Ohio Practical Business Lawyer & Attorney : Teri Rasmussen : Lane Alton & Horst Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

If you've been paying any attention at all to the national news of late, you know that Detroit's Big Three automakers are in deep trouble and that a substantial number of folks seem to think that forcing them into a "prepackaged " bankruptcy is the ANSWER.  When I first heard this, I thought this seemed like a pretty good idea ....  until I started really thinking about both what can and can't be accomplished  with this sort of Chapter 11 bankruptcy proceeding. 

So in a two-part post, I want to first explore the nature of the beast  those of us in the "biz" call a "prepack" and then focus more specifically on how it might actually operate in the context of the problems being faced by America's automakers.  While superfically appealing, a prepack is far from the panacea some seem to think it could be.  To understand why, you first have to understand how prepacks work in general.

Prepack Coming of Age.  Chapter 11 (and they always are Chapter 11 reorganizations) prepackaged bankruptcies came to the fore about twenty years ago.  Many say that  Dallas based hospital owner Republic Health Corp. was the first successful prepack with a plan confirmed less than five months later.  Prepacks became somewhat more popular during the 1990's in the context of failed LBO's, to implement mass-tort settlements, or as a vehicle to consummate sales or mergers of companies.   In the August issue of the Turnaround Management Association's Journal of Corporate Renewal, an article by Douglas Foley and James Van Horn entitled "Prepacks on the Rise in Chapter 11 Bankruptcies Prenegotiated Plans Can Accelerate Reorganization", asserts that there has recently been renewed interest in this variation of Chapter 11 with four filed in 2007 and more than a dozen filed in the first half of 2008. 

Companies utilizing the prepackaged option have included Donald Trump's Taj Mahal Casino in Atlantic City, Zenith Electronics, Aurora Foods-Pinnacle Foods merger, and TWA.  More recent participants have included Davis Petroleum (Case No. 06-20152, Bankr. S.D. Tex.) (whose plan was confirmed less than a week after filing), Blue Bird Body Co. (Case No. 06-50026, Bankr. D. Nev.), Bally Total Fitness (Case No.07-12395, Bankr. S.D.N. Y.), and Mrs. Fields' Original Cookies (Case No. 08 - 11953 , Bankr. D. Del.) (plan confirmed in less than sixty days after bankruptcy filed).

To promote organization and judicial economy, some jurisdictions such as the Northern District of California Bankruptcy Court and the Southern District of New York Bankrptcy Court have even adopted local rules governing prepackaged bankruptcies.   

Prepack Advantages.  The hallmark and principal advantage of a successful prepack is a substantial savings in time and disruption as compared with the ordinary Chapter 11 bankruptcy case.  The average Chapter 11 case, even a relatively small one, is rarely likely to be completed in less than a year and it can often take two or three years, or even longer, for a company to emerge from Chapter 11.  By contrast, prepackaged cases typically take less than six months, thus saving both time and money typically spent on case administration.  Conventional wisdom also holds that deterioration of the intrinsic value of a business which is often a consequence of a Chapter 11 filing and the attendant uncertainty is lessened through use of the prepackaged option.  (For a general discussion of the general effect of a Chapter 11 bankruptcy on a public company's shareholders, visit the discusssion of "What Every investor Should Know ... Corporate Bankruptcy" on the SEC's website.)

Technically, a prepackaged bankruptcy differs from a prenegotiated bankruptcy in that votes for a plan of reorganization have already been solicited and agreed upon prior to the filing, thereby leaving nothing to chance when it comes to achieving a successful confirmation of the Plan of Reorganization.  In a prenegotiated bankruptcy, actual votes or agreements to vote have not yet been reached with the critical mass of creditors, although resolution has typically been reached with those creditors deemed most crucial to success. 

The most important characteristic of a prepack  (or a prenegotiated bankruptcy) is that the major players in the bankruptcy have come to an agreement among themselves about the most important issues of subsequent financing, lien priority, and the extent to which the debt owing will be discounted or terms of repayment extended.  This reduces the potential for the debtor to lose control of the proceeding and allows it to proceed directly to its contemplted reorganized operations.  By minimizing the time spent subject to the restrictions and various oversight provisions embodied in the Bankruptcy Code and reaching important agreement before  even filing, the liklihood of full blown creditor second-guessing and need to balance the influence of various interests is thought to be significantly and productively decreased. 

Nuts and Bolts.  Section 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b) explicitly allow prepetiton solicitation of votes for approval of a Plan of Reorganization as long as certain procedures are observed.  The key elements to a successful prepetiton solicitation crtical to making a prepack a "go" are:

• The proposed plan must have been transmitted to substantially all creditors or equity security holders entitled  to vote in a class;
• Sufficient time  must have been allowed for voting (or in the words of the statute, the time allowed must not be "unreasonably short" which is of courae a case by case judgment call)
• Those solicited must have been provided with "adequate information" in connection with the solicitation of their vote.
• The provisions of any applicable nonbankruptcy law  such as federal securities law governing communication with shareholders of public companies must be complied with.

