Bankruptcy & Financial Restructuring
Backed by full-service corporate, real estate and commercial litigation groups, our bankruptcy and creditors' rights team is uniquely equipped to deliver the highest quality representation in a cost-efficient and responsive manner.
Debtor and Creditor Representation
Chapter 11 bankruptcy is the foundation of our bankruptcy and creditors' rights practice. Since 1979, our team has successfully represented dozens of business enterprises from a wide array of industries in traditional bankruptcy reorganizations, “prepackaged” Chapter 11 cases and “liquidating” Chapter 11 cases. We are uniquely equipped to represent virtually any size debtor, and in the past five years alone, we have achieved confirmed plans of reorganization and/or liquidation for more than 25 clients including manufacturers, technology companies, service providers, developers, and a wide array of retail businesses.
Our team routinely represents a broad range of bankruptcy creditors, including trade creditors, preference defendants, financial institutions, shareholders, taxing entities, landlords and landlord committees, franchisers, equipment lessors, private equity groups, medical providers and asset acquirers. Likewise, the team has significant experience representing bankruptcy trustees and Chapter 11 creditor committees. Following is a sampling of our current and former creditor representations. Served as co-counsel to the unsecured creditors’ committee in the Chapter 11 case of Elantic Telecom, Inc. Represented “Fortune 100” company in successful acquisition of “pipeline assets” in the NELCO bankruptcy case. Counsel to informal landlords’ committee in the Best Products Chapter 11 case. Represented a consortium of furniture manufacturers in the Heilig-Meyers, Inc. Chapter 11 case. Routinely represent several credit card issuers in Chapter 7 dischargeability litigation. Represented substantial creditor interests in the Fas Mart Stores, Inc. and AMF Bowling Centers, Inc. Chapter 11 cases. Represented Chapter 7 bankruptcy Trustee in multimillion-dollar adversary proceeding against member of Saudi royal family. Regularly represent several regional banks in debtor/creditor matters. Represented national commercial lessor in Purina Mills and Maxxim Medical Chapter 11 cases.
Bankruptcy Litigation
Our team routinely litigates all manner of bankruptcy issues, including dischargeability complaints, lien priority and avoidance disputes, fraudulent conveyance actions, exemption disputes, claim issues, preferential transfer actions, plan confirmation challenges and other adversary proceedings and contested matters.
Other Experience
As a compliment to our bankruptcy practice, our firm has served as receiver in a variety of business liquidations. Most of these representations were through appointments by Virginia state court judges or the Virginia Attorney General's Office.
Attorneys
• Kevin J. Funk
Summary of Chapter 11 Bankruptcy
Provisions of the Bankruptcy Reform Act of 2005
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the Bankruptcy Reform Act”) was signed into law by President Bush on April 20, 2005. The majority of the Bankruptcy Reform Act’s provisions became effective on October 17, 2005. We have summarized below some of the Bankruptcy Reform Act’s major provisions that are important to Chapter 11 bankruptcy cases. If you have any questions regarding these materials, other parts of the Bankruptcy Reform Act, or Chapter 11 bankruptcy generally, please contact us.
Commercial Real Estate Leases
The debtor now has 120 days after filing Chapter 11 bankruptcy to assume or reject any lease of commercial real estate under which it is the lessee, except that the debtor can obtain one 90-day extension of the deadline from the bankruptcy court. An additional extension can be granted only if the lessor consents in writing. Under the old law, Chapter 11 bankruptcy debtors frequently were able to obtain numerous extensions of the deadline from the bankruptcy court in order to focus on other aspects of their business reorganization. That will no longer be the case unless the lessor consents in writing.
If the Chapter 11 bankruptcy debtor assumes a lease but then later rejects it, the lessor is now entitled to an administrative expense claim in the bankruptcy equal to the 2 years of monetary obligations that would have accrued under the lease but for the rejection (except that the administrative claim will be reduced to the extent the landlord has received or will receive payments from another entity – i.e., a new tenant). Amounts due for the time beyond the 2-year period are subject to the long-standing “cap” on landlord claims in bankruptcy.
Reclamation Claims
The Bankruptcy Reform Act expands the reclamation rights of suppliers of goods. A supplier may now demand reclamation of goods delivered to the debtor within 45 days before the Chapter 11 bankruptcy filing. However, the supplier must make written demand for reclamation within 45 days after the debtor’s receipt of the goods (or if the 45-day period expires after the bankruptcy filing, then within 20 days after the bankruptcy filing). Also, a supplier is now entitled to an administrative expense claim in the Chapter 11 bankruptcy for the value of any goods it delivered to the debtor within 20 days before the date of the bankruptcy filing, so long as the goods were sold to the debtor in the ordinary course of its business.
Priorities for Wage Claims
The priority status for each employee’s claim for pre-bankruptcy wages, salaries, commissions (including vacation, severance, and sick leave) is now $10,000 (it was formerly $4,925), and the “look-back” period during which those wages, etc., must have been earned is now 180 days (it was formerly 90 days).
