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By: Mark Haut, Lexis Practice Advisor
This article provides general guidance for counsel retained to represent a party in interest in a bankruptcy proceeding. Bankruptcy cases involve myriad issues so coverage in this article is limited to certain general actions that should usually be taken when representing a party in interest. Counsel should refer to the specific topics in Lexis Practice Advisor to find practical advice concerning specific bankruptcy issues.
In addition to debtor representation, attorneys are retained in bankruptcy proceedings to handle a wide variety of matters both big and small. Numerous parties have stakes in the outcome of a bankruptcy case, particularly a large case. Some attorneys represent parties involved in every aspect of the case, such as creditors’ committees and Debtor in Possession (DIP) lenders (among others), while other attorneys are retained to handle discrete matters, such as filing a proof of claim, defending a client in an adversary proceeding, and/or responding to a motion. Counsel may also be retained prior to the bankruptcy to assist with prebankruptcy planning and workout discussions with the debtor.1
Counsel representing Chapter 11 debtors and creditors’ committees have numerous responsibilities that are outside the scope of this article.2 When filing bankruptcy, certain non-debtor clients will immediately retain counsel to represent them in all matters that may arise in the bankruptcy proceeding. These clients may be existing clients that frequently utilize the same counsel’s services for bankruptcy matters (usually large institutional clients, such as banks, national landlords, or telecommunications companies), existing clients of other departments in the bankruptcy counsel’s firm, or new clients.
Counsel retained upon the Chapter 11 filing (or prior) should immediately review the bankruptcy petition and first day motions to determine if any of the relief sought is objectionable. After a Chapter 11 filing, the debtor typically files several motions at the same time as the petition (known as first day motions). First day motions involve matters requiring immediate consideration and are heard on or soon after the bankruptcy filing date. The first day motions often include requests for interim postpetition financing and/or the use of cash collateral, as well as requests for authority to pay certain prepetition claims (such as certain employee and critical vendor claims, for example) ahead of others during bankruptcy. The requests for interim relief are made to ensure that the debtor’s business operations continue uninterrupted.3 In certain jurisdictions, the debtor is also required to file an affidavit or declaration with the first day motions (a so-called first day affidavit). The affidavit typically includes general and specific information about the debtor and is used to meet the applicable local rule requirement and provide evidentiary support for the first day motions. For this latter reason, debtors in jurisdictions that do not require a first day affidavit will sometimes still file one with the first day filings. A review of the first day affidavit will assist counsel in understanding the debtor’s business, the events leading to the bankruptcy filings, and potentially the debtor’s intentions for the bankruptcy proceeding. Counsel will be able to quickly access all of these documents through Case Management/Electronic Case Files (CM/ECF), and, when dealing with large debtors, the claims agent’s website. Claims agents typically maintain a website to provide the public with free access to all filings on the bankruptcy docket as well as the claims filed in the case.
Counsel should consider how the first day motion affects the client’s interests. For instance, counsel to significant and essential trade creditors should consider contacting the debtor to negotiate obtaining critical vendor status. Counsel should discuss with the client whether counsel should attend the first day hearing regarding the first day motions to object to entry of orders that may adversely affect their interests or otherwise be present to protect their rights. Time permitting, counsel might file a quick objection to one or more of the first day motions. However, in most cases, counsel will not have time to draft an objection and will need to make an oral objection at the first day hearing. When there is an objection to interim relief, counsel usually negotiates the terms of the proposed order with debtor’s counsel at the courthouse.
Outside of the first day motions, counsel may also need to take certain actions in the early stages of the bankruptcy case to protect its client’s interests. For instance, some creditors will need to timely file a reclamation claim to preserve its reclamation rights.4 Prepetition secured creditors may object to the final DIP financing and/or cash collateral motion if the client’s prepetition lender is not convinced that its liens are adequately protected. Depending on the client and the size of its claims, counsel may also want to discuss whether the client wants to serve on the creditors’ committee. Serving on the committee allows a creditor to influence the outcome of the case in a meaningful way. On the other hand, serving on the committee comes with significant responsibilities.5 In sum, counsel should be prepared to file objections and otherwise protect its client’s interests during the flurry of activity that takes place at the beginning of a Chapter 11 case.
Regardless of when counsel is retained, counsel should typically take the following additional steps after being retained:
The above list of recommended actions is not meant to be all-inclusive but instead represents certain universal general practices when representing a party in interest in a Chapter 11 bankruptcy proceeding. There are numerous other actions that counsel may need to take during the bankruptcy case. Note that counsel representing a party to an adversary proceeding will need to take other steps as part of the representation but should keep apprised of the bankruptcy proceeding and possibly take the actions described above.16
To effectively represent a non-debtor client in a bankruptcy proceeding, counsel will need to understand the client’s relationship with the debtor and the reason for the retention. Counsel should usually obtain copies of agreements and other documentation between the debtor and the client and ascertain the amounts at stake and the client’s business interests. For some clients, counsel will need to educate the client on Chapter 11 bankruptcies and the bankruptcy process. For example, if applicable, counsel should inform a secured creditor of its right to adequate protection and a trade creditor of the significance of being a critical vendor.
