Demystifying the Ch. 11 Process: What Every Business Debtor Needs to Produce Right After a Filing

Written by Amy Weston, Paralegal and Salene Mazur Kraemer, Esquire

        Fear of the unknown.  The Ch. 11 process is unknown to many.  C-level executives dread  discussions about bankruptcy options.  We just recently filed a new Chapter 11 case and thought we would write a series of posts on basic Ch. 11 procedural matters so as to demystify the process.

      Filing Chapter 11 (reorganization/restructuring) is a powerful tool that can be invoked by businesses and certain individuals pursuant to Title 11  of the United States Code (aka the “Bankruptcy Code”).   As a practitioner,  I am privileged to be able to  facilitate such restructurings.  Here is the first post in this series on Ch. 11 basics.

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           The administrative burden of filing a case can be heavy.  Often, a paralegal is running the “paper pushing” ship just before and shortly after a case is filed.   Information gathering.  Data compilation.  Report generation.  A debtor’s bookkeeper, accountant and/or CFO all work with Debtor’s counsel and paralegal staff to gather  necessary documentation and to fulfill requirements imposed by the Court and the United States Trustee (appointed by Department of Justice).  Each office has very specific document requests, rules and procedures.

          In furtherance of a U.S. Trustee’s monitoring responsibilities, here is a list of what the U.S. Trustee wants prior to the Initial Debtor Interview.  Most of the documentation requested is straightforward and anticipated:

• Bank account statements.
• Latest filed Federal Tax Returns or copy of extension to file.
• Financial statements.
• Payroll detail.
• Rent roll.
• Accounts receivable detail.
• Recently filed sales tax
• Recently filed payroll returns.
• Detail of intercompany transactions.
• Accounts payable detail.
• Check register for last 60 days.
• Filed Scheduled and Petition

Other requirements are not as obvious. Two that specifically need explanation are:

• Proof of establishment of Debtor-In-Possession account(s)
• Proof of insurance indicating that the Office of the U.S. Trustee is an additional certificate holder.

DIP Accounts

         Once a debtor has filed a bankruptcy petition, it must close existing bank accounts and open new accounts which identify the debtor as a debtor in possession (“DIP”). All money from the bankruptcy “estate” (i.e. anything the debtor owns) must be put into these accounts.  The title of “Debtor in Possession” must be printed on the checks along with the bankruptcy case number.  The Bank will not issue a debit card for a DIP account.

        While this seems complicated at first, the good news is that this is standard procedure. So, any bank should be familiar with this request.  However, a debtor cannot go to just “any” bank. The U.S. Trustee’s Office will only accept DIP accounts from approved depositories.  A current list of such institutions is available through the U. S. Bankruptcy Court in the district where the bankruptcy was filed.  Approved Banks DIP

              Within 15 days of receipt from the bank, a debtor must serve copies of monthly bank statements upon all creditors and interested parties, together with a monthly operating report (MOR) of gross receipts and disbursements.  Both the monthly operating report (MOR) and DIP bank statements are publicly filed on a debtor’s docket.

Proof of Insurance

          A debtor must maintain all insurance coverage during the bankruptcy process.   This includes: general comprehensive liability; property loss from fire, theft or water; vehicle; workers’ compensation; and any other coverage that would be customary in line with the debtor’s business.

           In addition to maintenance, a debtor must list the Office of the U.S. Trustee listed as an additional certificate holder and provide proof of such.  The documentation of proof must include the type and extent of coverage, effective dates, and insurance carrier information.  In order to fulfill the Trustee’s requirements, the debtor will usually have to provide proof of the request.   The proof of insurance and additional certificate holder requirement is standard, so the insurance company should not have any trouble fulfilling a debtor’s request.

          Please TAKE NOTE that a debtor’s failure to comply could result in DISMISSAL of the case or conversion to a Chapter 7.

If the case is a designated as a small business case or as a subchapter V small business case, there are additional  requirements.

This post does not constitute legal advice.  Consult an attorney about your specific case.

Avoiding Emergency Bankruptcy Filings

It was the day before Thanksgiving.  A friend of mine called me in a panic.   She received a notification that her bank account was frozen by a creditor; she was to get a direct deposit of her salary in the next 2 days, which was two weeks before Christmas.  She needed to file bankruptcy fast in order to trigger the automatic stay (legal principle that means no creditor can take action to harm you).

I stayed up until midnight that day in order to get the case filed for her.  Her business had gone bad and this was the fallout from it.

