Everyone Loves Found Money Maximizing Recovery Using Found-Money Assets

<p>For most bankruptcy estates, the typical approach to asset recovery has been to
focus exclusively on core assets: fresh accounts receivable, large-balance preference
claims, inventory, real estate and maybe the occasional "hope certificate"
litigation matter. However, it is becoming increasingly advantageous to identify
and pursue recoveries from a range of less-obvious areas that can generate meaningful
liquidity. As these valuable, but often overlooked, assets create significant
found money for bankruptcy estates, we now refer to them as found-money assets
(FMAs).
</p><p>Bankruptcy professionals should focus on FMAs in an effort both to fulfill
the fiduciary duty to explore recovery opportunities and, in many cases, to
significantly move the needle in terms of ultimate payout to creditors. Since
the volume of mid- and large-sized bankruptcy filings has been relatively low
in 2005 and the first part of 2006, right now is a golden opportunity for professionals
to review older cases originally filed between 1999-2004.
</p><p>Although there are some common areas to review for FMAs, the key to success
is tied to the creativity of the professional, requiring an eye for hidden value
and an ability to think outside the norm. In this article, we aim to highlight
several common areas for FMAs, as well as touch upon examples of hidden opportunities
that may be illustrative of ways to generate additional cash in your cases.
These areas include:
</p><blockquote>
<p>• highly aged and written-off accounts receivable<br>
• small-balance preference claims <br>
• default judgments from preference claims <br>

• bankruptcy trade claims held by estates <br>
• class action settlement claims <br>
• dividend payouts or rights to future distributions <br>
• others, such as trade credits, double/ overpayments, vendor deductions,
litigation rights and more. </p>
</blockquote>
<p><b>Highly Aged and Written-Off Accounts Receivables </b>
</p><p>The lowest hanging fruit on the FMA roadmap is the highly aged and written-off
receivables. Although most collection efforts focus on the fresh receivables,
more than 90 percent of distressed companies and bankruptcy estates have significant
write-offs from two, three and even four years ago that should be considered
in any recovery strategy.
</p><p>The first step in identifying the opportunity to turn highly aged receivables
and historical write-offs into cash is to gather an aging schedule that lists
the outstanding receivables. However, any such schedule is likely to show only
part of the picture because often, upon initial inspection, the accounts receivable
(A/R) can look pretty clean. Further digging often reveals an interesting insight:
The A/R looks clean because the company had routinely written off accounts,
which often don't even show up any longer as a footnote on the aging schedule!

</p><p>After identifying the potential opportunities, there are three basic options
to capture them: Collect internally, outsource on a contingency basis to a specialty
firm, or sell for cash.
</p><p>Collecting internally works well in the limited number of cases when resources
are available internally and are adept at taking a proactive, problem-solving
approach. Far too often, though, restructuring professionals make the mistake
of assuming that the company's credit and collections personnel are well-suited
for such activity, but these employees had limited success at collecting these
receivables initially, and they are unlikely to find alternative paths to success
now.
</p><p>Outsourcing on a contingency basis is another option if resources to collect
internally are limited. Many professionals have existing relationships with
collection agencies that perform well on accounts less than a year old, but
struggle with commercial accounts that are one-to-four years old, and they often
won't even apply much effort toward these older accounts. Aged receivables and
historical write-offs have limited documentation and are rife with disputes.
It takes a specialized agency to have success with these types of accounts,
particularly the prior write-offs.
</p><p>Finally, selling for cash is an option if time, simplicity or short-term liquidity
issues are the key considerations. This is a common and straightforward process
in the relatively uniform world of consumer debt. However, in the case of written-off
commercial receivables, firms willing to pay cash are far fewer in number. A
key reason for the difference is that credit card portfolios have common characteristics,
whereas commercial receivables tend to have unique attributes from one company
to the next. For instance, credit applications can differ dramatically, as do
ordering forms, invoices and proofs of delivery. Purchases of aged commercial
receivables typically include a short timeframe for recourse by the buyer on
accounts deemed invalid, shifting into a non-recourse situation thereafter.
Depending on pricing and documentation, the sale can sometimes even be done
on a modified as-is, where-is basis, with limited representations by the seller.
</p><p><b>Small-Balance Preference Claims</b>
</p><p> Another FMA is the small-balance preference claim, particularly when considering
the potential impact of BAPCPA. Even prior to BAPCPA, many professionals did
little more than send a demand letter or two on the small-balance preference
claims. Typically, it was pre-determined that no suits would be filed on matters
below an arbitrary pre-selected size, so little attention was paid to such cases.
As an alternative, these can be considered FMAs, particularly when a specialty
commercial collections agency that understands the preference laws pursues these
monies on a purely contingency basis, and (under BAPCPA) has the capacity to
bring and prosecute suits in the vendor/defendant's local jurisdiction when
necessary.
</p><p><b>Default Judgments Stemming from Preference Claims </b>
</p><p>Any practitioner knows that in just about every case with preferences, a percentage
of the preference suits end up as default judgments. These default portfolios
sit and atrophy, but they are actually a potential source of found money. Fatigue
and inertia work against these defaults, as it's believed that they have been
pursued extensively, first via the demand efforts and then via the entire suit
process.
</p><p>Since many of the files are "dead," it no longer makes sense to continue
to invest in hourly fees to work them. However, that does leave two viable options
for generating cash from the defaults: either outsource on a contingency basis
or sell for cash.
</p><p>For preference defaults, outsourcing on a contingency basis can be a good option
if the estate is not in a hurry to wrap up because you get the benefit of potential
cash recovery without incurring additional costs. However, if you don't outsource
to the right type of firm, then you will have wasted your time and not generated
any found money. Specifically, you need to hire an agency or recovery group
that has significant expertise in collecting defaults, as the required skill
set is quite different from traditional collections work. Additionally, the
partner you hire should have access to counsel in the defendants' local jurisdictions
to domesticate efficiently and pursue judgments when amicable resolution is
impossible.
</p><p>Selling defaults for cash is a second good option for the estate, trustee or
committee. With this approach, you can quickly generate a fixed payment of cash
and gain closure on these assets. Typically, the sale of defaults is completed
on a largely as-is, where-is basis, with only nominal representations by the
seller. The process tends to be simple and easy as well, with the buyer turning
around a purchase proposal in as little as one day after reviewing a list of
the defaults. Further, the seller may also secure a commitment that requires
the buyer to obtain a §502(h) waiver from any paying or settling defendant.
</p><p>For example, in the <i>ACT Manufacturing et al</i>. case, the liquidating CEO
(LCEO) and his counsel together determined that the cost/benefit equation of
having counsel continue to pursue the defaults didn't make sense, so the LCEO
sought a sale to generate found money for the estate. The LCEO sold a portfolio
of defaults to Oak Point Partners in 2005 on an all-cash "as-is, where-is"
basis, and then sold a second portfolio to Oak Point in 2006 as the case approached
closure. Both transactions provided cash to the estate that would not otherwise
have been generated for creditors.

