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Elizabeth Prentice
Elizabeth Prentice, Attorney
Category: Bankruptcy Law
Satisfied Customers: 170
Experience:  Managing Attorney for one of the largest consumer bankruptcy firms in America.
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My biggest client just declared Chapter 11 bankruptcy. Before

Resolved Question:

My biggest client just declared Chapter 11 bankruptcy.

Before they filed, I had billed them for $14,000 for work performed. They are pre-petition invoices, and will *almost* certainly get wiped out, or paid at pennies on the dollar in 6-12 months.

But I also have some other current contracts for services (signed back in October, before they filed) with this same company that are *not* yet completed: they are long-running projects, which get billed when each design phase is completed.

We have already completed, and billed (and were paid) for the first 30% of those contracts. But now that the company is in Chapter 11, I don't know if I will be forced to complete months of work on those projects (knowing that I will be paid pennies on the dollar), or if they must pay my OTHER invoices on other projects ("cure the default" on my other invoices for other projects that are not on these current contracts, but which their company still owes me) in order to force me to complete work for their company.

Let's assume that they will assume the contracts (they would be crazy not to.) Do I need to finish the work? Do they need to pay me for the $14,000 in previous work in order to make me finish the new work on other contracts?

Help!!
Submitted: 1 year ago via Cornell Legal Info Institute.
Category: Bankruptcy Law
Expert:  Elizabeth Prentice replied 1 year ago.

I am a bankruptcy attorney and I would be happy to assist you. A Chapter 11 is different than other types of bankruptcy, since it allows a debtor to continue their company operations while in bankruptcy. Despite this fact, a bankruptcy stay is now in place. This means that you can not attempt to collect on a pre-petition debt (the $14,000). Typically, a judge does not want to see a company incur any more debt while in bankruptcy. So for the short term, you should halt work and talk to the attorney who is representing the debtor to see how they plan to handle the future work to be performed. Since I can not review your contract for services with the debtor on here, I recommend you hire a Chapter 11 attorney who can advise you on the contract's specific terms and effects in the debtor's bankruptcy. (A great place to start is by contacting you local NC state bar lawyer referral service. They usually have a list of attorneys who are pre-approved and provide free or discounted initial consultations.) You may be able to prepare (with the help of an attorney) a reaffirmation agreement. Ask if this is an option when you meet with the attorney. This can require that the debtor pay you back the $14,000, in order for you to do future work, essentially reaffirming the original contract and making your debt non-dischargeable. Once the debtor agrees and signs, it will still need to be approved via motion (and hearing) by the judge. This is why you will need a local attorney to handle this for you. Also, you may have construction liens which could be considered secured debts and give your debt priority in the debtor's bankruptcy, but again you should ask a Chapter 11 attorney in your area this question after they look at your original agreement. The answer will also depend on what other debts the debtor has listed. Just remember to ask the question "do I have any priority?" Although you need to retain an attorney soon to review your contract, if the creditor's meeting is coming up make sure you attend. You don't want to miss this. It is where the debtor and its attorney will talk about how they plan to deal with their debts and restructure their business. You will also be able to ask the debtor questions at that time. It is typically a month after they file bankruptcy and you should have received the notice with the date, time and location in the mail. If you can't meet with an attorney before, don't miss this. You may also receive a notice to file a proof of claim. Don't miss this deadline either, but you may want to talk to an attorney about which box to check with regards XXXXX XXXXX and priority of your claim after the attorney reviews your contract. When you file the proof of claim, don't forget to attach any paperwork that gives you a right to be repaid (ex- the original contract, invoices, receipts, etc.). I hope my answer has assisted you and that you will leave me a positive rating! Feel free to ask for me by name in the future if you have any other questions.

Customer: replied 1 year ago.

Greetings Elizabeth,

I understand that once a Bankruptcy stay is in place that I cannot pursue the payment of the $14,000 of pre-petition invoices, but is there any chance that they will be paying it anyway? <she asked hopefully>

I am an "unsecured creditor" with no collateral, and no ability to place liens. Isn't that the lowest of the low, when it comes to priorty for payment? They have to wipe 4 billion off of their balance sheet...what are my odds of getting anything? <you can answer *after* you stop laughing.>

The Creditors 341 Meeting is on September 9th, but I am meeting with a local bankruptcy attorney tomorrow to review the language of the contracts. I will seek their advice on the possibility of a "reaffirmation agreement"--a brilliant suggestion on your part.

Is the Creditors 341 Meeting where they determine how to handle future work to be performed? Future work on the mid-stream contracts is absolutely the most urgent issue, because my clients are pressuring me (today) to move ahead with work, and I don't know what to tell them. I will not be working with them in the future. Should I tell them they must wait for the results of the Creditors Meeting before we proceed? If they don't like that answer, can they sue me for breach because I have failed to act as if "time is of the essence" on their project? What are the implications of breaching a contract?

I'll try to make these my last questions--I don't want to tie you up forever. You've already been very helpful.

Thanks,

Irene Morris





Expert:  Elizabeth Prentice replied 1 year ago.
Ms. Morris:

I am glad my answer assisted you. Typically an unsecured, non-priority creditor will not receive much if anything in bankruptcy. The silver lining is that they are still an operating business and may be able to achieve profits again someday, thereby you receiving compensation. In order to get paid though you will need to file the proof of claim as soon as the trustee informs you that they are accepting them. This proof of claim gives you the right to be repaid.

It sounds like the best bet for you would be to see if you can put the $14,000 into the reaffirmation agreement. This will change your claim to a higher priority claim in exchange for your continued services to the debtor.

I understand your concern about failing to provide services to the debtor, but consider this: if the debtor company rejects your pre-petition contract in the bankruptcy and you provide services to the debtor company post-petition, your post-petition services will become an administrative priority claim that could potentially not be paid. Although your work today may be an administrative priority claim, the debtor or trustee could claim that the work was not beneficial or unacceptable depending on what type of work you plan to do today. Typically, administrative claims must be paid in full before any payment can be made to holders of lower priority claims.

According to Section 503(b) of the Bankruptcy Code, an administrative
priority claim is an actual and necessary cost and expense of preserving the debtor’s bankruptcy estate. For instance, a trade creditor that sold and delivered goods or provided services, post-petition, on credit terms, to a Chapter 11 debtor is entitled to an
administrative priority claim against the debtor for any unpaid claim, with a prior right to payment of its claim ahead of the claims of the debtor’s pre-petition unsecured creditors. Therefore, if you feel the services you are about to provide today meets this level of importance, you will "hopefully" be paid. When in doubt, I recommend that a creditor call the Chapter 11 trustee's office. His phone number is XXXXX the notice for the 341 meeting. Explain to him/her the type of service you are about to provide today and see if he/she will approve it later on as an administrative priority claim. The Chapter 11 trustee is the best person to talk to, since he/she will either prevent you from getting paid or will approve your payment for services rendered later on. At a minimum they will advise you in your's and the debtor's best interest.

I hope my answer has assisted you and that you will provide me a positive answer. If you have any follow-up questions please feel free to ask for me by name.
Elizabeth Prentice, Attorney
Category: Bankruptcy Law
Satisfied Customers: 170
Experience: Managing Attorney for one of the largest consumer bankruptcy firms in America.
Elizabeth Prentice and 4 other Bankruptcy Law Specialists are ready to help you
Expert:  Elizabeth Prentice replied 1 year ago.
Hi Irene,

I'm just following up with you to see how everything is going. Is there anything else I can help you with?

Let me know,
Elizabeth Prentice

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