May 2018: Consult the Expert feat. Kirk Burkley

May 22, 2018

This feature originally appeared in the May 18th edition of the Pittsburgh Business Times.

Q: When a customer has not been making payments, should I consider a “workout”? 

Advice: A “workout” is a mutually negotiated legal arrangement, signed by both creditor and debtor, in which the debtor agrees to continue making payments in exchange for more lenient terms. This modification does not include a bankruptcy filing. By contacting your customer at the first sign of trouble to discuss a workout or a refinance, you can avoid the difference between winning (getting paid) or suffering defeat at the hands of a bankruptcy court.

Kirk Burkley
412-456-8108
kburkley@bernsteinlaw.com

April 2018: Consult the Expert feat. Kirk Burkley

April 23, 2018

This feature originally appeared in the April 20th edition of the Pittsburgh Business Times

Q: My company received notice of a significant default judgment against it.  After investigating, I discovered that an employee received notice of the lawsuit in the mail but never opened it. Can we do anything?

Advice: After you are served with a lawsuit you have a certain amount of time to respond (usually 20-30 days depending on your jurisdiction). If you don’t submit a written answer to the lawsuit the court can enter a default judgment.

First, it is important to determine whether your company was properly served. Service by mail is only proper under certain circumstances. If you determine your company was not properly served with notice of the lawsuit, any default judgment is invalid and you should file a motion in Court to have the judgment removed.

If you discover that your company was properly served, you may still be able to open the judgment. Generally speaking, a default judgment may be opened if the moving party has (1) promptly filed a petition to open the default judgment, (2) provided a reasonable excuse or explanation for failing to file a responsive pleading, and (3) pleaded a meritorious defense to the allegations contained in the complaint. Setting aside a judgment can be time-sensitive and complex – the attorneys at Bernstein-Burkley would be happy to guide you through the process.

Kirk Burkley
412-456-8108
kburkley@bernsteinlaw.com

Impact of Critical Vendor Payments on Lessors in Chapter 11 Cases

April 9, 2018

Understanding bankruptcy basics may be the difference between losing out and receiving fair treatment during the proceedings. While the Bankruptcy Code and Rules are complicated, they are several easily understood basics. The Bankruptcy Code groups similar creditors together to ensure that similarly situated creditors receive comparable treatment. Depending on which group the Bankruptcy Code places a creditor, the distribution scheme is generally the same (secured creditors receive the value of their collateral, the costs of administering the estate are paid, priority unsecured claims are paid, then unsecured claims are paid, and if anything is left, equity holders are paid). If a debtor is party to an unexpired lease, it must assume or reject that lease in accord with Section 365 of the Bankruptcy Code. These basic understandings are turned upside down with the introduction of Critical Vendor payments.

The ability to pay Critical Vendors at the outset of a chapter 11 bankruptcy case is becoming more “critical” than ever. Though bankruptcy proceedings are generally fair and reasonably predictable, the expectation of “who gets what, when, and in what order” is greatly impacted when a court authorizes a debtor to pay Critical Vendors

Bankruptcy courts recognize the need to authorize Critical Vendor payments because, once a debtor files for bankruptcy, its vendors have no obligation to continue doing business with the debtor. If the debtor cannot keep its vendors, it cannot reorganize its business. Bankruptcy courts have authorized debtors to pay its Critical Vendors under the Necessity Doctrine. Since reorganizing a struggling business is the fundamental purpose of chapter 11, courts will allow a debtor to pay its Critical Vendors first to avoid a disruption in service. Payment of Critical Vendors force creditors with greater or equal priority to wait and hope the debtor has money left after paying its Critical Vendors. Payment of Critical Vendor claims will also impact whether, and to what extent, the debtor will assume its unexpired leases.

Lessors usually will not know whether a debtor will assume or reject its leases until the debtor determines whether it needs the lease. The payment of Critical Vendor claims will almost certainly impact this decision. If a debtor makes Critical Vendor payments, the debtor may end up spending all of the money needed to assume its leases. If the debtor does not assume its leases, the lessors will be forced to the back of the line with other unsecured creditors.

Conceptually, most everyone agrees that successful reorganization is preferable to liquidation, which often necessitates the payment of Critical Vendors. If paying Critical Vendors avoids disrupting service, then all creditors may benefit if the debtor reorganizes and makes a sizable distribution to its creditors.

There is also an inherent sense of unfairness when paying Critical Vendors. Unsecured vendors that typically share with other unsecured creditors can extort payment of their pre-petition claims by refusing to do business with the debtor. Because of the automatic stay, vendors should not refuse to do business with the debtor unless they are paid. Lessors, on the other hand, must wait for 60 days (or longer) while the debtor decides what to do with the lease.