</p><p><b>Bankruptcy Trade Claims Held by Bankruptcy Estates </b>
</p><p>FMAs can come in all shapes and sizes. An overlooked FMA can be found with
bankruptcy trade claims held by bankruptcy estates. These assets are ignored
because they have little to no expected payout, or the payout will be at some
unknown time in the future.
</p><p>Traditional claims buyers typically structure deals on a recourse basis with
the ability for the buyer to unwind the transaction under a number of future
scenarios. This recourse clause is not a viable deal term when purchasing from
a bankruptcy estate, thereby minimizing the interest on the part of the traditional
buyers. However, a limited number of firms are willing to purchase such claims
on a nonrecourse basis, thereby accepting the risks and complexities associated
with buying claims from bankruptcy estates.
</p><p><b>Class Action Settlement Funds</b>
</p><p>Participation in recoveries from class action settlements is an excellent FMA
for bankruptcy estates. One such example is the <i>VISA/MasterCard</i> settlement,
in which VISA and MasterCard agreed to refund more than $3 billion to merchants
in settlement of a lawsuit filed by Wal-Mart and other retailers. Any business
that accepted VISA or MasterCard between 1992-2003 is entitled to a share of
the settlement fund. There are firms that work to assist estates in identifying
the potential for recovery, with some of these firms willing to pay cash to
purchase the rights to future payouts.
</p><p><b>Dividend or Co-Op Payouts</b>
</p><p>We previously pointed out the importance of thinking creatively to identify
FMAs. One of the best examples of this took place in a recent case, where a
firm specializing in FMAs did some sleuthing, ultimately discovering that the
estate was entitled to a payout from a utility co-op. The firm learned that
the co-op would begin making dividend payouts the following year and that the
estate was entitled to 10 years' worth of such payouts. Now, of course, the
estate would not be around to collect that payout in another year, let alone
in 10 years. However, it was determined that this was a transferable asset,
enabling the estate to sell this FMA in exchange for a nice, up-front payment.
</p><p>Not every bankruptcy estate will have rights to co-op dividends, but they might
have other opportunities, such as trade credits for returns, double/overpayments,
vendor deductions, nontraditional litigation claims and the like. Again, a bit
of research and creative thinking will help to uncover a wide array of FMAs
in most estates.
</p><p><b>Conclusion</b>
</p><p> Who doesn't like found money? Certainly, the more recovery that can be generated
into bankruptcy estates, the better, particularly after the "low-hanging
fruit" is picked. In fact, these extra recovered funds might not only have
an impact on the ultimate percentage recovery for the estate, but the enhanced
performance and the perception of trying to go the extra mile for creditors
will have a positive impact for the professionals in their efforts to get hired
on future cases.

</p><p>Our list of FMAs is in no way a comprehensive list. Every case is different,
with varying opportunities and limitations. However, we believe that this roadmap
should guide professionals to areas to explore within their cases as well as
to third parties that can help with either the identification or monetization
of such opportunities.
</p>