Tuesday, June 14, 2011

Guarantor Releases and Injunctions

A very common question I get from businesses contemplating bankruptcy is whether or not the personal guarantees can be dealt with through the Chapter 11 reorganization process.  Obviously the owners are concerned that we get a great deal for the business but the difference ultimately falls back on them because of the guarantees.  There really is no easy answer regarding the guarantees but I will attempt to at least touch on the subject.
There are two distinct ways to protect guarantors.  Injunctions or Releases.  Injunctions permanently enjoin creditors from bringing an action against the guarantor.  Releases relieve the guarantor from liability.  Let me start off by saying that if the creditor agreed to release the guarantor then there is no issue at all.  Courts routinely allow guarantors to be released when the creditor agrees.  (This is rare however that they agree!)  Typically if you are going to get a release it has to be done through the plan process and approved by the court.  Courts routinely look at the following when deciding whether or not to allow a release:
1.  Are there “unusual circumstances” present?
2.  Is the release fair and necessary?
3.  Do the debtor and the guarantor share an identity of interest that would negatively affect the debtor?
4.  Has the guarantor contributed substantial assets to the debtor’s reorganization?
5.  Is the release essential to the reorganization?
6.  Have the affected creditors voted to accept the plan with the release language?
7.  Does the plan offer to pay all, or most of the claims that are negatively affected?
8.  Does the plan have a mechanism for non-agreeable parties to recover in full?
9.  Is the release supported by adequate consideration?
The court looks and weighs all of the above factors.  It appears that numbers 2 through 5 are looked at closest but the court takes this case by case and there really is no hard line rule regarding releases.  A lot of times the guarantee clauses can be alleviated by the owner filing for personal bankruptcy protection and other times the creditors just decide not to pursue the guarantee clauses.  If you would like to discuss your specific situation please feel free to call me at (904) 521-9868 or (386) 868-2650.  If you just want more information on bankruptcy go to http://chapter11jax.com.

Tuesday, June 7, 2011

Why Does Chapter 11 Cost So Much!

Lawyers who handle Chapter 11 Bankruptcy cases for small to medium size businesses usually address these questions in the initial conversation with potential clients.  "How much is a Chapter 11 case?"  "Why is it so expensive?"  "I just want to stop the foreclosure/lawsuit/collection, then we can dismiss." "Can't I pay a little over time?"  While these questions are very reasonable, the answers are often not what prospective clients like to hear.
Initially, unlike other types of cases, lawyers representing Chapter 11 debtors have several restrictions in getting paid:
  • After a case is filed, lawyers cannot get paid for fees or expenses without notice to the parties in the case, and Court approval.  This includes drawing on any initial retainer provided by the client.  Detailed fees and expenses are reviewed by the U.S. Trustee and Court prior to approval.
  • Lawyers typically must wait a minimum of 4 months to even request approval of fees, but more often, it is six months or more.  If the fees and expenses incurred during this time are more than the initial retainer held by the lawyer, the lawyer is at risk if the client does not have the funds to pay the additional amount.
  • If the case is converted to a Chapter 7 case, the expenses of the Chapter 7 have priority over Chapter 11 expenses.  More often than not, there are no funds available after the payment of Chapter 7 expenses and the Chapter 11 fees and expenses are not paid.
  • If a lender has a security interest in cash and accounts of the company, there may be no unencumbered funds for fees and expenses, and the lawyer must seek approval from the creditor.
These rules mean that lawyers representing Chapter 11 debtors must request an initial retainer that will provide some protection that they will be paid for their services.  Typically, lawyers will consider the nature of the business and the issues leading to the Chapter 11 filing, and request a retainer that will cover them for the first few months of the case.
Let's look at a small manufacturing or retail business that has been hit hard by the economy and is facing.  In the first few weeks of the Chapter 11 case:
  •  Detailed schedules must be completed, including historical financial information, all debts and creditor contact information, a list of all assets, and information about prior payments to creditors and insiders.
  • Documents must be gathered and provided to the United States Trustee, including bank account statements, a budget, tax returns, balance sheets, profit & loss statements,  and other documents.  A meeting is held with the U.S. Trustee within two to three weeks of filing.
  • The first meeting of creditors is scheduled about a month after filing.
  • If a secured creditor has a security interest in cash and accounts, a motion is filed and a hearing scheduled to get approval to use funds of the business.
  • Other emergency motions may be necessary, including the continuation of utility service, the payment of salaries, authority to maintain bank accounts, etc.
  • The first monthly reports are due, and the first U.S. Trustee fees will be billed.
The items listed above are required in every Chapter 11 case, whether it is a single asset real estate entity or a large manufacturing company.  Even if a company decides to seek dismissal of the case soon after filing, the Court and U.S. Trustee normally require that most or all of these requirements are satisfied as a condition of dismissal.
Hopefully this post answers the question of why experienced business bankruptcy lawyers request retainers that may seem large to owners and managers of companies already experiencing financial difficulties.  If the company has a chance of success, it is imperative that an experienced lawyer is retained even if the owners wish to get out of Chapter 11 as soon as possible.

Monday, June 6, 2011

Don’t Delay Filing (It may cost you more than you think!)

So many times I meet with businesses and individuals that are interested in Chapter 11 bankruptcy too late.  They have already tore through their resources until there is nothing left.  Not even enough to attempt a successful reorganization.  It is even more important for businesses that collect rent as their form of income.   

Florida Statutes and the state court can kill any reorganization attempt before it even starts.  Florida Statute 697.07 can take all of your rents and not allow you to use it to fund a Chapter 11 reorganization attempt.  Bankruptcy case law is not settled in the area of assignment of rents but one thing is for sure, if you wait around and let the state court adjudicate the issue then you will have no chance to reorganize.   

If your business relies on some form of rental income, filing Chapter 11 early may be the only way to save your business.  For more information please feel free to call (904) 521-9868 or (386) 868-2650.  If you just need more information regarding Chapter 11 bankruptcy go to http://chapter11jax.com  Again, please do not delay talking to a Chapter 11 bankruptcy attorney.  Delay may cost you more than you think!