EEE 400 Quiz 3

90 days

*A video primer on Bankruptcy with David Temes, Esq.*... The debtor has 120 days initially to file their plan of reorganization. That can be extended another _____, and that's the debtor's period.

120 days, 90 days

*A video primer on Bankruptcy with David Temes, Esq.*... The debtor has ___1___ initially to file their plan of reorganization. That can be extended another ___2___, and that's the debtor's period.

120 days

*A video primer on Bankruptcy with David Temes, Esq.*... The debtor has _____ initially to file their plan of reorganization. That can be extended another 90 days, and that's the debtor's period.

perfection

*A video primer on Bankruptcy with David Temes, Esq.*... =-As a creditor, you need to make sure you have achieved _____ in your claims.

trustee

*A video primer on Bankruptcy with David Temes, Esq.*... =-In Chapter 11, the DIP acts as the _____ unless there is a motion made and approved for the court to appoint another _____. =-Often comes in Chapter 11 only when there's an issue of malfeasance or fraud since management should have best idea of business. =-_____ has "power of God" =-They get portion of claims that they actually distribute. Specifically, the claims distributed to unsecured creditors.

B

*Bankruptcy*... *Kahoot Time!*... Which type of BK allows the Debtor to reorganize? A. Chapter and verse B. Chapter 11 C. Chapter 22 D. Chapter 7

preference or clawback period

*A video primer on Bankruptcy with David Temes, Esq.*... =-The _____ for payments in general is 90 days prior to the bankruptcy filing, meaning those payments must be returned to the company unless an argument can be made to excuse the payment; a legitimate excuse can be that the payment was received under normal, fair terms, this excuse just needs to be proven to the court's satisfaction.

unsecured

*A video primer on Bankruptcy with David Temes, Esq.*... =-Trustees get portion of claims that they actually distribute. Specifically, the claims distributed to _____ creditors.

where

*A video primer on Bankruptcy with David Temes, Esq.*... Bankruptcy is often a series of judgment calls in many ways... There are certain districts and judges... that will provide additional time and space to debtors... I don't necessarily even have to have business in that district, as long as I can create some claim... So there's a lot of leverage both from I'm going to file bankruptcy but also _____ I'm going to file bankruptcy =-The debtor picks _____; it may not be convenient to creditors.

Yes

*A video primer on Bankruptcy with David Temes, Esq.*... Can companies go bankrupt more than once? _____... =-However, courts get more and more judgmental and restrictive each time you file for bankruptcy; may be forced into Chapter 7 instead. Depends on reasons, like if it's management's fault or economy downturn, for example... *Bankruptcy*... *Questions:*... 5. Can you file BK more than once? -_____

Automatic Stay

*A video primer on Bankruptcy with David Temes, Esq.*... Take electricity. Few businesses are going to be able to run without that... Utility may be owed $10,000 on the petition date... pre-petition obligations. Now the utilities are entitled to, under the code, particular rights including an additional deposit and the right to payment, but the electricity costs on day 2, post-petition, those are due and paid and can be paid. However, the utility costs that were incurred prior to the petition cannot be paid and the utility cannot, if it gets its deposit and the debtor otherwise complies with all the provisions of the code, cannot say I'm turning off the power on Tuesday because you didn't pay me for last week's power. That's what, under the code, is called the _____... It acts as an injunction against all creditors from taking any action which would harm or somehow remove the debtor's control over assets. =Post-petition debts in Chapter 11 must be paid or else the company will be converted into a Chapter 7. =-Post-petition creditors receive liquidation funds before pre-petition creditors in the case of dissolution ("super-priority"). =-Post-petition lending is often discussed BEFORE petition is even filed, so bankruptcy is typically not a surprise to major players but is for trade or day-to-day creditors. =-Creditors need to seek court approval for relief from the _____, even to move to collect on collateral... there are exceptions, the big one being police/government power (like a health/safety issue)... *Bankruptcy*... *Questions:* 1. What is the _____? -_____ is issued on day 1 of BK and holds all creditors in place and forbids any collection action or activity against the BK party

Federal

*A video primer on Bankruptcy with David Temes, Esq.*... The _____ law preempts any state law except with regard to exemptions. So every state allows individual debtors to claim their house as exempt from their creditors. The amount of those exemptions changes from state-to-state and under _____ bankruptcy code, the _____ law says we'll look to state law... For all intensive purposes, for all other provisions of the bankruptcy code, the _____ bankruptcy code preempts all state law... *Bankruptcy*... *Questions:*... 2. Is BK managed by Federal Law or State Law? -_____

first day orders

*A video primer on Bankruptcy with David Temes, Esq.*... The first day of the case there is a series of orders called _____ that are absolutely mandated under the bankruptcy code. =-Changing bank names to reflect DIP name as opposed to old name before bankruptcy. =-Petition to use collateral or cash collateral =-Key employee retention plan... *Bankruptcy*... *_____* 1. Automatic Stay! 2. Legally switch bank accounts 3. Pay all pre-petition wages 4. Use cash and inventory and accounts receivable (even if they are already collateralized 5. Key employee benefit plan 6. DIP funder arrangements

existing lenders

*A video primer on Bankruptcy with David Temes, Esq.*... The majority of DIP funding is done by _____.

exit plan

*A video primer on Bankruptcy with David Temes, Esq.*... The second phase is going to be once the debtor sort-of has their feet under them and is looking to operations, it's what's the _____? Economically, being in bankruptcy is not sustainable... *Bankruptcy*... *Chapter 11 "Other Goodies"*... -_____ --Emerge from Chapter 11 BK protection --Section '363' sale

half

*A video primer on Bankruptcy with David Temes, Esq.*... There's typically two exit plans. The first is a 363 sale - let's find a buyer, let's have somebody come in. =-Can buy a portion of the assets... The second exit is this Chapter 11 plan of reorganization, and that is when you hear somebody emerging from bankruptcy or coming out of bankruptcy with a reorganized debt structure... put a proposal out... of the creditors that vote, more than _____ in dollar amount and two-thirds in number have to vote to approve the plan for each impaired class.

two-thirds

*A video primer on Bankruptcy with David Temes, Esq.*... There's typically two exit plans. The first is a 363 sale - let's find a buyer, let's have somebody come in. =-Can buy a portion of the assets... The second exit is this Chapter 11 plan of reorganization, and that is when you hear somebody emerging from bankruptcy or coming out of bankruptcy with a reorganized debt structure... put a proposal out... of the creditors that vote, more than half in dollar amount and _____ in number have to vote to approve the plan for each impaired class.