In essence, a prepack allows the debtor to bypass the lengthy time (starting with a 25 day notice period  for a hearing on the Disclosure Statement) involved in getting a disclosure statement approved by the Bankruptcy Court, distributed to creditors, and gathering/tabulating ballots approving or rejecting the proposed Plan of Reorganization.  There is of course the risk that the Court will determine after the fact that the prepetition solicitation process did not meet the requirements set forth above; this can happen either as a result of a motion by a party in interest on the Court can make such a finding on its own initiative.

What a prepack does not do, however, is change the requirements concerning creditor approval of a Plan of Reorganization.  Pursuant to section 1126(c), a class of "impaired" creditors (i.e. those not being paid in full) will be deemed to have accepted the plan if and only if the creditors in that class voting hold two-thirds in amount and at least a majority in number of claims voted do in fact vote to accept the plan.  In addition, pursuant to section 1129(a)(10), the plan cannot be confirmed unless at least one class of impaired creditors vote to accept the plan.  there are also the other usual requirements of feasibility and the like. 

Prepack Risks and Obstacles.  Prepackaged bankruptcies tend to work best where there are a limited number of sophisticated secured creditors involved with whom productive negotiations can actually be had.  They tend to work less well when a debtor has a large number of creditors, especially if unsecured, with a variety of different claims ( e.g. trade creditors, employees, landlords, equipment lessors,etc.) entitled to varying treatment under the Bankruptcy Code and which may fluctuate considerably during the period immediately preceding a filing.  Large numbers of contingent claims can also be an obstacle for the obvious reason that time must be spent determining how to estimate the amount of such claims.

In addition, by immediately proceeding to the plan confirmation phase, a debtor does lose the benefit of the "breathing spell" provided by the automatic stay which arises immediately upon the filing of the petition.  And, of course, it does tip the debtor's hand as to its financial distress (which may often be obvious anyway).

Drawing Conclusions.  While there are certainly some useful rights and remedies available to Detroit's Big Three should they decide to file Chapter 11 - being able to shed burdensome labor and/or dealer contracts springs to mind - there are also substantial risks - will consumers continue to spend thousands of dollars to buy vehicles from a car company in bankruptcy.   Prepackaged bankruptcy seems to be advanced by many of its advocates as a way to maximize the advantages of being a Chapter 11 debtor while eliiminating the "down side" of a bankruptcy filing.  I just don't think it's that simple.

So next time I will focus more specifically on how well suited the prepack option really is for Detroit's Big Three and what it might and might not be able to do for them.,

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Although I've practiced bankruptcy law for more than twenty years, when I first heard about Chapter 15, I thought it must be shorthand for another serial bankruptcy filing combination.  After all, I'd quickly adapted to Chapter 20 in which a Chapter 13 proceeding is followed by a Chapter 7 and I'm certainly familar with Chapter 22 consisting of successive Chapter 11 reorganization proceedings. 

But Chapter 15?  For the uninitiated, Chapter 15 was added to the Bankruptcy Code as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act which is perhaps better known for its credit card industry inspired "means testing" provisions restricting consumer use of Chapter 7.  Chapter 15 addresses cross-border insolvencies and offers a way for debtors involved in foreign insolvency proceedings to administer assets found in the U.S.  In plain English, it deals with situations in which assets, creditors, or affiliates of the debtor exist in more than one country.  According to 11 U.S.C. 1501, Chapter 15 of the Bankruptcy Code is designed to

• promote cooperation between the United States courts and parties in interest and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases; 
• establish greater legal certainty for trade and investment;
• provide for the fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested entities, including the debtor;
• afford protection and maximization of the value of the debtor's assets; and
• facilitate the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

>>>>>>>>>   Chapter 15 of the Bankruptcy Code is still not well known, but there are some useful resources available to anyone wanting to know more.

There is a good overview of the statutory provisions making up Chapter 15 on the U.S. Courts website.

The Canadian law firm of Cassels offers a Canadian view of the important provisions of Chapter 15 and how it addresses issues of particular concern to domestic creditors.

Bob Eisenbach of the In the (Red) business bankruptcy blog provides a terrific summary of the major substantive aspects of Chapter 15 and how it works on a practical level.  Among other useful information, Bob explains that if a U.S. Bankruptcy Court "recognizes' a "main" insolvency proceeding pending outside the United States, the foreign debtor receives important protections such as the application of the automatic stay to U.S. creditors and assets without the necessity of a separate U.S. filing.  There are also other provisions giving U.S. bankruptcy courts discretion to grant other appropriate relief. 

