Financial Relief for Your Troubled Small Business Clients

A. Thomas DeWoskin

By A. Thomas DeWoskin



It’s no secret that many small businesses are facing financial troubles these days, not only because of the COVID-19 pandemic, but also because of the rapid and unpredictable twists and turns of the current economy. This article will discuss, in two parts, the various ways in which a financially troubled business can seek financial relief, ranging from informal negotiations and state statutory remedies to filing a Chapter 11 reorganization bankruptcy case, so that attorneys can provide general assistance to their small business clients, or refer them to an insolvency attorney if appropriate.

Part I: Negotiations and State Statutory Remedies

Informal Workouts

If a debtor is on good terms with its creditors, especially its primary lenders, it may be able to earn itself out of its financial troubles. The secured creditors, of course, must be treated with full respect for their security interests in the assets of the debtor. Unsecured suppliers of critical goods and services also must be treated with care, as their cooperation may be needed at some point in the future.

It is often useful for a debtor to obtain an appraisal of its assets, both real and personal, from well-respected appraisers experienced in their fields. The appraisal should value the assets at three levels: forced liquidation value, orderly liquidation value, and fair market value. These values will enable the debtor to intelligently discuss the likelihood of collection in different situations.

Another useful action would be to hire a consultant. Sometimes business owners cannot see opportunities for improvement which are right in front of them, simply because they think that the current practice works well. The consultant can help the owner review the company’s operating procedures, cash flow procedures and pricing structure to look for opportunities to increase profitability.

The consultant also could prepare projections of future profitability for the company, based upon the opportunities which are discovered. Armed with the collateral valuations and projections, the owner can show the company’s creditors a plan for solving its problems.[1] That is much more effective than simply asking for more time or engaging in stalling tactics.

Statutory Remedies

1. Assignments for the Benefit of Creditors

Continue reading »

Accumulating Cash and Improving Your Business’ Cash Flow

A. Thomas DeWoskin

By A. Thomas DeWoskin



Part 2 of a 5-part series: Options for Small Business Owners in Financial Distress

turbulenceCash is how your business likely will get through its difficulties. Simply put, obtain as much cash as you can, and spend it sparingly.

In Part 1 of this five-part series on options for small business owners in financial distress, I suggested some ideas about improving the operation of your small business in order to survive different types of disasters. In Part 2, I’ll share some thoughts on improving your cash position and cash flow.

First, look at your business as a source of cash.

  • Account receivables: Contact your customers with outstanding account receivables and encourage them to make payment. Provide discounts for prompt payment and charge interest on past due amounts if you can.
  • Line of credit: If you have unused room on a line of credit, draw on it now while you still can. If things get bad enough, your lender might freeze your line and cut off further draws.
  • Business loan: If you need to approach a lender for a new loan or an increase in an existing one, do your homework. No lender is going to give you money just because you ask for it.
  • Business plan: Prepare a business plan or update your current plan to reflect current conditions. You may need help from your accountant, attorney, consultant or similar outside sources in order to do so. Your plan may include both a “needs” list and a “wants” list.
  • How much? Determine how much money you need to implement your plan whether your business plan is to simply tread water, grow, or pivot in another direction. Break it down so your potential lender understands how it is going to save your business.
  • How to pay it back? Once you have a rough number, consider how you’re going to repay it. Your business’ survival depends in part on its ability to pay its debts. Consider both the amount and duration of the likely payments.
  • Avoid “hard money” lenders: When looking for lenders, be very careful to avoid “hard money” lenders and their draconian interest rates and repayment schedules. These can include factoring companies who purchase your receivables, MCA lenders who say they are “purchasing” your accounts receivable but in reality are lending against them, and other types of lenders with outrageous interest rates and impossible repayment terms.

Continue reading »

Your Small Business: Getting Through the Economic Turbulence

A. Thomas DeWoskin

By A. Thomas DeWoskin



Part 1 of a 5-part series: Options for Small Business Owners in Financial Distress

turbulenceSuppose your small business has been doing fairly well over the last few months in spite of COVID-19 and the many other factors affecting our economy. However, you are worried about the upcoming change of seasons, additional shutdown orders, or other circumstances which might adversely affect it.

Or suppose you expect to do well over the holidays even in the face of (or because of) the pandemic, but dread your normally slow months of January, February, and March.

Or suppose you recently undertook a large project which fell apart and left you owing a ton of money.

Different situations require different responses.

