Originally Published - April 16, 2015, 4:17 PM ET
Wall Street Journal - The $12,473 Corporate Reorganization
By Katy Stech
The owner of a small, struggling business can get sticker shock at the $100,000 to $300,000 price of a corporate reorganization in bankruptcy.
Meet the Florida lawyer who fixed VitaChef Steamer Skillets’ financial problems for a fraction of that amount.
Jason Burgess put VitaChef into bankruptcy in November 2013 and wrote a 22-page survival plan for its founders—a group that patented and made at least 5,500 of the kitchen gadgets but ran out of money to advertise. Under the plan, VitaChef’s owners agreed to put in money to pay creditors half of their combined
$400,000 in debt. No one objected to trigger an expensive courtroom fight, perhaps because those creditors knew they’d get far less money if the company shut down.
The final tab: $12,473.73.
“I hate to think that a legitimate business with cash flow would be prohibited from cash flow because they can’t afford the attorney fees,” said Mr. Burgess, 33 years old, who charges $275 an hour.
But bankruptcy lawyers across the country say their industry is turning away small companies that might be saved by chapter 11 protection. The problem has prompted some restructuring industry leaders to push for federal law changes that would make the process cheaper.
“[A business has] to have at least $1.5 million a year in revenue in order to afford the process,” said Canton, Ohio-based bankruptcy attorney Anthony J. DeGirolamo, who works with small, family-owned businesses and charges $300 an hour. His most expensive case cost a local manufacturer $127,000.
Bankruptcy Beat found low-cost bankruptcy lawyers across the country who—unlike their colleagues at white shoe firms—focus on fixing small local businesses.
In Kentucky, $200-an-hour lawyer Miles Apple took panel maker FischerSIPS LLC, a Kentucky manufacturer of insulated panels for building construction, through bankruptcy in 2013 for the cost of a used car. FischerSIPS couldn’t reach a repayment plan with a lender owed $910,161.94, so it used bankruptcy to sell itself to a local businessman for $50,000. Since the sale money went straight to the lender, Mr. Apple skipped the expense of putting a creditor repayment plan together.
The total cost of the case? $14,294.50.
To keep costs low, Mr. Apple said he prefers to negotiate deals outside of the courtroom “rather than just going in and filing motions and doing a war of attrition.”
What else kept costs low for VitaChef and FischerSIPS?
Neither case had an unsecured creditor committee—a group that typically monitors a case to make sure that a bankrupt firm is putting the most money possible toward repaying its debts. Lawyers for those committees have, at times, charged higher hourly rates than the lawyers for the bankrupt company itself. That happened in the bankruptcy cases of Johnny Carino’s Italian restaurant chain and Massachusetts trumpet and trombone maker S.E. Shires Inc.
The desire for robust oversight is a modern feature of bankruptcy that’s caused the cost to grow, said Dan Dooley, chief executive of the MorrisAnderson financial consulting firm. He described a growing mentality of distrust among creditors like this: “If you’re not protected by lawyers and financial advisers, somehow the debtor is going to treat you unfairly.”
“That is not the way it used to be,” Mr. Dooley said.
A group of lawyers, judges and others, organized by the nonprofit American Bankruptcy Institute, say that Congress should get rid of committees for private businesses worth less than $10 million. But others are wary of getting rid of a watchdog, especially for small companies that may need more oversight because decisionmakers are wearing multiple hats.
Another congressional proposal introduced a complicated mechanism to help owners of small bankrupt companies keep their businesses if they promise to use future profits to pay companies’ past debts. Existing rules require owners to repay all existing debts in full if they want to remain in control. But University of North Carolina School of Law professor Melissa Jacoby said that bankruptcy rules need to simple and less intimidating for small business owners. “Otherwise they’re not going to make it that far in the process,” she said.
The proposed reforms don’t address another major small business issue: stigma. A small manufacturer, for example, is more likely to sell a product that consumers can buy elsewhere, giving them less leverage with suppliers who may be reconsidering whether to continue to deal with them after bankruptcy.
“That’s a reasonable worry,” said bankruptcy lawyer Aram Ordubegian, who is with the Arent Fox law firm in Los Angeles. “Companies that are specialized with a limited set of customers or providers—they do have the worry that…their customers are going to be less likely to deal with them.”
Write to Katy Stech at firstname.lastname@example.org. Follower her on Twitter at @KatyStech
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