By Jason G. Dykstra
(As published in the Idaho Business Review, April 2010)
As the economy has worsened, almost anyone in the construction industry has received a Notice of Commencement of Case under the Bankruptcy Code, Meeting of Creditors, and Deadlines (“Notice”). This Notice contains information regarding the bankruptcy proceedings and also the deadlines that must be followed by creditors seeking to preserve their rights and optimize the recovery of their claims.
Generally, you received this Notice because the bankruptcy debtor, whether an owner, subcontractor or vender, believes you are one of their creditors. Often, you will immediately recognize the debtor’s name and the nature of the debt. If you don’t, realize that you may have dealt with the debtor through a trade name, assumed business name or even a defunct legal entity. Below the debtor’s name and address, the Notice should disclose all other names used in the last eight years.
If you are still not sure why you received the Notice, understand that the nature of the debt may not be readily apparent. Notice is given even to creditors with contingent and unliquidated claims. For example, a recent fender-bender involving the debtor and your employee could result in such claim. This claim could be contingent, if fault for the accident has not been determined, and unliquidated, to the extent the cost to repair your vehicle’s bumper has not been determined. To learn more about your claim, pass the notice on to your attorney. Most law firms have access to the electronic case filing or “ECF” system used in Idaho and can readily review the debtor’s filings to ascertain details regarding the nature and amount of the debt.
The Notice contains information about the “automatic stay” provision of the bankruptcy code that stops all lawsuits, foreclosures, and garnishments, and precludes all collection activities against the debtor from the moment a bankruptcy petition is filed. This precludes a creditor from contacting the debtor by telephone or mail to demand repayment or repossessing any property of the debtor. As such, your post-petition right to collect from the debtor will be limited to procedures provided by bankruptcy law. Courts take the automatic stay very seriously. Willful violations of the automatic stay can be remedied with awards of actual damages, including costs and attorneys’ fees, and where appropriate, punitive damages.
The Notice also sets the date for the Meeting of Creditors. This meeting is required by section 341 of Bankruptcy Code. At the so-called “341 meeting”, the debtor is present and placed under oath to be questioned by the bankruptcy trustee and creditors about their financial affairs and bankruptcy filings. Creditors are not obligated to attend the meeting, but creditors often attend to ask questions of the debtor.
A deadline for submitting a Proof of Claim may be set by the Notice. A Proof of Claim is a signed form filed by a creditor that describes the nature and value of their claim. Creditors that neglect to file a timely Proof of Claim might not receive any money from the assets of the bankruptcy estate. In an asset case, the bankruptcy trustee pays creditors a dividend based upon the amounts reflected in their proofs of claim. Depending on the assets of the bankruptcy estate, the portion of claims paid can be significant or each creditor may only receive pennies on the dollar for their claim.
However, a secured creditor retains rights in its collateral, regardless of whether that creditor files a Proof of Claim. For example, a contractor that asserted a lien pre-petition upon real property owned by the debtor. However, such a creditor must file a motion with the bankruptcy court for relief from the automatic stay to foreclose upon a lien during the pendency of the bankruptcy.
A bankruptcy discharge releases the debtor from personal liability for certain specified types of dischargeable debts. Generally, this includes most claims arising before the filing of the bankruptcy petition. This discharge from indebtedness is intended to permit the “honest but unfortunate” debtor to obtain a fresh financial start. The Notice may also set a deadline to file a proceeding seeking to determine certain debts to be nondischargeable. For example, debts tinged with bad behavior like false pretenses, false representations and actual fraud may be determined to be nondischargeable by a bankruptcy court. However, a creditor must file a timely action to challenge dischargeability.
Businesses should implement procedures for handling Notices upon receipt to avoid violating the automatic stay provision of the Bankruptcy Code, to timely preserve their rights under bankruptcy law and to maximize the recovery on their claims.