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Avoid a clawback

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on September 13, 2018.


Clayton Ketter

Clayton D. Ketter is a Director and a litigator whose practice involves a wide range of business litigation in both federal and state court, including extensive experience in financial restructurings and bankruptcy matters.

By Phillips Murrah Director Clayton D. Ketter

A business owner learns that one of her customers has filed for bankruptcy. She rushes to check her books and breathes a sigh of relief after seeing that the customer paid all of their outstanding invoices just days before going bankrupt. Unbeknownst to the business owner, those payments may have to be paid back to the bankruptcy estate as a preference.

One of the principal policies underlying bankruptcy law is fairness to creditors, which attempts to ensure that similarly situated creditors are treated equally. To promote this goal, creditors in a bankruptcy are placed into classes, with members of each class sharing proportionally in distributions of a bankrupt debtor’s assets.

This policy can be hampered when a debtor pays a preferred creditor immediately before a bankruptcy, to the detriment of other creditors. To ensure that a debtor’s limited money does not disappear to creditors favored by the debtor, the Bankruptcy Code allows a bankruptcy trustee to claw back such payments.

A payment is considered a preference if it meets five criteria: It is made to a creditor; for a debt owed prior to the payment being made; while the debtor was insolvent; during either 90 days before the bankruptcy filing for ordinary creditors or one year for insiders of the debtor; which allowed the creditor to receive more than it would have received in distributions from the bankruptcy estate.

If a payment is a preference, it must be paid back to the trustee unless a valid defense can be established.

Several defenses are available to creditors, including for substantially contemporaneous exchanges. Typically, point-of-sale transactions and those that involve cash on delivery will meet this defense. Another common defense exists for payments made in the ordinary course of business, which analyzes the typical transactions between the parties and in the relevant industry. If it is common for a debtor to pay invoices within 60 days of delivery, for example, those payments may meet the ordinary course defense.

Businesses can take steps to shield payments received from financially troubled customers from being subject to preference liability. The most effective means is to require prepayment, COD, or point-of-sale transactions only. Businesses can also strategically apply payments to invoices in a manner designed to fit within preference defenses.

To recover a preference, the bankruptcy trustee must commence a lawsuit within the bankruptcy case, typically preceded by a demand letter. Any business that receives such a letter should consult with bankruptcy counsel to determine whether they have valid defenses to the claim. Consulting with a bankruptcy attorney is also advisable prior to entering into sizable business transactions with a financially troubled company to attempt to eliminate preference risk. Doing so can help reduce the risk that a business gets embroiled in a bankruptcy, and worse, has to repay money that it was owed.

Clayton D. Ketter is a litigation attorney at Phillips Murrah P.C. who specializes in financial restructuring.

Firm selects Employee of the Month for March 2018

Maribeth Mills, Paralegal, is Phillips Murrah’s Employee of the Month for March 2018.

“It is such a compliment to be recognized by an amazing team of co-workers,” Mills said.

The Employee of the Month is selected anonymously by Phillips Murrah staff on merits of teamwork and overall contributions to the Firm.

“I’m very proud to work with Maribeth on a daily basis,” Director Clayton D. Ketter said. “Her work ethic and dedication are of the highest caliber, as is her expertise in many areas of the law. The award is very much deserved.”


Journal Record and Oklahoman Best Places to Work of 2017

Phillips Murrah has been recognized as one of the Best Places to Work in Oklahoma in 2017 by The Journal Record and an Oklahoma Top Work Place by The Oklahoman/Energage three years in a row. Our Firm strives to recognize and reward our employees for excellence.

Why Weinstein’s creditors hired bankruptcy counsel

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on November 16, 2017.


Clayton D. Ketter is a Director and a litigator whose practice involves a wide range of business litigation in both federal and state court, including extensive experience in financial restructurings and bankruptcy matters.

