Proofs of Claim in Commercial Bankruptcy Cases

Many of our commercial bankruptcy clients ask us if they need to file a Proof of Claim in Chapter 11 commercial bankruptcy cases. Let's briefly review the law regarding the filing of Proofs of Claims in Chapter 11 bankruptcy cases and related issues.

In a Chapter 11 bankruptcy petition, if a creditor is listed on the Debtor's bankruptcy schedules and the claim is not listed as disputed, contingent or unliquidated, then the creditor is not required to file a Proof of Claim. If a creditor is not listed on the bankruptcy petition schedules (which is often the case) and/or the claim is listed as disputed, contingent or unliquidated, then a creditor is required to file a Proof of Claim to evidence its claim against the Debtor. If a creditor files a Proof of Claim, it is then subject to the jurisdiction of the Bankruptcy Court. As an aside, in bankruptcy law we have the ultimate long arm statute, where service is made on parties by first class mail.

Whether or not a creditor files a Proof of Claim, if the Debtor desires to commence an adversary proceeding against a creditor, they can simply mail the summons and complaint to the creditor. Consequently, with respect to service of process, it is inconsequential whether a creditor files a Proof of Claim in a bankruptcy case. However, if a creditor files a Proof of Claim in a bankruptcy case, then it waives its right to a jury trial. The United States Bankruptcy Court for the Southern District of New York does not conduct jury trials. Accordingly, if a creditor is sued, it can remove or remand the case to the United States District Court for the Southern District of New York, if it desires a jury trial. On the other hand, if the creditor files a Proof of Claim and submits to the jurisdiction of the Bankruptcy Court, then it will not be able to obtain a jury trial. This was Judge Gonzalez's holding in In re WorldCom, Inc., Case No. 02-13533, Adv. Pro. No. 04-04338 (Bankr. S.D.N.Y. Dec. 7, 2007). In WorldCom, Judge Gonzalez ruled that if a creditor files a proof of claim, then it submits to bankruptcy court jurisdiction and waives its right to a jury trial in an adversary proceeding (bankruptcy litigation).

Therefore, before a creditor files a Proof of Claim in the case, it must weigh its potential recovery in the bankruptcy case as a result of filing the Proof of Claim versus submitting to Bankruptcy Court jurisdiction and waiving its right to a jury trial. It has been the experience of this law firm, however, that most creditors file a Proof of Claim and waive their right to a jury trial. Anyone who has questions regarding the filing of Proofs of Claims or creditors' rights in bankruptcy cases should contact Jim Shenwick of Shenwick and Associates.

MessageSave for Microsoft Outlook

Shenwick and Associates practices bankruptcy and real estate law, and we do not often post reviews or comments on technology products. However, we’re making an exception for MessageSave by TechHit.com, a $49.95 plug-in to Microsoft Outlook that organizes sent and received e-mail messages. Having used this product for approximately three months, we have found that it saves us hours each week, reduces the tedium of saving e-mails and paid for itself in a matter of days.

The company allows for a 30-day trial and provides free technical support. However, we found that the product worked fine out of the box. Once you download MessageSave, an icon appears in Outlook. When you want to save an e-mail message in your inbox, you click the MessageSave icon and are prompted to browse to the folder where you want to save the file. You then click “save now” and the e-mail is saved. Correspondingly, after you send an e-mail, the message save window opens up and you browse to where you want to save the file.

MessageSave is highly customizable and one can modify the program so that the saved e-mails have a thread. We have configured the program so that every saved e-mail shows the sender, recipient, date and a brief description of the subject of the e-mail. Effectively, what the program does is reduce the number of steps and the amount of typing required to save an e-mail. Shenwick and Associates does not save e-mails to the Outlook folders—in our opinion, that is the worst place to store e-mails, because the .pst file becomes corrupted as it grows in size. As part of our case management approach to managing files, we have created a folder on our hard drive entitled "Client Files," and each client has a subfolder within the main folder. With this approach, our firm saves a great deal of time on e-mail management with this program. Without MessageSave, we would have to double-click on an e-mail, select “save as,” scroll to the client file, type a description of the file and changes the type of file to a message file. MessageSave significantly reduces the steps in saving e-mails, and we highly recommend it.

New Southern District Bankruptcy Order on Motion for Relief from the Automatic Stay in real estate cases

Most of our readers probably think of Shenwick & Associates as a debtor bankruptcy firm, but we also have a substantial creditor rights practice. In that area of our practice, the most common motion that creditors use to protect their interests in the debtor's estate is a motion to lift the automatic stay. This is a motion to alter the automatic stay under Bankruptcy Code section 362 to allow the creditor to act against the debtor or the debtor's property, and the filing fee is $150.00. An example of this is a creditor seeking permission to foreclose on a lien because its security interest is not adequately protected.

Effective as of February 7, 2008, the Board of Judges for the Southern District of New York have promulgated General Order M-347, which requires that all motions for relief from the automatic stay under section 362 in cases filed by individuals concerning real property and cooperative apartments must include a completed copy of the "Relief from Stay- Real Estate and Cooperative Apartments" worksheet annexed as an exhibit to the motion. The fillable worksheet can be found on our website here and on the U.S. Bankruptcy Court for the Southern District of New York website here.

The five page worksheet asks for background information, including the address of the property, the name of the lender, the date of the mortgage and post-petition address for payment. Then it continues to ask for debt/value representations, including the total indebtedness of the debtor to the creditor at the time of the motion, the estimated market value of the property and the source of the valuation. It then asks the movant for more detailed information about the debt-a breakdown of the pre-petition and post-petition debt, which includes attorney’s fees, amounts applied to principal, interest, escrow and late fees.

