Protecting Creditors’ Rights During (and After) the Chapter 11 Bankruptcy Process

While Chapter 11 bankruptcy filings can present significant financial risks for creditors, there are also several tools, tactics, and strategies that creditors can use to protect their interests during the process. Creditors have clear options for protecting their rights after the reorganization process if necessary as well. Learn more from an experienced Miami bankruptcy litigation attorney at Edelboim Lieberman.

Options for Protecting Creditors’ Rights During a Chapter 11 Bankruptcy

Creditors have several options for protecting their rights during the Chapter 11 bankruptcy process. These options range from pursuing collection and seeking to avoid participating in the debtor’s reorganization altogether to asserting defenses to discharge during the reorganization process:

Seeking Relief from the Automatic Stay

When a debtor files for bankruptcy under Chapter 11, the automatic stay prevents its creditors from pursuing collection during the bankruptcy process. However, creditors can seek relief from the automatic stay on various grounds. If a creditor successfully files for relief from the automatic stay, it will be authorized to pursue collection—and it may be able to fully protect its interests without participating in the debtor’s reorganization.

Section 362(d) of the U.S. Bankruptcy Code establishes three potential grounds for seeking relief from the automatic stay in a Chapter 11 case:

• “[F]or cause, including the lack of adequate protection;”
• In cases involving actions against property, the debtor lacks equity in the property at issue, and the property “is not necessary to an effective reorganization;” and,
• In cases involving a single piece of real estate, creditors are entitled to pursue collection unless the debtor meets certain additional requirements.

In the vast majority of cases, seeking relief from the automatic stay involves asserting a “lack of adequate protection.” A Miami bankruptcy litigation attorney at our firm can help you determine if this is an option under the circumstances at hand, and if so, we can seek appropriate relief at the earliest possible opportunity.

Seeking a “Critical Vendor” Designation

When going through the Chapter 11 bankruptcy process, debtors are prohibited from making certain payments that will reduce the size of their bankruptcy estate. This means that certain creditors won’t get paid. However, creditors that are designated as “critical vendors” during the process are entitled to continue receiving payment—so this can be a viable alternative to seeking relief from the automatic stay in some cases.

Pursuing Commercial Options

Along with pursuing options afforded to creditors under Chapter 11, creditors can also pursue commercial options in some cases. Here, timing can be extremely important, and creditors must be careful to ensure that their commercial efforts do not run afoul of the prohibitions imposed by Chapter 11. With this in mind, some examples of potential commercial options include:

• Stopping delivery of goods in transit;
• Asserting reclamation rights under the Uniform Commercial Code (UCC); and,
• Seeking assumption of executory contracts.

All of these options are subject to restrictions and limitations, and they may or may not be the best option under the circumstances at hand. Here, too, our lawyers can help you make informed decisions and then proceed as warranted.

Filing a Proof of Claim

Creditors can file a proof of claim during the Chapter 11 bankruptcy process to ensure their right to participate. While this isn’t necessary in all cases, it may become necessary if either (i) the debtor fails to list a creditor’s claim on its schedule of debts or (ii) the debtor disputes a creditor’s claim for payment. In either scenario, promptly filing a proof of claim can be essential for avoiding an unwarranted discharge.

Objecting to the Debtor’s “First Day” Motions

When initiating the Chapter 11 bankruptcy process, debtors can file “first-day” motions to seek various forms of relief before the reorganization process begins. These include motions for approval to pay certain claims and approval to secure debtor-in-possession (DIP) financing, among others. In many cases, creditors will need to object to these motions in order to preserve the ability to protect their interests later in the process.

Asserting Defenses to Discharge

Creditors who have taken the necessary steps to preserve their rights can potentially assert a variety of defenses to discharge during debtors’ Chapter 11 proceedings. These include defenses available under Sections 523 and 727 of the U.S. Bankruptcy Code, among others. By successfully asserting defenses to discharge, creditors can protect their ability to collect—the debtor’s bankruptcy proceeding notwithstanding.

Initiating an Adversary Proceeding

Initiating an adversary proceeding provides another path toward protecting creditors’ rights during the Chapter 11 bankruptcy process. Here, too, there are several potential grounds to file. From challenging preferential transfers before (or during) the bankruptcy process to seeking to establish priority over other creditors, we assist creditors with using all types of adversary proceedings to protect their financial interests by all means available.

Options for Protecting Creditors’ Rights After a Chapter 11 Bankruptcy

While creditors have various options for protecting their financial interests during debtors’ Chapter 11 bankruptcy cases, participating in a debtor’s reorganization plan isn’t always avoidable. With this in mind, it is important for creditors to be aware of their options for protecting their rights post-reorganization as well.

Generally speaking, as long as a debtor makes its payments on time, creditors must accept the outcome of the reorganization process. However, if a debtor misses a payment or if it becomes clear that a debtor made fraudulent misrepresentations or omissions during the bankruptcy process, then creditors may have grounds to pursue collection and/or other legal remedies.

Schedule a Call with a Miami Bankruptcy Litigation Attorney at Edelboim Lieberman

Do you need to know more about protecting your company’s interests during a customer’s or client’s Chapter 11 bankruptcy case? If so, we encourage you to contact us promptly for more information. We represent creditors nationwide in Chapter 11 bankruptcy proceedings in Florida. To speak with an experienced Miami bankruptcy litigation attorney at Edelboim Lieberman in confidence as soon as possible, please call 305-768-9909 or tell us how we can get in touch online today.