Bankruptcy Bits

New court decision establishes company's liability for debt to corporate successor

The recently decided case of Renaissance Worldwide, Inc. v. Converged Access, Inc., et al has lessons for everyone.

The facts of the case are that the plaintiff, Renaissance Worldwide, had leased space in a Waltham building to one Sitara Networks, a voice-over internet company. Sitara arranged for a secured creditor to foreclose on its assets and then subsequently bought them back, reopening as a new entity, Converged Access. Renaissance, claiming to be owed $1.2 million in unpaid rent, brought suit seeking to hold the defendant, Converged Access, liable for the tenant's non-payment as corporate successor to the tenant.

The Court found that "(T)he transaction at issue was designed and engineered from the beginning to ensure that there would be a seamless transaction...with minimum disruption to the business." In essence, Converged "purchased" Sitara's assets by assuming Sitara's debt to Lighthouse (Capital Partners,) its secured creditor. In a well documented 19-page decision, the Court concluded that "(f)or these reasons, the credible facts as established at trial demonstrate that Renaissance has established Converged's liability for Sitara's debt to Renaissance as Sitara's corporate successor."

The decision in the case represents the first time that a lower Court has applied the key successor liability doctrine established by the Supreme Judicial Court in the case of Milliken& Co. v Duro Textiles, in which the SJC held that "New Duro" was responsible for the debts of "Old Duro" and had to pay its supplier, Milliken, the sum of $8.8 million.

The concept of successor liability smacks of fraudulent conveyance law and just plain old fraud. It has particular significance in environmental law as well as in creditor-debtor relationships, and it is a hot topic these days.

The lessons to be learned from Renaissance and other developing cases is that debtors can no longer avoid liability by the device of a friendly foreclosure of assets - real and/or personal property, that creditors have a viable basis for attacking devises calculated to avoid liability, and that attorneys must be diligent in their investigations of transactions involving the transfer of assets in cases in which the claims of creditors are sought to be avoided.

The successor liability cases are fact dependent and therefore require thorough investigation and careful analysis of the facts leading up to the transfer, the nature of the transfer, and the conduct of the new entity after it receives the assets. It may well be anticipated that these cases are the forerunners of a new series of cases more clearly defining this developing area of creditor/debtor law.

By: Eugene B. Berman, Esq.

Can I lose my job as a result of my filing for bankruptcy?

The answer is clearly set forth in Section 525 of the Bankruptcy Code titled, "Protection against discriminatory treatment. Paragraph (b) of the Section is specific in its prohibitions:

 

No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt –

1. is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;
   
2. has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or
   
3. has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act

 

The "no" answer to the individual contemplating bankruptcy is important to that individual but is equally important to employers who may not realize the statutory prohibition against a bankrupt person by terminating the individual or refusing to employ an individual who has been bankrupt.

 

While the "no" answer is comforting to the would-be-bankrupt, it is an answer to a question that should be posed by employers, or would-be employers, before they take action that would be in violation of Sec.525.

 

Alas, the law is not always without exceptions. Debts incurred as a result of defalcation of a fiduciary duty, larceny, fraud, deceit and other acts of dishonesty, malfeasance and criminal intent, while generally non-dischargeable, may well be justification for either terminating or not employing an individual where such conduct is related to the position of employment. Although "no" is the general, statutory answer, a prospective debtor and present and past employers are best advised to consult with counsel concerning specific facts and situations.

by: Eugene B. Berman, Esq.

 

 

The Berman Hook Theory – planning the timing of filing bankruptcy

 There are statistics that evidence that a substantial number of Chapter 11 plans fail, and that even in cases in which a plan is confirmed, the reorganized debtor fails shortly after confirmation.

An explanation for the phenomenon is contained in a theory that has become known as "The Berman Hook." Envision a hook: a line straight down, a perpendicular line at the bottom with another line headed up. Think of a fishhook.

The Berman Hook Theory incorporates the previously expressed viewpoint that timing can be everything. Like "location, location, location," the manta is, "timing, timing, timing" for debtors.