For those wanting to follow Chapter 15 cases in detail, Chapter15.com is an invaluable resource.  In addition to various commentary on the pertinent law, Chapter15.com provides summary information about cases and related foreign proceedings, as well links to the dockets and pleadings for Chapter 15 cases filed throughout the U.S.  The website's database is searchable in a variety of ways, including by court, debtor, filing date, and industry.

While many cases are filed in New York as one might expect, at least one case has been filed in every circuit according to Chapter15.com.  In Ohio, the following cases involving Canadian insolvencies have been filed, including a recent filing here in the Southern District of Ohio:

• In the Northern  District of Ohio >>>  Kirshan K. Sudan, Case No. 07-11166, Judge Harris 
• In the Southern District of Ohio >>>  ROL Manufacturing (Canada) Ltd., Case No. 08-31022, Judge Walter presiding
  • Marwil, Inc., Case No. 08-31029, Judge Walter presiding
  • ROL Holdings USA, Inc., Case No. 08-31025, Judge Walter presiding
  • ROL Holdings (Canada) Inc., Case No. 08-31024, Judge Walter presiding
  • ROL Manufacturing of America, Inc. Case No. 08-31027, Judge Walter presiding

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The ongoing C.V. Perry receivership case reflects an interesting choice of state law insolvency procedures over federal bankruptcy proceedings. And yet, no doubt in part due to the sparseness of developed case law and statutory authority when it comes to Ohio receivership law, much has been borrowed from federal bankruptcy law.

As a Columbus bankruptcy attorney who often represents creditors, I find the C.V. Perry case quite interesting because the procedures and law that will be established during the course of this case are likely to have an impact for some years to come. If nothing else, Franklin County at least will have a roadmap for others contemplating receivership to follow.

A few months ago I wrote about how the C.V. Perry receivership was representative on what I saw as a mini-trend in choosing state court receivership over federal bankruptcy and some reasons that might be happening. In my last post, I provided more detailed information about the C.V. Perry receivership itself. In this post, I want to discuss some more of the events in the case and how the influence of federal bankruptcy law can be seen.

Proof of Claim Procedure. Although Ohio Rev. Code 1701.89(A) does refer to the "presentation and proof of all claims and demands against the corporation", the actual process to be followed is left rather vague. Moreover, there is no analogous provision in Chapter 1705 of the Ohio Revised Code applicable to limited liability companies. Under federal bankruptcy law, requiring creditors to make a written "proof of claim" is a key component to the administration of any bankruptcy case and Bankruptcy Rule 3002 and Bankruptcy Rule 3003 sets out exactly how and when this should be done.

Injunctive Relief in Form of a "Stay". Count VII of the Complaint seeks unspecified injunctive relief. However, the Amended Order goes further and in language very similar to section 362 of the Bankruptcy Code, provides:

IT IS FURTHER ORDERED that all creditors, claimants, bodies politic, parties in interest, and all sheriffs, marshalls, and other officers, and their respective attorneys, servants, agents, and employees, and all other persons, firms and corporations be, and they hereby are, jointly and severally, enjoined and stayed from commencing or continuing any action at law or suit or proceeding in equity to foreclose any lien or enforce any claim against any of the Movants or their respective property, or against Martin Management, as receiver and liquidating trustee, in any court. All such entities are further stayed from executing or issuing or causing the execution or issuance out of any Court of any writ, process, summons, attachment, subpoena, replevin, execution, or other process for the purpose of impounding or taking possession of or interfering with, or enforcing any claim or lien upon any property owned by or in possession of Martin Management, as receiver and liquidating trustee, and from doing any act or thing whatsoever to interfere with Martin Management, as receiver and liquidating trustee, in the discharge of its duties in this proceeding with the exclusive jurisdiction of this Court over Movants' properties and said receiver and liquidating trustee. This Order shall be in full force and effect as of the date of its journalization with the Clerk of Court.

Creditors have also responded in a fashion similar to what they would do in a bankruptcy proceeding. One even entitled its pleading "Motion for Relief from Stay".

My point here is that ordinarily in cases in which injunctive relief is granted outside bankruptcy, the procedure is somewhat different than what seems to be happening in this case. Typically an interim temporary restraining order is first imposed for a limited period of time followed, generally after some kind of hearing or by agreement of the parties, by a preliminary injunction. Parties wanting the injunction removed usually ask that it be dissolved, not that the "stay" be lifted. Here, there is no indication that any hearing was ever held prior to the issuance of this Order.

What makes the issuance and continuance of that portion of the order appointing the receiver/liquidating trustee particularly interesting is that, as some creditors have pointed out, statutory authority doesn't really support such a blanket imposition of a stay. While Ohio Rev. Code 1701.89(A)(2) does allow the imposition of a "stay of the prosecution of any proceeding against the corporation or involving any of its property", Ohio Rev. Code 1705.45(B)(2) specifically states that "dissolution of a limited liability company does not... prevent the commencement of a proceeding by or against the company in its name..."