By Phillips Murrah Director Clayton D. Ketter

Since the onslaught of sexual misconduct allegations against Hollywood producer Harvey Weinstein, his film studio, The Weinstein Company, has wasted no time in firing its founder. Yet, the namesake studio has been unable to distance itself from Mr. Weinstein’s bad press, and it is questionable how willing moviegoers will be to support anything associated with the toxic moniker. This has prompted speculation that a bankruptcy is looming.

While The Weinstein Company has not filed for bankruptcy, and denies any plans to do so, some of the company’s debtholders reportedly have already retained bankruptcy attorneys. Why? At first glance, it may seem odd for creditors to hire bankruptcy counsel before a filing is even initiated. However, there are strategic reasons as to why early retention makes sense.

Often, a company facing financial pressure will attempt, prior to filing, to work with its largest lenders to craft a strategy that is mutually beneficial to all parties. Cooperation among debtors and creditors increases the likelihood of a successful bankruptcy and can significantly reduce associated attorneys’ fees.

Even if the parties won’t work together, bankruptcy counsel can provide vital pre-bankruptcy assistance to a creditor. It is normal for the debtor to file a number of pleadings on the day the bankruptcy is commenced or shortly thereafter. These typically include mundane items such as authority to continue to use bank accounts, pay employees and employ legal professionals. However, it is also possible for significant relief to be requested as part of these first-day motions, including post-bankruptcy financing arrangements or even requests to liquidate assets. Having bankruptcy counsel at the ready and fully engaged allows a creditor to immediately respond to any such requests to ensure the creditor’s rights are protected.

Should The Weinstein Company file bankruptcy, it is likely to begin with a motion seeking to liquidate its highly portable assets, which include its film library, and movie and television development projects. Those assets could be acquired by a rival studio and washed of the Weinstein name, thereby increasing the potential value. The Weinstein Company’s significant creditors would want to ensure that they won’t get blindsided by a sudden bankruptcy filing and a first-day motion to sell. Their early retention of bankruptcy counsel will help prevent such a scenario from happening.

Clayton D. Ketter is a director and litigation attorney at Phillips Murrah P.C. who specializes in financial restructuring.

Firm selects June Employee of the Month

Maribeth Mills, Paralegal, is Phillips Murrah’s Employee of the Month for June 2017.

“I’ve always enjoyed the work I do, but it is like icing on a cake to get a nod from your co-workers,” she said.

The Employee of the Month is selected anonymously by Phillips Murrah staff on merits of teamwork and overall contributions to the Firm.

“Maribeth’s work ethic and expertise are of the highest caliber,” Director Clayton D. Ketter said. “She takes great pride in her work and in expanding her legal knowledge and skills.

“We are very lucky to have her as a member of the Phillips Murrah team.”


Phillips Murrah has been recognized as an Oklahoma Top Work Place by The Oklahoman/WorkplaceDynamics two years in a row. Our Firm strives to recognize and reward our employees for excellence. Each Employee of the Month is chosen by a monthly survey of peers.

SCOTUS overturns structured bankruptcy dismissal in favor of payment priority rules

“Chapter 11 permits some flexibility, but a court still cannot confirm a plan that contains priority-violating distributions over the objection of an impaired creditor class.” – U.S. Supreme Court Ruling in Czyzewski v. Jevic Holding Corp.

A landmark decision handed down last Wednesday from the U.S. Supreme Court reversed a bankruptcy court ruling that approved a “structured” Chapter 11 bankruptcy dismissal settlement for a collapsed trucking company. WSJ reported that, in the highly anticipated ruling, SCOTUS overturned a controversial payout plan that disregarded important bankruptcy rules.

In Czyzewski v. Jevic Holding Corp., the High Court ruled that the dismissal violates payment priority rules of the Bankruptcy Code as set out by Congress, which gives a special priority creditor status to employees who are owed unpaid wages. In the decision, SCOTUS sent the case back to bankruptcy court so that it may be properly adjudicated.

The Backstory

In 2006, private-equity firm Sun Capital Partners’ acquired Jevic Transportation, Inc. in a leveraged buyout, according to the Wall Street Journal. By the following year, the company had started experiencing financial difficulty. In 2008, Jevic Transportation filed its Chapter 11 petition.

