Sometimes it begins when a client, tenant, or customer starts to slow-pay, with the result that your accounts receivable start to accrue gradually. Other times the issue presents itself more suddenly. Either way, you find your company owed a great deal of money that looks like it may not be collected because your client/tenant/customer has filed bankruptcy, has commenced an assignment for the benefit of creditors, has been put into receivership, or is otherwise just plain insolvent. What do you do? What should you not do? The topics discussed in this webinar include the pros and cons of putting a counterparty into involuntary bankruptcy; when and how you may be able to pursue third parties (like guarantors, directors, or officers) for the amount owed; risks related to preference attack; pros and cons of sitting on a “creditors’ committee” in a Chapter 11; how to negotiate for “critical vendor” protection in Chapter 11; and practical guidance for continuing to provide goods or services to an insolvent counterparty. To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/bad-debtor-owes-me-money-2020/

1. 1

2. 2
Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.

3. 3
Thank You To Our Sponsors

5. Disclaimer
The material in this webinar is for informational purposes only. It should not be considered
legal, financial or other professional advice. You should consult with an attorney or other
appropriate professional to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate,
Financial Poise™ makes no guaranty in this regard.
5

6. Meet the Faculty
MODERATOR:
Thad Wilson - King & Spalding LLP
PANELISTS:
Jonathan Friedland - Sugar Felsenthal Grais & Helsinger LLP
David Johnson - Abraxas Group LLC
Ryan Maupin - Grant Thornton LLP
6

7. About This Webinar – Bad Debtor Owes Me Money!
Sometimes it begins when a client, tenant, or customer starts to slow-pay, with the result that
your accounts receivable start to accrue gradually. Other times the issue presents itself more
suddenly. Either way, you find your company owed a great deal of money that looks like it
may not be collected because your client/tenant/customer has filed bankruptcy, has
commenced an assignment for the benefit of creditors, has been put into receivership, or is
otherwise just plain insolvent. What do you do? What should you not do? The topics
discussed in this webinar include the pros and cons of putting a counterparty into involuntary
bankruptcy; when and how you may be able to pursue third parties (like guarantors, directors,
or officers) for the amount owed; risks related to preference attack; pros and cons of sitting on
a ―creditors’ committee‖ in a Chapter 11; how to negotiate for ―critical vendor‖ protection in
Chapter 11; and practical guidance for continuing to provide goods or services to an insolvent
counterparty.
7

8. About This Series – Restructuring, Insolvency &
Troubled Companies
Companies fail all the time, for all sorts of reasons. Some companies become distressed, or even
insolvent, because of mismanagement; others because of fraud; others for myriad other reasons- some
intrinsic to the company and some extrinsic. Regardless of the cause, failing or failed companies create a
unique set of issues, risks, and even opportunities for all involved. This area of law and finance has
become so specialized that no fewer than five (American Bankruptcy Institute; Association of Insolvency
& Restructuring Advisors; Commercial Law League of America; National Association of Federal Equity
Receivers; Turnaround Management Association) national organizations exist to help those who
specialize in the field to stay up to date on the latest developments, strategies, and tactics in the area.
Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and
executives without much background in these areas, yet is of primary value to attorneys, accountants, and other
seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to
entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that
participants will enhance their knowledge of this area whether they attend one, some, or all episodes.
8

9. Episodes in this Series
#1: Help, My Business is In Trouble!
Premiere date: 8/19/20
#2: Opportunity Amidst Crisis- Buying Distressed Assets, Claims, and Securities for
Fun & Profit
Premiere date: 9/16/20
#3: Bad Debtor Owes Me Money!
Premiere date: 10/14/20
9

10. Episode #3
Bad Debtor Owes Me Money!
10

11. Early Signs of Distress
• Financial or other covenant compliance
• Delay in delivering financial results
• Going concern from audit
• Exercise of cure rights
• Unexpected management and board changes
• Increased reliance on consultants
• Termination of material contracts
• Accounting restatement
• Data security breach
• IP infringement issues
• Cash hoarding
• Material changes in cash management system
• Change in accounting firm
• Post transaction integration issues
• Unexpected cost increases
• Unexpected customer loss
• Government investigation
• Change in regulatory environment
• Casualty, loss of key assets
• Material litigation
• Report of fraud or irregular conduct
11