"Administrative Priority". One especially interesting concept borrowed from bankruptcy practice is the recognition of "administrative priorty" for certain claims. An intial Borrowing Order entered in late December authorizes the Receiver/Liquidating Trustee to borrow funds or purchase materials up to an aggregate amount of $5 million. It also provides that those extending credit in this way "shall be entitled to administrative priority distribution" for those amounts.

More recently in February, the Receiver/Liquidating Trustee filed a Motion for Authorization to Establish Fund for Administrative Fees, Costs and Operating Expenses which essentially seeks to surcharge creditors with liens on real estate to pay fees for the Receiver/Liquidating Trustee and his counsel, as well as other administrative expenses. Creditors have opposed this latest motion and some have pointed out that in a Chapter 7 bankruptcy proceeding, attorneys' fees and other administrative priority claims are only paid out of the disposition of unencumbered assets.

The concept of "administrative priority" is a bankruptcy one spelled out in section 503 of the Bankruptcy Code. There is no comparable provision in the Ohio Revised Code. Here again, the sparseness of statutory authority and relative staleness of caselaw (most cases cited by any party are more than 50 years old and some date back before 1900) has led to importation of bankruptcy concepts into a state law insolvency proceeding.

The paucity of recent or extensive authority concerning receiverships in Ohio law has been both the advantage and drawback of choosing receivership over the more clearly delineated Chapter 7 bankruptcy proceeding. At the conclusion of the C.V. Perry case, that will no longer be true. As the case proceeds, it will be interesting to see the extent to which bankruptcy concepts and procedures are imported.

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Columbus based Skybus Airlines, Inc. (which is a Delaware corporation) has filed for Chapter 11 bankruptcy in Delaware, Case No. 08-10637-CSS. Judge Christopher S. Sontchi will be presiding. Click here for the story by Bloomberg.com. Also read the initial story on the shut down as reported by the Columbus Dispatch. The Columbus Regional Airport Authority is listed among the Twenty Largest Creditors (having unsecured debt) with a debt in the amount of $200,000.00.

Skybus is the third airline to file for bankruptcy protection in the last three weeks.

UPDATE: The Docket Sheet for the first week of the Skybus Chapter 11 shows relatively little activity for a case this size.

On April 8, Ohio Attorney General Marc Dann provided this advice for Skybus customers, including a sample letter to send to your credit card company.

On April 15, 2008, a Class Action Adversary Proceeding Complaint (Adv. Pro. No. 08-50570) on behalf of Skybus employees was filed seeking damages consisting of 60 days' pay and ERISA benefits. The putative (i.e. not yet certified as a class action) class action asserts that approximately 450 individuals are affected and contends that Skybus violated the Worker Adjustment and Retraining Notification Act (aka and better known as the "WARN Act") in the way it ended operations. The action also seeks to obtain "administrative priority" for the claims pursuant to 11 U.S.C. 503(b)(1)(A) which would put them in the same category as the lawyers and other professionals working on the case for Skybus. This is a smart move because, if successful, it would require Skybus employees to be paid ahead of other unsecured creditors, including Skybus ticketholders unable to obtain a refund from their credit card company.

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In connection with the downfall of the C.V. Perry homebuilder entities, I have previously posted on the increasing use of receivership in place of bankruptcy. It's been a few months since then and perhaps time for an update, as well as some commentary.

This is the first of a two-part series concerning events in the case itself and some reflections on what it all means. In this post, I want to provide some more detailed information about the case, some of its players, and the context in which it is happening. In Part II, I will explore the influence of federal bankruptcy law in the case.

Parties. First, more info on the basics. The C.V. Perry receivership actually involves multiple related entities, consisting of limited liability companies in which C.V. Perry & Co. was the sole member. In addition to C.V. Perry & Co., the receivership case also includes the judicial administration and winding up of the following entities (collectively, along with C.V. Perry & Co., I'll refer to as "Perry Entities"):

• C.V. Perry Builders, LLC
• C.V. Builders II, LLC
• Manors at Homestead, LLC
• Pointe at Blacklick, LLC
• Manors at CrossCreeks, LLC
• C.V. Land II, LLC
• Arlington Remodeling, LLC

Martin Management Services, Inc., through its principal Reg Martin is the court appointed "Receiver and Liquidating Trustee" (more on what this means below) and is represented by the law firm of Strip, Hoppers, Leithart, McGrath & Terlecky Co., LPA. Judge John F. Bender is presiding.

Following Case Progress. Anyone wanting to follow this case closely can visit the Franklin County Clerk of Court's website and enter Case No. 07MS-11-454 (you don't actually have to enter the "11" as that is simply a notation indicating the case was filed in November) to see the docket showing the pleadings which have been filed. To see copies of pleadings, you can make a personal visit to the Franklin County Clerk of Courts and view them on computer terminals provided there.