If possible, all of the above-referenced discussions and due diligence will occur prior to taking positions in the bankruptcy proceeding. Counsel that fully comprehends the client’s interests in the bankruptcy case, including the monetary amounts at stake, will be able to advise the client whether a particular pleading should be filed or position taken and perform the associated cost-benefit analysis with the client. For example, in some cases, the legal fees that would be incurred in objecting to a motion are higher than the monetary amounts at issue or the expected distribution on the client’s claim. However, a simple dollar and cents calculation does not end the analysis of whether a client should object to a particular motion. A motion can also impact the client’s business, its rights under a contract with the debtor or a purchaser of the debtor’s business, and potential exposure to the debtor’s estate. The client may also have an objective beyond the simple collection of its debt, which is to preserve a profitable business relationship with the debtor. Thus, counsel and the client party in interest should develop a game plan for how it wants to deal with the debtor.
As part of developing a game plan, counsel should also analyze whether the client has any preference, fraudulent conveyance, or other legal exposure. This may prove relevant to settlement discussions as the elimination of significant preference or other exposure can be extremely valuable. With respect to preference exposure, creditors should gather records (invoices, correspondence, checks, receipts, shipment confirmations, etc.) of their business with the debtor during the 12–18 months prior to the debtor’s bankruptcy filing, and counsel should perform a preference analysis.17
Mark Haut is a Content Manager for Lexis Practice Advisor. Prior to joining LPA, he was counsel at Norton Rose Fulbright, where he advised clients on a variety of bankruptcy matters. Previously, he was an associate in the Bankruptcy and Reorganization Practice Group at Morgan, Lewis & Bockius, LLP. Prior to joining Morgan Lewis, he clerked for Judge Stuart M. Bernstein in the United States Bankruptcy Court for the Southern District of New York.
To find this article in Lexis Practice Advisor, follow this research path:
RESEARCH PATH: Bankruptcy > Commencing a Bankruptcy Proceeding > Current Bankruptcy Scheme and Reforms > Practice Notes
For an overview of the Bankruptcy Code, see
> BANKRUPTCY 101 FOR COMMERCIAL LITIGATORS
For a detailed summary of the Chapter 11 process, see
> CHAPTER 11 CASES OVERVIEW
For a discussion on the roles of the major participants in a Chapter 11 case, see
> CHAPTER 11 KEY PLAYERS
For an outline of the initial steps that legal counsel should take when a client is near default or insolvency, see
> Bankruptcy > Commencing a Bankruptcy Proceeding > Current Bankruptcy Scheme and Reforms > Practice Notes
For general information on representing creditors leading up to the bankruptcy, see
> REPRESENTING SECURED AND UNSECURED CREDITORS
For an outline of steps to assist a trade creditor client that suspects a customer or supplier may file for bankruptcy protection, see
> TRADE CREDITORS’ PREPETITION CHECKLIST (DEALING WITH FINANCIALLY DISTRESSED ENTITIES)
RESEARCH PATH: Bankruptcy > Commencing a Bankruptcy Proceeding > Chapter 11 Petitions and First Day Motions > Checklists
For a checklist to help a trade creditor client navigate the bankruptcy process and react to a customer’s bankruptcy filing, see
> TRADE CREDITORS’ POSTPETITION CHECKLIST
1. For information on workouts, see Business Workouts. 2. For information on certain of these responsibilities, see Creditors’ Committees’ Roles in Chapter 11, Creditors’ Committee Objections, and Fiduciary Duties and Statutory Obligations of Professionals to the Debtor-in-Possession. 3. For more information on first day motions, see First Day Filings. 4. For more information on reclamation, see Reclamation. 5. For more information, see Creditors’ Committee Formation. 6. See Fed. R. Bankr. P. 9010(b). 7. In re LandAmerica Fin. Grp., Inc., 2013 Bankr. LEXIS 1756, at *3 n.4 (Bankr. E.D. Va. Apr. 30, 2013) (“[b]y filing a proof of claim and a notice of appearance, Experian consented to personal jurisdiction in this Court”); see also In re Deak & Co., 63 B.R. 422, 432 (Bankr. S.D.N.Y. 1986) (“[b]y filing his notice of appearance, DAMA has indicated and, in essence, declared himself to be not only interested in these proceedings but to have acknowledged that his interests are affected . . . [and] [i]n this context, DAMA has voluntarily interjected himself into these proceedings and by his presence has indicated his consent to jurisdiction over matters involving him”). 8. Compare S.D.N.Y. U.S.B.C. L.B.R. 2090-1 (allowing pro hac vice admission without local counsel) with Del. Bankr. L.R. 9010-1 (requiring local counsel). 9. For more information, see Disclosure Obligations under Bankruptcy Rule 2019. 10. For more information on the debtor’s schedules, see Schedules and Statements of Financial Affairs. 11. For more information, see Proofs of Claim in Bankruptcy and Proofs of Claim Categories and Calculations. 12. See 11 U.S.C.S. § 1121(d)(1). 13. For information on exclusivity, see Parties That May File Plans. 14. For more information, see Disclosure Statements. 15. For more information, see Acceptance Process and Chapter 11 Plan Confirmation Resource Kit. 16. For more information, see Adversary Proceedings. 17. For more information, see Preferences and Fraudulent Conveyances versus Preference Actions.