The theory is simple: during the period of declining business, the entity survives by using its capital (cash, inventory, accounts receivable) and available credit to survive. Debt is incurred and continues to be incurred during the downturn and at the leveling off phase. The cash flow and capital crisis really occurs when the business turns around and new capital and credit are required for new inventory, (or to finance the production of new product,) and to finance the accounts receivable created by new sales. The real crisis occurs when capital is depleted, debt is the highest and demands for capital, cash and credit are newly needed. A classic scenario.

The theory suggests that the filing of a petition in bankruptcy provides little long term relief when filed in the downward spiral but is best exercised when there is a realty of a fresh start, i.e. when relief from existing debts can be most beneficial. A successfully reorganized debtor is relieved of the burden of incurring additional debt and has the opportunity to engage in business when there is an opportunity to succeed. A simple, pragmatic theory.

And the concept is equally applicable to individuals. Timing is everything. You should not seek recourse in Bankruptcy Court until you have bottomed out. By means of example, you’re best advised not to file before you have the operation and will be out of work for a prolonged time or are unemployed with no early prospect of employment. Timing can be everything.

While the theory is valid, there are, of course, unusual circumstances under which you don’t have the luxury of choosing the time.

by: Eugene B. Berman, Esq.

If my business fails…does bankruptcy help me?

Every year in America, millions of businesses are started, however, unfortunately approximately an equal number also fail. Oftentimes a business failure will also cause significant financial strife in the principal’s personal life. The question then becomes does the owner of a failed business have to file a personal bankruptcy in order to get a fresh start.

The answer depends on two factors: a) how was the business established; and b) how was the debt structured? Specifically, if the business was officially incorporated, and all of the debt was solely in the name of the business (no personal guaranties,) then the closing of the business will not have a negative repercussion on the principal’s credit, and thus no bankruptcy will be necessary.

On the other hand, if the business was a sole proprietorship, (also known as a “d/b/a,”) and/or the debtor guaranteed the business debt personally, then the principal will be pursued for the debt and a bankruptcy may become necessary. In this situation, a successful Chapter 7 will relieve the principal of the failed business debt in order to allow them a fresh start and a chance to start another business if they become so inclined.

by: Justin H. Dion, Esq.

Chapter 11 filings up 49%

Under the amended bankruptcy laws (BAPCPA), Chapter 11 is far more restrictive, costly and burdensome, but those factors have not prevented growing numbers of business bankruptcy filings over the past year.

According to statistics recently released by the Administrative Office of the U.S. Court, in fiscal year 2008, (which is the 12 month period ending 9-30-08,) Chapter 11 filings rose 49% from the prior 2007 fiscal year. The actual numbers were an increase to 8,799 from 5,888 cases.

In reviewing all types of business cases that were filed, the numbers show a jump from 25,925 cases to 38,651, which is a 49% jump.

The same increased filings are found in almost every type of bankruptcy filing, except for the rarely used Chapter 12 farm filings. Nationally, Chapter 7 liquidation cases were up 40%, while consumer wage plans under Chapter 13 were up 14%, but likely to continue rising with the continued foreclosure problems facing many people trying to save their homes.

In Massachusetts, there were a total of 15,636 filings, of which 11,525 were Chapter 7, 3957 were Chapter 13, 149 were Chapter 11 and 4 were for Chapter 12 cases.

It appears that bankruptcy filings are on pace to increase over the 2008 filings, so more record filings can be expected.

By: Michael B. Katz, Esq.

Reorganizing under Chapter 11 - giving your business some breathing room

Bankruptcy protection is not just intended individuals. Small business owners who are dealing with less credit, rising inflation and costs, and slower accounts receivables collection often face tough choices in this economy. As bills get harder to pay and collection efforts ensue, the risk of business closure increases.

In enacting chapter 11 of the Bankruptcy code, Congress concluded that it is sometimes the case that the value of a business is greater if sold or reorganized as a going concern than the value of the sum of its parts if the business's assets were to be sold off individually. It follows that it may be more economically efficient to allow a troubled company to continue running, cancel some of its debts, and give ownership of the newly reorganized company to the creditors whose debts were canceled.

