CHAPTER 8 How to Close the Bankruptcy Case

• Jurisdiction: United States

CHAPTER 8: How to Close the Bankruptcy Case

CONTRIBUTING AUTHORS:

Daniel F. Dooley (MorrisAnderson)

Steve F. Agran (MorrisAnderson)

Mark J. Welch (MorrisAnderson)

Kenneth A. Rosen (Lowenstein Sandler LLP)

Richard J. Corbi (Lowenstein Sandler LLP)

Elie J. Worenklein (Lowenstein Sandler LLP)

A. ADMINISTRATIVE CLAIMS: § 503(b)(9), PROFESSIONAL FEES, POST-PETITION EXPENSES

One of the powers of bankruptcy is to ensure that entities that provide goods and services to the debtor in possession retain a very high likelihood of payment in order to allow for an orderly reorganization to occur. So-called administrative expenses relate to expenses incurred during bankruptcy.

Most expenses incurred in the ordinary course of business are paid through the use of cash collateral or from DIP financing. If expenses are not paid during the bankruptcy, they are provided administrative status. Administrative expenses must be paid from the estate prior to all other priority or general unsecured claims (while still subordinate to secured claims).

In order for a plan of reorganization to be confirmed, all administrative claims must be paid in full, in cash, on the plan's effective date, or else each administrative claimant must agree to accept payment under different terms and conditions (not an easy or manageable task). Without the payment of all administrative claims, a plan cannot be confirmed. It is imperative that the CRO identify all potential administrative claims to ensure that funds are available to pay the claims in full to allow the potential of confirming a plan of reorganization.

Not only are all post-petition expenses provided administrative status, but the bankruptcy law changes in 2005 (also known as BAPCPA) provided for administrative status for all suppliers that provided goods to the debtor that were delivered within 20 days prior to the bankruptcy petition. The goods received within 20 days are referred to as § 503(b)(9) claims. Another type of claim that is given administrative status is NLRB awards of back pay and benefits regardless of when the infraction occurred, as long as the bankruptcy judge does not believe that the award will result in layoffs or terminations of current employees.

The CRO must also be aware of reclamation claims. In addition to the § 503(b)(9) claims, BAPCPA further expanded the rights of vendors who sold goods to a debtor within 45 days of a bankruptcy petition. The vendor must notify the debtor with a written reclamation demand within 20 days of the filing. The notice should identify the goods being reclaimed and demand that the goods be segregated. Those goods can be reclaimed by the vendor, assuming that the goods can be identified. The caveat is that if the goods are sold, no reclamation occurs. This is very important, because BAPCPA removed language from the prior version of § 546(c) that allowed the vendor to claim administrative status if the goods were sold and not returned.

One of the final tasks that the CRO must handle with regard to administrative claims is ensuring that professionals that were approved by the court are paid for services rendered. Most professionals file monthly fee applications requesting the approval of fees and expenses incurred. In most jurisdictions, upon approval of the fee application, 80 percent of professional fees and 100 percent of expenses can be paid. At the end of the case, a final fee application is filed requesting the payment of any fees not paid to date. Professionals are provided administrative status, and therefore the CRO must know the amount of professional fees due at the end of the case. One way to avoid a large cash requirement at the end is to escrow the approved funds in the court-approved budgets. Any unused portion of the escrowed funds will need to be returned to the estate.

Administrative claims are crucial to the closing of a chapter 11 case. While an administrative bar date is set, due to the nature of some administrative claims, post-bar date claims for unpaid post-petition claims for professional fees are often allowed. The administrative claims are a moving target, and the CRO must understand the magnitude of the administrative claims. Without being aware of all the administrative claims, a situation could arise where there is not enough money left to pay all the administrative claims and a plan cannot be confirmed.

B. CLAIMS RESOLUTION

In resolving claims, there are a number of steps that need to be addressed in order to ensure that the claims processed are accurate in amount, documentation and classification. It is up to the CRO to ensure that all claims provided by creditors match the debtor's records and are correctly classified as "secured," "administrative," "unsecured priority" and "unsecured general." Classification is highly important, as the absolute priority rule requires that any payments to creditors be paid in order of priority. Additionally, in order to confirm a plan of reorganization, the administrative claims will need to be paid in full and the priority tax claims must be paid in full within five years.

The first priority of the CRO is to ensure that it has a complete and accurate list of all liabilities of the estate. Upon the filing of the bankruptcy petition, the estate is required to notify all creditors about the bankruptcy. To ensure that all creditors are properly notified, notification should be provided to any vendor of the debtor for at least the prior two years. Even if a vendor does not show any liability due from the estate, notifying the larger pool is important to ensure completeness in the process. Additionally, upon filing for bankruptcy, the debtor is required to file a schedule of all known outstanding liabilities of the estate. The estate then provides initial notification of its liabilities to all its creditors. The schedules are broken into "secured," "priority" and "non-priority" liabilities, which are discussed earlier in this book.

As the bankruptcy proceeds, creditors will file their own proofs of claim to notify the estate regarding the creditors' records of the debtor's liabilities. In order to ensure that all claims are captured, a bar date will be set for creditors to provide a proof of claim. The bar date sets a fixed deadline by which all creditors are required to file their proofs of claims, accept the amounts provided in the Schedules or give up the right to a claim. Bar dates may be set separately for administrative claims, governmental claims and general claims.

Once the bar dates have passed, the estate should have a complete list of potential liabilities that need to be analyzed. The claims agents will produce a global list of all potential liabilities from the Schedules and filed proofs of claim. Most claims agents have an ability to match the information on the Schedules against the proof of claims. If the creditor name and amount listed match exactly, the two amounts will show up on one line in the list. The CRO must now work to further match the items listed to reduce the global list and ensure that duplicates don't exist.

The matching of similar items on the Schedules and proofs of claims is difficult and tedious. There is no alternative to reviewing the list claim by claim. The first method is to review the creditors alphabetically. If names match but amounts do not, the advisor needs to ensure that the proof of claim is for the same items as listed on the Schedule. As long as the CRO can confirm that the lists are for the same account, the proof of claim takes precedent over the Schedule. Secondly, the CRO should match the amounts. It is not uncommon for the listed name of the creditor to differ between the proof of claim and Schedule for the same account. Once the advisor is able to confirm...