363 sale, half, two-thirds

*A video primer on Bankruptcy with David Temes, Esq.*... There's typically two exit plans. The first is a ___1___ - let's find a buyer, let's have somebody come in. =-Can buy a portion of the assets... The second exit is this Chapter 11 plan of reorganization, and that is when you hear somebody emerging from bankruptcy or coming out of bankruptcy with a reorganized debt structure... put a proposal out... of the creditors that vote, more than ___2___ in dollar amount and ___3___ in number have to vote to approve the plan for each impaired class.

A

*Bankruptcy*... *Kahoot Time!*... Who appoints the Trustee? A. The Bankruptcy Court B. The Uniform Commercial Code C. The Creditors D. It is always the Debtor

363 sale

*A video primer on Bankruptcy with David Temes, Esq.*... There's typically two exit plans. The first is a _____ - let's find a buyer, let's have somebody come in. =-Can buy a portion of the assets... The second exit is this Chapter 11 plan of reorganization, and that is when you hear somebody emerging from bankruptcy or coming out of bankruptcy with a reorganized debt structure... put a proposal out... of the creditors that vote, more than half in dollar amount and two-thirds in number have to vote to approve the plan for each impaired class.

debtor-in-possession (DIP)

*A video primer on Bankruptcy with David Temes, Esq.*... While the name may be the same, they are truly a _____... management may be the same, it may be the same faces, but all of their employment agreements are going to be reviewed, their ability to get wages are going to be reviewed, their ability to spend money is going to be under the review of the court and whoever their post-petition lender is and whoever their secured creditors are... *The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... _____ is a term used when the company is still operating, with some form of management still running it.

Chapter 7

*A video primer on Bankruptcy with David Temes, Esq.*... _____ bankruptcy is your simplest form in many ways. It's a liquidation. So in a corporate context, it truly is management throwing their hands up in the air or, as we get down the road, being forced to throw their hands up in the air turning all of the business assets over to a court-appointed trustee, who then marshals the assets and their responsibility is to, basically, administer the assets, run them to the extent necessary in order to liquidate and sell them for the benefit of the creditors. It is a moment where equity is totally out of the picture... equity owners are out, management is out, they wouldn't have any control or authority and it's truly up to this court-appointed trustee who is typically an attorney who practices bankruptcy in the area or within the district that has been approved by the court to serve as a trustee in these situations, and they will go liquidate everything for what they believe to be the highest and best value or offer, they will have the court review the sale, the court will approve the sale, and then the trustee will, in turn, review all the claims that have been made against the debtor, sort out the claims that may be inflated or otherwise there may be some defense to, and then distribute the proceeds of the liquidation to those creditors on the priority status; if there's any secured claims left, but generally the trustee is only going to be dealing with the unsecured creditors and it's going to be on a pro rata basis... *Bankruptcy*... *Questions:*... 3. What is _____? -_____ is an orderly liquidation of company assets under Trustee supervision

Chapter 11

*A video primer on Bankruptcy with David Temes, Esq.*... _____ is going to be your restructuring. The debtor typically comes into bankruptcy voluntarily, they petition the court for relief by filing a petition for _____ with the bankruptcy court, they will then continue to operate the business, management will generally retain control as long as they're not doing anything inappropriate, they will continue to manage all of the assets of the business. They will be under court oversight... They can't pay any debts that were owed prior to the petition date; so that is the date that they filed their bankruptcy petition... We typically refer to pre-petition and post-petition obligations and the debtor in the _____ is prohibited from paying pre-petition obligations without further authority from the court, and there may be situations in which they want to do that. The goal of the debtor in _____ is ultimately to restructure its debts and to come out with some kind of debt structure that will allow the debtor to continue operation, management may continue, there may be new equity or old equity, but the business will continue and it will continue to generate cash and use that cash to pay its obligations. It may not be able to pay them in full, but under the bankruptcy _____ process, it's going to come up with a percentage plan and, essentially, either everybody will agree or be deemed to have consented to that treatment... *The Bankruptcy Process as Sword and Shield*... *The U.S. Bankruptcy Code*... The goal of _____ is to maximize the value of the distressed firm's assets, either through a reorganization plan approved by the bankruptcy court, through a liquidation; that is, sometimes a company files for _____ protection with the assumption that it will reorganize or sell itself a going concern, but finds such alternatives unfeasible and converts to a Chapter 7 liquidation... *Bankruptcy*... *Questions:*... 4. What is _____? -_____ is the ability to reorganize the business under BK Court protection... *_____ Reorganization* -Reorganization time! -Offers relief from pre-petition creditors -First Day Orders -Debtor has 120 day exclusive period to file a re-org plan. Thereafter creditors can file their own -During BK _____, debtor MUST provide tons of reporting to the court and creditors

2 years

*Bankruptcy*... *Chapter 11 "Other Goodies"* -Preference period --90 days for outsiders --1 year for insiders --_____ for malfeasance

1 year

*Bankruptcy*... *Chapter 11 "Other Goodies"* -Preference period --90 days for outsiders --_____ for insiders --2 years for malfeasance

90 days, 1 year, 2 years

*Bankruptcy*... *Chapter 11 "Other Goodies"* -Preference period --___1___ for outsiders --___2___ for insiders --___3___ for malfeasance

90 days

*Bankruptcy*... *Chapter 11 "Other Goodies"* -Preference period --_____ for outsiders --1 year for insiders --2 years for malfeasance

Rejection of (Executory) Contracts

*Bankruptcy*... *Chapter 11 "Other Goodies"*... =_____ - Retailers often go into bankruptcy to reject contracts, like a lease contract; they may owe a lot of money but retailer can choose to move out and owe landlord nothing.

