Magazine article Business Credit

Legal Corner

Magazine article Business Credit

Legal Corner

Article excerpt

A Side Effect of the Mergers and Acquisitions and the Consolidation of Credit Departments: Missing Bar Dates to File Proofs of Claims and Losing Your Dividend

Mergers and acquisitions of companies are at a record pace. Every industry seems to be transforming through mergers and acquisitions, from food to paper to telecommunications. As the credit professional knows, mergers of domestic companies may mean the elimination of the target company's credit department as the companies attempt to achieve administrative cost savings. These mergers may mean the consolidation of credit departments and the adoption of a centralized or decentralized credit department, usually depending on the acquiring form. A side effect of these mergers and acquisitions is the risk of missing important dates with a company's accounts in bankruptcy, such as a bar date to file a claim.

Suppose you are the national credit executive of a manufacturer that recently acquired a large competitor. Your credit department is centralized. Your competitor's credit department that you acquired was decentralized. Your competitor's regions have a number of accounts in Chapter 11 of the Bankruptcy Code. A recent bankruptcy decision underscores that a credit executive must move quickly in determining the status of the recently consolidated credit department's accounts in bankruptcy and the mail routing procedure of the newly acquired company so as to timely file a proof of claim. In In re Petroleum Production Management, Inc., a bankruptcy court recently ruled that a vendor that was part of a family of corporations, employing thousands of employees, would not have an allowed claim that was filed six months after the bar date. The vendor failed to properly route the bar date notice within its companies and was denied its 55 percent distribution. An overview of proofs of claim in Chapter 11 is considered.

Proofs of Claim in Chapter 11

For a credit executive attempting to collect on a delinquent unsecured account, a debtor's bankruptcy filing requires the credit executive to cease collection efforts. Payments on prepetition claims are suspended with the bankruptcy filing, and creditors file a proof of claim for the unpaid value of their goods and services. The purpose of the proof of claim is to give notice to the bankruptcy court, the debtor, the trustee (if one is appointed) and the creditors of claims against the estate. The Bankruptcy Code and Rules spells out specific requirements for a creditor to participate in a distribution of a debtor's assets. Failure to strictly comply with the filing requirements for a proof of claim can be disastrous for the credit executive, as a late-filed claim effectively eliminates any distribution.

Chapter 11 of the Bankruptcy Code provides for the reorganization of a debtor's assets and liabilities, and existing management continues to operate the business. A Chapter 11 debtor must file Bankruptcy Schedules and Statement of Financial Affairs within 15 days of the bankruptcy filing, unless the bankruptcy court extends the time period. The bankruptcy court serves creditors with notice of the bankruptcy filing and a form proof of claim.

Who Must File

A Chapter 11 debtor must file Bankruptcy Schedules and Statement of Financial Affairs within 15 days of the bankruptcy filing, unless the bankruptcy court extends the time period. A debtor must list all its prepetition debts in its schedules. If a creditor agrees with the debtor's scheduled amount of its claim, and the claim is listed as disputed, contingent or unliquidated, a creditor need not file a claim. However, a debtor may schedule a creditor's claim as disputed, contingent or unliquidated by checking a small box contained on the schedules next to the creditor's claim. An unsecured creditor whose claim is scheduled as disputed, contingent or unliquidated must file a claim by the bar date, or the claim will be subordinate to the unsecured creditor class, which means the claim, as a practicable matter, will be disallowed. …

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