Were Sued by a Debtor or Trustee.

In preference litigation the best defense attorneys are ones that also pursue avoidance claims in unrelated cases. The Bankruptcy Code provisions concerning the avoidance of payments are not based on one set of facts but rely upon a detailed determination of the potential defenses that vary case by case. Our experience gained in the prosecution of more than 15,000 preference actions can in certain cases be used to defend cases that are not properly brought by other firms who have not analyzed the cases before commencing them. Too often we see these unmeritorious cases filed in the hopes of forcing an early unjustified settlement. If you are confronted by such a suit or demand consider contacting ASK LLP. Our attorneys have some of the most extensive experience in the nation with lawsuits brought under Bankruptcy Code sections 547 and 548. Bankruptcy Code sections 547 and 548 are designed to force you to return money paid to you by a debtor, even if such payment was made before the debtor filed for bankruptcy. Should you be named as a defendant in a “preference action” brought under Bankruptcy Code section 547 or a “fraudulent conveyance action” brought under section 548, ASK LLP will analyze your case and advise you as to your potential liability. Where liability is in question we will vigorously defend you and give you the best shot at keeping your-hard earned money.

ASK LLP’s experience in defending Avoidance Actions is unique as our attorneys tend to be aware of the latest case-law related to Avoidance Actions. In fact, ASK LLP publishes the Avoidance Action Report, which is a one-of-a-kind quarterly report devoted exclusively to avoidance actions. To access past issues of the Avoidance Action Report, click here. To learn more about ASK LLP’s Avoidance Action experience, click here.

ASK LLP will also staunchly defend you in lawsuits filed by a debtor or trustee under section 542 of the bankruptcy code, seeking the return of monies allegedly owed to the debtor. Moreover, ASK LLP may help you avoid the payment of monies owed to bankrupt estates by utilizing the Bankruptcy Code’s setoff provisions.

3. Your Claims.

If an entity that owes you money files for bankruptcy, ASK LLP will file your proof of claim, guide you through the often confusing claims resolution process, and, where applicable, make a persuasive case that your claim is entitled to a priority. In short, ASK LLP may be able to help you recover more money, sooner.

4. Reclaiming Your Goods.

If you provided goods to a bankrupt debtor and have not been paid, ASK LLP will help you reclaim such goods in an orderly fashion, or otherwise help you receive payment for such goods.

5. Bankruptcy Litigation.

If you are in the middle of a litigation that was stayed pursuant to the automatic stay, or if you are considering commencing litigation against a debtor, ASK LLP could help you lift the automatic stay or transfer the litigation to the bankruptcy court by commencing an adversary proceeding.

Terms

Adversary Proceeding.
An adversary proceeding is a civil lawsuit separate from the bankruptcy case, which is filed in the bankruptcy court. Examples include a proceeding to recover money or property, and a proceeding to obtain an injunction or other equitable relief.

Automatic Stay.
Under Bankruptcy Code section 362, immediately upon the filing of a bankruptcy petition, an injunction or “stay” is imposed on virtually all actions by creditors to enforce, execute, or otherwise collect on debts incurred before the bankruptcy filing. The automatic stay prevents any exercise of control over the debtor’s property, halts the collection of creditors’ claims and protects the debtor from collection attempts by creditors. Creditors have an affirmative duty to ensure violations of the stay do not occur and to stop or reverse pre-petition collection actions. There are several exceptions to the automatic stay which are enumerated in Bankruptcy Code section 362(b), and include criminal proceedings and the exercise of police and regulatory powers; however, these exceptions are narrowly construed by the courts.

Bankruptcy Code.
The Bankruptcy Code is codified in title 11 of the United States Code. The Bankruptcy Code is subdivided into several chapters. Each chapter either sets forth general rules in connection with all bankruptcy proceedings (Chapters 1, 3 and 5), or provides rules relating to a particular kind of bankruptcy proceeding (Chapters 7, 9, 11, 12, 13 and 15).

Bankruptcy Court.
The bankruptcy court is a unit of the federal district court for the judicial district in which it is located. The bankruptcy court in which a debtor’s Chapter 11 (or Chapter 7) petition is filed has, essentially, exclusive jurisdiction over all of the debtor’s business affairs and property. Nevertheless, approval of certain actions taken in bankruptcy may require the approval from the district court in the district where the bankruptcy court is situated.