B

*Bankruptcy*... *Kahoot Time!*... Bankruptcy Law A. Is a State Law B. Is a Federal law C. Is pretty recent legislation D. Is practiced in the US District Court

B

*Bankruptcy*... *Kahoot Time!*... If you are owed money by a debtor in BK... A. You must hire a lawyer B. You must cease collection efforts C. Bankruptcy doesn't matter D. You must initiate suit against the Debtor

A

*Bankruptcy*... *Kahoot Time!*... In BK, who is the "Debtor"? A. The party who went bankrupt B. all of the above C. The party who is owed money D. The employees of the bankrupt company

C

*Bankruptcy*... *Kahoot Time!*... In Bankruptcy... A. The creditor's attorneys fees are *always* paid by the Debtor B. All of the above C. There is no timetable for eventual resolution D. A creditor's committee is always formed

B

*Bankruptcy*... *Kahoot Time!*... The Absolute Priority Rule A. Has no bearing in Bankruptcy Court B. Can be changed in bankruptcy C. Only impacts the IRS in bankruptcy D. Remains unchanged in bankruptcy

B

*Bankruptcy*... *Kahoot Time!*... What is the role of a Trustee in Bankruptcy? A. Represent the creditor's interests B. Represent the Court as a "referee" C. Invest the debtor's last dollars D. Represent the Debtor's interests

B

*Bankruptcy*... *Kahoot Time!*... When a Debtor wishes to dissolve, they file A. Chapter 11 B. Chapter 7 C. Chapter 13 D. Chapter 9

A

*Bankruptcy*... *Kahoot Time!*... Why is it called a Bankruptcy "Petition"? A. The debtor is actually petitioning the Court for relief B. Employees have to approve of the Court's solution C. 5 Creditors have to sign the petition D. The Court asks the public via petition if it is OK

Equity Interests

*Bankruptcy*... *The Absolute Priority Rule*... *Post-Petition*: 1. Wages 2. Secured Claims & Super-Priority Claims 3. Administrative Claims 4. Priority Unsecured Claims (Taxes) 5. Unsecured Claims 6. Other Pre-Petition Claims (in order) 7. _____ -Equity almost always gets wiped out

Other Pre-Petition Claims (in order)

*Bankruptcy*... *The Absolute Priority Rule*... *Post-Petition*: 1. Wages 2. Secured Claims & Super-Priority Claims 3. Administrative Claims 4. Priority Unsecured Claims (Taxes) 5. Unsecured Claims 6. _____ -All Pre-petition claims in order (other than wages and secured) 7. Equity Interests

Secured Claims & Super-Priority Claims

*Bankruptcy*... *The Absolute Priority Rule*... *Post-Petition*: 1. Wages 2. _____ -Secured Lenders from before BK &. DIP Secured Lenders since BK 3. Administrative Claims 4. Priority Unsecured Claims (Taxes) 5. Unsecured Claims 6. Other Pre-Petition Claims (in order) 7. Equity Interests

Wages, Secured Claims & Super-Priority Claims, Administrative Claims, Priority Unsecured Claims (Taxes), Unsecured Claims, Other Pre-Petition Claims (in order), Equity Interests

*Bankruptcy*... *The Absolute Priority Rule*... *Post-Petition*: 1. ___1___ 2. ___2___ 3. ___3___ 4. ___4___ 5. ___5___ 6. ___6___ 7. ___7___

Equity Owners

*Bankruptcy*... *The Absolute Priority Rule*... *Pre-Petition*: 1. Wages 2. Secured Claims 3. IRS 4. Unsecured Claims 5. _____

IRS

*Bankruptcy*... *The Absolute Priority Rule*... *Pre-Petition*: 1. Wages 2. Secured Claims 3. _____ 4. Unsecured Claims 5. Equity Owners

Wages, Secured Claims, IRS, Unsecured Claims, Equity Owners

*Bankruptcy*... *The Absolute Priority Rule*... *Pre-Petition*: 1. ___1___ 2. ___2___ 3. ___3___ 4. ___4___ 5. ___5___

Wages

*Bankruptcy*... *The Absolute Priority Rule*... *Pre-Petition*: 1. _____ 2. Secured Claims 3. IRS 4. Unsecured Claims 5. Equity Owners *Post-Petition*: 1. _____ =-Only get base _____ at first; bonuses and other additional forms of compensation may be moved down the priority list. 2. Secured Claims & Super-Priority Claims 3. Administrative Claims 4. Priority Unsecured Claims (Taxes) 5. Unsecured Claims 6. Other Pre-Petition Claims (in order) 7. Equity Interests

BK Strategies (Misc.)

*Bankruptcy*... *_____* (BK Strategies (Misc.)) -Can debts incurred by fraud be avoided through the use of a BK filing? =-NO -Creditor Committees -BK costs everyone a LOT of money -Alternatives: --Non-BK workout --Assignment for the benefit of creditors --Close down and walk away...

Creditor Protection Issues

*Bankruptcy*... *_____* (Creditor Protection Issues) -Think you're secured? Prove it. Confirm it! -Know that others will seek to diminish your position --You are only entitled to the value of your collateral at the time of BK filing. -Realize that when selling on terms, you are making a credit decision and risking your entire repayment. Don't become an unsecured creditor unknowingly. -Did you obtain credit info prior to making your sale? -Record every payment you receive and what it's for. You might be able to beat any future clawback efforts related to a look back period. =Only secured up to point of filing. If you have $500,000 loan, only protected up to collateral. =Companies that extend trade credit risk going into unsecured pool. =Need to track payments