Original Complaint. According to the Perry Entities' receivership Complaint, filed November 7, 2007, the impetus for seeking appointment of a receiver/liquidating trustee resulted from such problems as (1) numerous cognovit judgments having been taken against the Perry Entities by The Home Savings and Loan Company of Youngstown; (2) dozens of mechanics' liens filed against Perry Entities; and (3) numerous other lawsuits filed against the Perry Entities. The Complaint for Judicial Administration of Winding Up of Affairs of Voluntarily Dissolved Corporation and Limited Liability Companies has eight counts which are:

• Appointment of Receiver for C.V. Perry; R.C. 1701.89(A)(8)
• Appointment of Liquidating Trustee for the Limited Liability Companies; R.C. 1705.44
• Establishment of Proof of Claims Procedure; R.C. 1701.89(A)(1), 1705.45 and 1705.46
• Settlement or Determination of Claims; R.C. 1701.89(A)(3), 1705.45 and 1705.46
• Determination of Rights of Holders of Shares; 1701.89(A)(4), 1705.45 and 1705.46
• Presentation and Filing of Receiver's and Liquidations Trustee's Account; R.C. 1701.89(A)(5) and 1705.44
• Injuctive Relief; R.C. 1701.89(A)(9) and 1705.44
• Allowance and Payment of Compensation to Receiver, Liquidating Trustee, Attorneys, Accountants, and other Persons; R.C. 1701.89(A)(10) and 1705.44

Order Appointing Receiver and Liquidating Trustee. An initial Order appointing the receiver/liquidating trustee was entered the same day as the Complaint was filed, but an Amended Order Appointing Receiver and Liquidating Trustee was entered on December 5, 2007. The Amended Order granted the relief sought in the Complaint and required the newly appointed Receiver and Liquidating Trustee to post a bond of $100.00 with the Franklin County Clerk of Court.

So why the appointment as Receiver and Liquidating Trustee? Simply put, what statutory authority Ohio has concerning the liquidation and winding up of the affairs of business entities are slightly different with respect to corporations and limited liability companies. Ohio Rev. Code 1701.89, applying to corporations, references appointment of a receiver. Ohio Rev. Code 1705.44, the analogous statute for LLCs, refers to a "liquidating trustee".

Local Rule 93. In addition to these statutes, Franklin County Court of Pleas Common Pleas Court Local Rule 93 (courts elsewhere in Ohio will have their own rules which may differ in important respects from this rule) will govern procedures and events in this case. Among other provisions, Local Rule 93 requires the filing of an initial inventory and appraisal of the assets of the entity placed in receivership by the court appointed receiver within two months of his or her appointment, together with receipts and disbursements received and made to that point. It also restricts a receiver's fees to no more than $75 an hour and caps fees for counsel for a receiver at $150,000 (which may seem like a lot, but in this case may pose a problem for the receiver's counsel).

Events. What's happened so far has mainly been authorization to sell certain properties, establishment of a "proof of claim" procedure, and a fair amount of sparring about "administrative priority". I'll talk about the latter two of these in my next post.

So that's the lay of the land. In Part II, I will focus on the influence of federal bankruptcy law on these receivership proceedings.

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As a bankruptcy attorney who mostly represents creditors, I am not infrequently asked to assist companies who have recently received correspondence demanding that they repay thousands of dollars of payments received from a now bankrupt customer because it's a "preference". Often this happens well into the bankruptcy proceeding and long after the creditor has closed its books on the account, perhaps even writing off a remaining balance as uncollectible. If you have been unfortunate enough to be tagged for a "preference", the most important thing to remember is that you still have options and it is not always necessary to just write a check for the amount demanded.

Bizpointer>>> As a practical matter, it is NEVER wrong for a creditor to accept a payment even if the creditor thinks it might be a "preference". For one thing, the failing company may last longer than you think and may not file until after the payment to you is outside the ninety day preference period. In addition, to recover, it is the debtor which must demonstrate its "insolvency" at the time the payment was made. Furthermore, there are a number of defenses which can be asserted which can wind up justifying the creditor's receipt of the payment. Finally, preference actions are typically matters especially susceptible to neogtiation and settlement which may allow creditors to keep a portion of the prefernce payment.

Bankruptcy Preference Defined. So what, exactly, is a "preference" and what should you do if you get one of these letters, or worse, actually get sued? Basically, a "preference" is a payment that allows the recipient to receive more than their fair share of the now bankrupt customer's available cash and assets. The Bankruptcy Code says that a "preference" must be repaid because it frustrates the underlying policy of federal bankruptcy law that similar creditors should be treated in a similar fashion. This policy is intended to discourage a mad grab by creditors that might accelerate a financially ailing company's slide into bankruptcy.