Claim.
Bankruptcy Code section 101(5) defines a “claim” as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured” or a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment...” This broad definition is designed to bring almost all possible claims and creditors before the bankruptcy court so that the debtor can reorganize all of its obligations. Claims fall into different categories: priority, secured, unsecured, contingent, liquidated, disputed, and matured.

Claims Resolution Process.
The claims resolution process is the process by which pre-petition claims against a debtor are ultimately allowed or disallowed in the debtor’s bankruptcy case. The allowance of a particular claim is governed by Bankruptcy Code section 502. In large and complex Chapter 11 cases, bankruptcy courts will generally appoint a claims agent to help facilitate the claims process. The bankruptcy court will fix a date by which all proofs of claims against the debtor must be filed, which is referred to as the “bar date.” Creditors whose claim is listed in the debtor’s “schedules” filed with the petitions and who are satisfied with the claim amount and status listed in the schedules do not need to file a proof of claim unless their claim is listed as “disputed,” “contingent,” or “unliquidated.”

Creditors Committee.
In most bankruptcy cases, the United States Trustee appoints a creditors’ committee pursuant to Bankruptcy Code section 1102. The creditors’ committee ordinarily consists of representatives of the seven largest non-insider, unsecured creditors of the debtor. The creditors’ committee owes fiduciary duties to all unsecured creditors. Its primary functions include the negotiation of a plan of reorganization with the debtor and the monitoring and investigation of the debtor’s business activities. The creditors’ committee is required to solicit and receive comments from non-committee creditors and creditors may look to the recommendations of the creditors’ committee and decide whether to vote for or against a proposed plan of reorganization. Therefore, close coordination and the maintenance of good relations with the creditors’ committee is desirable.

Debtor in Possession (“DIP”).
Upon the filing of a Chapter 11 petition, the debtor becomes a “debtor in possession,” sometimes referred to as a “DIP,” unless or until a trustee is appointed to run the debtor company. A debtor in possession is automatically authorized to continue to operate in the ordinary course of business without further court authorization. The debtor in possession (or a trustee, if appointed) performs three essential functions: (1) running the business; (2) pursuing certain causes of action on behalf of the estate, such as preference actions, fraudulent transfer actions, and avoiding unperfected liens and security interests; and (3) for a limited time, it has the initial, exclusive right to propose a plan of reorganization for the debtor and its business. A debtor in possession has a fiduciary obligation to protect all parties in interest, including creditors.

Executory Contracts and Unexpired Leases.
Executory contracts are contracts under which performance remains due to some extent on both sides. Bankruptcy Code section 365 allows for the rejection or assumption of executory contracts and unexpired leases entered into before the commencement of a bankruptcy case. In other words, with approval of the bankruptcy court, the debtor may rid itself of (”reject”) burdensome contracts and leases and continue to enjoy (”assume”) beneficial ones. If a debtor decides to assume an executory contract or unexpired lease, it must assume the agreement in its entirety. As a condition to assumption, the debtor is required to cure most existing defaults and provide “adequate assurance” of its future performance. Thus, all monetary defaults then due and owing, whether arising pre-petition (before the bankruptcy filing) or post-petition (after the bankruptcy filing), must be cured or otherwise satisfied. If a debtor rejects a pre-petition executory contract or unexpired lease, the rejection constitutes a breach that gives the counterparty a claim for damages against the debtor’s estate. The damages resulting from rejection are deemed a pre-petition general unsecured claim.

Fraudulent Transfer.
A “fraudulent transfer” is any transfer or obligation made within two years prior to filing for bankruptcy with the actual intent to hinder, delay, or defraud a present or future creditor. Under section 548 of the Bankruptcy Code, the debtor may avoid fraudulent transfers and recover any property of the estate that was fraudulently conveyed to a third party. In the absence of fraudulent intent, a transfer may still be avoidable as “constructively fraudulent” under both the Bankruptcy Code and applicable state law if such transfer was made in exchange for less than reasonably equivalent value and (i) the debtor was insolvent at the time of the transfer, (ii) the debtor was rendered insolvent as a result of the transfer, or (iii) the transfer was made to an insider of the debtor.

Petition.
The "petition" is the legal document filed with the bankruptcy court to initiate a bankruptcy case.

Plan of Reorganization.
The “plan of reorganization” is the formal plan setting forth in detail how the claims and interests of each class will be treated. Among other things, it sets forth what distributions, if any, will be made to holders of allowed claims and equity interests. The plan must be voted on and accepted by a certain percentage of creditors and then be approved or “confirmed” by the bankruptcy court to become effective.