A day prior to the bankruptcy filing, Jevic ceased operations and about 90 percent of its employees were abruptly terminated. A group of the company’s truck-driver force filed a multi-million dollar class-action lawsuit claiming that the layoffs violated the Worker Adjustment and Retraining Notification (WARN) Acts. According to Federal Regulation Title 20, Section 639.1(a), employers are required to give a 60-day notice of plant closings and mass layoffs.

The suit included over $8 million in employee priority wage claims under Section 507(a)(4) of the Bankruptcy Code. Jevic truck drivers were awarded a judgment against Jevic, entitling the workers to payment ahead of general unsecured claims against the Jevic estate.

Another lawsuit was brought by the official committee of Jevic’s unsecured creditors claiming fraudulent conveyance and equitable subordination against secured creditors, Sun Capital and CIT Group, which funded the LBO. During the course of Chapter 11 proceedings, Jevic stated that it had run out of money to fight the claims, which set into motion a settlement with the unsecured creditors’ committee representing Jevic’s unsecured creditors in the form of a structured dismissal. A Delaware bankruptcy judge approved a payout plan and dismissed the case.

The Controversy

Under the settlement negotiated by Sun, CIT, Jevic and the committee, no assets were to be distributed to the truck drivers despite the WARN Act class-action judgment. The settlement did, however, provide for distributions to general unsecured claims. The group of Jevic truck drivers appealed the bankruptcy court ruling to the U.S District Court for the District of Delaware and the Third U.S. Circuit Court of Appeals, but was the appeals were denied.

This past summer, the Supreme Court agreed to review the case. At that time, the Wall Street Journal wrote:

“The question of what to do about bankruptcy rules that get in the way of a settlement has divided courts of appeal across the country, with some courts rejecting settlements that don’t comply with the scheme set out by Congress for who gets paid first.”

“The Bankruptcy Code contains a clearly-defined priority scheme for distributions to creditors of the bankruptcy estate, which is grounded on considerations of fairness to all creditors,” said Clayton D. Ketter, a Director at Phillips Murrah who specializes in financial restructurings and bankruptcy matters.

The negotiated structured dismissal did not include the consent of the group of Jevic truck drivers, the SCOTUS opinion stated, which allowed Jevic to evade its priority-creditor responsibility to the unpaid drivers. As long as priority creditors don’t consent to the deal, such settlements can’t be approved, the High Court said.

“In the case before us, a Bankruptcy Court dismissed a Chapter 11 bankruptcy. But the court did not simply restore the prepetition status quo. Instead, the court ordered a distribution of estate assets that gave money to high-priority secured creditors and to low-priority general unsecured creditors but which skipped certain dissenting mid-priority creditors. The skipped creditors would have been entitled to payment ahead of the general unsecured creditors in a Chapter 11 plan (or in a Chapter 7 liquidation). See §§507, 725, 726, 1129. The question before us is whether a bankruptcy court has the legal power to order this priority-skipping kind of distribution scheme in connection with a Chapter 11 dismissal.

In our view, a bankruptcy court does not have such a power. A distribution scheme ordered in connection with the dismissal of a Chapter 11 case cannot, without the consent of the affected parties, deviate from the basic priority rules that apply under the primary mechanisms the Code establishes for final distributions of estate value in business bankruptcies,” wrote Justice Breyer.

“The Supreme Court’s ruling reinforces the enforceability of those priorities and clarifies that priority line jumping through a structured settlement will not be permitted,” Ketter said.

The Jevic case will now head back to bankruptcy court for more work.

The Takeaway

What are the implications of this decision, beyond the fairly narrow Supreme Court’s ruling? Will it affect the overall utilization of structured dismissals across the industry?

Ketter said that he has noticed a rise of structured dismissals in bankruptcy cases, which typically follow a sale of a substantial portion of the debtor’s assets.

“I don’t foresee the Jevic decision changing that,” he added. “The Supreme Court Justices did not say that structured dismissals are not allowed.  Rather, they said that structured dismissals that violate the bankruptcy code’s priority scheme are not allowed.  Thus, we are likely to continue to see structured dismissals used, so long as they do not impermissibly skip a class of creditors in making distributions.”