Alternatively, the business can be sold as a going concern with the net proceeds of the sale distributed to creditors ratably in accordance with statutory priorities. In a Chapter 11, jobs may be saved, the engine of profitability is maintained rather than being dismantled, and, as a proponent of a chapter 11 plan is required to demonstrate, the business's creditors will end up with more money than they would in a chapter 7 liquidation. All creditors are entitled to be heard by the court that is responsible for determining whether the plan of reorganization complies with the purposes of the bankruptcy law and provides for fair and equitable treatment of all parties in interest.

Some contracts, known as executory contracts, may be rejected if canceling them would be financially favorable to the company and its creditors. Such contracts include labor union contracts, supply or operating contracts (with both vendors and customers) and real estate leases. The standard feature of executory contracts is that each party to the contract has duties remaining under the contract. In the event of a rejection, the remaining parties to the contract become unsecured creditors of the debtor.

Chapter 11 is reorganization, as opposed to liquidation. Debtors may "emerge" from a chapter 11 bankruptcy within a few months or several years, depending on the size and complexity of the bankruptcy. Debtors in Chapter 11 have the exclusive right to propose a plan of reorganization for a period of time. After that time has elapsed, creditors may also propose plans. Plans must satisfy a number of criteria in order to be "confirmed" by the bankruptcy court.

Among other things, creditors must vote to approve the plan of reorganization. If a plan cannot be confirmed, the court may either convert the case to a liquidation under Chapter 7, or, if in the best interests of the creditors and the estate, the case may be dismissed, resulting in a return to the status quo before bankruptcy. If the case is dismissed, creditors will look to non-bankruptcy law in order to satisfy their claims.

As with other forms of bankruptcy, petitions filed under Chapter 11 invoke the automatic stay of § 362. This requires all creditors to cease collection attempts and makes post-petition debt collection void. Under some circumstances, creditors or the United States Trustee can ask the court to convert the case to a liquidation under Chapter 7 or to appoint a trustee to manage the debtor's business.

The court will grant a motion to convert to Chapter 7 or appoint a trustee if either of these actions is in the best interest of all creditors. Sometimes a company will liquidate under Chapter 11, and the pre-existing management may be able to help get a higher price for divisions or other assets than a Chapter 7 liquidation would be likely to achieve. Appointment of a trustee requires some wrongdoing or gross mismanagement on the part of existing management, and is relatively rare.

Although bankruptcy is a last resort, it can sometimes keep your business afloat during times that would otherwise cause closure.



By: Justin H. Dion, Esq.

Today's $13.4 billion dollar auto industry bailout - what it means

Today the Bush administration, with praise from President-elect Barack Obama, announced an emergency bailout of American auto makers, General Motors, Inc. and Chrysler, LLC, to the tune of $13.4 billion dollars, with another $4 billion possibly coming. These funds are coming from the first 350 billion that was approved for the massive nationwide bank bailout. Similar to the terms of those recent “loans” to so many U.S. banks, the delivery of these badly needed funds gives the feds the option of becoming a major stockholder in each of these companies, in part possibly nationalizing the domestic car industry as well.

Ford has not requested or accepted bailout money, indicating that such drastic measures are not needed at this time.

These bailouts are contingent on each company coming up with a plan for major restructuring and making it a viable business operation by March 31, 2009. If this is not accomplished, the “loans” will have to be paid back, which would most likely lead to ruin for each. Without the bailouts, it appears both manufacturers would be in line for massive bankruptcies and liquidation much sooner than that. This seems to be one last chance prior for each to create a productive and profitable future.

One of the big issues to look out for will be how the powerful unions might come together with the auto makers and make necessary and significant sacrifices now in order to give the companies and their families a chance to keep their jobs in the future. Everyone from the highest white-collar managers on down the ladder is expected to be affected by the restructuring.

During less extraordinary economic times, these bailouts would be much more controversial and would lead to massive partisan battles and infighting. Particularly given the fact that we are engaged in two expensive foreign wars, at any other time, we could expect outrage at such unheard-of assistance to any industry.