A more direct problem with Critical Vendor payments is that the Bankruptcy Code does not expressly allow payments that deviate from statutory scheme. The Bankruptcy Code carefully prioritizes which creditors will be paid and in what order. The Bankruptcy Code expressly requires that similar creditors be treated similarly.

While not expressly permitted by the Bankruptcy Code, courts have exercised their equitable powers under Section 105(a) to authorize Critical Vendor payments. Some courts authorize Critical Vendor payment to allow the debtor to “realize the possibility” of successful reorganization. Others take a more hardline approach, requiring a debtor to demonstrate the necessity and the material benefit to the estate.

This strict approach affords greater protection to unsecured creditors, including lessors, who have not been singled out as particularly important to the reorganization process. However, these early decisions carry with them sometimes irrevocable consequences.

If a debtor makes Critical Vendor payments and ultimately fails to reorganize, lessors and non-critical vendors will receive even less due to the Critical Vendor payments. In Delaware, a favored venue for largescale corporate bankruptcies, debtors often negotiate pre-packaged plans before filing and move swiftly to confirmation. Yet over half of the companies that were studied failed to thrive, necessitating a second bankruptcy, liquidation, or distress merger within five years of from the prior bankruptcy.

Also in connection with Critical Vendor payments, vendors sometimes demand “super-priority” payments. Vendors could insist that the debtor grant liens on its property to secure both pre-and-post petition debts. By cross-collateralizing the pre-petition debts, an unsecured vendor would not only get superior treatment in the bankruptcy case, but also the ability to foreclose on the debtor’s property that would have been available to unsecured creditors.

Whatever the case may be, the Necessity Doctrine is a gamble. Creditors often agree to Critical Vendor payments if they believe that doing so will increase their odds of receiving a greater distribution later in the case. The risks are even greater when a debtor presents a Critical Vendor motion along with its other first day motions, which often occur before other parties even receive notice of the bankruptcy. Careful monitoring of, and participation in, a bankruptcy case from the start is imperative to ensuring that your rights will not be prejudiced. If you receive notice of a bankruptcy after matters have been decided, immediately get involved to see if you have any recourse against the relief previously granted.

In the end, creditors who exert their influence in a bankruptcy case often earn better results than those who sit idly by and do nothing. Bankruptcies are risky enough that any leverage can add a few points to the probabilities that a lessor will be treated more fairly.

Written By: Robert S. Bernstein, Esq.

March 2018: Consult the Expert feat. Robert Bernstein

March 29, 2018

This feature originally appeared in the March 23rd edition of the Pittsburgh Business Times.

Q: What are some suggested provisions for the terms I should include in my credit agreement in order to protect my rights against a defaulting credit customer?

Advice: A credit agreement provides the terms and conditions of a credit relationship and sets the ground rules for any future conflicts. I recommend that you include:

  • Payment Terms – Here are the due dates, rates, discounts, late fees, percentages and payment options (the heart of a good, working credit relationship).
  • Interest – When are late fees assessed? At what percentage rate? Unless creditors obtain a signature on an agreement, they may not be able to legally collect one.
  • Waiver of Jury Trial – Credit criminals find wiggle room in asking for a costly jury trial. This provision waives the jury trial in the honeymoon phase of a relationship.
  • Choice of Law Provision – Sellers usually understand the laws in their state (or know which states are favorable) and want them to apply in any dispute.
  • Jurisdiction – Usually, a creditor wants disputes resolved close to their home, not the debtor’s home.

Robert Bernstein
412-456-8101
rbernstein@bernsteinlaw.com

Dealing with Liquidated Damages In and Out of Bankruptcy

March 28, 2018

When utilized in contracts and leases, a liquidated damages clause can serve as a tool to avoid unnecessary litigation. In situations where a party has breached the terms of a lease, the parties can include a liquidated damages clause in order to determine the amount to be paid upon default for damages resulting from the breach. Courts have typically upheld such clauses as long as the agreed upon amount is not deemed a penalty or punitive. Several factors are taken into consideration when determining whether a liquidated damages clause will bring the lessor party whole or act as a penalty to the lessee/lessor.

Generally speaking, the U.S. Supreme Court stated in Priebe & Sons, Inc. v. United States1 that liquidated damages provisions can be useful when fair and reasonable, and that they are a “particularly useful function when damages are uncertain in nature or amount or are unmeasurable.”2 The Tenth Circuit Court of Appeals ruled that the burden of demonstrating 1) the damages would be difficult to ascertain and 2) the liquidated damages provision isn’t punitive rests on the party seeking to enforce the clause.3 When ruling, the Courts will look to:

  • The specific lease;
  • The state law upon which it was drafted or agreed upon; and
  • The facts and circumstances surrounding each case.

