Bankruptcy and Workouts After the CARES Act

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

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

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

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

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

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 »

Your Restaurant is Failing – Now What?

Restaurants fail for a variety of reasons, from failure to watch costs to failure to develop the right menu to a nearby construction project eliminating most of your on-street parking.  If you followed the tips in my previous article, you should have some money to rely on going forward.

If your financial problems are operational or managerial, one of the things you can do at this late stage is to hire a consultant to help you tweak your menu, streamline your operations, or take any of a number of additional steps to bring you back to profitability.  This is the time to be humble, rather than arrogant – ask for help!  You should also consult with a bankruptcy lawyer at this point.  That does not mean you are necessarily going to file bankruptcy, but an attorney knowledgeable in this area can tell you what to expect if different scenarios unfold. Unanswered ‘end-game’ questions will add to your stress and divert you from your primary mission of saving your restaurant. You can learn a lot of useful information for not a lot of money, and gain some peace of mind as well.

A bankruptcy attorney also can help with your current problems. For instance, the attorney can negotiate with the landlord, either to reduce the rent or give back some space.  He can negotiate with your lender and your suppliers to negotiate better terms, or a temporary break in your monthly payments. Continue reading »

Opening a Restaurant: Plan for Success – and Failure, Too

Failure is a topic most restaurateurs would prefer to avoid when setting up a new venture, when their heads are full with visions of success. However, the restaurant business is tough, and problems can arise due to circumstances both within and outside of your control.

A great time to protect yourself from potentially devastating problems is now, while you are setting up your business and you can plan calmly.

In this post, I will discuss several of the initial legal steps you can take to prepare for a potential failure.  In my next post, I will turn to the ramifications of failure and what actions you can take at that time.

First, consult an attorney to prepare your initial legal documents.  There are many issues of which you may be unaware, or that you may not know how to resolve. You need to choose an appropriate legal structure and learn about human resource issues. Especially if you have a partner, you will want to deal with buyout issues, succession issues and how to handle deadlocks if multiple owners are unable to reach decisions on major issues.  As they say, an ounce of prevention is worth a pound of cure. Continue reading »

Inherited IRAs – Once Protected – Now Possibly Fair Game for Creditors

You should read this article if  –

1. You expect to transfer funds to your descendants through an individual retirement account (IRA); or
2. You have inherited an IRA from a relative.

The U.S. Supreme Court has ruled in Clark v. Rameker that the money in an inherited IRA does not qualify for the protection from creditors as provided in the Federal Bankruptcy Code.[1]

The Court concluded that funds in an IRA which was inherited from someone else are not really retirement funds.  It gave three reasons for this conclusion.  The holder of an inherited IRA:

1. Can never invest additional money into the account.
2. Is required to withdraw money from the account, no matter how far away retirement may be.
3. May withdraw the entire balance of the account at any time – and use it for any purpose – without penalty. Continue reading »

Inherited IRAs Not Protected in Bankruptcy

If you directly inherited an IRA and are facing bankruptcy, these funds are no longer protected from creditors.

In Clark v. Rameker (In re Clark), No. 13-299, the U.S. Supreme Court unanimously ruled that inherited IRAs do not qualify under the “retirement funds” bankruptcy exemption. As a result, non-spouses inheriting an IRA may no longer protect the funds from creditors after filing bankruptcy and spouses have more incentive to “roll over” inherited IRA funds.

Before the Supreme Court decided Clark, there was a split between the 5th and 7th Circuit Courts of Appeals regarding exactly what the “retirement funds” bankruptcy exemption covered. In Chilton v. Moser, the 5th Circuit previously held that inherited IRAs were exempt from the bankruptcy estate because the “retirement funds” exemption never stated that the retirement funds had to be the debtor’s. In Clark v. Rameker, the 7th Circuit disagreed and held that inherited IRAs were not exempt because they were an “opportunity for current consumption, not a fund of retirement savings.” The disagreement stemmed from the interpretation of what “retirement funds” included. Continue reading »