Before and/or shortly after the filing of a Chapter 11 petition, the debtor and debtor’s counsel should consider the following issues.
1. CORPORATE RESOLUTION.
Where the debtor is a corporation or an entity controlled by an agreement between its principals, the debtor should follow the procedures articulated therein, so that the act of the Chapter 11 filing is one authorized by the Board of Directors, partners or other controlling parties. Typically, a corporate or partnership resolution authorizing the filing of the petition by an authorized individual is filed together with the bankruptcy petition.
2. PARTNERSHIP CONSENSUS OR INVOLUNTARY PETITION.
The bankruptcy law provides that if less than all general partners of the debtor have authorized the filing of the Chapter 11 petition, any petition filed by less than all general partners shall be an involuntary petition. After the filing of the involuntary petition, the non-petitioning general partners can controvert the petition’s filing or join in the bankruptcy petition.
3. CONTROL OF ESTATE PROPERTY.
Typically, the filing of a reorganization petition results in the continued operation of the business under the control of the debtor-in-possession. However, a provision of the bankruptcy law exits to allow estate property to continue to be controlled by a previously appointed state court receiver under particular circumstances. Accordingly, if the debtor wishes to in fact be a debtor-in-possession, it should be in control of the estate property at the time of the bankruptcy filing. Generally, debtors file bankruptcy petitions prior to the appointment of a receiver, where applicable, for this reason.
4. PROFESSIONAL RETAINERS.
The Bankruptcy Code prevents the payment of professional persons (attorneys, accountants) after the filing of the bankruptcy petition from estate resources, except upon court authorization after notice to creditors. So, it is less costly and more efficient to provide estate professional’s retainers pre-petition. While it may be necessary to obtain court approval for drawing down the retainer, there is not the restriction upon transfer of estate property to professionals, so long as it is done pre-petition and does not constitute a preference.
5. PAYMENTS TO NECESSARY SUPPLIERS.
When the debtor’s business is dependent upon provisions from particular suppliers, arrangements should be made pre-petition for the orderly access to such necessary ingredients, notwithstanding the bankruptcy. Frequently, key suppliers will require that an account be brought current. Occasionally, key suppliers will require cash-on-delivery payments for all goods provided post-bankruptcy. Regardless of the particular arrangements, the lines of supply need to be examined before the petition’s filing.
6. PREFERENCES/FRAUDULENT CONVEYANCES.
Payments on antecedent debts made within the ninety days before a bankruptcy is filed, or fraudulent conveyances made within a year before the petition, are susceptible to being set aside post-bankruptcy. If such a transfer has been made, and the debtor does not wish it disturbed, some planning should be undertaken so as to put said transfers outside of the statutorily mandated scrutiny.
7. SET-OFFS.
The Code specifically provides that bankruptcy law will not affect state set-off law. However, the automatic stay may prevent a creditor from unilaterally accomplishing this. In any case, before filing a petition, a debtor and his counsel should examine the potential for set-offs and make necessary arrangements. For example, it would be imprudent to have significant funds in a lending institution to whom the debtor owed money. It is conceivable that upon the filing of a bankruptcy, the bank could freeze that account pending Court authorization to accomplish a set-off.
8. BANK ACCOUNTS.
In conjunction with the discussion of set-offs, the bankruptcy debtor, for strategic purposes, may want to establish accounts at a new bank. Additionally, the Bankruptcy Court will require, at or near the time of bankruptcy filing, that pre-petition accounts be closed and that new accounts, in an authorized institution, be opened. This requirement facilitates an analysis of the debtor’s finances post-petition.
9. EXEMPTIONS/HOMESTEAD.
Where the debtor is an individual and therefore entitled to declare certain property as exempt from attachment by its creditors or trustee, pre-petition consideration need be focused on the debtor’s property. Bankruptcy law permits “bankruptcy planning” in the conversion of non-exempt assets to exempt assets although such planning has been set aside where courts have found the debtor overreached.
10. PRE-PETITION CASH COLLATERAL AGREEMENT.
Businesses contemplating a reorganization filing when counseled by sophisticated counsel typically initiate cash collateral discussions with its secured lenders pre-petition. Where a creditor has a properly perfected security interest in rents or proceeds from accounts receivable, and this income is the lifeblood of the debtor’s business, it is advisable to have an agreement as to the use of cash collateral at the time of the bankruptcy filing.
11. FILING REQUISITES.
In order to initiate the bankruptcy, the debtor will need to have in cash, certified funds or cashier’s check, a filing fee. In addition, all Chapters require a master mailing matrix which includes the name, address and zip code of all creditors and interested parties, a corporate or partnership resolution authorizing the act where necessary, and the bankruptcy petition itself. Within fifteen days of the filing of the petition, all schedules and the statement of financial affairs for the debtor must be filed with the Clerk.
12. POST-PETITION REQUIREMENTS.
As soon as possible after the filing of the petition, appropriate applications for approval of employment of attorneys for the debtor, as well as employment of other professionals, need to be filed with the Court. In many Districts, local rules require the lodging of an operating order which designates the person to act as agent for the debtor-in-possession (Chapter 11 cases). In addition, local rules often require the filing of partnership agreements or articles of incorporation.
Within days after the filing of the petition, the Office of the United States Trustee sends letters to the debtor and its counsel requesting the provision of certain information and documents, including the most recent income tax returns, financial statements, and proof of insurance. With its letter, the U.S. Trustee also provides the debtor and its counsel with operating guidelines which sets forth the duties and powers of the debtor-in-possession.
