Posts Tagged ‘creditor’

13 Nov

Commercial Landlords and WeWork Will Face Off in Bankruptcy

Posted by Douglas A. Goldstein, Esq. in Bankruptcy, chapter 11, Collections, Landlord tenant law. Tagged: , , , .

As a flexible workspace provider, WeWork relies on commercial landlords for its survival. WeWork rents space from these landlords and then rents or sublets that space to its customers. So, what happens to WeWork’s commercial landlords in a bankruptcy case? Let’s explore a few scenarios:

  1. Lease Rejection:  In bankruptcy, lease rejection allows the debtor (WeWork) to break a lease without the associated ramifications.  The debtor can limit or avoid paying rent that came due before the bankruptcy filing, as well as rent owed for the period after the debtor vacates, or ceases to benefit from, the premises.  The affected landlord still has remedies.  The landlord can pursue a rent claim based on the debtor’s continued benefit and occupancy of the premises.  Also, the landlord can pursue a claim for its lease rejection damages, up to a capped amount.
  2. Lease Assumption:  If the debtor wishes to keep a lease, the debtor can ask the bankruptcy court for authority to assume the lease.  If authorized by the court, the debtor can keep the lease and possession of the premises, subject to the lease terms.  Despite the powerful remedies in bankruptcy, the debtor may not change the lease terms without the landlord’s consent.  The Bankruptcy Code offers several opportunities for the landlord to challenge lease assumption – a bankruptcy attorney can advocate for the landlord and protects its rights.
  3. Lease Assumption and Assignment:  Similar to no. 2 above, the debtor can ask the bankruptcy court for permission to assume the lease, and to assign the lease to a new tenant.  With some exceptions, even if a lease contains an anti-assignment clause, the lease can be assigned in bankruptcy.  The landlord will want to conduct due diligence into the proposed tenant and may have grounds to challenge the assignment.  A bankruptcy attorney can advocate for the landlord and, where appropriate, defeat the assignment.

WeWork has not yet publicly identified the leases and contracts that it wishes to assume.  The Bankruptcy Code gives the debtor until the earlier of:

  • 120 days from the date of its bankruptcy case filing, or
  • the entry of an order confirming a chapter 11 plan,

to assume a lease of nonresidential real estate.  If the debtor needs additional time and shows cause, it can seek a 90-day extension of that deadline.

As of this writing, WeWork has proposed streamlined procedures for the assumption or rejection of leases and contracts, and it awaits the bankruptcy court’s consideration.

19 Jun

How to Prevent, or Deal With, a Preference Lawsuit

Posted by Douglas A. Goldstein, Esq. in Bankruptcy, Creditor, Preferential Transfer. Tagged: , , , , , , .

In my last article, I considered the possibility of a bankruptcy trustee suing to recover a “preferential transfer.” Preference lawsuits are very common in large bankruptcy cases, and reach many unsuspecting individuals and businesses. Here are a few strategies to help prevent (or deal with) a preference lawsuit:

1. Do not extend much credit to a customer before confirming its creditworthiness. Your due diligence may avoid a credit sale that otherwise could lead to a preference lawsuit (or the more obvious result: nonpayment).

2. Take and perfect a security interest in the goods that you sell. If you can be made whole by repossessing the goods, such that the payment will not improve your position, the payment may not be recoverable as a preference.

3. Determine if you have a defense, the most common of which being:

a. The “contemporaneous exchange” defense – e.g., a C.O.D. sale.

b. The “ordinary course of business” defense – did the debtor incur, in the ordinary course of its business, the debt for which the debtor made the payment, and either make the payment in the ordinary course of its and your business or financial affairs, or according to ordinary business terms? Said differently, was the debt, the payment and the surrounding events typical or unusual for all parties involved?

c. The “subsequent new value” defense – after the debtor made the payment to you, did you provide more goods or services?

(each defense may depend on other factors and require complex analyses not discussed here)

4. Seek a properly worded guaranty, and indemnification, from a third party capable of protecting your claim.

These strategies might not guarantee a favorable outcome, but they are a good starting point to protect yourself.

7 Jun

Being Preferred Is Not Always a Good Thing

Posted by Douglas A. Goldstein, Esq. in Bankruptcy, Creditor, Preferential Transfer. Tagged: , , , , .

What if, immediately after a customer pays you for a service you provided, the customer files for bankruptcy relief? You might consider yourself fortunate for not being one of the customer’s other creditors, who might have to wait years before they recover possibly pennies on the dollar.  But before you celebrate, take note: the bankruptcy estate could demand that you repay the money that the customer paid, even if there was no dispute concerning the quality of your services.

Why should you have to return any money?  Subject to certain exceptions, a bankruptcy trustee may seek to “avoid,” or recover, so-called “preferential transfers” if the debtor made payment to a creditor:

•   on account of a debt owed by the debtor before such transfer was made (such as a payment made on credit);

•   on or within 90 days before the filing of the bankruptcy;

•   while the debtor was insolvent (which is presumed during that 90-day period); and

•   enabling the creditor to receive more than the creditor would receive if the bankruptcy case were a liquidation, and if the payment had not otherwise been made.

The rationale behind a preference action is that a creditor should not be “preferred” over other creditors; by bringing into the bankruptcy estate the monies paid to preferred creditors, the funds can be redistributed to all creditors. This might sound fair, especially if a “preferred” creditor was paid ahead of other creditors only because it threatened the debtor’s business or harassed its employees with aggressive collection tactics. But not all creditors fit this mold. For example, a creditor may get paid quickly because it offers a discount for early payment, or is the only remaining supplier willing to sell to the debtor.

Either way, a preference lawsuit could spell disaster for a business if it must return a large preference payment.

Watch for my next article, in which I will discuss strategies to prevent, or favorably settle, a preference lawsuit.

10 Jan

When a Customer Files For Bankruptcy – Part 2

Posted by Douglas A. Goldstein, Esq. in Bankruptcy, Creditor. Tagged: , , , , .

After reading my last article, you might wonder: what about the money owed for goods you sold more than 20 days before the bankruptcy filing? There still may be hope.

First, ask yourself:

• Did the customer receive the goods within 45 days before the bankruptcy? And,

• Did you sell the goods in the ordinary course of your business?

If you answer “yes” to these questions, you should make a written demand for “reclamation” (literally, you are demanding that the goods be returned). If you make this demand soon enough, and if another creditor does not already have a security interest in the goods, you may be entitled to payment for the goods before other, “unsecured” creditors receive anything.

Here is a possible scenario:
On each of June 1, June 21, July 1, and July 11, you sell, on credit, a box of parts to a manufacturer. Each box is worth $10,000. On July 21, you are owed $40,000, and the manufacturer files for bankruptcy.

Provided that you meet the necessary deadlines and substantiate the claim, you may seek payment of $20,000 (the value of the goods sold within 20 days before the bankruptcy filing) ahead of other, “unsecured” creditors.

You may make written demand for “reclamation” of the goods sold within 45 days before the bankruptcy filing, which consists of goods worth $30,000 (but if you recover $20,000 based on the above, this demand cannot recover more than the remaining $10,000).

And, what about the money owed for the goods you sold on June 1st? Unfortunately, you might have to wait with the rest of the “unsecured” creditors for this money. Actually, you could do better than that, but that is a topic for another article….