56 RI Bar J., No. 5, Pg. 9. Attorney Practice Guide: Creditors' and Debtors' Rights.

AuthorDiane Finkle, Esq., Richard L. Gemma, Esq. and Thomas S. Hemmendinger, Esq.

Rhode Island Bar Journal

Volume 56.

56 RI Bar J., No. 5, Pg. 9.

Attorney Practice Guide: Creditors' and Debtors' Rights

Rhode Island Bar JournalMarch/April 2008 Volume 56, No. 5, Pg. 9Attorney Practice Guide: Creditors' and Debtors' RightsDiane Finkle, Esq., Richard L. Gemma, Esq. and Thomas S. Hemmendinger, Esq.The authors are members of the Rhode Island Bar Association Creditors and Debtors Committee.

General Points

  1. Be Sensitive to Conflicts of Interest. Unlike other civil litigation, insolvency cases involve numerous parties. Early in a case, it may not be obvious how various creditors might have conflicting interests. Therefore, one should review relevant financial sources and run a thorough conflicts search. In re Filene's Basement, Inc., 239 B.R. 850 (Bankr. D. Mass. 1999) (debtor's counsel was disqualified and had to return its retainer, for failure to disclose potential conflicts).

  2. Know the Codes. Practitioners must be thoroughly familiar with the Bankruptcy Code and the Uniform Commercial Code (UCC) and must know how they interact. For example:

    1. Automatic Stay. The filing of a bankruptcy case automatically enjoins most actions to collect or enforce pre-petition claims. 11 U.S.C. § 362(a). Creditors must move the court for relief from the stay, before they can exercise remedies. Actions taken in violation of the stay are void, and creditors and their attorneys may face sanctions for violation of the stay.

    2. Strong-Arm Powers. State court equity receivers, bankruptcy trustees, and debtors-in-possession have the same rights as lien creditors. 11 U.S.C. § 544; R.I. Gen. Laws § 6A-9-317(a). Attorneys should know how these strong-arm powers affect security interests, especially in light of the 2000 revisions to UCC Article 9.

    3. Expanded Scope of Article 9. Revised Article 9 covers more transactions and more types of collateral than former Article 9 (e.g., sales of payment intangibles, sale of promissory notes, consignments, and bank accounts).

    4. Reclamation Rights. Bankruptcy Code and UCC provisions on the reclamation rights of a seller of goods differ and may conflict.

    5. Cash Collateral and Post-Petition Financing. The bankruptcy court may authorize liens or security interests on assets, either to secure post-petition borrowings or to give adequate protection for pre-bankruptcy collateral. 11 U.S.C. § 364. Court orders often provide that these liens are automatically perfected, but counsel for the secured creditor should still perfect under non-bankruptcy law.

    Secured Party Remedies

  3. The Front Page Principle. Even though the law permits secured parties to exercise self-help repossession, the practitioner should not advise a secured party to take any action that one would not want to read about on the front page of tomorrow's paper. In appropriate cases, one should consider seeking court relief, such as replevin, a temporary restraining order, or a receivership.

  4. Commercial Reasonableness. All aspects of the sale or other disposition of collateral must be "commercially reasonable." R.I. Gen. Laws § 6A-9-610(b). The secured party cannot disclaim this obligation, nor can the debtor or any guarantor waive it. R.I. Gen. Laws § 6A-9-602(7).

    1. Therefore, before selling collateral, the secured party's counsel should consider a number of issues, including: private sale v. public auction v. judicial sale; wholesale v. retail disposition; advertisements for the sale (publication, Internet, targeted marketing); preparation of the collateral (including whether to complete raw material or work in process into finished goods); requirement of government approval for the sale (e.g. liquor licenses); warranties or disclaimer of warranties; and the use of professionals in liquidation of collateral.

    2. The consequences of failure to sell in a commercially reasonable manner are severe. They include damages, reduction or elimination of a deficiency claim, and statutory damages. R.I. Gen. Laws § 6A-9-625. Most disputes over commercial reasonableness come down...

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