A Word on Fraud

*Managing International Turnarounds*... *_____* (A Word on Fraud) As mentioned previously, the risk of fraud is significantly higher in international turnarounds, where regulatory oversight may be spotty... Parmalat represents a perfect example of such a situation... In any turnaround, the process of forming an accurate picture of the company's liquidity and the timeline upon which various creditors needed to be paid in the near term is a critical first step. The outright embezzlement by departed management made this already difficult process even more challenging, for executives guilty of fraud rarely leave behind accurate company records that might include illegal disbursements, and they rarely respond to requests for clarification of the victim company's muddled income statements... Operating in the dairy industry exacerbated this already exceptional time crunch, for failure to pay key vendors would result in an immediate shutdown and likely liquidation... Mesterharm immediately called the Italian Court-appointed turnaround consultant hired to oversee the Italian parent company's bankruptcy and requested financing to keep the company afloat. Naturally, the parent was receiving identical calls from subsidiaries all over the globe that had been left similarly high-and-dry by the embezzlement. After procuring an $8 million unsecured junior loan from Parmalat SpA, Mesterharm had to turn to the company's second-largest creditor - GE Capital - for additional financing. Even making such a request took a great deal of both diplomacy and nerve, for just two weeks before the bankruptcy filing, GE had engaged in a sale-leaseback transaction with Parmalat USA for almost all of its manufacturing and distribution assets . . . and just weeks later, not a penny remained because it had been stolen in its entirety. Naturally, GE twice refused Mesterharm's request that they consider offering Parmalat USA the DIP financing necessary to remain operational, expressing the sense of indignation and betrayal typically felt by a creditor who has fallen victim to fraud... Reluctantly, GE realized that in spite of the still stinging wound left from the embezzlement, it would benefit from injecting more capital into Parmalat USA in the form of temporary DIP financing, so the company could live and retain value as a going concern. Ironically, Mesterharm's team continued to uncover inappropriate behavior above and beyond the theft by former managers, and yet found a way to use it as leverage in addressing the company's operational challenges... Dean Foods nonetheless had the temerity to file a large claim in Parmalat USA's bankruptcy case, on the grounds that Parmalat USA's closure of its Brooklyn plant led to the rejection of a contract to supply Dean Foods with milk at a below-market rate... Aspects of the original fraud ultimately resulted in additional leverage, this time against the Italian parent from which it unquestionably had to make a clean break. However, Parmalat USA required two things from Parmalat SpA: technical support and, more important, the right to use the Parmalat name, logo, and related IP... Fraud rarely occurs in as blatant a matter as it did at Parmalat, with the guilty executives fleeing under cover of darkness and most absconding with their ill-gotten gains. As brazen as it was, it probably made recovery for survivors at the company easier, as there were no shades of grey in determining who was at fault; the villains were easily identifiable. Typically, fraud is far more painful, for it is difficult to be defrauded by someone you do not already trust... In turning around a company that has fallen victim to fraud, communications to employees, customers, and suppliers takes on an even greater role than in most turnarounds. Employee morale is less likely to plummet, and customers and vendors are less likely to panic and switch to a competitor if they find out the truth directly from the source, with an appropriate degree of contrition and apology even from new management... It is particularly important to find the guilty parties and remove them from the company as soon as possible... As with many aspects of the turnaround field, an ounce of prevention is worth a pound of cure in dealing with fraud.

superheater

*Success! Tolko/Kraft Paper with Jeff Sands*... =-Biggest problem with Canadian Kraft Paper was that the _____ needed to be replaced. Costs $15 million to replace.

negative purchase price

*Success! Tolko/Kraft Paper with Jeff Sands*... =-Bought for a _____ of $100 million or something like that.

42 days

*Success! Tolko/Kraft Paper with Jeff Sands*... =-To fix the superheater, the plant needed to be shut down for _____.

DIP Financing (or DIP Funding)

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... *Box 6: _____* The mere existence of _____ seems to surprise even more reasonably sophisticated executives, who wonder why in the world a bank would ever lend to a company already in bankruptcy. One critical reason is that though such loans are super-priority claims as a matter of law, a debtor who can demonstrate that financing was only available from the DIP lender can often convince a court to grant the DIP lender a lien that has priority over the existing (i.e., prebankruptcy) secured lenders' claims, moving the DIP lender to the very top of the food chain. Such liens are called "priming" liens, and DIP lenders will often insist on a priming lien on the debtor's inventory and receivables regardless of whether a prebankruptcy creditor already has a lien on them, a second lien (right below prebankruptcy secured creditors) on other encumbered property, and a first-priority lien on any unencumbered property... The elevation of those loans to a higher priority is a critical justification for making such loans, as it ironically makes lending to a bankrupt company safer than lending to the same company prebankruptcy when it is ostensibly healthy. Priority, however, is but one part of the picture, with the other part being fees. DIP lending can bring with it some of the most lender-friendly terms available in the world... Typically, the existing senior lender is first in line to become the DIP lender, and unless they demand totally outrageous terms, the bankruptcy court will agree to let them extend the _____... Such lenders will also request a stipulation from the bankruptcy court that all of their liens have been perfected and above challenge, that the bank and its officers and directors cannot be sued for any act that occurred before the bankruptcy filing, such as for accepting preference payments. This is known as a "defensive" DIP (as opposed to an "offensive" or "new money" DIP), and has caused a great deal of controversy when one existing secured lender uses a priming lien to vault ahead of other secured lenders (referred to as "rolling up" pre-petition debt into post-petition debt)... The collapse of the _____ market during the recent credit crunch explains why so many companies that had filed for Chapter 11 with the intention of reorganizing ultimately had to convert to Chapter 7 liquidations... *A video primer on Bankruptcy with David Temes, Esq.*... =-_____ allows the company to keep operating in Chapter 11. DIP lenders are prioritized above all other creditors... *Bankruptcy*... *Chapter 11 "Other Goodies"*... -_____ --How does it work? --Things to watch for --Who might provide it? --Any new (post-petition) creditors have priority over pre-petition

Committee Composition

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... *Box 7: Committee Formation*... *_____* (Committee Composition) The trustee will usually invite the largest twenty creditors listed on the petition to join the committee, and then pick up to eleven representatives depending on the size of the company.

Cooperation Versus Collusion

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... *Box 7: Committee Formation*... *_____* (Cooperation Versus Collusion) Membership on such a committee does not preclude competitors from cooperating to produce the desired result in a reorganization. Collusion is perfectly acceptable with respect to sharing information on what the debtor offered one creditor in terms of an out-of-court restructuring, or what one creditor was told about the debtor's financial condition. Such collusion is acceptable, however, only so long as competitors do not discuss anything relating to pricing.

Hedge Funds on Committees

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... *Box 7: Committee Formation*... *_____* (Hedge Funds on Committees) Hedge funds and other high-risk traders raise a number of issues on creditor committees, as their chase for higher returns prompted them to offer second-lien and even third-lien financing to companies during the credit boom, leaving them holding large positions in many bankruptcies today. The Code dictates that members of the creditors' committee hold a fiduciary duty to the group they represent and - because they are privy to material, nonpublic information regarding the company's reorganization plan - their organizations may only continue to trade any publicly traded securities of the debtor if they can demonstrate strict "Chinese Walls" preventing the in-house passage of information from committee members to traders. As a result, many hedge funds have begun refusing invitations to join such official committees, sacrificing control over the process for the ability to continue trading in the debtor's securities.

Professional Fees

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... *Box 7: Committee Formation*... *_____* (Professional Fees) Typically, the debtor must pay all _____ for any official committee.