The worksheet also requires exhibits to the motion for relief from the automatic stay:

1. Copies of documents that indicate the movant's interest in the subject property. For example, a complete and legible copy of the promissory note or
other debt instrument together with a complete and legible copy of the mortgage and any assignments in the chain from the original mortgagee to the moving party.

2. Copies of documents establishing proof of standing to bring the motion.

3. Copies of documents establishing that the movant's interest in the real property or cooperative apartment was perfected. For example, a complete and legible copy of the Financing Statement (UCC-1) filed with either the Clerk’s Office or the Register of the county the property or cooperative apartment is located in.

The worksheet closes with a declaration by the moving party that the foregoing information is true and correct based on personal knowledge of books and business records.

In our prior Cooler e-mails, we've written about abuse of the foreclosure process by secured creditors. This order by the Judges of the U.S. Bankruptcy Court for the Southern District of New York appears to be a response to these abuses. Whether you’re looking at bankruptcy from the creditor's or debtor's side, please contact Shenwick & Associates and let us know how we can be of service.

Bigger Isn’t Always Better When It Comes to Outside Counsel

By Ruth E. Piller, Litigation News Associate Editor

General counsel are increasingly turning to small firms and solo
practitioners

Corporate legal clients once again seem to be developing an affinity for small law
firms—notwithstanding the merger mania of recent years and the perception that
large corporations want only to hire megafirms. With increasing frequency, the chief
legal officers of leading corporations are now retaining small law firms and even
solo practitioners.

"I do believe that we are seeing an increase in inside counsel using smaller,
boutique firms," says Horace W. Jordan Jr., Lake Forest, IL, cochair of the Section
of Litigation’s Corporate Counsel Committee. Jordan, who is general counsel for an
equipment leasing company, believes that two dynamics are responsible for this
change: "the billable hour and a feeling that the smaller firm might have more
flexibility in both arranging billings and understanding the client and its business."

Walter D. James III, Grapevine, TX, a member of the Section’s Criminal Litigation
and Environmental Litigation Committees, practiced at large Texas firms until 2004,
when he became a solo practitioner. James represents several Fortune 500
companies on environmental matters and says his clients like the fact that he does
not mark up litigation costs such as copying and long distance calls, as some big
firms do. In addition, he says, his clients know they can be big fish in a small pond
when he represents them, unlike experiences they have sometimes had at larger
firms.

"Generally speaking, what they like is the accessibility and accountability that come
with working with a smaller outfit," says Stephen J. Curley, Stamford, CT, cochair of
the Section’s Solo and Small Firm Committee. "It’s not lost on clients that in certain years they could be 10 to 20 percent of a firm's revenues and that they will get immediate attention and white-glove service when it comes to working with a solo.
On the other hand, their problems can be just as big, and those figures can be 1 or
2 percent of a much bigger firm’s revenue."

Like James, Curley left a large firm to form his own office. He says that he and
other solo and small firm practitioners have benefited from the increased use of
technology. For example, many benefits that were traditionally available only at the
larger firms "can be replicated through an artful use of technology in the hands of a
competent solo. You don’t need the 100,000-volume law library that the big firms
heavily invested in years ago. You don’t need the trappings of a class office space
in a landmark building like people used to insist on years ago." Also, with the
availability of remote access, he says, clients have realized there is no need to pay
for the overhead of a big firm.

That’s not to say that corporate clients have forgone the big firms completely. "We
use the large firms for big-ticket matters still because we have a relationship with
them,” Jordan says. "But the bulk of my work I have limited to firms, whether big or
small, that really know me and care about me. That sounds silly, perhaps, but it is
absolutely essential."

Curley says big firms have in part become the victims of their own success. When
the big firms command hourly rates approaching $1,000 for their most-senior
attorneys, he says, it becomes difficult for the client to call the senior partner from that office. When Curley left big-firm practice in 2002, he cut his rates literally in half, he says. Likewise, James says his rates, when compared to those of his colleagues at the big firms, are much lower. "For someone with my experience, it is just a bargain rate."

ABA member James G. Potter, San Francisco, senior vice president and general
counsel of Del Monte Foods Co., says that his company’s philosophy is to match
the legal resource to the project. "That is from a host of perspectives including cost and quality, and what that has resulted in is that we use far more medium and small firms than we do large firms," he says. Del Monte tends to use large firms, for
example, in areas that require very specialized expertise, such as in mergers and
acquisitions or intellectual property litigation. He adds, however: "It is virtually
impossible for a larger firm to cost efficiently handle a litigation matter where the
cost at issue is less than $1 million." Small firms are "extremely cost effective on
the smaller matters."

Although it is one thing to understand why corporate clients want to use smaller
outside counsel, it is another to attract those clients. James says that one way
small firms and solos can solicit clients is by building on existing relationships with friends and acquaintances. One of James’s biggest clients was once his opposing
counsel in Superfund cases. Afterward, when the lawyers went in-house with an
energy company, he maintained their friendship; now he now represents their
company on the largest Superfund site in Texas. "It’s not always about getting the
file that day," he says.

Curley credits the ABA with helping to make his solo practice attractive to corporate
clients; he calculates that 25 to 30 percent of his revenues each year are the direct
result of referrals from ABA contacts. "The contacts that I’ve developed and the
networking opportunities I’ve gotten because of the exposure I’ve received to other
attorneys, both litigators and nonlitigators, have really given me the comfort to
move out on my own," he says.

Copyright (c) 2008, American Bar Association. All rights reserved.