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Legal Notices in Bankruptcy Proceedings: To Read, or Not to Read?

The typical business inbox – either print or digital – can overflow with all forms of business communications. Occasionally, a legal notice that may appear to be fairly benign can be of vital importance to you and your business. Legal notices, such as subpoenas, complaints, or pleadings, can result in a loss of certain rights if ignored. And while they are important in all aspects of litigation, they are especially important in bankruptcy proceedings given the speed at which the legal proceedings can move, finality of decisions, and the parties that those decisions might affect. Unlike traditional litigation, you do not need to be a party or a litigant to have your rights affected.

As a creditor or party in interest in a bankruptcy case, you should review all bankruptcy notices and documents that you receive.  If you do not, you risk losing your rights or even your interest in property.  This is especially true when the notices pertain to a sale of the debtor's assets.

If you fail to respond to a pleading (especially a notice of sale) a court can modify or terminate your interest in property (whether real or personal); your license to use certain property (including intellectual property); your leasehold interest in property; your ability to bring certain claims or causes of action; and your ability to effectuate a setoff of obligations owed to you.

Notice is an integral part of the judicial system, and unless you are made aware of a pending proceeding against you or that may alter your legal rights, no action taken should affect you.  However, the converse is also true – if you receive notice, almost any action can be taken against you. 

One of the primary purposes and policies of the Bankruptcy Code is to rehabilitate the debtor or recycle the assets to a more productive use, and the longer that process takes the less the assets tend to be worth. As a result, sales in bankruptcy court can happen very quickly, and once an order is entered approving a sale, that order is very hard to overturn.

This need for speed tends to be of paramount importance in a bankruptcy case, and many bankruptcy courts hold strictly to the concept that if a party receives notice of a sale and fails to raise an objection, that party's silence can constitute consent to the proposed sale and the treatment of your legal rights as a result of that sale.  For example, if you own an interest in property (real or personal) and the bankruptcy trustee or debtor in possession moves to sell that property free and clear of your interest and provide you with notice, unless you object to the sale, many courts will find that your lack of objection equaled consent or assent to the sale and the terms of the sale order.

Moreover, if you receive notice of a sale and fail to take steps to protect yourself, any action you try to take after the fact may be ineffective. A court may determine that you received actual notice if the debtor or trustee provides notice in a form approved by the Bankruptcy Court, such as by mail to a registered agent or officer of your company, or you learn of the sale even if notice is not otherwise provided to you. In either of those cases, unless you object to the sale or the altering of your rights or interest, it is likely that a court will provide you with no relief.

The lesson is clear – although reading the numerous pieces of mail that you receive related to a bankruptcy case may seem tedious, in the long run it could protect you from inadvertently foregoing some of your property or your rights.

© 2022 Much Shelist, P.C.National Law Review, Volume III, Number 70
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About this Author

Jeffrey L. Gansberg, Much Shelist Law Firm, Bankruptcy Attorney
Special Counsel

Jeff Gansberg is an experienced bankruptcy, creditors' rights, and trial attorney with an extensive background in both the transactional and litigation aspects of insolvency, reorganization and creditors’ rights representations. Jeff represents debtors, trustees, creditors and creditors’ committees from a wide range of industries, including health care, travel, transportation, manufacturing, retail, insurance, entertainment and communications. Jeff has represented constituencies in restructuring matters including workouts, forbearance agreements, and assignments for the benefit of...

312-521-2649
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