However, Ketter added that decision may have broader implications outside the realm of structured dismissals.

“For example, there are types of plans within a bankruptcy case where a priority class voluntarily gifts a portion of the recovery it would otherwise be due to a lower priority class,” he added. “Sometimes, those gifted distributions skip other classes sitting higher on the priority scheme.  The Jevic decision raises the question of whether such plans are permissible.”

 

Clayton D. Ketter is a Director and a litigator whose practice involves a wide range of business litigation in both federal and state court, including extensive experience in financial restructurings and bankruptcy matters.

Medical bankruptcies likely to rise

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on Jan. 26, 2017.


Clayton D. Ketter is a Director and a litigator whose practice involves a wide range of business litigation in both federal and state court, including extensive experience in financial restructurings and bankruptcy matters.

By Phillips Murrah Director Clayton D. Ketter

One of the central promises of Donald Trump’s candidacy was that, once elected, the Affordable Care Act (also known as Obamacare) would be repealed. Now, with President Trump in office, and aided by a Republican Congress, the ACA’s remaining days are likely numbered.

According to the U.S. Department of Health and Human Services, the ACA has resulted in an estimated 20 million people who previously lacked health insurance becoming insured. Along with the many other effects resulting from a large number of Americans becoming insured, one less discussed consequence was a drop in medical-related bankruptcy filings.

Research by Daniel A. Austen, an associate professor at the Northeastern University School of Law, found that medical costs were a predominant cause of between 18 to 25 percent of all bankruptcies. Since the ACA was passed, one study by the National Bureau of Economic Research found that medical debt had been significantly reduced for those covered by the act.

These findings are intuitive, as hospital visits are often unexpected and typically result in large bills. Without insurance, most individuals lack the financial flexibility to absorb those medical debts. Bankruptcy can be an effective tool in those situations, as it can either allow a person to repay the debt over time or, in some cases, wipe it out altogether.

Problems can arise, however, for those facing ongoing health issues. A bankruptcy filing will only eliminate past debt. It does nothing for liabilities incurred after the bankruptcy is filed. Further, there are certain time restrictions to how often a person can receive a bankruptcy discharge. Depending on the type of bankruptcy at issue, those time limitations can be up to eight years. Thus, if an uninsured person is faced with a health issue that forces them to seek bankruptcy, his or her financial options may be seriously constrained if health issues return before the time limitations have run.

Such scenarios are all too familiar to bankruptcy practitioners, especially given insurance companies’ distaste to insuring people who have histories of health issues. Although there has been a temporary decline in those types of cases, they are likely to make a comeback should Congress choose to repeal the ACA without enacting a replacement or stopgap.

Clayton D. Ketter is a litigator at Phillips Murrah with experience in financial restructurings and bankruptcy matters.

Workouts a good option: Companies in financial hardship have alternative to bankruptcy

This article was published in OIPA Wellhead, a publication produced by Oklahoma Independent Petroleum Association and distributed to its membership.

Phillips Murrah Directors Elizabeth K. Brown, Stephen W. Elliott, and Melvin R. McVay, Jr. present at the Oklahoma Independent Petroleum Association Annual Meeting.

Phillips Murrah Directors Elizabeth K. Brown, Stephen W. Elliott, and Melvin R. McVay, Jr. present at the Oklahoma Independent Petroleum Association Annual Meeting.

OIPA board member Elizabeth Kemp Brown and her fellow attorneys from Phillips Murrah PC presented a panel at the Annual Meeting discussing workouts and bankruptcies in the oil and natural gas industry.

Phillips Murrah’s Melvin McVay, Stephen Elliott and Clayton Ketter joined Brown, who is also CEO of E&P company The Gloria Corporation, on the panel.

Bankruptcies in the oil and natural gas industry more than quadrupled from 2014 to 2015, totaling almost $35 billion.

Bankruptcy is usually not the best choice for a company facing financial trouble, Ketter said.