12. Preventative Measures
 Guarantees (Personal, Affiliate or Corporate Parent)
 Letters of Credit
 Collateral
 Credit Insurance
 Cash in Advance (CIA)
 Cash on Delivery (COD)
 Consignment
 Security Deposits
 Intercreditor Agreements
12

13. Preventative Measures
• Monitor the debtor’s solvency:
 Several financial services firms provide credit opinions regarding commercial
companies and their ability to meet their debts as they become due.
 If, for instance, your company extends trade credit to a particular customer whose
business represents a significant source of your company’s revenue, it would be
prudent to request such an opinion from time to time in order to hedge against the
downside risk should that customer file for bankruptcy
 If the company or its debt is publicly traded, monitor securities disclosures and reports
from credit rating agencies (e.g., Moody’s, S&P, Fitch)
13

14. Customer/Supplier Defaults – Now What?
• Creditor Remedies:
 Send to collections
 Stop performing
 Sue/Evict customers/guarantors
 Institute lawsuit
 Seek appointment of a Receiver
 Seek involuntary bankruptcy
 Setoff deposit or collect on LOC
14

15. Debtor Protections
• Debtor may seek to protect itself by:
 Commencing Assignment for Benefit of Creditors (―ABC‖)
 Filing for Bankruptcy
 Filing ―pre-emptive‖ lawsuit
15

16. Bankruptcy in Brief
• Bankruptcy court is a unit of federal district court.
• A Petition, filed with the bankruptcy court, commences case and triggers automatic stay.
16
Chapter 7 Chapter 11 Chapter 13
• Companies and
individuals
• Debtor stays in
possession of assets and
administers case itself to
reorganize or conduct
orderly liquidation
• Individuals only
• Trustee appointed to
oversee debt repayment
plan
• Companies and
individuals
• Trustee appointed to
liquidate assets
3 most common filings types

17. The Automatic Stay in Bankruptcy
• Upon filing for bankruptcy, the automatic stay prohibits creditors from seeking to collect on
prepetition debts or exercise remedies—i.e., an automatic injunction prohibiting creditors
from starting or continuing actions to collect debts or enforce debts against debtor’s
property
• Allows debtor ―breathing room‖ to make decisions in time of crisis
• Prohibited actions include continuing litigation, enforcing or perfecting liens, setting off
mutual debts, sweeping deposits, and taking actions to obtain debtor’s property
• Creditors who knowingly violate automatic stay will be liable for damages
17

18. Relief from the Automatic Stay
• A creditor, typically secured, can obtain relief from automatic stay
• Creditor essentially has 2 options:
 Prove ―cause,‖ which may include a lack of ―adequate protection‖ (discussed later); or
 Prove that:
o debtor has no equity in the property; and
o property is not necessary for an effective reorganization
18

19. Adequate Protection
• Protects value of a secured creditor’s collateral during the bankruptcy case
• It is often applied when value of collateral is declining in value (e.g., debtor is using cash
collateral to sustain operations during bankruptcy)
• Bankruptcy Code provides three non-exclusive examples of adequate protection:
 Periodic or lump-sum payments to creditor with an interest in the property;
 Additional or replacement liens (e.g., a lien on cash proceeds of the sale of property)
 Other relief resulting in indubitable equivalent of the creditor’s interest in property (e.g.,
reporting/inspection rights, payment of creditor’s legal/advisory fees)
19

20. Classes of Claims in Bankruptcy
• Creditors in bankruptcy case are distinguished by types of claims they hold & priority of
payment among them
• Types of claims (in order of payment priority):
 Secured – creditors with a lien on debtor’s property
 Administrative – post-petition expenses necessary to administer bankruptcy (e.g.,
legal and advisory fees) and operate debtor’s business (e.g., wages, taxes, 503(b)(9)
and reclamation claims); often times administrative claims are ―paid in full.
 Priority – certain pre-petition claims given priority under Bankruptcy Code (e.g., taxes,
pension obligations or wages earned within 180 days of bankruptcy)
 Unsecured – creditors without collateral (e.g., utilities, credit card, trade creditors,
bondholders, PBGC, tort claimants)
20

