Introduction to Bankruptcy Litigation
April 29, 2020
Many believe the concept of litigation is antithetical to a sound bankruptcy practice. When I pitch "bankruptcy litigation" to corporate and litigation departments, eye rolls often abound. What do I know? What am I talking about? Why multiply expense with diminishing returns? I understand these common questions well. After all, bankruptcy lawyers, perhaps even more than some of our counterparts, tend to wax more practical in our advice. We usually are chasing limited recoveries shared by multiple parties. Generally, that leaves little room for expense.
But litigation finds its place in the bankruptcy world in plenty of ways. Sophisticated debtors engage in myriad techniques considered pre-bankruptcy "planning." Recalcitrant debtors often ignore creditors entirely. Sometimes, then, litigation itself plays a vital role in tipping the apple cart and pushing debtors into a place where the results of that "planning" can be inspected closely. I have advised clients with both modest and large credits in just these circumstances countless times. Payments stop. Collateral walks away. People form trusts. As a result, the roadblocks between creditors and recovery build. Without fail, the longer a creditor waits, the more substantial those roadblocks become. At these points, complaints seeking judgment balance, complaints to appoint a receivership, complaints seeking injunctive relief, complaints seeking to set aside fraudulent conveyances, and involuntary bankruptcy petitions make sense. In our series of articles, we will discuss this in more detail.
Other times, commercial debtors file bankruptcy and have complex business histories that invite close inspection. They could have account debtors who have not paid accounts receivable. They could have made payments preferential to some creditors and detrimental to others. They could have made insider transfers, large equity distributions, or inter-company transfers. In these instances, if the debtor files bankruptcy, the professionals involved have work to do. Whether it's a secured creditor (or secured creditor group), an unsecured creditor's committee, a restructuring officer, a Chapter 11 Trustee, or a Plan Liquidating Trustee, chances are there are folks interested in inspecting these transactions. Sometimes, the more they dig, the more they find. An outsider might be surprised at just how often close inspection reveals legitimate commercial torts that could benefit the general creditor body. We also will discuss these instances in far more detail in our series. However, each of these situations presents a litigation opportunity that makes sense within the bankruptcy framework.
Yet other times, debtors--whether individuals or companies--have engaged in certain chicanery pre-petition. Perhaps they overstated assets in financial reports to obtain loans. Perhaps they concealed assets in their pre-bankruptcy planning. Or perhaps they simply have not been fair or honest in their dealings. This opens them up for attacks on their ability to obtain a discharge, either generally or of specific debts. This is another useful area of bankruptcy litigation, and it's often overlooked and underrated.
Finally, even previously routine motions are becoming more litigation-centric as bankruptcy courts evolve. The days of attorney representations carrying a motion have largely passed. Instead, courts require the presentation of evidence to support challenged motions. Motions for relief, motions for turnover of property, challenges concerning priority of enforceability of liens, objections to claims--all of these present litigation opportunities. Failing agreement between the parties, a bankruptcy judge will require parties to present evidence--formally--to prevail on their motions.
Indeed, while the majority of bankruptcy cases require a finer touch, plenty of situations still require litigation experience with bankruptcy focus. These articles will explore many of those areas in hopes that they will help our clients and friends better understand the broad toolkits available to them (and the situations where it makes sense to employ those tools).