Advantages to Bankruptcy

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... *_____* (Advantages to Bankruptcy) -Bankruptcy helps a company's immediate liquidity crisis by granting it an automatic stay on the collection of debts... Put differently, if a company still faces a cash crisis despite not having to pay its rent on real estate or leased equipment, a strong argument can be made that it should have filed a Chapter 7 liquidation instead of a Chapter 11 reorganization. -In addition to alleviating the short-term cash crisis, the automatic stay also provides protection from creditors and from most litigation, with exceptions pertaining to certain tax liabilities and criminal actions... -As previously mentioned, a bankruptcy filing forces creditors to the bargaining table, thereby preventing them from overly aggressive negotiating tactics based on leverage they might gain from acting as a holdout to an out-of-court restructuring. -Similarly, the bankruptcy process allows for a cram down of certain creditors, particularly those who have threatened to "play terrorist" and attempt to submarine a reasonably fair plan of reorganization. -As the case of Winn-Dixie, discussed later in the chapter, demonstrates, the discharge of debts is a highly compelling advantage offered by bankruptcy... -Bankruptcy can also offer preferential tax treatment, as the IRS will negotiate payment plans over seven years and the company usually does not have to show debt reduction as income. -The rejection of executory contracts makes it vastly less difficult for a company to reduce its exposure to prior poor decisions, either by escaping leases on unprofitable stores or plants or by exiting unprofitable contracts that force it to supply goods below market. Similarly, the ability to assume and assign such contracts to a third party for cash allows the debtor to monetize an asset that provides it with no value but could prove valuable to the third party. These rejection or assumption decisions can lead to some interesting disputes, however, particularly when creditors are fighting to wrest control of a company from a recalcitrant management team... -Most of all, bankruptcy offers a fresh start.

Box 7: Committee Formation

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... *_____* (Box 7: Committee Formation) Typically, the bankruptcy court will immediately appoint members to official committees, the most important of which tends to be the unsecured creditors' committee, for they are most frequently the first impaired class, or the "fulcrum security."

Disadvantages to Bankruptcy

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... *_____* (Disadvantages to Bankruptcy) -Bankruptcy usually has a negative impact on customers, who take this very public declaration of the company's distress as a sign that perhaps they should shift their business to healthier competitors who can deliver product on time, honor warranty obligations, and provide post-sale service. -Similarly, suppliers become suspicious and tend to put the debtor on aggressive payment schedules such as COD or CIA, and may express reluctance to revert to more standard payment terms even after the debtor has successfully emerged from bankruptcy... -Morale suffers during a bankruptcy, as employees are typically aware only of the negative connotations of the process and none of its protections... -Bankruptcy is unfathomably expensive, because the costs of arranging DIP financing and paying for accountants, valuation experts, and attorneys for both the company and all of its official committees add up very rapidly... -The necessity of responding to every creditor's filed claim or disputative motion is distracting to management, at precisely the time when it must focus on executing a three-pronged turnaround... -Management's loss of control is another drawback, as aggressive creditors who may not be nearly as knowledgeable about the company's business can take on disproportionate amounts of control, potentially sacrificing the company's long-term viability in exchange for a fast recovery on their claims. -Reporting requirements increase in bankruptcy, even over the more stringent reporting requirements established by Sarbanes-Oxley... -The high failure rate of bankruptcy is another disadvantage; fewer than 10 percent of companies in Chapter 11 successfully reorganize... -Finally, future claims are accelerated in bankruptcy... Even a brand new operation can fail and the pros of bankruptcy outweigh the cons.

Preferred equity and common equity

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... _____ are the last two classes of claimants, respectively, and very rarely do they participate in any recovery in a Chapter 11 proceeding.

Unsecured Claims (or Unsecured Claims without Priority)

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... _____ come, for all intents and purposes, last; although there are lower classes of claimants, very rarely do they see any significant recovery. These so-called "great unwashed" include all pre-petition debts owed to trade creditors and suppliers as well as any portion of an undercollateralized secured claim that has been bifurcated... *Bankruptcy*... *The Absolute Priority Rule*... *Pre-Petition*: 1. Wages 2. Secured Claims 3. IRS 4. _____ 5. Equity Owners *Post-Petition*: 1. Wages 2. Secured Claims & Super-Priority Claims 3. Administrative Claims 4. Priority _____ (Taxes) 5. _____ -_____ since BK petition (New Trade Creditors) 6. Other Pre-Petition Claims (in order) 7. Equity Interests

Super-priority claims

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... _____ consist of any loans the company takes out while in bankruptcy, which are known as debtor-in possession (DIP) loans.

Administrative Claims

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... _____ consist of any professional fees paid to attorneys, accountants, investment bankers, valuation experts, or other service providers, as well as any amounts owed to suppliers who provide goods or services after the filing. Again, this elevation of post-petition claims encourages suppliers to do business with a bankrupt company by ironically making it less risky to supply a company in bankruptcy than one that may appear healthy from the outside but is within months of filing... *Bankruptcy*... *The Absolute Priority Rule*... *Post-Petition*: 1. Wages 2. Secured Claims & Super-Priority Claims 3. _____ -Lawyers, Consultants, BK experts 4. Priority Unsecured Claims (Taxes) 5. Unsecured Claims 6. Other Pre-Petition Claims (in order) 7. Equity Interests

Priority Unsecured Claims (Taxes) (or Unsecured Claims with Priority)

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... _____ include certain taxes owed, consumer deposits for goods yet to be delivered, and up to $14,000 per employee in owed salary, benefits, and bonus. *Bankruptcy*... *The Absolute Priority Rule*... *Post-Petition*: 1. Wages 2. Secured Claims & Super-Priority Claims 3. Administrative Claims 4. _____ -Priority Unsecured - Taxes 5. Unsecured Claims 6. Other Pre-Petition Claims (in order) 7. Equity Interests

Secured Claim

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... _____s are those debts where the creditor - generally a bank or other lender - has an enforceable lien on a particular piece of property (the collateral) owned by the debtor... Secured creditors should note two other concerns regarding their claims. First, failure to perfect the lien will prevent it from being honored as a _____, thus dropping the creditor's claim down into the much lower-ranked class of unsecured claimants. Timing is also important; if two creditors hold liens on the same piece of collateral, the first to perfect is the first in right to that collateral. Second, a creditor's claim is only secured to the extent that the value of the collateral is greater than or equal to the amount of a claim; any deficit will be converted to a general unsecured claim... *Bankruptcy*... *The Absolute Priority Rule*... *Pre-Petition*: 1. Wages 2. _____s 3. IRS 4. Unsecured Claims 5. Equity Owners