Specific Event

If a specific event led to your problems, but your business is otherwise profitable, you may be able to work out of them.

Equipment Problems

Imagine that your business was doing so well that you bought additional equipment and hired additional employees in order to meet the demand.

Unfortunately, your new equipment didn’t work as promised. Rather than the promised six weeks, the new equipment took a year to get up and running smoothly. In addition to failing to fulfill all of your orders during this time, you paid employees overtime to produce as much as they could despite the distractions caused by the equipment problems. Continue reading »

Options for Small Business Owners in Financial Distress: A 5-Part Series

A. Thomas DeWoskin

By A. Thomas DeWoskin



options for business

Many small business owners are suffering financially due to the effects of COVID-19 and the unpredictable, rapidly changing economy in general. In this five-part series, we will discuss the various options available to small businesses in financial trouble, all the way from working out obligations informally to Chapter 11 reorganization to going out of business.

The series will cover the following issues:

Part 1: Your Small Business: The Economic Turbulence – Analyzing and improving your business operations

Part 2: Accumulating Cash and Improving Your Business’ Cash Flow – Analyzing and improving the business’ flow, as well as obtaining additional financing if necessary

Part 3: Non-bankruptcy solutions

Part 4: Pros and cons of various types of bankruptcy

Part 5: Getting through a bankruptcy case and coming out on the other side

Continue reading »

Bankruptcy and Workouts After the CARES Act

A. Thomas DeWoskin

By A. Thomas DeWoskin



As the COVID-19 crisis deepens, it is getting even more difficult for small business owners to plan for the future. It now appears likely that the crisis will not simply end – it will ebb and flow in waves for quite a while, yet another variable for small business owners to consider for an extremely uncertain future.

Despite the payroll protection program and all of the other government support programs being enacted in an effort to support the economy[1], it is a virtual certainty that hundreds of thousands of small businesses will need to file Chapter 11 bankruptcy reorganizations or enter into out of court workout agreements with their creditors during the next few years.

Several changes to a debtor’s ability to survive this chaos have occurred in recent months:

  • The enactment of Subchapter V of Chapter 11 of the Bankruptcy Code;
  • The enactment of the CARES Act; and
  • The practical results of so many businesses teetering on the brink of failure.

Before getting into the details, I am repeating my basic plea to all small business owners facing potential troubles. PLEASE: Continue reading »

Thoughts for Business Owners Trying to Run a Business During a Pandemic

A. Thomas DeWoskin

By A. Thomas DeWoskin



Who would have thought we’d be in a situation like this? This is the 21st century, not the Middle Ages. The need for action is certain, but the need for panic is not. In fact, panic makes the matter worse for all concerned.

On the personal front, take care of yourself first. You need to have your wits about you at a time like this.

  • Keep your mind busy with something other than worry. If you have a hobby, now is a good time to engage in it. Read a book; write a letter; call your mother. If working 80 hours a week has limited time with your kids, spend some time with them now. Just speak to them with open-ended questions. Find out what’s on their minds. Do something together.
  • Help someone else – you’ll feel good about it.
  • We’ve all heard the saying that every problem is an opportunity. One of the best ways to stay calm is to do something. You can’t sit and fret your way out of this.

On the business front, now is a great time to analyze your situation, both short- and long-term.

Continue reading »

New Benefits for Those in Financial Difficulty: The Small Business Reorganization Act of 2019

A. Thomas DeWoskin

By A. Thomas DeWoskin



If you own a small business (defined as one owing less than $2,725,625 in total debt) and are in or nearing financial difficulties, you should contact your attorney to learn more about The Small Business Reorganization Act of 2019 (the Act).

Effective in February 2020, this new addition to Chapter 11 of the U.S. Bankruptcy Code provides the benefits of a traditional Chapter 11 case, but with fewer burdens and more flexibility.

For instance:

  • There will be no creditors’ committee to deal with (unless the court orders otherwise).
  • A trustee will be appointed instead. This may be a mixed benefit.
    • On one hand, a good trustee might be able to help keep the case moving, negotiate a consensual plan of reorganization, object to claims, and take other burdens off the debtor.
    • On the other hand, a bad trustee might misuse his/her powers and make things worse for the debtor.
    • In either case, the debtor will pay the trustee on a percentage basis, generally under 5% of debtor’s quarterly revenues.
  • A status conference must be held within 60 days after the commencement of the case to further a prompt and economical resolution of the various issues involved.
  • No disclosure statement will be required, saving both time and attorney fees in the process.
  • Only the debtor may file a plan; creditors may not.
  • It is somewhat easier to “cram down” the terms of the plan on objecting creditors.
  • The Absolute Priority Rule is essentially eliminated, making it easier for owners to retain their ownership in the debtor.
  • Confirmation standards are relaxed, making it easier to get your reorganization approved.

