presents presents Bankruptcy Litigation Strategies for Secured Lenders and Other Creditors Minimizing Risks of Fraudulent Conveyance, Preference Challenges and Avoidance Actions A Live 90-Minute Teleconference/Webinar with Interactive Q&A A Live 90-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: David S. Musgrave, Principal, Ober Kaler , Baltimore F Thomas Rafferty Principal Ober Kaler Baltimore F. Thomas Rafferty, Principal, Ober Kaler , Baltimore Tuesday, October 12, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 10 am Pacific P ifi You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrants.
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www.ober.com Bank Bankruptcy Litigation Strategies for ptc Litigation St ategies fo Secured Lenders and Other Creditors Minim izing Risks of Fraudulent Conveyance, Preference Challenges y , g and Avoidance Actions
www.ober.com David S. Musgrave g Shareholder Ober, Kaler Grimes & Shriver 410 347 7391 410-347-7391 Fax: 443-263-7572 dsmusgrave@ober.com 5
www.ober.com F. Thom as Rafferty Shareholder Ober, Kaler, Grimes & Shriver 410-347-7372 Fax: 443 263 7572 Fax: 443-263-7572 ftrafferty@ober.com 6
7 www.ober.com • Fraudulent conveyance actions, Section 548 • Other avoidance actions, Sections 549, 544 Minim izing risks • Preferences, Section 547
8 www.ober.com Minim izing risks • Everything works sometime. • Nothing works every time.
www.ober.com Section 5 4 7 • Section 547(b) – Six elements to prove a preference Six elements to prove a preference • Eliminate one or more to win • Eliminate one, or more, to win 9
10 www.ober.com • available for transferee to prove Section 5 4 7 • Section 547(c) - 9 exceptions • affirmative defenses to plead
www.ober.com Section 5 4 7 ( b) : Property of the ( ) p y debtor – four exam ples • Factoring, “true sale” • No filed UCC-1 financing statements No filed UCC 1 financing statements • “precautionary” financing statements • skipped bankruptcy litigation • skipped bankruptcy litigation • sued the account debtor post bankruptcy • DON’T FIGHT UCC ARTICLE 9 • DON T FIGHT UCC ARTICLE 9 • DON’T BE MIA for 8 months 11
www.ober.com Property of Debtor: No. 2 • Creative financing – MBE joint venture financing of fuel oil MBE joint venture financing of fuel oil • Competing interests: – ultimate customer requirement ultimate customer requirement – MBE working capital lender with lien on all assets assets – joint venture partner supplier 12
www.ober.com Property of Debtor: No. 2 • A joint venture between MBE and supplier [ T] he unincorporated association of two or more persons to carry on as co- [ T] h i t d i ti f t t owners a business for profit forms a partnership, whether or not the persons intend to form a partnership and whether or not the association is called "partnership" "joint venture" or any other name RUPA partnership , joint venture , or any other name. RUPA. 13
www.ober.com Property of the Debtor: No. 2 • Bankruptcy courts in various jurisdictions have held that a plaintiff trustee may not avoid a transfer of partnership property as a id t f f t hi t preference, because no transfer from the debtor’s estate has occurred. debtor s estate has occurred. • Notwithstanding a very pro-Trustee set of facts, a transfer of corporate property did not qualify as part of the debtor’s estate, despite 100% ownership by the debtor, little corporate formality and rampant fraud corporate formality, and rampant fraud. 14
www.ober.com Property of Debtor: No. 3 • Security deposits, $25 million, $7 million – Held by third party y p y – Periodic renewal of income distribution absent default • Escrow agreement, – Held by third party – Trust law, legal and equitable interests T t l l l d it bl i t t – Security interest perfect by third party possession possession 15
www.ober.com Property of Debtor: No. 4 • Construction lender with perfect UCC filings • Repossessing equipment supplier Repossessing equipment supplier • No delivery, no transfer of risk of loss • UCC Article 2 can help • UCC Article 2 can help • Equipment supplier wins at trial 16
17 www.ober.com • Ownership protection ripples through all the Property of the Debtor Section 5 4 7 ( b) : Section 5 4 7 ( b) : elements
18 www.ober.com 5 4 7 ( b) ( 4 ) : 9 0 Days • Useful to avoid unnecessary crash • Necessary to step out of routine • Prop to emphasize risk • Tolling Agreement
www.ober.com Does a tolling agreem ent w ork? • VERY useful VERY useful • Private agreement to change statute • Stipulation that complaint filed within 90 • Stipulation that complaint filed within 90 days • Estoppel because of wrongful conduct Estoppel because of wrongful conduct • Contract in substitution • Jurisdiction “related to” • Jurisdiction, related to 19
www.ober.com 5 4 7 ( b) ( 4 ) Deprizio echoes No reported problems for non-insider lender – two patches in 1994 and 2005 two patches in 1994 and 2005 20
www.ober.com Deprizio echoes • Waiver of subrogation – failed to protect insider, enforcement denied because can’t , change statute by private contract, still liable for 1 year preference • Waiver of subrogation – enforced against insider guarantor who paid • Awareness for guarantor and lender 21
www.ober.com Section 5 4 7 ( b) ( 5 ) : Section 5 4 7 ( b) ( 5 ) : Greater share than Chapter 7 • United Rentals equipment supplier • paid by subcontractor • loses to subcontractor trustee preference claim • despite surety • despite mechanics lien availability • NOT USED • No bond claim • No bond claim • No proof of contractor balance remaining to substantiate mechanic’s lien protection p • USE 22
www.ober.com Greater share Use Bankruptcy Code protections: • Section 503(b)(9), 546(c) enhanced reclamation rights g • Section 365 assumption and cure defeats avoidance under Section 547(b)(5) ( )( ) • Section 546(b) notice of mechanics lien procedures 23
www.ober.com 5 4 7 ( c) ( 2 ) : Ordinary course • Evidentiary issue: • List of preferential transfers p • Exhibit A to demand letter • Exhibit A to preference complaint • Some check registers, some analyses • Object to the summary. • Different account numbers, the terms and facts varied among the Debtor in possession general ledger accounts FRE 1006 general ledger accounts. FRE 1006 24
www.ober.com “I ndefeasibly Paid” • “Indefeasible” used as promise and court order • Indefeasibility of payment is like finality court order • Not known until after future events have N t k til ft f t t h happened • Senior lender intercreditor agreement • Senior lender intercreditor agreement proposal to subordinated lender • “no payment to subordinated lender until p y senior lender has been indefeasibly paid” 25
www.ober.com Bankruptcy “proof” settlem ent • Here are some ways to minimize likelihood of successful preference attack if debtor files p bankruptcy petition within ninety days of settlement. 26
• Structure payment in such a manner that it is 27 www.ober.com Structure of Paym ent not an avoidable preference. p
www.ober.com Third Party Paym ent • A payment is not preferential if made from assets of third party and effect of payment is p y p y not to diminish assets remaining in estate. Third party can be subsidiary or affiliate of Debtor, as long as third party will not itself be D bt l thi d t ill t it lf b debtor in bankruptcy. 28
www.ober.com Debtor Borrow s Money • If Debtor borrows money from third party to make payment, court might consider p y , g payment as having been made to Debtor and from Debtor to creditor, making it an avoidable preference. id bl f 29
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