Subordinated claim

*The Bankruptcy Process as Sword and Shield*... *The Absolute Priority Rule*... _____s follow the general unsecured claims. Subordination can arise contractually when a lender agrees to be placed lower in the hierarchy than general unsecured claims in exchange for a higher interest rate or other favorable terms, or a bankruptcy judge might subordinate them to punish a lender with unclean hands, such as one who has committed fraud, breached a fiduciary duty, or meddled too much in the running of the company. This is known as "equitable subordination." Finally, any claims arising from a successful derivative shareholder suit (as mentioned in Chapter Three) would constitute a _____.

assignee

*The Bankruptcy Process as Sword and Shield*... *The U.S. Bankruptcy Code*... *Box 5: State Laws* State Laws involving insolvent companies typically cover other ways to liquidate a company rather than reorganize. The two most popular are the following. *Assignment for the Benefit of Creditors* Here, all the assets of a company are assigned to an independent fiduciary or _____. The _____'s job is to gather and sell all the assets usually at some form of auction... *Foreclosure* Foreclosure by creditors is covered by Article 9 of the Uniform Commercial Code, where the secured creditor(s) will conduct a foreclosure sale. This is often used for a relatively quick sale of a business's assets.

Foreclosure

*The Bankruptcy Process as Sword and Shield*... *The U.S. Bankruptcy Code*... *Box 5: State Laws* State Laws involving insolvent companies typically cover other ways to liquidate a company rather than reorganize. The two most popular are the following. *Assignment for the Benefit of Creditors* Here, all the assets of a company are assigned to an independent fiduciary or assignee. The assignee's job is to gather and sell all the assets usually at some form of auction... *_____* _____ by creditors is covered by Article 9 of the Uniform Commercial Code, where the secured creditor(s) will conduct a _____. This is often used for a relatively quick sale of a business's assets.

Assignment for the Benefit of Creditors, assignee, Foreclosure

*The Bankruptcy Process as Sword and Shield*... *The U.S. Bankruptcy Code*... *Box 5: State Laws* State Laws involving insolvent companies typically cover other ways to liquidate a company rather than reorganize. The two most popular are the following. *___1___* Here, all the assets of a company are assigned to an independent fiduciary or ___2___. The ___2___'s job is to gather and sell all the assets usually at some form of auction... *___3___* ___3___ by creditors is covered by Article 9 of the Uniform Commercial Code, where the secured creditor(s) will conduct a ___3___ sale. This is often used for a relatively quick sale of a business's assets.

Assignment for the Benefit of Creditors

*The Bankruptcy Process as Sword and Shield*... *The U.S. Bankruptcy Code*... *Box 5: State Laws* State Laws involving insolvent companies typically cover other ways to liquidate a company rather than reorganize. The two most popular are the following. *_____* Here, all the assets of a company are assigned to an independent fiduciary or assignee. The assignee's job is to gather and sell all the assets usually at some form of auction... *Foreclosure* Foreclosure by creditors is covered by Article 9 of the Uniform Commercial Code, where the secured creditor(s) will conduct a foreclosure sale. This is often used for a relatively quick sale of a business's assets.

Absolute Priority Rule

*The Bankruptcy Process as Sword and Shield*... *The U.S. Bankruptcy Code*... Known as the _____, it explains in exactly what order stakeholders are to be paid... The power of the _____ stems from the fact that it lays out a specific order of each class of claimants, and stipulates that until the first (highest-ranked) class of claimants is paid in full, the second-highest class cannot receive anything; until the second-highest class is paid in full, the third-highest class cannot receive anything; and so on... *The _____*... The key is that, unless the first class of claims is paid in full, the classes below it are not entitled to anything... For larger companies each of these food chain categories has multiple subgroups, as the actual food chain of any group of creditors usually represents that company's capital structure... The _____ affects all negotiations in a turnaround situation, particularly once a covenant is breached, such as the covenants listed in Box 1 at the end of the Introduction... Negotiations can take place at any level... The food chain guides all of the negotiations before and during a bankruptcy filing, for it determines who gets what in any recovery analysis.

Conclusion

*The Bankruptcy Process as Sword and Shield*... *_____* (Conclusion) The success of the Winn-Dixie reorganization demonstrates the overarching theme to bankruptcy: though it can wipe out shareholders and undermine customer and supplier confidence, it offers a company powers it would otherwise lack to enact sweeping changes in pursuit of a three-legged turnaround... One last item about bankruptcy: Companies can declare bankruptcy more than once... A good example of multiple bankruptcies is Trump Entertainment Resorts, which filed for bankruptcy three times so far... Pillowtex's board of directors similarly failed to observe clear warning signs, thus leading to its own multiple filings, with a less attractive outcome than Trump... In summary, bankruptcy offers many advantages and disadvantages, which dictate whether a company on the brink should embrace it willingly or strive to avoid it at all costs. The Bankruptcy Code lays out how to deal with these advantages and disadvantages and many rules and regulations in one not too convenient package for U.S. companies.

