Representing Parties in Interest in a Chapter 11 Bankruptcy

By: Mark Haut, Lexis Practice Advisor

This article provides general guidance for counsel retained to represent a party in interest in a bankruptcy proceeding. Bankruptcy cases involve myriad issues so coverage in this article is limited to certain general actions that should usually be taken when representing a party in interest. Counsel should refer to the specific topics in Lexis Practice Advisor to find practical advice concerning specific bankruptcy issues.

Overview of Representing Parties in Interest in Bankruptcy

In addition to debtor representation, attorneys are retained in bankruptcy proceedings to handle a wide variety of matters both big and small. Numerous parties have stakes in the outcome of a bankruptcy case, particularly a large case. Some attorneys represent parties involved in every aspect of the case, such as creditors’ committees and Debtor in Possession (DIP) lenders (among others), while other attorneys are retained to handle discrete matters, such as filing a proof of claim, defending a client in an adversary proceeding, and/or responding to a motion. Counsel may also be retained prior to the bankruptcy to assist with prebankruptcy planning and workout discussions with the debtor.¹

Counsel representing Chapter 11 debtors and creditors’ committees have numerous responsibilities that are outside the scope of this article.² When filing bankruptcy, certain non-debtor clients will immediately retain counsel to represent them in all matters that may arise in the bankruptcy proceeding. These clients may be existing clients that frequently utilize the same counsel’s services for bankruptcy matters (usually large institutional clients, such as banks, national landlords, or telecommunications companies), existing clients of other departments in the bankruptcy counsel’s firm, or new clients.

Counsel Retained Immediately after the Bankruptcy Filing

Counsel retained upon the Chapter 11 filing (or prior) should immediately review the bankruptcy petition and first day motions to determine if any of the relief sought is objectionable. After a Chapter 11 filing, the debtor typically files several motions at the same time as the petition (known as first day motions). First day motions involve matters requiring immediate consideration and are heard on or soon after the bankruptcy filing date. The first day motions often include requests for interim postpetition financing and/or the use of cash collateral, as well as requests for authority to pay certain prepetition claims (such as certain employee and critical vendor claims, for example) ahead of others during bankruptcy. The requests for interim relief are made to ensure that the debtor’s business operations continue uninterrupted.³ In certain jurisdictions, the debtor is also required to file an affidavit or declaration with the first day motions (a so-called first day affidavit). The affidavit typically includes general and specific information about the debtor and is used to meet the applicable local rule requirement and provide evidentiary support for the first day motions. For this latter reason, debtors in jurisdictions that do not require a first day affidavit will sometimes still file one with the first day filings. A review of the first day affidavit will assist counsel in understanding the debtor’s business, the events leading to the bankruptcy filings, and potentially the debtor’s intentions for the bankruptcy proceeding. Counsel will be able to quickly access all of these documents through Case Management/Electronic Case Files (CM/ECF), and, when dealing with large debtors, the claims agent’s website. Claims agents typically maintain a website to provide the public with free access to all filings on the bankruptcy docket as well as the claims filed in the case.

Counsel should consider how the first day motion affects the client’s interests. For instance, counsel to significant and essential trade creditors should consider contacting the debtor to negotiate obtaining critical vendor status. Counsel should discuss with the client whether counsel should attend the first day hearing regarding the first day motions to object to entry of orders that may adversely affect their interests or otherwise be present to protect their rights. Time permitting, counsel might file a quick objection to one or more of the first day motions. However, in most cases, counsel will not have time to draft an objection and will need to make an oral objection at the first day hearing. When there is an objection to interim relief, counsel usually negotiates the terms of the proposed order with debtor’s counsel at the courthouse.

