Creditor strategies in Chapter 11 cases must be developed immediately upon a debtor’s bankruptcy filing–or even before, if possible. The strategic focus should be: first, how to defend against likely maneuvers by the debtor and second, how to re-assert control.
Prior to a bankruptcy filing, investors, secured creditors and landlords typically control all negotiations with debtors. But as soon as a debtor files for bankruptcy, that balance of power shifts immediately–the debtor then sits in the proverbial “drivers seat,” often aided and assisted by the bankruptcy judge. Creditor rights defined by the Bankruptcy Code set the tone for everything.
Well-prepared debtors will immediately file a flurry of first-day motions seeking to, e.g.:
(a) obtain debtor-in-possession financing that subordinates (primes) the rights of existing lenders,
(b) authorize the use of cash collateral otherwise encumbered by secured creditors, and
(c) assume certain contracts under terms more flexible to a debtor, claiming “adequate assurances” of future performance that are often not very “adequate.”
If successful in these motions, a debtor will gain an advantage in the bankruptcy proceedings that will likely continue through the end of the case. For this reason, creditors must aggressively fight back against first-day motions with a well-prepared opposition.
To create successful creditor strategies in Chapter 11, a creditor’s legal counsel must be able to rapidly assess asset values and various transactions of the debtor prior to bankruptcy to find what the debtor is hiding, or how it is trying to manipulate asset value or other important issues. This is an area in which we excel.