In the mid-1990’s I represented several trade creditors in a contentious Chapter 11 bankruptcy called Pro-Snax. At the creditors’ request, the bankruptcy court directed the appointment of a Chapter 11 trustee one month into the case. Nonetheless the dispossessed debtor pursued a Chapter 11 liquidation plan. The creditors, which held a clear “blocking position” in terms of class voting, opposed the plan. The plan was denied confirmation six months into the case.

Suppliers of good and services (“trade creditors”) generally have no duty to determine whether their customers are operating an illegal enterprise. However a recent Fifth Circuit opinion presents an unprecedented “claw-back” risk facing trade creditors who unknowingly provide goods and services to a “Ponzi-scheme” enterprise.

The Janvey Opinion

After more than two years of study on what needs fixing, the ABI Reform Commission proposed hundreds of discrete recommendations on refurbishing the Bankruptcy Code. The 396 page report addresses a wide variety of topics, from modifying the rights of secured lenders in large corporate workouts to creating a viable restructuring path for small businesses.

The legal principles governing corporate finance are often complex. Sometimes, however, the simplest of errors can be the most costly. Such was the case with a large syndicated secured loan made to General Motors. Due to a simple filing error, what had always been intended by the lender and borrower to be a secured loan will be treated as unsecured.

The Second Circuit Opinion in Motors Liquidation

Owners of small business entities are frequently required to guaranty the debts of such entities.  Those business entities might later file for Chapter 11, and may be able to achieve confirmation of a plan to restructure their indebtedness.   The question then presented is whether this confirmation event affects the separate guaranty obligations of the owners?  The Tenth Circuit Court of Appeals recently explored this issue in In re: Larry

Most loan contracts include provisions allowing the collection of attorneys’ fees in the event the borrower defaults.  These attorney fee provisions are routinely enforced in collection suits brought in state courts.