Outside of the first day motions, counsel may also need to take certain actions in the early stages of the bankruptcy case to protect its client’s interests. For instance, some creditors will need to timely file a reclamation claim to preserve its reclamation rights.⁴ Prepetition secured creditors may object to the final DIP financing and/or cash collateral motion if the client’s prepetition lender is not convinced that its liens are adequately protected. Depending on the client and the size of its claims, counsel may also want to discuss whether the client wants to serve on the creditors’ committee. Serving on the committee allows a creditor to influence the outcome of the case in a meaningful way. On the other hand, serving on the committee comes with significant responsibilities.5 In sum, counsel should be prepared to file objections and otherwise protect its client’s interests during the flurry of activity that takes place at the beginning of a Chapter 11 case.

Necessary Actions during the Bankruptcy Case

Regardless of when counsel is retained, counsel should typically take the following additional steps after being retained:

• File a notice of appearance. In most cases, counsel should file a notice of appearance requesting service of all pleadings. The notice should include the client’s name, the law firm’s name and contact information (office address, telephone number, and fax), and the specific lawyers at the firm and their email addresses.⁶ Counsel representing a client that also wants to receive service of all pleadings should include the name of the individual who should receive pleadings (often in-house counsel) and that person’s contact information. Note that in certain cases, filing a notice of appearance could potentially waive jurisdictional objections.⁷ Counsel should inform the client that the notice of appearance is a publicly filed document prior to the filing. In certain instances, the client may want to silently monitor the case and, for business reasons, may not want certain parties or the general public to be aware of its interest in the bankruptcy. For instance, the client may be interested in the potential sale of the debtor’s assets to a competitor and would consider bidding for such assets if the competitor is also bidding or becomes a stalking horse bidder. However, until that point, the client may want to be informed of these and other developments in the case while considering various strategies.
• If applicable, file a pro hac vice application and retain local counsel. If not authorized to practice in the debtor’s jurisdiction, counsel should submit a request to be admitted pro hac vice. Counsel should check the local rules for the pro hac vice requirements and use the applicable local form. In some jurisdictions, counsel can be admitted pro hac vice and practice before the court without local counsel and, in other jurisdictions, counsel must have local counsel to be admitted (and submit objections, other pleadings, and appear before the court).⁸ Counsel should check with the client to determine if the client has a preference for local counsel (or uses the same firm for local counsel). If the client has no preference, counsel should then ask members of the firm or other attorneys for local counsel recommendations.
• If applicable, file a Fed. R. Bankr. P. 2019 statement. Fed. R. Bankr. P. 2019 is a disclosure rule that generally requires committees, creditor groups working in concert, and the attorneys who represent them to file a verified statement that lists each committee or group member’s name, address, and nature and amount of each disclosable economic interest. Counsel representing multiple creditors typically file the statement at the outset of the case (and supplement the statement as needed). Attorneys providing general advice to multiple creditors that are following a bankruptcy case do not have to file a statement unless or until the attorney takes a position in the case, such as filing pleadings, objections, or appearing in court (or soliciting votes). Counsel that files a proof of claim on the client’s behalf or advises the client on voting on a plan but takes no positions in court (through pleading, appearances, etc.) does not have to file a statement. Despite these rules, counsel should usually file the statement at the beginning of the multiple representations and not risk inadvertently failing to comply with the rule by taking positions before filing the statement (or entirely neglecting to file the statement) as the bankruptcy case becomes active. Counsel should also check the local rules for rules addressing the timing or other local requirements for Fed. R. Bankr. P. 2019 statements.⁹
