COMMERCIAL SURETY BANKRUPTCY WHAT AGENTS & UNDERWRITERS NEED TO KNOW
Presented by: George J. Bachrach Wright, Constable & Skeen, LLP
April 26, 2011
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PRESENTER BIOGRAPHY George J. Bachrach is a partner in the Baltimore, Maryland law firm of Wright, Constable & Skeen, LLP. He is a graduate of Harvard University, B.A., cum laude, 1971, and Georgetown University Law Center, J.D. 1974. He has represented surety companies in performance bond, payment bond and commercial surety bond claims, workouts and related bankruptcy proceedings for over 36 years. Mr. Bachrach is a former Chair of the ABA/TIPS Fidelity and Surety Law Committee (2001 to 2002), and is a member of many surety industry groups and affiliations. On May 21, 2009, Mr. Bachrach received the ABA/TIPS Fidelity and Surety Law Committee Martin J. Andrew Award for Lifetime Achievement in Fidelity and Surety Law. Mr. Bachrach is a frequent author, editor, program chair and speaker on surety issues, including the surety’s performance bond rights, options and obligations; the surety’s indemnity agreement, subrogation and salvage rights; the surety’s claims investigation rights and claims handling process; and commercial surety and contract surety bankruptcy issues.
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Stage 1: The Underwriting Documents • • • • •
The financial file The general agreement of indemnity The list of the executed bonds The collateral agreement Evidence of obtaining/perfecting rights in the collateral
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Stage 1: Business as Usual (Maintaining the Account) • The billing and collection of premiums (old and new bonds) • The renewal of bonds • The cancellation of bonds • Obtaining collateral – for old bonds (a demand to be “placed in funds”) and new bonds • Suretyship – a no loss but a risk of loss business April 26, 2011
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Stage 2: The Unthinkable and Impossible Happens – The Account Files for Bankruptcy
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Basic Bankruptcy Concepts – Corporate Principal Chapter 11 Case Principles of Bankruptcy: • Breathing space and time (automatic stay) • Sharing of the distribution of the debtor’s property • Forgiveness of debt (the “fresh start” discharge)
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The Principal’s Bankruptcy Petition Commencing the Case • The petition date (pre-petition and post-petition events) • The principal becomes a debtor • The debtor may operate its business (ordinary course of business and outside the course of business) • First day orders • The debtor pays post-petition obligations • The debtor’s Chapter 11 plan and disclosure statement address the debtor’s pre-petition obligations – the debtor’s “contract” with its creditors that discharges the debtor’s pre-petition debt April 26, 2011
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Automatic Stay – Underwriting Issues The automatic stay (the “stay” that prevents you from doing what you really want to do against the debtor and debtor’s property) prohibits as of the petition date: • Collecting pre-petition premiums • Cancelling bonds • Obtaining new collateral and lien rights against the debtor’s property • Exercising rights against the debtor’s collateral (debtor’s property)
Pre-bankruptcy planning April 26, 2011
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Property of the Debtor’s Estate The Surety’s Collateral: • Debtor’s assets – real and personal property • How held by the surety • When obtained by the surety Letters of Credit are Not Property of the Debtor’s Estate: • Letters of credit themselves • Proceeds of letters of credit April 26, 2011
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Stage 3: Issues When the Account/Debtor is in Bankruptcy • Premiums – Pre-petition bonds – Post-petition (old and new bonds)
• Renewal of bonds • Cancellation of bonds • Post-petition surety credit (bonds) April 26, 2011
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Premiums • Pre-petition premiums for pre-petition bonds (automatic stay issues) • Post-petition premiums for pre-petition bonds (renewals and administrative expense issues) • Post-petition premiums for post-petition bonds (new surety credit and administrative expense issues) April 26, 2011
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Renewing the Bonds Types of Renewals (and the Effect on the Bond Penal Sums): • Non-cancelable bonds • Continuous bonds (no action required to remain in effect) • Bond requires a “continuation certificate” • New bond required every year 12
Renewing the Bonds (continued) Changes to Bonds (Increased Penal Sums, Extensions) Renewal Premiums: • Pricing (higher rate than pre-petition) • Collection (administrative expense) April 26, 2011
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Cancelling the Bonds What Bonds, When, How, and What the Surety Should Not Do Pre-Petition Cancellation Issues (Effective Cancellation or Not): • Cancel and issue new bonds • Cancellation effective date April 26, 2011
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Cancelling the Bonds (continued) Automatic Stay Issues: • Relief from the automatic stay (dispute with the debtor) • Debtor’s motion or stipulation and consent order (cooperate with the debtor)
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Cancelling the Bonds (continued) Cancellation Effective Date Issues: • Pre-effective date claims • Post-effective date claims
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Providing Post‐Petition Surety Credit (Bonds) When, How and Procedures: • At the debtor’s request • Motion and bankruptcy court order What (and Parameters – to Meet Underwriting Standards): • Kinds of bonds • Penal sums of bonds • Duration of surety’s liability April 26, 2011
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Providing Post‐Petition Surety Credit (Bonds) (continued) Terms: • A new indemnity agreement • Collateral (preferably a letter of credit) and collateral agreement • Bankruptcy court order • Strict parameters for the new bonds (no long tails) • Rights to draw on collateral to pay claims • Waiver to any Section 5 claims against the surety (preferences, fraudulent transfers and others) • Other effects on claims handling issues (settling claims and reimbursement for loss) 18
Going Forward or Backward • Forward – exoneration and/or reimbursement • Backward - preferences
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The Surety’s Use of Collateral – Exoneration and/or Reimbursement Exoneration and/or Reimbursement Issues: • Surety’s indemnity agreement rights • Surety’s collateral agreement rights • Surety’s rights against collateral • Relief from the automatic stay When and how – exoneration or reimbursement April 26, 2011
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The Surety’s Use of Collateral – Exoneration and/or Reimbursement (continued) Letter of Credit Proceeds: • Draw • Application of proceeds Release of Collateral – When: • Collateral agreement • Statute of limitations • Contingent claims 21
Preferences Definition – The surety’s receipt of the debtor’s property (transfer) for the payment of an antecedent debt within 90 days prior to the petition date may be an avoidable preference Issue – Keeping the premiums paid by the account Issue – Hanging on to the collateral that the surety obtained April 26, 2011
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Preferences (continued) Defenses: • Definition of a “preference” • New value (new consideration after payment or contemporaneous exchange), and forbearance does not equal new value • Ordinary course of business payment Documents to preserve for any defenses 23
Preferences (continued) Results: • Surety keeps the transfer (money) • Surety pays back the money to the debtor Letter of Credit Issues: • Not property of the debtor’s estate • But, there are still preference issues April 26, 2011
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Commercial Surety Bankruptcy – What Agents and Underwriters Need to Know
YOUR QUESTIONS? If you do not have the opportunity to have your question addressed during the Seminar, you may contact the presenter directly:
George J. Bachrach Wright, Constable & Skeen, LLP
[email protected] 410-659-1308
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