On a more technical level, section 547 of the Bankruptcy Code defines a "preference" as a payment

• On an antecedent (i.e. past due) debt owed to a creditor;
• Made while the now bankrupt customer was "insolvent";
• Within 90 days (or a year, if the creditor is an "insider" such as a shareholder, officer, or director of the bankrupt debtor, or another affiliated company) before the date the bankruptcy proceeding was filed; AND
• That allowed the creditor to receive more on its claim than it would have had the payment not been made and the claim paid through the bankruptcy proceeding.

Banks and other creditors holding collateral for a debt can wind up receiving a preference payment if they are owed more than the collateral is worth. However, it is unsecured creditors such as the ordinary trade creditor in the form of suppliers, product inventors, and service providers that are the most vulnerable. In addition, it is important to understand that a preference claim can be asserted against a creditor even if the debtor still owes money to the creditor after the payment.

How to Respond. The records of a company in bankruptcy are, not surprisingly, often disorganized and sometimes incomplete. As a result, the net for possible preference payments is usually cast far wider than the true universe of actual preference payments. Thus, once fingered as a possible preference payment defendant, it is crucial to do a thorough "preference analysis" to determine whether there is really any actual liability.

A bankruptcy and creditors' rights attorney has the skills and experience to assist with this crucial task of evaluating what the likely liability exposure is. Martindale-Hubbell's Counsel to Counsel magazine offers this helpful, but very brief, overview of action steps and conceptual considerations that should be undertaken by any company being confronted with preference allegations.

• The CMA Daily News offers several suggestions about how to avoid being in a preference payment situation by taking certain preventive action such as requiring payment in advance of supplying goods or services.

• Thomas Onder of the New Jersey Law Blog recommends that, before contacting your attorney, you should try to gather a full payment history for the period of at least the year before the payment was made. A copy of all invoices showing both sales and payments received during this period is essential to a good defense. In addition, copies of any correspondence (including e-mail), contracts, checks, or other evidence of payments received can be extremely helpful. If you can determine the number of days which generally elapsed between presentation of the invoices and receipt of payment and detect any patterns, that can also be useful.

• Why is this information useful? Well, the two leading defenses to a preference action rely upon what this information can show. The "contemporaneous exchange" defense found in section 547(c)(1) excepts payments where the debtor receives something of value at the same time the payment is made. A related defense depends upon the amount of "subsequent new value" extended to the debtor by the creditor. Alternatively, the "ordinary course" argument based on section 547(c)(2) rests upon a demonstration that a payment comported with a reasonable course of dealing between the creditor and the debtor.

How This Helps in the Defense of a Preference Action. A preference analysis can utilize this information and preventive action to determine whether there is in fact a defense to the demand for repayment of the alleged preference payment. Three of the most common defenses are:

Contemporaneous Exchange. In many cases, as the now bankrupt customer begins to have more and more severe financial problems, there will be times in which the need for a particular shipment of goods or services is so great, that there will be payment for that particular shipment. When the shipment of goods or services and receipt of payment for those goods and services happen more or less at the same time, there is said to be a "contemporaneous exchange", constituting an exception within the meaning of section 547(c)(1) of the Bankruptcy Code.

Ordinary Course of Business. Section 547(c)(2) of the Bankruptcy Code offers another defense if the payment was made in the "ordinary course of business or financial affairs" of the creditor and bankrupt customer in payment of a debt "incurred in the ordinary course of business or financial affairs" of the parties. Payment made "according to ordinary business terms" are also excepted. Thus, both the course of dealing between the parties as well as customs in the relevant industry can be important. Changes in the Bamkruptcy Code in the last few years has made it somewhat easier to rely upon this defense.

Subsequent New Value. Sometimes, even as a financially distressed company struggles for survival, it is able to induce creditors to continue doing business with it, perhaps on the strength of a promise to get everything caught up in the near future or a partial payment of the past due amount. If there are both payments and supplying of goods and/or services within the ninety day "preference period", it is likely that the "subsequent new value" defense found in section 547(c)(4) will be applicable at least to some extent. If applicable, the amount of "subsequent new value" extended will be subtracted from the amount of payments received.

All of these defenses depend greatly on the timing of invoices and payments and require a careful legal analysis of the creditor's documentation. Once a preference analysis has been completed by a bankruptcy attorney, you will have a much better idea of the strength of your case. This will then allow you to make a legally informed decision whether to fight or negotiate your best settlement quickly, thus minimizing the cost both in the amount paid back and attorneys' fees.

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About a week ago, established Central Ohio custom home builder C.V. Perry & Co. was placed in state court receivership to liquidate its assets.  (Case No.07-MS-454 in Franklin County Common Pleas Court, Judge Bender presiding - click here to visit the court's website and see the latest docket.)  C.V. Perry & Co. had been in business for sixty years and had faced increasing financial difficulties following the death of its founder and founder's son in 2004.  Click here to read more about what led up to the company's decision to shut down operations. 