• Review schedules. The debtor is required to file a schedule of assets and liabilities with (or within 14 days of filing) the bankruptcy petition. However, in large complex cases, it is often not possible to file schedules and statements of financial affairs within 14 days. Fed. R. Bankr. P. 1007(c) permits the bankruptcy court, for cause, to extend the time for filing the schedules and statements. When the schedules are filed, counsel should identify its client’s claims and confirm whether the debtor listed them accurately. In doing so, counsel should ascertain if the debtor listed the claims as contingent, disputed, or unliquidated claims. When representing a large corporation with many affiliates, counsel should check the schedules to see if any affiliates, subsidiaries, or d/b/as are listed. Counsel may already have the relevant names as part of its review of client contracts with the debtor or other due diligence. Even if counsel believes it has all such information, counsel should still check with the client. Some large corporations acquire smaller businesses and, consequently, have many distinct business units that may have limited communication with each other. In such cases, the client’s affiliate may be involved in the bankruptcy without the client’s knowledge (e.g., filing a proof of claim on behalf of the affiliated business unit). This can be detrimental to the client if the client is not getting a complete picture of the business issues that need protecting (and is potentially losing leverage to negotiate a global resolution of issues between the parties). Locating this information on the schedules can greatly assist the client in such circumstances.¹⁰
• Monitor docket. Monitoring the docket is a good general practice for an attorney representing a creditor or other party in interest in a bankruptcy proceeding. Numerous events can occur during the course of a bankruptcy that will affect a party in interest’s rights. Counsel can monitor the docket him- or herself, assign a junior associate or a paralegal to conduct such monitoring, and/or sign up for CM/ECF alerts. Counsel should be mindful of the costs associated with such monitoring and discuss the activity to be monitored with the client. In large (or mega) bankruptcy cases, monitoring the docket (and reviewing various pleadings) can result in significant billings. Counsel can avoid surprising the client with these billings and a resulting fee dispute by discussing the matter prior to incurring such costs and billing the client.
• Keep track of deadlines. Counsel should also keep track of the various deadlines that may affect the client’s interest in a bankruptcy case. The most important of these deadlines is the deadline by which creditors are required to file their proofs of claim (referred to as the bar date). The court will often set a bar date for filing administrative expense claims and a separate bar date for filing general unsecured claims. These deadlines are generally firm and the failure to timely submit a client’s proof of claim by the applicable bar date is likely to result in the claim being dismissed. Counsel should therefore calendar bar dates established by the bankruptcy court. Note that in certain limited instances, counsel may advise against filing a proof of claim because of the risk to the creditor (even though any creditor has the right to file a claim) that, among other things, the filing will give the bankruptcy court jurisdiction over pending litigation with the debtor.¹¹
• Review relevant pleadings and, if necessary, object. Certain motions filed in a bankruptcy will directly impact the client, such as an objection to the client’s claim and a motion to assume and assign the client’s contracts with the debtor. Other motions may impact recoveries or other issues important to the client. For example, a creditor may want to file its own plan of reorganization/liquidation¹² and, therefore, may oppose a debtor’s request to extend the debtor’s exclusive period for filing a plan and obtaining acceptances.¹³ Counsel will need to discuss whether to object to a motion or attempt to resolve outstanding issues through settlement discussions. If preparing an objection, be sure to provide the client with sufficient time to review the objection prior to the objection deadline. To have sufficient time, counsel may need to start the objection while the parties are negotiating a resolution.
• Review the terms of the disclosure statement and plan. A disclosure statement is a document that describes the terms of the plan and is transmitted by a plan proponent to allow the plan proponent to solicit votes regarding the plan from a holder of a claim or interest.¹⁴ The basic function of a plan is to provide for the treatment that is to be afforded to the debtor’s creditors and equity security holders with respect to their various claims and interests. Counsel should describe the relevant terms of these documents to (1) explain how the client’s claims will be treated or interests otherwise affected, (2) assist the client with its determination on whether to vote for or against the plan, and (3) detail any objectionable provisions in the plan.¹⁵

