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THE COMMUNITY BANKER

WINTER 2017

What Every Community Banker Should Know

About Bankruptcy Basics:

Part 1 of a Series

Calculated Risks to Fuel the

Economy. As community

bankers, you fuel our economy’s

engines, enabling individuals to

purchase first cars and dream

homes. You provide eager

business owners with the cap-

ital that they need to upgrade

to cutting-edge technology,

buy essential equipment or

inventory, or hire a workforce

necessary to take a business to

the next level. Your bank truly

becomes a cornerstone in our

communities.

As you know better than

anyone, community banks,

however, undertake calculated risks when extending credit to any individ-

ual or entity.

What happens when things don’t go as planned for the

individual or the business? The borrower trips loan covenants or causes a

monetary default for weeks, for months. Taxing bodies file liens. Suppliers

stop providing goods. Judgment creditors garnish the borrower’s bank

accounts. Creditors start intercepting accounts receivables. No matter

how hard the community banker has tried to be patient, the writing is on

the wall. The borrower needs to restructure debt or file bankruptcy.

This is the first of a series of articles regarding what every community

banker should know about the basics of bankruptcy.

In the world of bankruptcy there are certain trigger events that are

important. Here is the timeline of a case:

Pre-Petition: Protect Your Secured Claim andMonitor the Borrower.

When a bank believes its borrower is slipping into bankruptcy, the bank’s

interests must be protected. Be certain that all steps have been taken to

properly perfect and record the bank’s security interest in any collater-

al, and that such perfection has been continuous. If possible, consider

requiring an additional guarantor on the loan or expanding the scope of the

bank’s collateral. Double check any lien and title searches on collateral.

More often than not, resolving the matter outside of a bankruptcy

case is the most efficient way to go. When a commercial borrower

files bankruptcy, a bank may be able to tack on legal fees to the

loan at hand but the risk of non-payment still exists and is proba-

bly higher given the additional administrative costs of filing a case.

If there is some chance of a turnaround, consider a forbearance

agreement with the borrower. If the bank is unsecured and insists

on substantially changing the terms of the loan agreement within

90 days prior to the bankruptcy filing, the bank may run the risk of

being sued Post-Petition for the avoidance of preferential transfers.

As a borrower swirls deeper in debt, he or she or the business

borrower may take desperate measures, and the lender may be able

to sue its borrower for gross mismanagement of collateral, fraudu-

lent transfers, and/or breach of contract, to name a few. Depending

upon each borrower’s circumstances, swift action is usually neces-

sary. A secured lender may want out now and accelerates the debt

along with the filing of a replevin action and/or utilizing any other

Uniform Commercial Code Article 9 remedies it may have. If the

borrower is not generally paying debts as they become due, another

option may be for a lender to team up with two other creditors to

force an involuntary bankruptcy petition upon the borrower. If

the company has fewer than 12 creditors, a bank alone could file the

involuntary petition.

Stay tuned for what a banker should know once a bankruptcy

petition is filed.

Julia A. Chincheck, Esq. is a lawyer in the Charleston office of Bowles Rice

LLP. Ms. Chincheck is a partner of the firm and concentrates her practice

in the areas of banking and creditors’ rights and bankruptcy, with empha-

sis on complex commercial transactions and commercial litigation. For

more information, please contact Ms. Chincheck at (304) 347-1100.

Salene Mazur Kraemer, Esq., M.B.A, is a lawyer in the Southpointe,

Pennsylvania, and Wheeling offices of Bowles Rice LLP. A certified

turnaround analyst, she concentrates her practice in the areas of banking

and creditors’ rights and bankruptcy, as well as complex commercial

transactions. For more information, please contact Ms. Kraemer at

(724) 514-8920.

client alert

Bankruptcy

Petition Date

Pre-Petition

Post-Petition

PlanConfirmation/

Discharge

Closing of Case