When facing business bankruptcy, act early to allow flexibility
Jeff Zbar | April 12, 2003
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In a career spent helping business clients navigate the intricacies of bankruptcy filings, restructurings and liquidations, attorney Peter Russin remains confounded by one reality: the number of executives caught off-guard by the demise of their business who come to him seeking 11th-hour guidance.
It could be a retailer or hotelier facing action from lenders, or a real estate developer who finds himself subject to a foreclosure action — sometimes within days.
“This, of course, really limits what we’re capable of doing,” said Russin, a shareholder with Meland Russin & Budwick. The boutique Miami law firm focuses on corporate restructuring, workouts, bankruptcy and commercial litigation.
“As you go back in time in the process, the flexibility of what a law firm can do increases,” he said.
Business owners saw tough times during the recession, but many seem to be on the mend. Commercial bankruptcy filings totaled 57,788 in 2012, according to the American Bankruptcy Institute. That represents a 22 percent drop from the 74,415 bankruptcies filed in 2011.
Bankruptcy filings stem from a number of issues. One is overleveraging — companies taking on too much debt despite a reduction in income, said C. Scott Pryor, a resident scholar with the American Bankruptcy Institute and a professor of commercial law at Regent University Law School in Virginia. Now, with the recovery underway, executives are shoring up balance sheets by reducing debt and taking on less new debt, he said.
“What has happened since the financial crisis and the lead-up, businesses and individuals have deleveraged,” said Pryor, whose private practice has participated in bankruptcy, insolvency and out-of-court workouts on behalf of creditor and lender clients. “They’ve used money to pay down debt, rather than using money to expand with a new factory or plant.”
Preventing balance-sheet woes that often presage a bankruptcy filing requires business owners and financial executives to be attuned to all market conditions, said Russin, a past president of the Bankruptcy Bar Association of the Southern District of Florida. It also may mean an entrepreneur must defy character traits such as optimistic risk-taking.
“Delay is an unwillingness to recognize the truth of their situation,” he said.
Such unwillingness in the face of a loan default reduces a debtor’s flexibility to respond, especially if the goal is to negotiate an out-of-court settlement rather than enter Chapter 11 reorganization or Chapter 7 insolvency.
Sometimes, bankruptcy isn’t the only option. A company can seek an out-of-court restructuring in which the debtor works out payment plans with various creditors. Another option is an assignment for the benefit of creditors, known as ABC or state court liquidation. Governed by state law instead of federal bankruptcy law, ABC often requires no court filings; the business must select an independent assignee to whom all assets will likely be transferred.
A final — and, to some, the least palatable — option is to do nothing at all, some attorneys say. Letting the company dissolve administratively won’t have the courts monitoring the process. Still, this carries risks, including leaving the principal to fend off various creditors.
If the principal were to open a similar business, he also could be subject to “alter ego” or successor liabilities. These seek to prevent a business owner from forming a company, running up debt, shuttering it, then opening a similar company.