The above list of recommended actions is not meant to be all-inclusive but instead represents certain universal general practices when representing a party in interest in a Chapter 11 bankruptcy proceeding. There are numerous other actions that counsel may need to take during the bankruptcy case. Note that counsel representing a party to an adversary proceeding will need to take other steps as part of the representation but should keep apprised of the bankruptcy proceeding and possibly take the actions described above.¹⁶

Understanding the Client’s Interests

To effectively represent a non-debtor client in a bankruptcy proceeding, counsel will need to understand the client’s relationship with the debtor and the reason for the retention. Counsel should usually obtain copies of agreements and other documentation between the debtor and the client and ascertain the amounts at stake and the client’s business interests. For some clients, counsel will need to educate the client on Chapter 11 bankruptcies and the bankruptcy process. For example, if applicable, counsel should inform a secured creditor of its right to adequate protection and a trade creditor of the significance of being a critical vendor.

If possible, all of the above-referenced discussions and due diligence will occur prior to taking positions in the bankruptcy proceeding. Counsel that fully comprehends the client’s interests in the bankruptcy case, including the monetary amounts at stake, will be able to advise the client whether a particular pleading should be filed or position taken and perform the associated cost-benefit analysis with the client. For example, in some cases, the legal fees that would be incurred in objecting to a motion are higher than the monetary amounts at issue or the expected distribution on the client’s claim. However, a simple dollar and cents calculation does not end the analysis of whether a client should object to a particular motion. A motion can also impact the client’s business, its rights under a contract with the debtor or a purchaser of the debtor’s business, and potential exposure to the debtor’s estate. The client may also have an objective beyond the simple collection of its debt, which is to preserve a profitable business relationship with the debtor. Thus, counsel and the client party in interest should develop a game plan for how it wants to deal with the debtor.

As part of developing a game plan, counsel should also analyze whether the client has any preference, fraudulent conveyance, or other legal exposure. This may prove relevant to settlement discussions as the elimination of significant preference or other exposure can be extremely valuable. With respect to preference exposure, creditors should gather records (invoices, correspondence, checks, receipts, shipment confirmations, etc.) of their business with the debtor during the 12–18 months prior to the debtor’s bankruptcy filing, and counsel should perform a preference analysis.¹⁷

Mark Haut is a Content Manager for Lexis Practice Advisor. Prior to joining LPA, he was counsel at Norton Rose Fulbright, where he advised clients on a variety of bankruptcy matters. Previously, he was an associate in the Bankruptcy and Reorganization Practice Group at Morgan, Lewis & Bockius, LLP. Prior to joining Morgan Lewis, he clerked for Judge Stuart M. Bernstein in the United States Bankruptcy Court for the Southern District of New York.

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Related Content

1. For information on workouts, see Business Workouts. 2. For information on certain of these responsibilities, see Creditors’ Committees’ Roles in Chapter 11, Creditors’ Committee Objections, and Fiduciary Duties and Statutory Obligations of Professionals to the Debtor-in-Possession. 3. For more information on first day motions, see First Day Filings. 4. For more information on reclamation, see Reclamation. 5. For more information, see Creditors’ Committee Formation. 6. See Fed. R. Bankr. P. 9010(b). 7. In re LandAmerica Fin. Grp., Inc., 2013 Bankr. LEXIS 1756, at *3 n.4 (Bankr. E.D. Va. Apr. 30, 2013) (“[b]y filing a proof of claim and a notice of appearance, Experian consented to personal jurisdiction in this Court”); see also In re Deak & Co., 63 B.R. 422, 432 (Bankr. S.D.N.Y. 1986) (“[b]y filing his notice of appearance, DAMA has indicated and, in essence, declared himself to be not only interested in these proceedings but to have acknowledged that his interests are affected . . . [and] [i]n this context, DAMA has voluntarily interjected himself into these proceedings and by his presence has indicated his consent to jurisdiction over matters involving him”). 8. Compare S.D.N.Y. U.S.B.C. L.B.R. 2090-1 (allowing pro hac vice admission without local counsel) with Del. Bankr. L.R. 9010-1 (requiring local counsel). 9. For more information, see Disclosure Obligations under Bankruptcy Rule 2019. 10. For more information on the debtor’s schedules, see Schedules and Statements of Financial Affairs. 11. For more information, see Proofs of Claim in Bankruptcy and Proofs of Claim Categories and Calculations. 12. See 11 U.S.C.S. § 1121(d)(1). 13. For information on exclusivity, see Parties That May File Plans. 14. For more information, see Disclosure Statements. 15. For more information, see Acceptance Process and Chapter 11 Plan Confirmation Resource Kit. 16. For more information, see Adversary Proceedings. 17. For more information, see Preferences and Fraudulent Conveyances versus Preference Actions.