Plan Confirmation

*The Bankruptcy Process as Sword and Shield*... *_____* (Plan Confirmation) For the first 120 days of a Chapter 11 case, the company - which means its management - has the exclusive right to present a plan of reorganization, which they may extend with the court's approval by another ninety days. If they fail to present a plan during that time, or present one that fails to win approval, then other stakeholders have the right to present their own plans... In a highly simplified example with only three classes of claimants - secured, unsecured, and equity - an unprofitable company with $300 million in secured debt and $500 million in unsecured debt that files for bankruptcy might enact a three-pronged turnaround that convinces the judge that it will swing it from a money-losing proposition to one that produces $100 million in EBITDA, and that all it has to give to creditors is the equity in the company because there's no cash to pay the accelerated debt... This admittedly simplified example of the recovery "waterfall" demonstrates the negotiation incentives each class of creditors faces in arguing how the emerging company should be valued. Regardless of the company's actual value, the secured creditors will be incented to argue for a very low valuation, probably one just below the amount of their outstanding claims... Unsecured creditors, by comparison, would be incentivized to argue for a more aggressive valuation, but still one that was right at or below the amount of their claims plus the secured claims... However, the unsecured creditors would not want the valuation to creep much higher than the value of their outstanding claims plus those of the secured creditors, because at any higher amount, they must begin sharing with equity holders, who will naturally be incented to argue for the highest possible valuation they can suggest while keeping a straight face... Table 6.1 demonstrates how this waterfall works across varying valuations, and how the classes of claimants who sit lower on the food chain only begin to eat at higher valuations... In order for a bankruptcy court to approve any plan of reorganization, allowing the debtor to emerge from bankruptcy, an impaired class of creditors needs to support the plan... In the meantime, there are frequently intercreditor battles brewing on the sidelines... *Box 8: _____* Unless the debtor is to be sold or liquidated, a plan of confirmation is necessary to emerge from bankruptcy protection... Plans must designate the claims and interests by the various classes, demonstrate which classes are not impaired by the plan (that is, they are made whole by the plan), and show how the impaired classes are treated, with all members within each class treated equally... The bankruptcy court grants great flexibility in the structuring of various plans, allowing them to impair various claims, provide for the rejection or assumption of executory contracts, dictate the sale or liquidation of specific assets or business units, and modify the rights of secured creditors... After the circulation of a disclosure statement that contains sufficient information to allow stakeholders to make an "informed and reasoned judgment" (e.g., an explanation of the plan, its various risk factors, and its proposed distribution to all interested parties), each class will vote. The plan can only receive confirmation if each class is either not impaired or voted to approve it, with a two-pronged test for approval: more than half of the claimants and two-thirds of the dollar value of the claims voting to confirm... If the plan fails to receive the votes necessary for confirmation from every voting class, the court can implement what is known as a "cram down," where one or more dissenting classes is "crammed down" over their objections. To receive court approval for a cram down, the plan's proponents must demonstrate that under the plan, each impaired creditor will receive at least as much value as they would under a Chapter 7 liquidation, which can lead to a battle of the experts regarding what a liquidation sale of the company's assets might fetch... Upon _____ and approval by the court, the debtor is bound and released, and the creditors are bound and barred. Essentially, this means that both parties are stuck with the plan's stipulations; for example, creditors cannot later attempt to recover even more value by reasserting their pre-petition claims against the debtor.

The U.S. Bankruptcy Code

*The Bankruptcy Process as Sword and Shield*... *_____* (The U.S. Bankruptcy Code) When the phrase "Chapter 11" is used, it refers to a certain part of _____ as passed by Congress and updated occasionally... _____ actually consists of nine chapters with some numbers "saved" for another day. The first three (Chapters 1, 3, and 5) deal with general provisions, bankruptcy case administration, and the relationships between creditors, debtors, and the estate, respectively... Chapter 7 deals with liquidations, which can occur both for companies deciding to dissolve and for individuals selling off most or all of their possessions to satisfy creditors. Chapter 9 covers the adjustment of the debts of municipality, while Chapter 12 is tailored to the unique economic situations faced by family farmers or family fishermen. Chapter 13 covers most personal bankruptcies for those individuals who have regular income to pay off some debts. Chapter 15 is the newest chapter, and represents the United States' adoption of the United Nations' Model Law on Cross-Border Insolvency... That leaves only the focus of this chapter, to highlight Chapter 11, which deals with corporate reorganizations.

railroad

*The Bankruptcy Process as Sword and Shield*... It is important to understand at least the basic concepts of bankruptcy in order to be successful in any turnaround or refinancing... The word bankruptcy actually comes from the combination of the Latin words bancus ("bench") and ruptus ("broken"). Its origin lies in the history of the Roman market, where merchants conducted all business at a bench in the public square... The American Bankruptcy Code is far more forgiving, and the process of declaring bankruptcy entails little of the shame, stigmatization, or violence against furniture that it did in ancient Rome... The young country's Congress passed its first attempts at a more forgiving bankruptcy law in part because Robert Morris had been jailed for failing to pay his debts... The debate over how America should treat its debtors - both individuals and corporations - raged for nearly a century, until the growth of the _____ industry gave it a push in the right direction... Since then, the code has developed to handle far more sophisticated bankruptcies... *A video primer on Bankruptcy with David Temes, Esq.*... I think it helps to put a little historical context on bankruptcy because... it truly is a legal fiction... It's almost a separate legal entity than the business that existed before the bankruptcy. It has all of the assets that existed before the bankruptcy, but it's under a totally new regime and new contractual obligations... It really comes out of the Bankruptcy Act which was developed in context with the _____s, where the lenders had sort of given a lot of money to these _____ development companies to build train lines across the United States, and as these companies ran out of money, they may have laid a thousand miles from east to west and a thousand miles from west to east, but left a thousand miles in the middle, and there was a real desire and a realization on behalf of all the creditors in this situation that if we all run out there and pick up our square mile of track, we've got nothing, we've got no value. Scrap metal is of nominal value. However, if we can all agree together, or at least three of us can agree and stop the fourth and fifth person from going and picking up any track and get somebody to come in and say let me put some new money on the table and I'll help you build the rest of the track. Now we've got an asset with real value and we may all be able to get at least a return if not a sizable return on our investment... The idea sort of grew up as how do we freeze everyone in place? Because we've got a debtor who's in trouble, we've got a lot of creditors out there who all have individual interest; in some ways it's a tragedy of the commons because everybody wants to be the first person to get to the debtor and get their money out of the debtor's pocket before there's nothing left... That's not in anybody's best interest if we allow that. One person may profit but, as an economic whole, we're going to suffer a greater loss. So bankruptcy came in, particularly Chapter 11, to say look, let's freeze everybody in place. Let's give the debtor the chance to do it, let's give three creditors who get together the chance to do it, but if we get a petition filed, everybody is frozen and now we can figure out, given the assets that we've got, how best do we get the value out of those assets. Does it take new money? Is anybody willing to put in new money? Does it take a buyer? Let's go and market this debtor and find somebody that's willing to step in and buy the debtor... the goal of bankruptcy is really to take a pile of assets that, for whatever reason, are in distress and give everybody the opportunity to come to the table and participate in a discussion over how do we create new value and how do we move this forward without letting anybody come and take... their piece of it and go home...