21. Distribution Waterfall
21
DIP Priming Lien
Secured Claims1
Adequate Protection Liens
General Unsecured Claims2
Equity Interests
“Carve-Out” for Professional
Fees
“Surcharge” Against
Collateral
1 Order of lien priority may be subject to Intercreditor
Agreement (ICA)
2 Order of payment priority may be subject to ICA
Administrative Claims
Priority Unsecured Claims
DIP Superpriority Claims
Adequate Protection Claims
General Unsecured Claims
(including undersecured
claims)2
Equity Interests
Priority Unsecured Claims
Administrative Claims
“Carve-Out” for Professional
Fees
Secured Value Unsecured Value
• Certain Employee
Wage Claims (up
to a cap)
• Certain
contributions to
Employee Benefit
Plans (up to a
cap)
• Tax Claims

22. Claims of Trade Creditors
• Trade creditors have 3 important ways to get (1) administrative priority, (2) the goods
returned, or (3) paid for all or a portion of their prepetition claims—
1. 20-Day Claims (aka “503(b)(9) Claims”) – value of any goods received by debtor in
the 20-day period preceding the bankruptcy and sold on an ordinary-course basis
(e.g., invoices related to shipments delivered within 20 days of bankruptcy)
2. Reclamation Claims – right of seller to take back ordinary-course goods received by
debtor within 45 days of bankruptcy and sold on credit terms while debtor was
insolvent; provides vendor with credit protection, negotiating leverage, and ability to
recover goods.
3. Critical Trade Vendor Designation – payment of prepetition claims of Critical Trade
Vendors if authorized by court order (see next slide)
22

23. Payments to Critical Trade Vendors in Bankruptcy
• Debtors often seek entry Critical Trade Order as part of first-day motions
• Grants debtor the authority to settle and pay specific claims of unsecured creditors
providing debtor with essential goods
• Rationale: certain trade creditors are indispensable to debtor’s capacity to stay in business
• Bankruptcy Code contains no explicit authority for this relief
 Some bankruptcy courts use equitable powers under the doctrine of necessity
(derived from § 105(a) of the Bankruptcy Code) to allow such payments if—
1) Vendor would cut off supplies or services absent payment of prepetition claims
2) Debtor could not operate as a going concern without vendor and would be forced
to liquidate
23

24. Claims of Trade Creditors
24
Critical
Vendor
Designation
Reclamation
Rights
507(b)
Claims
45 days before
bankruptcy
Seller can reclaim goods
sold prepetition if debtor
received goods while
insolvent
Value of goods received
given administrative
priority
20 days before
bankruptcy
Goods received:
Upon entry of Critical Trade
Order, debtor can pay
seller’s prepetition claims
immediately

25. General Unsecured Creditors
• General unsecured creditors (―GUCs‖) stand behind secured creditors and priority
unsecured creditors
• General unsecured creditors often viewed as having the most to lose in chapter 11 cases
(sometimes referred to as the ―fulcrum security‖ if parties ahead of the GUCs are ―in the
money‖)
• Litigation (or threatened litigation) may be only means for recovery by GUCs
25

26. Official Committee of Unsecured Creditors
• Committee of Unsecured Creditors (aka the ―UCC‖ or the ―Creditors’ Committee‖) ​
 Comprised of unsecured creditors holding the largest claims
 Appointed by the U.S. Trustee (DOJ ―bankruptcy watchdog‖)
 UCC = ―Guardians of the Process‖—central voice and opportunity to be heard for the
unsecured creditors
 Expenses are paid out of the Debtor’s assets and constitute administrative claims
 UCC gives creditors with small or de minimis claims mechanism to participate in case
(otherwise it’d be economically irrational)
 Usually key ―opponents‖ to DIP loan provisions