Note that if the Court finds that the liquidated damages provision constitutes a penalty, the provision will be deemed void even if the damage resulting from a breach would be difficult to ascertain.4

When lease terms are breached before or during a bankruptcy, liquidated damages may fall under the jurisdiction of the Bankruptcy Courts. The timing of a breach of terms is significant in bankruptcy matters. Was the lease breached by the bankruptcy debtor prior to filing for bankruptcy? If so, those damages would be calculated as part of the pre-petition debt and amount necessary to cure a default in order for the lease to be assumed. When parties in a bankruptcy are deciding whether or not to assume the lease, 11 U.S.C. § 365(b) (1) provides that should a lease be assumed, the amount due and owing under the lease must be cured or provide adequate assurance that the lease will be cured, as well as provide assurance of future performance. Should a requirement be made to pay the liquidated damages as part of the cure? Unless otherwise objected to, it should be part of the cure. The bankrupt debtor could be the party attempting to enforce the liquidated damages provision to reduce the cure amount. In either situation, is the party seeking to collect on the liquidated damage provision able to show that those damages are actual damages that have been incurred? The party seeking to meet the burden of proof will need to show that the calculated liquidated damages were meant to make the party whole in anticipation of the breach and not act as a penalty. Resolution of such an issue could be lengthy depending upon the provision and amount. It is possible that the lease can be assumed pending resolution of the cure amount and whether or not it includes the liquidated damages.

Ideally, liquidated damages should be used when actual damages are not able to be ascertained at the time of the execution of the contract or lease. In order to be enforceable, these damages should not be disproportionate to the contract or lease amount. How can a party ensure the provision is enforceable in order to minimize the risk of litigation should a breach occur? The parties should:

  • Confirm that reasonable damages are not able to be ascertained at the time of the drafting of the contract or lease.
  • Decide on a specific number that would make the non-breaching party whole (i.e. rents, insurance, anticipated attorney fees/costs) based on the type of breach.

Thoughtful consideration should be given to the calculation of potential breach damages. Providing a haphazard amount could result in litigation in state or bankruptcy court.

To help avoid unnecessary litigation, creditors and lessors should seek immediate legal assistance when navigating this legal process. Bernstein-Burkley, P.C. is experienced in such matters and can lend its legal expertise in dealing with liquidated damage provisions in both state and bankruptcy courts.

Footnotes

  1. Preibe & Sons, Inc. v. United States, 332 U.S. 407 (1947)
  2. Id.
  3. Yale 41 Associates, et al v. Five Shopping Center Company 16 Fed. Appx. 921 (2001)
  4. Yale 41 Associates, et al v. Five Shopping Center Company 16 Fed. Appx. 921 (2001); Sun Ridge Investors, Ltd. v. Parker, 956 P.2d. 876, 877 (Okla. 1998)

February 2018: Consult the Expert feat. Kirk Burkley

March 19, 2018

This feature originally appeared in the February 23rd edition of the Pittsburgh Business Times.

Q: What does it mean to be named a “top 20” unsecured creditor in a bankruptcy filing? Is there anything my company needs to do?

Advice: A debtor filing for Chapter 11 must file a list of its 20 largest unsecured creditors. Those creditors are then given an opportunity to form an Unsecured Creditors’ Committee. The Committee provides an organized, centralized process whereby unsecured creditors can be assured that their claims and interests are being protected throughout the bankruptcy process. The Committee often plays a significant role in how the case progresses and the ultimate distribution to creditors.

Participating in an Unsecured Creditors’ Committee requires minimal time commitment and no out-of-pocket costs to its members. The Committee has certain well-defined rights under the Bankruptcy Code, and it also has the right to retain professionals to help provide those functions. The fees of all professionals retained by the Committee are paid by the bankrupt debtor’s estate, not by Committee members.

Bernstein-Burkley often represents Unsecured Creditors’ Committees, and we’d be happy to help guide your company through your customer’s Chapter 11 process. To learn more, visit bernsteinlaw.com/unsecuredcreditor.

Kirk B. Burkley
412-456-8108
kburkley@bernsteinlaw.com

January 2018: Consult the Expert feat. Kirk Burkley

January 19, 2018

This feature originally appeared in the January 19th edition of the Pittsburgh Business Times.

Q: What can I do in the New Year to improve revenue?

Advice: As the economy improves, the chances of collecting on bad debt or old accounts receivable increases. Many account debtors will be sitting on additional assets in the New Year, which means it is a good time to revisit collection strategies. Some companies will find it beneficial to make a push using internal resources, while others find it beneficial to outsource collections. In either scenario, there is no time like the present to build up liquidity in the New Year by cleaning up receivables and your balance sheet.

