Archive for the ‘chapter 11’ Category

3 Aug

Preparation Is Key For a Small Business Bankruptcy Reorganization

Posted by Douglas A. Goldstein, Esq. in Bankruptcy, chapter 11, reorganization, small business.

Remember George Zimmer’s famous line? “You’re gonna like the way you look. I guarantee it.”  On August 2, 2020, the parent company of Men’s Wearhouse filed for bankruptcy.  The men’s clothier very well may emerge successfully from bankruptcy.  The company gained the support of a majority of its lenders.  The company has obtained financing to get through the case.  The company recognizes that it must compete in a rapidly evolving retail environment.  No doubt, the company has taken other steps to prepare for its bankruptcy reorganization.

What are the prospects of a small business in bankruptcy?  Proper planning and preparation are key to a successful reorganization.  Here are a few considerations for pre-bankruptcy planning:

  • Should the company seek a global, out-of-court workout with its creditors so as to facilitate, or avoid altogether, a bankruptcy filing?
  • What are the consequences if the company does not file a bankruptcy case?
  • Can the business survive if its trade debt is eliminated?  If not, what other changes may be necessary?
  • How will the business stay afloat for the next 60-90 days?
  • Can the company find an investor or competitor that might buy, or buy into, the company if it were sold free and clear of all liens, claims and encumbrances?
  • Would the closure of weak performing store locations, and escaping those leases, help the business to survive and thrive?
  • Which vendors provide goods or services so critical that the company should seek permission from the bankruptcy court to pay them in full?

With careful planning and preparation, a small business can reorganize successfully, at less expense, and with less stress and uncertainty.

Advertisement

10 Jan

Don’t Cry Over Spilled Milk! Borden Dairy Files For Bankruptcy Protection.

Posted by Douglas A. Goldstein, Esq. in Bankruptcy, chapter 11, reorganization. Tagged: , , .

For years, Americans have been turning to alternative “milks”–such as soy milk, coconut milk and nut milks–and away from dairy milk.  Sales of dairy milk plummeted.  Thousands of dairy farms have gone out of business.  In a sour twist, while sales dropped, the cost of raw milk rose.  The Borden Dairy Company, a 163 year old milk producer, found itself in the cross-hairs of this phenomenon and saddled with too much debt.

In an effort to reorganize, on January 5, 2020, Borden filed for bankruptcy relief.  On the same day, Borden asked the bankruptcy court for permission to pay the pre-bankruptcy claims of its “critical vendors.”  Borden wanted the unfettered right to:

  • Designate which creditors provide goods or services that are necessary for Borden’s continued operation and that it cannot readily replace or buy from another vendor;
  • Pay up to the full amount owed to those creditors; and
  • Leave the remaining unsecured creditors to recover possibly pennies on the dollar at some later time, if ever.

Three days later, the bankruptcy court granted Borden’s “first day motion” on an interim basis, and with some limitations.  Now may begin a stampede of creditors to convince Borden that they should be designated as “critical vendors.”

The creditors that fail in this pursuit could try to challenge the entry of a final “critical vendor” order.  After all, the full payment to some, but not all, creditors goes against the Bankruptcy Code’s general scheme of treating like creditors equally.

Unsecured creditors also may evaluate their right to assert a claim under Section 503(b)(9) of the Bankruptcy Code.  That statute prioritizes certain claims for “the value of any goods received by the debtor within 20 days before [the bankruptcy was filed] … [if] sold to the debtor in the ordinary course of [the] debtor’s business.”  That priority designation can enhance a creditor’s distribution and would not require Borden’s approval.

Creditors should not ignore their rights, or ignore the case.  As the “first day” motion practice demonstrates, the bankruptcy court can decide significant matters quickly and without the input of all stakeholders.

23 Sep

The New, Streamlined Chapter 11 Bankruptcy Case — Part 2: Nine Significant Benefits of the Small Business Reorganization Act of 2019

Posted by Douglas A. Goldstein, Esq. in Bankruptcy, chapter 11, reorganization, Uncategorized. Tagged: , , , , .

In my last post, I discussed the new Small Business Reorganization Act of 2019 (“SBRA”), which will allow a small business debtor to reorganize in a streamlined chapter 11 bankruptcy case.  The SBRA offers the following benefits to the debtor:

 

  • Like a chapter 13 debtor, the SBRA debtor does not need to solicit votes from creditors to support its plan, which will reduce fees and aggravation.

 

  • Unless the bankruptcy court orders otherwise, the SBRA case will not have a creditors’ committee.  Because the debtor-in-bankruptcy is typically responsible for the fees of the creditors’ committee’s attorneys and accountants, as well as the debtor’s own professional fees, no committee means less expense for the debtor.

 

  • The bankruptcy court can confirm the SBRA plan over the objections of creditors provided that the plan does not “discriminate unfairly,” and is “fair and equitable,” with respect to each class of impaired claims or interests that have not accepted the plan.

 

  • The SBRA eliminates the “absolute priority rule” and permits a shareholder to retain ownership of the debtor business without the need to pay unsecured creditors more through the plan than the business’s projected disposable income (and the plan must not discriminate unfairly, and must be fair and equitable).

 

  • Like a chapter 13 trustee, the SBRA trustee would collect periodic payments from the debtor and make cash distributions to creditors, but cannot sell the debtor’s assets (in contrast, a chapter 7 trustee may sell the debtor’s non-exempt assets to pay creditors).

 

  • Unlike a chapter 13 plan, the SBRA plan can modify the rights of a creditor whose claim is secured only by the debtor’s primary residence, provided that the underlying loan was used primarily in connection with the debtor’s small business and not primarily to acquire that property.  This provision may allow the debtor to strip down a partially secured mortgage on his primary residence and discharge the balance of the loan.

 

  • “Means testing” under Bankruptcy Code section 707(b)(2) does not apply to the SBRA debtor.

 

  • In a typical chapter 11 case, administrative priority claims (such as trade debts or professional fees arising during a bankruptcy case) must be paid, in full, on the plan’s effective date.  In the SBRA case, an administrative claim can be paid over time through the plan.  This can help the cash-flow-challenged debtor to avoid a default on the first day of its reorganization.  In addition, the payment of an administrative claim through the plan may reduce payments to other creditors.

 

  • Unless the bankruptcy court orders otherwise, the SBRA debtor can avoid filing a disclosure statement, which will save it considerable time and professional fees.

 

As debtors’ attorneys discover the benefits of the SBRA, small business chapter 11 bankruptcy filings likely will increase.  As a result, creditors should prepare for this wave of filings, understand the limits of the SBRA and take steps to protect their interests.