For those of monitoring the Cedar Funding implosion, it was not surprising to see that Cedar Funding, Inc. filed for Chapter 11 bankruptcy last week.
Cedar Funding is now a Debtor-in-Possession (DIP), and no doubt David Nilsen will seek to remain in control of the organization, and avoid the receiver recently appointed by a California Superior Court judge.
What can creditors do?
In cases of fraud or wrongdoing, creditors can seek to appoint a Chapter 11 Trustee. This would prevent the DIP (in this case Nilsen) from having ongoing control and management of the business. However, many creditors should recognize that there is a cost associated with this, much the same as having a receiver in place.
Additionally, for unsecured creditors, the US Trustee will circulate a request that a creditor's committee be formed.
All of these steps are to part of evaluating the DIP's ultimate plan for reorganization. The committee has voting rights, and in addition to the Trustee can object to a plan that is unlikely to be successful or in the best interest of creditors.
More aggressive steps? Creditors can determine if they should bring a motion to convert the bankruptcy to a Chapter 7. Upon a conversion, the bankruptcy estate is controlled by the Chapter 7 Trustee and the goal of the Chapter 7 is a liquidation of assets rather than an a "re-organization." While it can seem draconian, in reality, most Chapter 11 bankruptcies fail and the sooner the debtor liquidates, the higher likelihood of some recovery before the estate is eaten away.
How can a creditor decide? A DIP has the obgliation to prepare operating reports and in this case, the operating reports may be more detailed than the reports that the investors may have sporadically received in the past. The failure to supply these reports can be an indication that there is something to hide or that the debtor lacks the ability to satisfy the requirements of remaining in a Chpater 11 bankruptcy.
At a bare minimum, creditors will need to prepare their proof of claim and can decide to take a wait and see approach.