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When a business is in financial distress, the breaking point sometimes comes with little or no warning. An event such as a termination of funding, the falling through of a crucial transaction, or the loss of a key customer can be difficult to predict, and may result in a distressed business being forced to cease operations abruptly, without providing its workers with the advance notice required under the Federal WARN Act.[1]

In In re Emoral, Inc.,[1] the Third Circuit held that personal-injury causes of action arising from the alleged wrongful conduct of the debtor corporation, asserted against a third-party non-debtor corporation on a theory of successor liability under state law, were generalized claims constituting property of the bankruptcy estate. The Third Circuit’s decision draws attention to the distinction between specialized and generalized claims and who has control over such claims: the individual creditors or the bankruptcy trustee.

Consider the following situation: A debtor owes you $1 million, and you find out that the debtor has transferred its assets to a third party without receiving reasonably equivalent value and is now unable to pay its debt to you. If you are in one of the many states that has adopted the Uniform Fraudulent Transfer Act for avoiding such transfers, the next step may be to file a fraudulent transfer action.[1] But what happens if the debtor files for bankruptcy?

Consider the following scenario: A financially struggling consumer borrows cash from a friend and deposits the cash into his bank account. He uses this cash to make a purchase at a retail store and later pays his friend back. Subsequently, he files for bankruptcy. In this scenario, few would argue that the payment to the retail store and paying back the friend were not separate, avoidable preferences (assuming that no § 547‌(c) defenses applied).

A Federal Rule of Bankruptcy Procedure 2004 examination is commonly referred to as a “fishing expedition”[1] into a debtor’s financial affairs. Debtors, trustees and creditors routinely use Rule 2004 exams to investigate an examinee’s financial affairs with very little interference by bankruptcy courts or discovery rule limitations. However, a party with pending litigation against an examinee may find that a Rule 2004 exam is not the road to take.

Editor's Note - The Unsecured Trade Creditor's Committee recently hosted a committee call dealing with these same cases. To listen to the recording of this call, click here.

The Bankruptcy Code defines “claim” as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured….”[1] Congress intended the “broadest possible” definition, and that the Code “contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case … [and] permits the broadest possible relief in the bankruptcy court.”