Things that you don't know - but need to know - about bankruptcy law

A special report by Tripp Scott's Charles Tatelbaum as published in Broward County Bar Association.

In my 58+ years of practicing bankruptcy law, I have learned that many of the nuances of the Bankruptcy Code, the Bankruptcy Rules of Procedure and the general practice of bankruptcy law can inflict pain-and-suffering on attorneys that do not deal in the area on a regular basis, and come to find that actions taken on clients’ behalf prior to and during a bankruptcy proceeding can have significant
negative consequences.

The list below is not meant to be an exhaustive identification of problems and pitfalls, but instead, to create an awareness that what may be appropriate client representation in a non-bankruptcy situation may have adverse consequences should a bankruptcy proceeding ensue.

• The filing of a bankruptcy proceeding creates an automatic stay (an injunction) of the commencement or continuation of any action to enforce a debt, to assert a claim or to proceed against collateral of the debtor. This means the following:·          

• All pending legal actions are stayed whether or not the creditor has notice of the bankruptcy proceeding. Any actions taken after the bankruptcy proceeding is commenced are a nullity.

• All actions to enforce liens are stayed.

• If collateral has been repossessed prior to the bankruptcy filing, it cannot be disposed of.

• All billing to the debtor for pre-petition debts must be terminated.

• All collection efforts including written, electronic and telephone communications must cease.

• In a Chapter 13 case, which is a reorganization proceeding for individuals, there is also an automatic stay for any co-debtors or other parties that may be obligated on the debt that is subject to the Chapter 13 proceeding, even when the codebtors are not in bankruptcy themselves.

• In a corporate Chapter 7 case, the Chapter 7 trustee has the right to waive the attorney-client privilege between the debtor and the debtor’s attorney to the end and effect that the Chapter 7 trustee may “open the door” for public disclosure of all communications between the debtor and the debtor’s attorney prior to the filing of the bankruptcy proceeding. This also includes a review of drafts of documents, schedules and
  other writings that may be utilized in contemplation of a bankruptcy filing but not actually filed. The law is unsettled in Chapter 7 cases where an individual is the debtor.

• In Chapter 11 proceedings, and in Chapter 7 proceedings if elected by the trustee (or debtor in possession as the case may be), executory contracts (agreements that have performance remaining on both parties) and leases may be assumed by the debtor or trustee and assigned to a third-party even if the contract or lease prohibits such assignment without the consent of the counterparty or landlord. There are very few limits on this right to assume and assign.

• If a lease is terminated prior to a bankruptcy filing, it may not be assumed by the Chapter 11 debtor or the trustee.

• A provision in any agreement that provides for the automatic occurrence of a default upon the filing of a bankruptcy proceeding is not enforceable.

• Pursuant to 28 USC §§ 1141 and 1452, certain actions that may be pending at the time of the filing of the bankruptcy case may be removed to the bankruptcy court either as a matter of right or if they are related to the bankruptcy proceeding, even if the debtor may not be a direct party to the litigation.

• The failure to list a creditor on the Schedules of Assets and Liabilities filed in the bankruptcy case may allow a creditor’s debt to survive a discharge in bankruptcy.

• Reclamation rights of vendors of goods are different in bankruptcy than under the Florida Statutes. There are different time limitations for notice and different rights and remedies available to the vendor of goods.

• Preferential transfers of assets of the debtor to insiders (with a broad definition of insiders being contained in section 101 of the Bankruptcy Code) have a look back period of one year from the date of the filing of the bankruptcy proceeding.

• When representing clients that provide goods or services to a distressed business, it is critical to understand the defenses available to creditors under the Bankruptcy Code to avoid a successful claim by a trustee or debtor in possession of the avoidance of preferential transfers.

• Testimony given at a section 341 meeting of creditors or during an examination pursuant to Bankruptcy Rule 2004 can be used only for impeachment purposes and cannot be used in the same way that a deposition of a party can be used. In Rule 20004 examinations, there are limited objections available except for privilege.

• The time for filing a notice of appeal or motion for reconsideration for final orders in bankruptcy cases is only 14 days, and not the 30 days available in most other federal court proceedings.