Kirk Burkley
412-456-8108
kburkley@bernsteinlaw.com

 

December 2017: Consult the Expert feat. Robert Bernstein

January 2, 2018

This feature originally appeared in the December 15th edition of the Pittsburgh Business Times.

Q: As a small business owner, I am wary of extending credit to certain customers, but my business depends on it. How can I offer credit to customers, while still protecting my interests? 

Advice: There are some sound strategies you can incorporate into your business practices for tipping the scales in your favor from the start of the transaction.

  • Make sure your credit and sales people are on the same page. Set up a standard risk assessment protocol and follow it without fail.
  • Include a confession of judgment clause in your agreement. This gives you the right to have a judgment entered against the debtor without trial.
  • Get written personal guarantees from the principals of the debtor company.
  • Avoid offering credit on “open account.” Instead, create a security interest, such as a lien, on the customer’s other assets.
  • Take the time to inspect your secured property to make sure it will be around if you need it. Be sure to have a credit policy that assures you will be informed of any transfers of secured property.

Robert Bernstein
412-456-8101
rbernstein@bernsteinlaw.com

November 2017: Consult the Expert feat. Kit Pettit

November 20, 2017

This feature originally appeared in the November 17th edition of the Pittsburgh Business Times.

 Q. How do I sell my property but maintain my mineral rights?

Advice: The first step is to understand and utilize the correct terminology. The terms “minerals” and “oil and gas” are often used interchangeably. However, if you live in Pennsylvania and are interested in retaining the natural gas rights associated with the Marcellus and Utica shale formations, you should use the term “oil and gas”.

Real estate can be divided into three separate and distinct estates which can be held by one owner or multiple owners. These estates are (1) the surface estate, (2) the subsurface estate, and (3) the support estate. In order to sell the surface estate and retain ownership of the oil and gas (subsurface) estate, the two estates must be separated, so a severed estate is created. To create a severed estate and retain your oil and gas rights when selling property, an “oil and gas reservation clause” needs to be included in the deed. Such a clause can be basic or complex and comprehensive. It is possible to reserve the oil and gas rights for a specified period of time, reserve a fractional interest of the rights where the seller and buyer agree to split the ownership of the oil and gas, or even reserve a certain shale formation.

It is important to consult with an attorney with experience in real estate and oil and gas to ensure that you are advised of the different options and considerations when the sale of real estate involves oil and gas rights and to be sure the transaction is handled properly.

Kit F. Pettit
412-456-8115
kpettit@bernsteinlaw.com

October 2017: Consult the Expert feat. JJ Richardson

October 27, 2017

This feature originally appeared in the October 27th edition of the Pittsburgh Business Times.

Q: My company (or an employee of my company) was just served with a subpoena in a lawsuit that we are not a party to. Why did we receive this and what should we do next?

Advice: If you or your company has been served with a subpoena in a lawsuit you are not a party to, it probably means that one of the parties to that lawsuit believes that you have documents or information relevant to their case. A subpoena is the legal mechanism by which a party to a lawsuit can obtain documents or information from a non-party that they believe may be related to their lawsuit. The subpoena may request documents, an inspection of property or real estate, or attendance at a deposition, court hearing or trial.

The first thing you should do if you are served with such a subpoena is READ IT CAREFULLY AND DON’T IGNORE IT. Once you or your company have been served with a subpoena, you are legally obligated to either comply with the subpoena or provide a valid and legal reason to the requesting party and possibly the Court as to why you cannot or should not be required to comply. If you fail to comply with a valid subpoena, you may be subject to serious legal sanctions.

Once you review the subpoena, I recommend you contact an experienced commercial litigation attorney to help you assess whether you have any responsive information and whether you have valid, legal reasons to oppose the subpoena.

John J. Richardson
412-456-8107
jrichardson@bernsteinlaw.com

September 2017: Consult the Expert feat. Kirk Burkley

September 25, 2017

This feature originally appeared in the September 22nd edition of the Pittsburgh Business Times.

Q: When a customer has not been making payments, should I consider a “workout”? 

Advice: A “workout” is a mutually negotiated legal arrangement, signed by both creditor and debtor, in which the debtor agrees to continue making payments in exchange for more lenient terms. This modification does not include a bankruptcy filing. By contacting your customer at the first sign of trouble to discuss a workout or a refinance, you can avoid the difference between winning (getting paid) or suffering defeat at the hands of a bankruptcy court.

Kirk Burkley
412-456-8108
kburkley@bernsteinlaw.com

Bernstein-Burkley Summer 2017 Newsletter

August 30, 2017