Often, bankruptcy cases are filed on an emergency basis. In many instances, time may be of the essence and you need to file the case immediately (e.g. a creditor  has a judgment against you and has sent the Sheriff to your home or business; you have received a notice of garnishment of your wages or bank account by a taxing body).  If this firedrill can be avoided, it should be.

Rushing into a case is pretty much never a good idea.   Filing the petition on an emergency basis only increases the costs of your case and there may not be enough time to research potential issues that may arise during the course of your case.   You may omit important creditors.  You may omit assets.  If the schedules are not accurate,  you will need to amend them and that costs more money to do.  Substantial, repeated amendments do not leave favorable impressions upon the U.S. Trustee or the Ch. 7 Trustee.

A debtor is permitted to file a barebones “emergency “bankruptcy petition together with a list of 20 largest creditors. The full set of schedules must be submitted within 14 days, unless extended.

Regardless of whether the case is an emergency filing or not, if you are an individual, you MUST complete pre-bankruptcy filing credit counseling course at least 24 hours before any case is filed.

BOTTOM LINE:

• Talk to an attorney.  He or she can give you the questionnaire you need to fill out well ahead of time. He or she will also give you a list of documents you will need You can start gathering that info.  If the case is billed hourly, you will save yourself money by gathering up this information rather than having a paralegal do it.
• Pre-bankruptcy planning is always advisable for any individual or business.  You don’t want to throw good money after bad (meaning you don’t want to pay down debt that ultimately may be discharged). You don’t want to make preferential or fraudulent transfers.    Often, there are non-bankruptcy options, particularly for businesses (but that can be a topic for another blog post).

DISCLAIMER:  This does  not constitute legal advice.  This post does not create an attorney client relationship.  Consultant an attorney for more information re: this topic.

“Dance Moms” Instructor Abby Lee Miller Files for Chapter 11 Protection: Public Disclosure of Private Facts

By: Justin A. Saporito, MAZURKRAEMER Law Clerk and Salene Mazur Kraemer

Salene’s Preface: I was in Bankruptcy Court last week in Pittsburgh and noticed Abby walking into Court.  (She is a stunning woman by the way and you can understand why she is on TV).  I had to ask myself, “How do I know her?”  I did figure it out pretty quickly.   I was surprised to see her on my turf (that is in the world of commercial bankruptcy) and was not aware that Abby had filed for Ch. 11.  My daughter is a dancer and I watch the show! 

Abigale Lee Miller filed for Chapter 11 relief on January 3rd, 2011.  The petition was filed in the United States Bankruptcy Court for the Western District of Pennsylvania under petition number: 10-28606 TPA and has been overseen by the Honorable Judge Thomas P. Agresti.

Debtor is better known as Abby Lee Miller, the host and instructor for the popular Lifetime reality television show Dance Moms.  The show follows a group mothers and their young daughters who are participating in the world of young competitive dance.  The show takes place in Pittsburgh, PA at the debtor’s studio, the Abby Lee Dance Company, and follows the ladies as they travel across the country to various competitions.  Dance Moms is currently holding open casting calls for its 4^th season.

The Abby Lee Dance Company was formed 27 years ago as a not-for-profit organization and is an audition only program.  It is located at 7123 Saltsburg Road, Pittsburgh, PA, 15235.  Debtor is also the owner of Reign Dance Productions, which shares the building with The Abby Lee Dance Company.

Debtor has declared approximately $325,500 in assets with approximately $356,500 in liabilities.   Thirty-four creditors are listed in the petition, with Chase Mortgage holding the largest unsecured claim in the amount of $50,000.   This debt is the unsecured portion of what appears to be a $200,000 undersecured mortgage on a home of Ms. Miller’s in Florida valued at $150k.   Ms. Miller’s dance studio has a $96,000 mortgage on it; the studio is valued at around $150,000  Ms. Miller owes about $27,000 in back taxes (which are unsecured priority claims).  Her unsecured debt only totals $32,000, many of whom are vendors for her business.

The Second Amended Disclosure Statement was approved on January 18^th, 2013 and the Order Approving Disclosure Statement and Scheduling Hearing on Plan Confirmation was entered into on October 21^st, 2013.  Please click here to for a copy of the order.  The debtor is represented by Donald R. Calaiaro of Calaiaro & Corbett, P.C.  The Confirmation Hearing to approve her Plan of Reorganization is set for December 12, 2013 at 1:30 p.m. EST.  Please click here for a copy of the Disclosure Statement.  A summary of the Chapter 11 plan can be found here.