“Before jumping into that you want to see if you can do an out-of-court workout,” he said.

Bankruptcy is the last resort for both borrowers and lenders, McVay said.

A consensual workout agreement is an agreement between parties to renegotiate the loan and stay away from bankruptcy. Workout measures can include extending the term of a loan, extending payments, or partial payments.

A workout allows the parties to have much more control, McVay said, and avoids public scrutiny and the stigma that is attached to bankruptcy.

“You file bankruptcy, and everything about your company is an open book,” McVay said. “The good, the bad and the ugly.”

He urged business owners to be proactive if the company is entering hard times.

Elliott said recent cases have seen a change to how bankruptcies have worked.

“Historically, secured creditors come in and assert their positions and everybody below them gets nothing,” he said. “That’s not what’s happening. What they’re generally doing is restructuring their debt, cutting in existing equity and leaving trade participants and trade creditors pretty much alone.

“It seems to be a realization that they can maximize value by keeping the industry participants and the relationships with them intact.”

Ketter said of the around 35 oil and natural gas bankruptcies that have been filed this year, few were filed in Oklahoma, even if the company was Oklahoma-based.

“You would think, a company that is headquartered in Oklahoma, has a lot of creditors in Oklahoma or even Texas, how is it that they can go to Delaware or the southern district of New York and file?” Ketter said. “The venue requirements under the bankruptcy code are pretty broad. They allow you to be creative in where you end up filing.”

The biggest cases tend to hire national counsel, Elliott said, and they practice more frequently in Delaware and New York and Texas than they do in Oklahoma.

“I think there’s also a perception that the courts in Delaware and New York may be more sophisticated,” Elliott said. “I personally don’t buy that. And if any of you were involved in the SEM Group case, you received decisions out of the Delaware judge that I don’t think were very compatible with your view of the world. So I think home filing would probably be a lot better for some of these folks than they realize.”

Brown said when dealing with a company that is having financial difficulties, reviewing existing contracts is vital.

“Make sure you have your ducks in a row,” she said. “Review back over those agreements … If you’ve done an acquisition, you need to make sure you have your assignments in hand, and you need to make sure those assignments have been actually executed and recorded.”  Take steps like making sure any liens are filed, and any other documents signed and recorded, so you understand your position, she said.  Brown said when providing services or products to a company with financial problems, options are to get a deposit, get a pre-payment or personal guarantee from the owner before providing additional products and services.

“It’s a good idea to evaluate where you are and then try to make sure that you’ve got your I’s dotted and your T’s crossed, and you’ll be in a much better position to be paid if the company ends up going into bankruptcy,” she said.

Phillips Murrah names four new Directors and Shareholders

Directors Melissa R. Gardner, Clayton D. Ketter, Patrick L. Hullum, and Bobby Dolatabadi.

Directors Melissa R. Gardner, Clayton D. Ketter, Patrick L. Hullum, and Bobby Dolatabadi.

Phillips Murrah is proud to announce that we have expanded our group of Directors from 31 to 35, promoting Attorneys Bobby Dolatabadi, Melissa R. Gardner, Patrick L. Hullum, and Clayton D. Ketter to Shareholders.

Dolatabadi an experienced real estate attorney who represents his clients in a multitude of real estate transactions including acquisitions, divestitures, leasing, development and land-use.

Gardner represents both privately-owned and public companies in a wide variety of oil and gas matters, with a strong emphasis on oil and gas title examination.

Hullum a litigation attorney who represents individuals and public and private companies in a wide range of complex litigation matters and specializes in business litigation.

Ketter is a litigator whose practice involves a wide range of business litigation in both federal and state court, including extensive experience in financial restructurings and bankruptcy matters.

Phillips Murrah law firm forms new partnership

By M. Scott Carter

[ SEPTEMBER 15, 2011 – OKLAHOMA CITY ] The Oklahoma City law firm of Phillips Murrah P.C. is 25 percent bigger today – thanks to a new partnership with the Kline, Kline, Elliott and Bryant firm and other new additions.

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