The Bankruptcy Process

*_____ as Sword and Shield*... *_____* (The Bankruptcy Process) Companies can enter bankruptcy either voluntarily by filing a petition with the Bankruptcy Court, or involuntarily if at least three unsecured creditors with a total of at least $10,000 in undisputed claims file their own petition. (If a company has fewer than twelve creditors, any single creditor can file an involuntary petition)... For debtors, entering bankruptcy offers a number of immediate advantages, the first of which is time... It also provides them with a singular platform from which they can address the varying interests of their diverse stakeholder base... Finally, a bankruptcy filing forces dissenting creditors to the table... Though the automatic stay provision prevents creditors from demanding immediate payment or seizing any collateral upon which they have a lien, creditors also benefit from _____ by gaining significant control over the company's management team... Finally, creditors will enjoy the benefits of the Code's protective measures, which provide them with various protections to ensure that they are treated fairly and the value of their collateral is not jeopardized unnecessarily. The first thing that happens when a bankruptcy court approves a petition for bankruptcy is that the court imposes an automatic stay on creditors that prevents them from demanding payment or seizing their collateral... To compensate secured lenders for their loss of the ability to seize their collateral, the court often grants such complaining creditors some form of adequate protection, which could come in the form of additional liens or cash payments from the debtor... Alternatively, a court could find that there is cause for relief from the automatic stay, such as a lack of adequate protection. Landlords or secured creditors collateralized by buildings frequently object that they lack adequate protection when a company has declared bankruptcy and wants to continue using the collateral facility but due to cash constraints have stopped paying for maintenance on the building... The day after a company files, creditors can no longer pick up the phone and harass management in hopes of receiving payment, as that would violate the automatic stay and result in grave consequences, determined at the discretion of the presiding bankruptcy judge... While the automatic stay is just that - automatic - many of the other protections of the bankruptcy code require that the debtor's attorneys file a flurry of so-called "first day motions" immediately upon commencement of the case... After the frequently nasty contentiousness of the adequate protection and cash collateral hearings, there is a slight lull in the action as various groups prepare for battle: unsecured creditors vs. secured creditors, secured creditors vs. other secured creditors, shareholders vs. the board of directors, and all of the creditors vs. the debtor... Creditors are often horrified to learn that interest stops accruing on any unsecured debt immediately upon the filing of a bankruptcy petition. In addition, any undercollateralized portion of a secured claim also stops accruing interest during the bankruptcy proceedings, so in our previous example where a claim in the amount of $10 million was secured by only $7 million, interest at the claim's contractually agreed-upon rate only accrues on the balance of $7 million. The $3 million becomes an unsecured claim... Courts will be asked to examine a company's transaction history to determine whether it made any preference actions. In an effort to discourage the kind of aggressive debt collection activities that can force a company into bankruptcy, the Code allows the court to avoid and revoke any payments made within the ninety-day period prior to the bankruptcy filing. The theory behind this rule is that the company did not suddenly become insolvent on the day they filed for bankruptcy protection, but rather that it was a gradual process that took some time... A court revoking preference actions can infuriate suppliers, who suddenly find themselves asked to return a check to the bankrupt estate of a company that probably still owes them money! However, there are seven defenses to preference actions that can help creditors avoid having to return payments from the debtor, the most popular are the following. The one used most often is to demonstrate that the payment happened in the "ordinary course of business," made on the same terms and conditions and within the same time frame as prior payments from the debtor... One could grant the customer their extension and instead use the "new value defense" against preference actions, which requires that they prove that they supplied new goods or services to the debtor after the preference payment in question. If the value of these new goods or services provided exceeds the amount of the payment, there is no preference action; if not, they can be offset dollar-for-dollar to reduce the amount of the preference action. Furthermore, any payment made on the date specified per a certain contract may be exempt from avoidance as a preference payment... This does not, however, mean that a company should not accept a payment simply because it expects that the supplier may be filing bankruptcy soon. Always accept the payment; it is far easier to negotiate from a position of strength (having checked the cash of a company that later files for bankruptcy) and make the debtor - or more accurately, its creditors - jump through the legal hoops necessary to prove a preference action and reclaim the payment... This ninety-day "look back" window for preference actions pertains only to company outsiders, however. On any payments to the insolvent company's insiders - including officers, directors, subsidiaries, or parent companies of the debtor - the court will look back a full year to determine preference actions... The court will also look back two years - and even more in the case of a violation of a similar state law - to determine whether the debtor has committed a fraudulent conveyance... The best defense comes from proof that a professional advisor such as an investment banker signed off on the price received for the asset, provided a fairness opinion, or ran an efficient auction to determine the transaction's fair market value... While the court conducts these tests for any alleged preference actions or fraudulent conveyances, the company can begin operational changes by reexamining every executory contract to which it is a party, which in bankruptcy means any contract where both sides still have ongoing obligations to fulfill... One of the Code's greatest powers offered to debtors is the ability to reject these contracts while under bankruptcy protection, allowing companies to escape from painfully unprofitable leases or supply contracts, almost without penalty... The ability to reject executory contracts should serve as notice to companies doing business with a troubled enterprise... The power of this clause was weakened significantly by the 2005 changes to the Code, termed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Previously, companies could wait until the final day of their bankruptcy proceedings to declare whether they would assume or reject each contract... After the passage of the BAPCPA, companies have only 120 days - which they may extend only once by 90 days with the court's approval - to identify which executory contracts they intend to reject... The point is, it often takes 120 days simply to gather the data necessary to embark upon these kinds of sophisticated analyses, leaving scant time to draw the appropriate conclusions and then hastily negotiate contracts with landlords before the window closes. Companies in bankruptcy may also assume such executory contracts, and assign them. For example, a debtor may have a long-term agreement with a supplier dictating that the supplier sell the debtor a specified amount of raw sugar at a fixed cost. Since the signing of the contract, the debtor has filed for bankruptcy and determined it plans to sell the division that requires raw sugar because that division no longer fits its revamped strategic vision. However, because the price of sugar has risen since the signing of the contract, that contract represents an asset of the debtor's estate; even though the debtor cannot benefit from the below-market price in the contract, someone can. As such, the debtor would choose to assume the contract, and then assign it to the highest bidder: presumably some other third party all too happy to buy sugar at an unusually low price... Many companies hear that any contract can be rejected or assumed in bankruptcy and attempt to circumvent this by including a clause in any lease or long-term purchase agreement claiming that the contract is "void in the event of a declaration of bankruptcy by either party." This does not work, as the Code stipulates very clearly that parties cannot contract around bankruptcy law. Other recent changes to the Code involve retention plans for employees. When Kmart filed for bankruptcy in 2002, management attempted to claim that the company's 280 highest-ranking executives all required retention bonuses because every one of them was needed to turn the company around; now companies must demonstrate that such executives have higher-paying job offers elsewhere in order to justify such payments... Another important topic that every supplier should be aware of is that of "reclamation." Under another recent Code change, if you send goods to a company that declares bankruptcy within forty-five days of receipt, you can reclaim those goods in writing within twenty days. The customer has a few defenses, especially if they sold the goods or a bank lien attached, but you have a shot at getting them back or at least a higher priority claim.