27. Official Committee of Unsecured Creditors
• General Duties of UCC and its members
 The UCC is considered a fiduciary body of the GUCs, therefore each member owes
fiduciary duties to all GUCs (see Neiman Marcus-Marble Ridge)
 Oversee and consult with Debtor concerning case administration​
 Investigate all aspects of the Debtor’s business ​
 Participate in formulation/negotiation of the plan​
 Prosecute estate causes of action (if Debtor unreasonably refuses to do so)​

28. Getting Paid in Bankruptcy
• Debtor must file bankruptcy schedules and statements of financial affairs listing all
prepetition claims its records show as outstanding against it on the petition date
• BUT: if creditor’s claim is not listed in Schedules, or debtor lists incorrect amount of or
basis for claim, creditor must file Proof of Claim.
 Failure to file a Proof of Claim, when necessary, will result in creditor
relinquishing right to vote on plan of reorganization and/or receive distributions
from bankruptcy estate, if any are made
28

29. Proof of Claim
• Requirements for Proof of Claim:
 Court has form to be filled out showing amount, basis, and other information relating to
claim
 Must be supported by writing & signed by authorized representative of creditor
 Properly filed claims presumptively valid; burden then shifts to trustee or debtor to
object to claim
 Filing proof of claim arguably submits a creditor to bankruptcy court jurisdiction
 Must provide documentation supporting the claim, unless such supporting
documentation is voluminous
29

30. Risk of Preference Attack
• Bankruptcy Code equips debtor with the ability to avoid (i.e., clawback) certain pre-
bankruptcy transactions as ―preferences‖ if certain conditions are met
• Elements of a ―preference‖
 Transfer made on account of pre-existing debt (i.e., debt that existed before transfer)
 Made while the debtor was insolvent (rebuttable presumption debtor was insolvent
throughout 90-day period before the bankruptcy)
 Made within 90 days of bankruptcy (or 1 year for insiders)
• Resulting in a greater distribution than the creditor would have received in a liquidation
• Debtor or trustee have obligation to do ―reasonable due diligence in the circumstances of
the case‖ and ―tak[e] into account a party’s known or reasonably knowable affirmative
defenses‖

31. Common Defenses to Preference Claims
• The Bankruptcy Code lays out several statutory defenses to preference claims, including:
1. Ordinary course payment – transfers made in the ordinary course of business (i.e.,
consistent with prior transfers in timing, amount and circumstances)
 Note – payment ―in the ordinary course‖ is a legal term of art that must be analyzed
with counsel before asserting such defense
 Note – Ordinary business terms is a second way to prove ―ordinary course‖ defense
2. Subsequent advance or new value – goods or services provided to debtor on
unsecured basis after receipt of a preference (e.g., using value of goods shipped to debtor
after debtor made an otherwise preferential payment to offset liability).
31

32. Common Defenses to Preference Claims
3. Contemporaneous exchange of new value – parties to transfer intended transfer to be a
contemporaneous exchange for new value given to debtor, and such transfer was actually
made contemporaneously
• Example:
 Vendor and Debtor exchange emails agreeing to COD terms for shipment of goods
 Vendor delivers goods to debtor, & Debtor pays Vendor at the time of delivery
 Debtor files BK 10 days later
 The payment, despite being made during preference period, is protected as
contemporaneous exchange of new value
32

33. About the Faculty
33

34. About The Faculty
Thad Wilson - ThadWilson@KSLAW.com
Thad Wilson is a Partner in the Atlanta office of King & Spalding LLP and a member of its
Financial Restructuring Practice Group. Ranked by Chambers USA 2020 as a ―Rising Star‖
in Bankruptcy, Thad represents a broad spectrum of clients in financial restructuring,
corporate and insolvency matters, including debtors, secured and unsecured creditors, and
other parties in interest in major Chapter 11 bankruptcy cases. He has extensive experience
representing clients in insolvency-related litigation and disputes. Thad is a member of the
American Bankruptcy Institute, the Turnaround Management Association (currently a board
member of its Atlanta chapter), and the State Bar of Georgia. In 2014, Thad was elected to
the initial class of Barristers of the W. Homer Drake, Jr. Georgia Bankruptcy American Inn of
Court, of which he is currently a member.
34

