Source: Dorsey & Whitney
Article Authors: Dorsey & Whitney Bankruptcy Team for Foreign Suppliers
Published: October 2020
This Series Three will address questions
relating to the early stages of the bankruptcy process, including what
disclosures debtors must make, what relief debtors will generally seek at the
outset of the case, and how “critical vendors” are treated.
1. Question: What information is the
debtor required to disclose in its bankruptcy case and how can a creditor
obtain information about the financial status of the debtor?
Disclosure is the hallmark of the bankruptcy
process. Along with the Chapter 11 petition, debtors must file a list of their
largest unsecured creditors and provide estimates of their assets and
liabilities. Early in the case, a debtor must file detailed schedules and a
statement of financial affairs, though debtors often obtain extensions of time
to file such documents. The schedules include, among other things, lists of all
known creditors and equity security holders (along with amounts and types of
claims), executory contracts and unexpired leases, and assets of any type or
nature. The statement of financial affairs requires disclosure of, among other
things, transfers made in the lead up to the bankruptcy filing and all pending
litigation. During the course of a Chapter 11 case, debtors are required to
file monthly operating reports detailing all receipts and disbursements during
each month of the case.
All of these documents are available online
through Public Access to Court Electronic Records (PACER), which charges a fee
for each page viewed. A U.S. law firm typically has a PACER subscription. In
very large cases, debtors may hire a third party service provider to make such
information available for free on a website specifically dedicated for this
purpose. Given the often voluminous nature of these filings, it is most
efficient to consult with a U.S. bankruptcy attorney to obtain and analyze the
relevant information and monitor the bankruptcy case as it proceeds.
2. Question: What relief will the debtor
seek at the very beginning of the case and how can a supplier protect itself?
Soon after filing a Chapter 11 petition, most
debtors file a variety of “first day motions” to obtain permission to take
certain actions necessary to keep the debtor’s business going that cannot be
taken absent permission from the bankruptcy court. First day motions usually
include requests to pay certain pre-bankruptcy debts (such as critical and/or
foreign vendors, employees, and insurance premiums), to obtain post-bankruptcy
financing, and to use cash collateral that is otherwise subject to a secured
interest. It would be worthwhile to consult with a U.S. bankruptcy
attorney to determine whether and how such motions may impact your rights in
the bankruptcy case.
3. Question: What is the impact of the
debtor recognizing a supplier as a “critical vendor”?
As noted above, among the first day motions
frequently filed in Chapter 11 case are those seeking authority to pay the
pre-bankruptcy claims of vendors that the debtor deems to be “critical.”
Critical vendors are those that are essential to the debtor’s operations going
forward (such as suppliers of important components, parts, or equipment) and
with whom the debtor desires to have a continuing contractual or business
relationship notwithstanding its bankruptcy filing. Absent authority to pay
such critical vendors on account of their pre-bankruptcy claims, no payment
would be made on account of such claims until a plan is confirmed which may not
provide for payment in full to such claims.
Debtors obtaining authority to pay critical
vendors are generally given broad discretion to use their business judgment to
determine which vendors qualify as critical for purposes of payment and how
much to pay them. Moreover, to the extent debtors are given the authority to
pay critical vendors, they are often expressly permitted to condition payments
to critical vendors on those vendors agreeing to proceed according to terms as
good as or better than those that applied to the relationship between the
debtor and the vendor prior to the bankruptcy filing.
4. Question: What is the “Section 341
meeting” of creditors and should suppliers attend?
The Section 341 meeting of creditors involves
an examination of the debtor under oath, through its representatives, regarding
the debtor’s primary assets, liabilities, and intentions regarding
reorganization. In Chapter 11 cases, the meeting is conducted, and the bulk of
the questioning is done, by a representative of the Office of the U.S. Trustee
(a branch of the U.S. Department of Justice). Creditors are welcome to attend
the meeting and are permitted to examine the debtor regarding its finances as
well. The judge in the bankruptcy case is not present at these meetings and
they are not conducted in a courtroom.
The meeting of creditors must occur between
21 and 40 days after the filing of the bankruptcy petition, although the U.S.
Trustee’s office may adjourn the meeting. Suppliers should consider having
their U.S. bankruptcy counsel attend the meeting, both to get a better sense of
where the case is headed and to examine the debtor under oath, if desired.
5. Question: Can a supplier seek to
dismiss the bankruptcy case if it believes it was filed in bad faith or other
grounds for doing so?
A Chapter 11 bankruptcy case may be dismissed
for a variety of reasons, including that the case was filed in “bad faith.”
When considering whether a Chapter 11 case is filed in bad faith, the
bankruptcy court will look at the totality of the circumstances and decide
whether the debtor actually needs Chapter 11 protection and intends to use the
substantial benefits afforded by bankruptcy law to reorganize its financial
affairs. In practice, bankruptcy courts tend to be cautious to dismiss a
Chapter 11 case at the outset and usually wait to see whether there are other
bases for dismissal, such as failure to comply with a court order or failure to
timely provide information or attend meetings.
***For any questions regarding this article, kindly contact:
Catherine Pan Giordano (pan.catherine@dorsey.com)