Payment of Tax Claims
Claims owed to the government for taxes must now be paid within 5 years after the date of the Chapter 11 bankruptcy filing, whereas under the old law such claims had to be paid within 6 years after the tax was assessed. Further, the taxes must now be paid in a manner at least as favorable as the manner afforded to the most favored unsecured non-priority claim in the Chapter 11 bankruptcy plan.
Preference Defense
The Bankruptcy Reform Act has made the “ordinary course of business” defense in preference lawsuits easier to establish. To establish that defense, a defendant in a preference case now needs only to show that the payment being sued for was (a) made in the ordinary course of business of the debtor and the defendant, or (b) made according to ordinary business terms. Under the old law, the defendant had to establish both of these elements, instead of one or the other. Hence, the new law makes it more difficult for a Chapter 11 bankruptcy debtor to recover preferential payments it made prior to the bankruptcy filing.
Other Preference Changes
The Bankruptcy Reform Act made some other changes to the law concerning preferences that make the law more difficult for the Chapter 11 bankruptcy debtor and easier for preference defendants. First, a purchase money security interest lender now has 30 days from the date the debtor receives possession of the collateral – it was 10 days under the old law – in which to perfect its security interest. Perfection after the 30th day makes the security interest potentially avoidable as a preference. Second, transfers totaling less than $5,000 are no longer subject to avoidance as a preference. Finally, a preference action to collect less than $10,000 must be filed in the district court for the district in which the defendant resides, except that this rule does not apply if the defendant is an insider of the Chapter 11 bankruptcy debtor.
Recovery of Certain Other Pre-Bankruptcy Transfers
The right of a Chapter 11 bankruptcy debtor to recover a pre-bankruptcy transfer made (a) with actual intent to hinder, delay, or defraud an existing or future creditor, or (b) in exchange for inadequate consideration and at a time when the debtor was, or was going to become, insolvent, has been extended to transfers made within 2 years before the bankruptcy filing (the limit formerly was 1 year). Further, pre-bankruptcy transfers to or for the benefit of an insider of the debtor pursuant to an employment contract and not in the ordinary course of business are now subject to recovery if the debtor did not receive adequate consideration in exchange (subject, also, to the 2-year time limit).
Utility Service
Now a Chapter 11 bankruptcy debtor’s duty to provide a utility provider with “adequate assurance of payment” in the bankruptcy must be satisfied by giving the utility a cash deposit, prepayment, letter of credit, or some other form of security agreeable to the utility; the debtor can no longer rely on giving the utility an administrative expense claim in the Chapter 11 bankruptcy for any unpaid post-bankruptcy utility service. Also, if the bankruptcy court must decide what “adequate assurance of payment” the debtor must provide, it can not take into consideration (a) the fact that there was no security deposit before the bankruptcy filing, (b) the fact that the utility received timely payment before the Chapter 11 bankruptcy filing, or (c) the utility’s entitlement to an administrative expense claim in the bankruptcy. \
Dismissal or Conversion of Case to Chapter 7
The grounds for a Chapter 11 bankruptcy case to be dismissed or converted to Chapter 7 are now much more extensive. They now include, for example, the unauthorized use of cash collateral that is substantially harmful to a creditor. Further, if a ground to dismiss or convert a case is established, the bankruptcy court must then dismiss or convert the case unless it “specifically identifies” “unusual circumstances” establishing that dismissal or conversion is not in the best interest of creditors.
Appointment of Trustee
The U.S. Trustee now must ask the bankruptcy court to appoint a trustee to manage the Chapter 11 bankruptcy debtor if there are reasonable grounds to suspect that the current members of the debtor’s board, the debtor’s CEO or CFO, or members of the debtor’s “governing body” engaged in actual fraud, dishonesty, or criminal conduct in managing the debtor or the debtor’s financial reporting.
Exclusivity Period for Proposing, and Soliciting Votes on, a Chapter 11 Plan
The debtor’s exclusive right to file a Chapter 11 bankruptcy plan of reorganization (or liquidation) is now absolutely limited to 18 months after the bankruptcy is filed, and its exclusive right to obtain creditor acceptance of its plan is now absolutely limited to 20 months after the bankruptcy filing.
Creditors’ and Equity Security Holders’ Committees
At the request of a party in interest in the Chapter 11 bankruptcy case, the bankruptcy court may now order the United States Trustee to change the membership of a creditors’ committee of equity security holders’ committee if the court determines that a change is needed to ensure the adequate representation of creditors or equity security holders. Also, the court can order the U.S. Trustee to add a business that is a “small business concern” (as defined by the Small Business Act) to a committee if the court determines that such creditor’s claim is “disproportionately large” in comparison to its annual gross revenue. Finally, each committee is now required to (a) provide access to information to entities that are not on the committee but hold claims of the kind represented by the committee, (b) solicit and receive comments from such entities, and (c) report to such entities if ordered to do so by the court.