What is most interesting about this development is the choice to utilize relatively vague state court receivership law rather than a more well-defined federal bankruptcy proceeding.  While it's not so prevalent that one could call it a trend yet, more and more often, litigants seem to be choosing state court receivership remedies in Ohio over federal bankruptcy court.  In part, the increasing popularity of receivership may be the result of a perception that it will be less costly and complex than federal bankruptcy -- which I'm not convinced is correct.  However, I think parties are also attracted to the concept that they can define how the receivership will operate in a way not possible in the more structured federal bankruptcy proceeding.

In Ohio, receiverships are governed primarily by the provisions of Ohio Revised Code Chapter 2735 and the local rules of the trial court in which the action is commenced.  In recent years, the primary use of receiverships in Ohio has been in conjunction with a foreclosure of income-producing commercial property by a mortgagee during the pendency of the lawsuit prior to the foreclosure sale.  However, Ohio Revised Code  §2735.01 also permits appointment of a receiver to carry out the terms of a judgment, in cases of corporate insolvency or "in all other cases in which receivers have been appointed by the usages of equity."  In addition, Ohio Revised Code §1701.90 specifically authorizes appointment of a receiver for the winding up of the affairs of a corporation and Ohio Revised Code §1701.91 regarding judicial dissolution of a corporation also contemplates use of a receiver.

Under Ohio law, both the circumstances justifying appointment of a receiver and the powers a receiver will have once appointed remain highly flexible.  While Ohio courts routinely note that appointment of a receiver is an "extraordinary remedy", there also seems to be substantial deference given to a trial court's determination that it is appropriate in particular circumstances.  Aside from relatively sparse case law, the only guidance regarding the scope of an Ohio receiver is found in Ohio Revised Code §2735.04 which states that a receiver "may bring and defend actions in his own name as receiver, take and keep possession of property, receive rents, collect, compound for, and compromise demands, make transfers, and generally do such acts respecting the property as the court authorizes."  Thus, unlike federal bankruptcy court where the rights and obligations of debtor and creditor are fairly clear, in an Ohio receivership action, the outer limits of permissible action by receivers has not yet been established.

Since I began practicing law more than twenty years ago, Ohio receivership law has always been a somewhat uncertain body of law.  In past years, however, that uncertainty seemed to encourage use of federal bankruptcy courts in insolvency situations.  Now, however, that very uncertainty and lack of established rules seems to be attracting both creditors and debtors as if they see receiverships as a "design your own" solution. 

At the same time, however, one can see some influence of bankruptcy law.  Orders appointing receivers now regularly contain "automatic stay" type provisions.  Frequently, a claims determination process similar to the proof of claim requirements in bankruptcy is mandated.  Asset sales are often modeled after the procedures used in bankruptcy court. 

Whether receivership is the answer in any particular case depends upon your role in the situation and what you hope to achieve in an insovency proceeding.  While the relative informality of the state court receivership is alluring, I believe  that in general both debtors, and especially creditors, are better served by participating in federal bankruptcy proceedings. 

For creditors, while I understand the attraction of perhaps being able to get orders from state court judges allowing the creditor all sorts of latitude in dealing with the assets of a debtor, I remain unconvinced that receivership will ultimately be less expensive.  The fact that there ARE established priocedures and responsibilities in a bankruptcy proceeding seem to me more likely to expedite resolution than the situation in state court receivership in which every issue is one in which almost anything could happen.  Moreover, aggreesive collection action seems more likely than receivership to result in available cash flow and assets being directed specifically in the direction of my client.

For debtors wishing to continue in business, state court receivership may actually offer a viable alternative to Chapter 11 proceedings which are indeed quite expensive.  Because Ohio receivership law is so undeveloped, there is an opportunity to choose which aspects of federal bankruptcy law are most beneficial while perhaps avoiding those considered less desirable.  Depending upon how the receiver is selected and the relationship which develops between the receiver and the principals of the debtor, state court may offer real opportunities for resurgence.  However, control over the company's business affairs may just as easily be irretrievably lost due to the sweeping scope of a receiver's powers. 

For debtors intending to liquidate, the advantage of a federal bankruptcy proceeding is that there is established law about what the effect of such a proceeding is. 

If the current trend towards utilizing state court receivership rather than federal bankruptcy court continues, it will be interesting to see how the case law develops concerning the grounds justifying appointment of a receiver and the scope of a receiver's powers once appointed.  

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Sooner or later every business experiences the bankruptcy of one of its customers.  If the customer has a large unpaid balance, this can be an especially unnerving experience.  There are, however, some basic things to know and do.