My personal instinct is still to feel some outrage at all of these enormous bailouts, but I think I feel as most others do…letting the banking and auto-manufacturing industries completely fail would greatly compromise everything we are and believe in as Americans. Today, while making headlines, this bailout and subsequent indentured servitude of sorts seems par for the course and predictable: there simply appears to be no other reasonable alternative.

Were the government to abandon the auto industry today and allow its collapse to devastating effect, no doubt the U.S.’s economic horizon would become significantly gloomier than it already is. President Bush indicated today that "It would worsen a weak job market and exacerbate the financial crisis," and could “…send our suffering economy into a deeper and longer recession." At this juncture, it’s hard to argue that point.

by: Greta LaMountain, Esq.

Tribune Co. filed for Chapter 11 protection on December 8, 2008

The publishing empire of the Tribune Co. was forced to seek protection under Chapter 11 on 12-8-08. The Delaware filing listed assets of over $7.6 Billion, and debts of $12.9 Billion. The largest creditors include JP Morgan Chase, Deutsche Bank, AG, Angelo Gordon & Co and KKR Financial Corp. The company is a huge media giant, led by Samuel Zell, which has eight major newspapers and a large number of regional television stations. It also owns the Chicago Cubs baseball team. The well-known papers include the Chicago Tribune, Los Angeles Times, Hartford Courant, Baltimore Sun, Orlando Sentinel and the Sun Sentinel of Ft. Laudedale, FL.

Zell attributed the filing to the approach of some major debt payments that were going to hurt the company’s cash flow, but other media reports indicate that notwithstanding Zell’s investments of over $300 Million last year, the Tribune Company’s debts ballooned and advertising revenue had been shrinking due to the weak economy and the shift of media ads to less-traditional outlets. This Chapter 11 filing is likely the first of many in the newspaper industry.

by: Michael B. Katz, Esq.

Bankruptcy filing statistics for the 12 months ending 6-30-08

In the District of Massachusetts, a total of 15,047 bankruptcy cases were filed in the 1-year period commencing on 6-30-07 and ending on 6-30-08.  In breaking down those numbers, a total of 10,643 cases were filed under Chapter 7; 154 cases were under Chapter 11;  3 cases were filed under Chapter 12;  and 4246 were Chapter 13 cases. 

In examining the breakdown of those cases between consumer and business cases, only 334 cases of the total were for businesses, and of those cases, they were distinguished into 184 Chapter 7, 134 Chapter 11,  3 Chapter 12 and  12 Chapter 13 cases.

Filings in every category but Chapter 12 and Chapter 11 remain strong, and it is expected that this quarter, ending 12-31-08, will show a growing number of cases being filed. The increase in filings is expected to continue to increase through 2009.


by: Michael B. Katz, Esq

State court judgment for sexual harassment found to be nondischargeable in subsequent bankruptcy filing.

The US Court of Appeals in the 8th Circuit has ruled in the case of Sells vs Porter (50 BCD 124) that that they would uphold the Bankruptcy Court's determination that the injured employee's state court judgment against her bankrupt employer was a nondischargeable debt under Section 523(a)(6) of the Bankruptcy Code.

In this case, the plaintiff female employee was sexually harassed by another owner of the business, but the harasser's partner, who later filed bankruptcy, knew of the actions, and increased the problem by both condoning the actions and subsequently retaliating against the employee by firing her for complaining about the actions.

The partner who filed bankruptcy expected that he would be able to avoid liability by obtaining a Chapter 7 discharge of the damage claim, but was found by the state court jury to have acted willfully and maliciously against the plaintiff in threatening to fire her unless she signed a written document that stated that the activities that occurred were of a "consensual nature."

Here, both the Bankruptcy Court and the US Court of Appeals determined that the case had been "actually litigated" and that they were going to use the doctrine of collateral estoppel to determine that the elements of making this award non-dischargeable had been met by the injured party, and therefore the debtor could not use the bankruptcy filing to avoid personal liability for the awarded damages.


By: Michael B. Katz, Esq.