Salene’s comment:   We purposefully do not often write blog posts about individual Chapter 11 cases (usually filed by very wealth individuals.  Most folks file a Chapter 7 or Chapter 13).  When a company or person files for bankruptcy,  I warn my clients that you are subjecting yourselves to a “financial autopsy”; you are making a public filing of all of your assets and liabilities.  So, information seekers can look up what your home is worth, what kind of car you drive,  how much credit card debt you have, whether you own a fur coat, how much your wedding ring costs, and whether you have any money in an IRA/401k.  Anyone can see how much money you have made in the last three years and they get to read what your monthly budget is for expenses.   While there are certainly benefits to the privilege of filing for bankruptcy, public disclosure of private facts is certainly one of the drawbacks.

Inside the Trenches of a Chapter 11: The Firehose of the First 30 Days

    The first 30 days of a Chapter 11 bankruptcy case often are like water spewing violently out of a fire hydrant.  Fast.   Furious.  Urgent.  Many issues being thrown at the Debtor, its employees, and its lawyers at one time.

According to the Pre-Bankruptcy Planning for the Commercial Reorganization: A Brief Guide for the CEO, CFO/COO, General Counsel and Tax Advisor, written by the Reorganization and Restructuring Group of Squire, Sanders & Dempsey, LLP (2nd edition, 2008), a whopping 83 percent of chapter 11 reorganizations that are filed generally “die on the vine” and are never confirmed.

I purchased this Brief Guide at the American Bankruptcy Institute that I attended this past Spring and I thought I would write a few blog posts integrating my experience with the concise content of the book.  As set forth on Appendix A to the Guide, generally certain matters must be addressed within the first 30 days of a case.

• Petition filed

• Filing of list of 20 largest creditors

• Applications for retention of professionals (attorneys, accountants, turnaround professionals, valuation specialists, real estate brokers).  A Debtor cannot pay a professional unless the retention of the firm is first approved by the Judge and the professional files a fee application on the docket, to which parties may review and/or object.

• Filing of ”first day” motions (seeking authority to pay wages, use pre-petition bank accounts, pay deposits for utilities, use of cash collateral, payment of interim compensation to professionals)

• Filing of schedules of assets and liabilities and statement of financial affairs.  Getting correct addresses and dollar amounts owed for every single creditor often is a daunting task.  Once the Schedules are filed, a creditor matrix is generated. The Bankruptcy Court and parties in interest use this address list to mail or “serve” important pleadings in the case. If the matrix is enormous, certain limited servicing lists can be authorized by the Court. In mega-cases, servicing agents are employed by the Debtor to handle only this aspect of the case, i.e., proper service.

• Filing of Corporate Resolution authorizing the Chapter 11 filing

• Negotiation of debtor in possession financing

• Hearing on use of cash collateral and adequate protection

• Negotiation with trade creditors regarding reclamation claims and/or reestablishment of trade terms.

The first few weeks of a case can be exhausting and dramatic.  Often, by the time a petition is filed, a debtor runs out of money and payroll has not been paid (therefore employees are angry and morale is low), bank accounts frozen, the utilities have been shut off, and/or the front doors have been padlocked by a creditor.   Once a case is filed, a creditor may immediately file a motion to dismiss the case.

The filing of the petition and related schedules requires a financial autopsy of a business and all of its related entities. In order to avoid confusion down the road, Debtor’s counsel should try to obtain as much factually accurate information as possible during this time. The process requires persistence, diligence and coordination with the Debtor’s employees, who basically become your co-workers for as long as the case is open, which could be 18 months or longer.

During this critical time, management and key employees must be counseled regarding what to do and not do, now that the actions of the Debtor are under close scrutiny by not only a Judge but also a U.S. Trustee as well as the creditor body. Employees should be clear regarding what transfers may or may not be made without court approval.  Also, at the same time, the U.S. Trustee’s Office dictates that a debtor comply with its financial reporting requirements (hence the required “Monthly Operating Report”), and the filing of insurance and bank account information.  Lack of compliance may lead to a dismissal of the case or a conversion to a Chapter 7.  Often the debtor must close pre-petition bank accounts and open new ones.

Keeping all constituencies informed is an important part of the role of Debtor’s counsel.  Creditors may include key lenders and critical vendors who will want to know what the turnaround strategy is for the company. Once creditors receive the “Notice of Suggestion of Bankruptcy”, they too will be scurrying around to hire bankruptcy lawyers if the size of their claims warrants such an expense.