            1.  Don't Ignore the Filing.  The most important thing not to do is continue collection action against the debtor.  When a bankruptcy is filed, it triggers an "automatic stay".  The "automatic stay" prohibits any further action or activities against -- or affecting -- the debtor, the debtor's interest, or the debtor's property.  This includes foreclosures or sheriff's sales, garnishments, collection calls and, of course, the commencement or continuation of a lawsuit.  Violation of the "automatic stay" can result in monetary fines and sanctions against the offender.

One important "exception" to the "automatic stay" does exist for creditors who have shipped goods to the debtor which have not yet been delivered at the time the bankruptcy is filed.  In this situation, the creditor may stop the goods in transit and refuse delivery unless paid in cash.

            2.  Document the Debt Owed by Filing a "Proof of Claim".  To have any reasonable hope or expectation of receiving any payment on the debt owed, a "proof of claim" must be filed with the Bankruptcy Court by the designated deadline.  Frequently, though not always, a "proof of claim" must be filed within the first four to six months after the bankruptcy has been filed so prompt action is often necessary.  You do not have to be a lawyer to complete and file the proof of claim.

The initial notice of the bankruptcy will often contain a proof of claim form that can be filed out.  The "proof of claim" should set forth the basis for the debt (i.e. the service or product purchased), attaching copies of any written contracts or documents giving rise to the debt, identify any collateral pledged to secure the debt and specify the exact amount owed to the creditor. 

Filing this document with the bankruptcy court ensures that a creditor will share in any subsequent distribution of the debtor's assets.  It also makes it more likely that the creditor will receive notice of important events and deadlines in the bankruptcy. 

            3.  Read and Analyze the Initial Basic Documents.  At the time the bankruptcy is filed, or shortly thereafter, the debtor is required to file its "Statement of Financial Affairs" and "Schedules of Assets and Liabilities".  These documents list the names of creditors and amounts owed to each.  They also provide insight into the recent history and current state of the debtor's financial affairs and can be useful in determining the prospects and potential amount of any repayment of the debt owed.    

            4.  Attend the "First Meeting of Creditors".  Within the first month or so after the bankruptcy has been filed, a "first meeting of creditors" will be held.  Creditors who have been listed by the debtor will receive written notice of the time and place of this meeting; others can check with the bankruptcy court or the office of the United States Trustee for the district.  Attendance at this meeting is not mandatory for creditors.  However, the debtor is required to appear and answer questions under oath by the United States Trustee and any creditor in attendance about events causing the bankruptcy, prospects for repayment and other matters related to the bankruptcy.  You do not have to have a lawyer to participate and ask questions.   Thus, a creditor who fails to attend loses a valuable opportunity to learn about the debtor's financial situation and intentions.

            5.  Don't Expect Prompt Payment of Past Debt.  What happens next in the bankruptcy depends upon what type it is and the number and type of creditors affected by the filing. 

• In Chapter 7 liquidation proceedings, a trustee in bankruptcy (not the United States Trustee) will evaluate and dispose of the debtor's unencumbered assets, if any; after analyzing the claims made by creditors, the Chapter 7 trustee will then distribute those assets pro rata among eligible creditors who have filed a proof of claim. 

•  In a Chapter 13 "wage earner" proceeding, designed for individuals with ongoing income, a portion of the debtor's "regular income" over a period of generally three years, though sometimes longer, will be paid to a Chapter 13 Trustee to repay creditors in accordance with the terms of a "plan" approved by the bankruptcy court.

• In Chapter 11 reorganization proceedings, the debtor remains in control of its financial affairs and operation of its business while it attempts to develop and negotiate a "plan of reorganization" which provides for the treatment of creditor's claims; this treatment frequently involves large discounts of the amounts owed.  Chapter 11 proceedings are often complex and take months, or even years, to reach a conclusion.  The largest creditors in these cases may be invited by the United States Trustee to serve on an Unsecured Creditors Committee which acts as a fiduciary on behalf of the general creditor body with respect to evaluation of the "plan of reorganization" and other events during the course of the bankruptcy. 

            6.  Decide How to Participate.  A creditor's appropriate level of participation will naturally depend upon the nature and amount of the indebtedness, as well as upon the perceived prospects for repayment.  Creditors holding collateral will generally have the most leverage and the highest level of interest in the case; they may want to seek a lifting of the automatic stay so they can pursue their state court remedies and will undoubtedly have a number of other concerns raised by the bankruptcy.  Landlords and lessors are also afforded significant rights under federal bankruptcy law.  Trade creditors and other owed relatively small amounts may often find it cost effective to restrict their involvement to filing a proof of claim.

Many creditors view the "fresh start" philosophy of the federal bankruptcy laws as just another dodge for delinquent debtors.  However, there are also many provisions designed to protect creditors and assure an equitable distribution of the debtor's assets among all creditors.  A basic understanding of the fundamental aspects of bankruptcy can help avoid inadvertent pitfalls while maximizing the possibilities of at least some recovery of a bad debt.

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