35. About The Faculty
Jonathan Friedland - jfriedland@sfgh.com
Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his
job simply: to make money for clients whenever possible and to protect their interests at every
turn. Licensed in four states, Jonathan’s transactional work focuses on representing private
funds and other owners of private businesses, and the businesses they own. He regularly
advises on M&A activities, structuring new ventures and restructuring old ones, and on other
commercial relationships. Jonathan is rated AV® Preeminent™ by Martindale-Hubbell, 10/10
by AVVO, and enjoys several other similar distinctions. Jonathan graduated from the State
University of New York at Albany, magna cum laude (in three years) and from the University
of Pennsylvania Law School. He clerked for a federal judge before entering private practice
and served for several years as an Adjunct Professor of Strategic Management at the
University of Chicago’s Graduate School of Business. Jonathan is lead author and editor of
several significant treatises, several chapters in other treatises, and scores of articles on law
and business.
35

36. About The Faculty
David Johnson - david@abraxasgp.com
David Johnson (@TurnaroundDavid), founder and managing partner of Abraxas Group, has a
20-year track record of driving organizational change. In an advisory capacity, David has
served as an interim executive or financial advisor to dozens of middle market companies in
transition.
Throughout his career, David has demonstrated a commitment to thought leadership, with
numerous speaking engagements and articles on the topics of business transformation,
change management, interim leadership, restructuring, turnaround, and value creation to his
credit. David received his MBA from the University of Chicago and completed his
undergraduate studies at Fairleigh Dickinson University.
36

37. About The Faculty
Ryan Maupin - Ryan.Maupin@us.gt.com
Ryan is a Principal in Grant Thornton's Strategic Solutions practice where he specializes in advising
boards, domestic and international company senior executives, secured and unsecured creditors, hedge
funds, and private equity funds, in restructuring situations both in-court and out-of-court. Mr. Maupin is
primarily focused on advising clients in complex financial restructurings, §363 sale processes, liquidations
- as well as serving in various interim management roles.
In 2017 Ryan was honored as a member of the American Bankruptcy Institute’s inaugural ―40 under 40‖
class, recognizing top bankruptcy, insolvency and restructuring professionals in the country.
Prior to Grant Thornton Ryan was a Director in KPMG’s Transactions and Restructuring Group where he
focused on large cross-border restructuring mandates.
Prior to KPMG Ryan was a secondee in Grant Thornton’s Cayman Islands office where he assisted
Official Liquidators on a number of cross-border insolvency proceedings.
37

38. Questions or Comments?
If you have any questions about this webinar that you did not get to ask during the live
premiere, or if you are watching this webinar On Demand, please do not hesitate to email us
at info@financialpoise.com with any questions or comments you may have. Please include
the name of the webinar in your email and we will do our best to provide a timely response.
IMPORTANT NOTE: The material in this presentation is for general educational purposes
only. It has been prepared primarily for attorneys and accountants for use in the pursuit of
their continuing legal education and continuing professional education.
38

41. ABOUT DailyDAC
DailyDAC.com is the leading source of
information about assignments, article 9,
bankruptcy, receiverships, out-of-court
workouts and vulture investing, designed
for business owners and vulture
investors.
Visit us at www.dailydac.com.
Premium Public Notice Service
DailyDAC’s Premium Public Notice Service helps market
asset sales on behalf of fiduciaries (e.g., Chapter 11 debtors-
in-possession and committees, trustees, receivers,
assignees), secured lenders selling collateral under UCC
Article 9, and auctioneers to a very large and self-selected
group of potential bidders and their advisors. The Service
also assists with noticing other events, deadlines, and
milestones – including tombstones and other press releases.
Our free weekly newsletter, DailyDAC contains our
latest bankruptcy article, current Public Notices and all
opportunistic deals added to our proprietary database
that week. Sign up at:
https://www.dailydac.com/dacyak-weekly-newsletter-signup/