Priority.
Certain classes of claims are given priority in payment by Bankruptcy Code section 507. These include claims for certain unpaid wages and taxes, among other things. Under the Bankruptcy Code, claims must be paid in order of priority, with claimants of a lower priority recovering only when all claimants of a higher priority are paid in full. While priority claims must be paid in full ahead of other claims, they are subordinate to secured claims and claims for administrative expenses (expenses incurred in the administration of the debtor’s estate).

Proof of Claim.
The “proof of claim” is the form that provides the details of a creditor’s claim and states the amount of the claim and whether the claim is secured or unsecured and if the claim has priority status. If the creditor’s claim is listed in the schedules accompanying a petition and it is not listed as being disputed, contingent, or unliquidated, the creditor’s claim will be allowed against the debtor’s estate in the amount scheduled. If the creditor’s claim is not listed in the debtor’s schedules or is listed as being disputed, contingent, or unliquidated, the creditor must file a proof of claim before the bar date. Failure to timely file a proof of claim will result in that claim being barred from recovery. A creditor’s proof of claim that differs from the scheduled amount or priority is deemed “prima facie” valid and supersedes the scheduled claim.

Preference Actions and Preferential Transfers.
Bankruptcy Code section 547 empowers the debtor to avoid certain transfers made during the 90-day period (one year if the transferee was an insider) immediately before the commencement of a bankruptcy case. A lawsuit initiated to avoid such payments is called a “preference action.” The theory behind such actions is that the debtor was already insolvent at the time the payments were made and the payments therefore give preferential treatment to certain creditors over others—hence the names “preferential transfers” and “preference actions.”
Preference actions are often confusing to defendants who wonder, “why do I need to repay money I rightfully earned?” The answer is that you don’t necessarily have to return a single penny. If you have been sued in a preference action, there are several defenses you can assert. First and most obviously, you could demonstrate that at the time the alleged preferential transfer was made, the debtor was not insolvent. In addition, Bankruptcy Code section 547(c) provides several defenses, including:

The transfer was intended to be “contemporaneous exchange for new value” (payment exchanged at the time new goods or services provided) and was in fact substantially contemporaneous (within a few days to a week).

The payment was for a debt incurred in the ordinary course of business and was made in the ordinary course of business and pursuant to the ordinary business terms of the industry.

The transferee provided the debtor with “new value,” usually in the form of goods, after the “preferential” transfer was made.

ASK LLP attorneys have extensive experience in “preference actions,” having been involved in hundreds of such actions on behalf of debtors. This unique knowledge of how debtors prosecute such actions gives ASK LLP the unique capability to defend against all debtor tactics to reclaim money that you rightfully earned. If you have been named as a defendant in a preference action, call ASK LLP for a free explanation of your rights and defenses. We will fight for your right to keep your hard earned-money.

To learn more about ASK LLP’s Preference Action experience, click here.

Property of the Estate.
Upon the filing of a bankruptcy petition, an “estate” is created by operation of law that comprises all of the debtor’s assets and property interests. All of the estate’s property is subject to the bankruptcy court’s jurisdiction and is available for the reorganization of the debtor’s affairs under a confirmed plan of reorganization.

Reclamation.
Under section 546 of the Bankruptcy Code, a vendor has the right to “reclaim” goods delivered to the debtor if the debtor received such goods while insolvent and within 45 days of the petition date. In order to reclaim goods, the seller must make a written demand for reclamation.

Recoupment.
Recoupment is the netting of mutual obligations arising out of the same transaction. While recoupment is a common law doctrine and is not found anywhere in the Bankruptcy Code, it functions as an exception to the automatic stay. Because recoupment requires that the mutual obligations that are to be offset arise out of the same transaction, its application is more limited in scope than the doctrine of setoff.

Setoff.
Bankruptcy Code section 553 authorizes a creditor to exercise its right to setoff obligations (netting) where (i) there is a mutual debt, (ii) both debts arose before the bankruptcy filing, and (iii) the claim is an allowable claim under the Bankruptcy Code. A creditor must seek relief from the automatic stay before exercising any setoff rights.

For any questions on Creditor’s rights, please do not hesistate to Contact Us.

Basic practice

News & Events

  • August 2015

    Edward Neiger and Alex Govze publish article entitled Protecting Your Interests When a Debtor Is Heading Into Bankruptcy in the Credit Research Foundation Journal. The articles explores several options creditors of soon-to-be bankrupt debtors can protect themselves in the event of a bankruptcy.

    Read more