STRATEGIES IN DEALING WITH
FINANCIALLY DISTRESSED CUSTOMERS
BEFORE AND AFTER CHAPTER 11
BANKRUPTCY
OESA ATLANTA REGIONAL MEETING
Gordon J. Toering – Partner
Thomas J. Manganello – Partner
May 13, 2009
Types of Bankruptcy
Chapter 11 (Reorganization)
z Typically executive management retains control of
the business (not a trustee)
z Goal is for the debtor to file and receive approval of
a plan of reorganization (usually paying creditors far
less than 100 cents on the dollar)
z Creditors are entitled to vote on the proposed plan
z
In many or most instances, companies in bankruptcy
are not able to reorganize and they either sell their
assets to another company and/or they convert
their Chapter 11 case to a Chapter 7 bankruptcy
Types of Bankruptcy
Chapter 7 (Liquidation)
z Chapter 7 trustee is appointed to liquidate assets
z Typically, the trustee does not operate the
business
z
In a normal Chapter 7 case, unsecured creditors
receive little or nothing
Priority of Claims in Bankruptcy
Secured Creditors – first priority
z Paid with proceeds of collateral
Administrative Creditors – second priority
z
Includes attorneys, financial advisors, employees and
trade vendors extending credit
z Also includes priority claims for vendors having “20-day
priority claims” (explained later)
Unsecured Creditors – third (last) priority
z Typically unsecured creditors receive a small percentage
of their debt
Consequences of Filing
1. Automatic Stay
z
Prohibits collection efforts against the debtor
z
Prohibits termination or modification of pending
contracts (“executory contracts”)
z
Prohibits setoff of obligations without court
approval (exception: recoupment)
Consequences of Filing
2. Executory Contracts (including blanket PO's)
z Can be assumed (accepted) or rejected (terminated)
in bankruptcy by debtor, but not by supplier
z
If assumed, supplier must be paid “cure amount”
consisting of pre-petition amounts owed
z Normally the decision whether to assume or reject an
executory contract is not made until the end of the