As the economy in the United States continues in recession, the number of companies filing for bankruptcy protection is expected to grow.  Bankruptcy proceedings in the US are judicial proceedings presided over by a judge.  They can result in either liquidation of the debtor or reorganization, if the debtor can obtain needed financing and it can be turned cash-flow positive on current operations, before interest and principal on pre-bankruptcy unsecured debt.  Recently, while some manufacturing companies have been able to reorganize, retail debtors have been forced to liquidate very early in their bankruptcy cases, and financial and service firms also tend to liquidate rather than reorganize.  Examples of liquidated retailers include Steve & Barry’s, Linen & Things, Whitehall Jewelers and Friedman Jewelers.  Trustees are seldom appointed in the US, and, therefore, creditors must organize and appear in court to protect their rights.

THE IMPORTANCE OF SPEED

Many important issues are decided at the very beginning of the bankruptcy case, including arranging for debtor-in-possession financing and paying critical vendors.  It is imperative that creditors be prepared to act quickly to protect their rights.  Problems of distance and language may put non-US creditors at a disadvantage, and this makes it even more important to identify legal counsel quickly to ensure your rights are protected.  In addition, a Creditors Committee is usually appointed within a few weeks of the filing of the bankruptcy, and, in some cases, have been appointed within a week of filing. Non-US creditors who do not contact the US Trustee (who appoints the Committee) and arrange to have representation at the selection meeting have less chance of being appointed.  It is important, therefore, for you to understand your rights immediately and move quickly to protect them.

Clearly, it is important to monitor your US customers and, if you suspect financial difficulty, seek legal advice from counsel knowledgeable about US bankruptcy law.  You may be able to improve your position before bankruptcy and you will be prepared to act promptly if bankruptcy occurs.

DEMANDING NOTICE

First, you must be sure you receive notices of the issues being presented in bankruptcy court.  A recent amendment to the United States’ bankruptcy law requires that non-US creditors be given notice individually rather than by publication (unless the court orders that some other form of notification would be more appropriate).  But many important decisions are made in bankruptcy cases on shortened notice, and it is possible that you may not receive the notice prior to the hearing on a particular issue.  Therefore, non-US creditors should file a demand to receive notices electronically and should try to designate a domestic representative to ensure timely receipt of all filings in a bankruptcy case.  Requesting notice of motions will not subject you to the jurisdiction of the bankruptcy court.

CREDITOR COMMITTEES             

A Committee of unsecured creditors is formed early in the case to represent the interests of unsecured creditors.  The Committee can hire legal or other professional advisors at the debtor’s expense.  The Committee typically consists of 7 creditors.  While the largest creditors are usually selected, in many cases the US Trustee seeks to appoint a diverse group of creditors (e.g., domestic and non-US trade suppliers, landlords, parties to executory contracts, unions, pension plan representatives, public debt holders, etc.).  In cases where the debtors include holding companies and operating subsidiaries, the US Trustee may appoint creditors of both the parent and subsidiary debtors. 

It is obvious from this that, although the Committee is supposed to represent creditor interests generally, the interests of different kinds of creditors are often in conflict.  In such a situation, the positions the Committee may take (and the creditors who may benefit from, or be injured by, those positions) are often determined by the types of creditors serving on the Committee.  As a result, if you are a significant creditor of a debtor, it can be important to volunteer for the Committee. The Committee’s expenses are paid by the debtor and many of your expenses as a member (such as travel) may also be reimbursable.  Most Committee meetings are conducted by conference telephone call, so participation should not be burdensome.  Also, your US representative may participate on your behalf.

RECLAIMING SHIPPED GOODS

You must act quickly to preserve your rights with respect to any goods delivered to the debtor during the 45 days prior to the filing of the bankruptcy case.  A creditor has ten (10) days after the filing of a bankruptcy case to make a written demand for return of such goods.  Once demand is made, you must follow-up to insure your demand is honored.  Unfortunately, reclamation may provide you no rights if the goods have already been used by the debtor at the time of the reclamation demand or if a floating inventory lien has attached to the goods when the debtor received them. 

FILING PROOFS OF CLAIM

Creditors cannot be certain of receiving their share of any distribution unless they file proofs of claim.  This does not need to be done early in the case, but it is best to have a US bankruptcy lawyer file the claim for you, rather than attempting to do it yourself.  There are several reasons for this.  First, certain types of claims may be entitled to priority treatment.  For example, if your goods were received by the debtor within 20 days prior to the filing of its bankruptcy case (and are not reclaimed), you may be entitled to a priority administrative claim for such goods.  Administrative claims must be paid before general unsecured claims and they must be paid in full at the conclusion of the bankruptcy case in order for a debtor to successfully reorganize in bankruptcy.  Another reason to have a lawyer prepare your claim is that the filing of a claim subjects you to US bankruptcy court jurisdiction.  If you have received substantial preferential payments during the 90 days prior to bankruptcy, you may be at risk of being sued to return those payments as preferences.  Filing a proof of claim in that situation may not be prudent.

Given the rapid changes in the US economy, it is important to consult with attorneys in the US who are expert in US bankruptcy law.  ONC Lawyers and Moses & Singer LLP are both independent member firms of the MSI Global Alliance of Law and Accounting firms.   Moses & Singer LLP in New York City, has represented creditors in many of the largest bankruptcy cases pending in the US, and is pleased to assist ONC Lawyers and its clients.