Continue reading »

An Oral Agreement Is Not Worth the Paper It’s Printed On

A. Thomas DeWoskin

By A. Thomas DeWoskin



On June 4, 2018, the U.S. Supreme Court held that an individual’s false oral statement about his assets would not support a finding of fraud under the relevant provision of the U.S. Bankruptcy Code. That provision required the false statement to be in writing if it were to serve as the basis of a fraud claim. (Lamar Archer & Cofrin LLP v. R. Scott Appling, Case Number 16-1215, 584 U.S. ___ (2018), issued on June 4, 2018.)

In this case, Mr. Appling hired a law firm to represent him in some litigation. When he had fallen behind on his legal bill to the extent of some $60,000, the firm threatened to withdraw from the case. He told the firm that he was expecting a tax refund of about $100,000 which would cover that bill and all future fees. Relying on Mr. Appling’s assertion, the law firm continued with the representation.

As you probably have concluded by now, there was no $100,000 refund. It was only $60,000, and Mr. Appling invested it in his business rather than paying his attorneys. Worse, when his attorneys subsequently asked about the refund, Mr. Appling lied and told him that he hadn’t received the refund yet. Continue reading »

Lien Stripping in Bankruptcy after Caulkett

Katherine M. Flett

By Katherine M. Flett



Under the Bankruptcy Code, “lien stripping” allows a debtor to void a property lien “[t]o the extent that [the] lien secures a claim against the debtor that is not an allowed secured claim.” Lien stripping is based on the concept that a second claim must actually be secured by collateral of sufficient value to equal or exceed the amount of the secured claim. Section 506(a) of the Bankruptcy Code provides that claims which are only partially secured, or “underwater,” are to be split into two claims – one fully secured and one fully unsecured.

In 1992, the U.S. Supreme Court addressed an important question about lien stripping in Dewsnup v. Timm (1992). In Dewsnup, a Chapter 7 debtor sought to strip the unsecured portion of an underwater lien on her residence under Section 506(d). Specifically, the debtor wanted to reduce her debt of approximately $120,000 to $39,000, the value of the collateral securing her debt at that time. Relying on the statutory definition of “allowed secured claim” in Section 506(a), the debtor argued that her creditor’s claim was “secured only to the extent of the judicially determined value of the real property on which the lien [wa]s fixed.”

The Court rejected this argument, relying on policy considerations and pre-Code practice. The Court concluded that if a claim has been “allowed” under Section 502 and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of Section 506(d). As such, the Court held that the debtor could not strip down the creditor’s lien to the value of the property because the creditor’s claim was secured by a lien and had been fully allowed under Section 502.

The Dewsnup Court defined the term “secured claim” in Section 506(d) as a claim supported by a security interest in property, irrespective of whether the value of the property would be sufficient to cover the claim.  Under this definition, lien stripping is limited to “voiding a lien whenever a claim secured by the lien itself has not been allowed.” Dewsnup has been widely criticized as being contrary to the plain language of Section 506(a). Continue reading »

Missouri Finally Has a New Statute Governing Receivers and Receiverships

A. Thomas DeWoskin

By A. Thomas DeWoskin



As most commercial attorneys in Missouri know, the previous Missouri statute governing receiverships, which was enacted in 1939 and consisted primarily of one sentence, provided very little guidance to attorneys, judges, or the parties involved.  Missouri’s new receivership statute solves that problem.  Effective August 28, 2016, and consisting of some 34 sections, the Missouri Commercial Receivership Act now provides guidance regarding the appointment of a receiver, the powers of a receiver, the rights and duties of the parties, and claim and distribution procedures.

A petition to appoint a receiver is now an independent cause of action.  It does not need to be merely an “add on” request to some other claim the creditor has against the debtor.  Receiverships can be instituted in order to dissolve an entity, enforce a lien, enforce a judgment, and other specific purposes, as well as any other situations in which the court may find a receivership appropriate.

Commencing a receivership is also a useful new way to resolve an ownership dispute or allow a majority shareholder to challenge a misbehaving management without destroying the business.

One of the most important improvements in Missouri’s receivership process is the requirement of notice to debtors.  Continue reading »