Chapter 11 for the Smaller Guys. Until very recently, filing for Chapter 11 reorganization was a tool for larger businesses since the process is expensive and time consuming while the Debtor corporation seeks to negotiate deals with suppliers, utilities, service providers and other creditors. However, on February 19, 2020, the Small Business Reorganization Act (“SBRA”) was passed by Congress.  The intent of the legislation is to afford the same restructuring benefits to smaller businesses that could still be profitable but are not large enough to handle the costs associated with a typical Chapter 11 filing. The SBRA is set out in sub-chapter v of Chapter 11 of the Bankruptcy Code.   Originally, to qualify for the small business provisions, the total amount of non-contingent, liquidated debts of the corporation, both secured and unsecured, could not exceed $2,725,625.

Enter COVID-19. To address the impact of the COVID-19 virus on small businesses, Congress amended the SBRA on March 27, 2020 as part of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The amendment raises the debt limit from $2,725,625 to $7.5 million for a one year period, after which the limit goes back down to the original amount absent further action by Congress. As a result, this fast and much easier process through Chapter 11 now covers a substantially greater number of firms, many of which are family owned enterprises that are struggling with lost revenue and creditor pressure from quarantines and business closures. Assuming the business has good prospects to survive and prosper if it can shed a substantial portion of debt owed creditors, and “out of court” negotiations have a low probability of quick success, a small business chapter 11 filing may be an excellent tool for a clean start.

High Speed, Low Cost. The main benefits of the amended SBRA, unlike the usual Chapter 11 cases involving larger businesses, include (i) the absence of a large retainer required by the company’s bankruptcy counsel, (ii) likelihood of no appointment of a creditors committee, who come with expensive lawyers and financial advisors to investigate and negotiate with the debtor, (iii) the ability of existing ownership to retain its ownership after emergence from bankruptcy even while paying creditors a fraction of the amounts owed to them from “disposable income”, (iv) no requirement that impaired classes of creditors to vote to approve the plan, (v) no ability of a creditor to file its own “hostile” plan of reorganization or liquidation since only the company may file the Chapter 11 plan, (vi) no fees payable to the United States Trustee and (vii) the ability to pass through Chapter 11 very quickly, because the plan must be filed within 90 days after the bankruptcy case is started.

Plan of Attack. This is the perfect time for small businesses to meet with their legal advisor to see if a small business filing is advisable. Clients should be prepared to discuss the formulation of income and expense projections to determine the amount of disposable income of the company that must be committed for creditor repayments. Disposable income excludes the expenditures for the continuation, preservation or operation of the business of the company. Also, your advisor will work with you to prepare a brief history of the business operations of the company and a liquidation analysis, both of which are included in the reorganization plan, as well as the other filing requirements.

Leaner and meaner. If successful, a small business reorganization can eliminate crushing debt that cannot be serviced outside of bankruptcy.  It will result in a full discharge of creditor claims in exchange for repayment over 3 to 5 years of an aggregate amount that is much less than the amount of pre-bankruptcy debt owed to creditors. A cleaner balance sheet allows for revenue to be used to continue operations, grow the business and avoid having to borrow for these purposes.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

First, do no harm.  The shutdown of businesses by government order was sudden.  Most companies were unprepared.  Decisions made quickly that are not carefully thought through can create liability down the road that make it harder to turn the company around once businesses start operating again.  For instance, the Workers Adjustment and Retraining Notification Act (the “Warn Act”) requires employers with 100 or more employees to provide 60 days written notice before laying off 50 or more employees during any 30-day period.  Some states have more stringent Warn Acts.  For instance, the New York Warn Act applies more strictly to companies with 50 or more employees who lay off 25 or more employees in any 30-day period.

Cash is Everything.  It’s important to make a plan to conserve cash and cut expenses.  Cancel orders that can be canceled and consider terminating burdensome contracts.  Much inventory will be outdated by the time business turns back on; consider returning inventory or selling it wholesalers to recoup cash.

While you are getting your arms around your outflows, you need to understand your inflows.  Scour the books for accounts receivables that can be collected.  Focus on the larger accounts and do what you can to get those obligations paid.

Create a Cash-Flow Model.  Create a 13-week cash flow model considering how much cash you have; how much will come in near term; and how much you need to operate.  Consider your expenses carefully – are there expenses that can be pushed to third quarter?  Many companies are moving to a “mothball budget”.  What will it cost to turn out the lights and shut it all down for the duration of the pandemic?  Also, what will it cost to turn it back on or maintain equipment?

Understand Your Options.  Assuming your business is like almost every other business in America, you are accumulating operating expenses with little to no revenue.  You may be able to weather the storm in the short term, but no matter what, you are borrowing from tomorrow to pay for today.

  • Gather your important documents. You are going to need them.  Loan documents, insurance policies, important vendor agreements and similarly important customer agreements.  These documents will be critical as you form a plan to weather this storm.
  • Draw the Revolver. If you have an available bank line, now is likely the time to draw it down.  Better to have the cash on hand than risk the bank terminating the line when you need it.
  • Cares Act of 2020. Try to understand your options under the CARES Act of 2020.  There are a lot of loan options built into the CARES Act for small businesses.  But don’t assume it’s your salvation.  There are limited options in the Cares Act for insolvent companies.
  • Review your insurance policies. A few states are considering retroactive laws to require business interruption insurance to cover the pandemic.  Review your policy carefully and determine if there is an argument to made for coverage.
  • Negotiate with the Banks. Don’t be afraid to call the bank and ask for a loan modification.  The CARES Act of 2020 has several provisions that allow a bank to modify the loan without complying with the GAAP requirement to recharacterize the loan as a troubled debt restructuring.  Moreover, the FDIC is encouraging banks to provide short term repayment relief by simply extending the maturity date on loans that go unpaid during the pandemic.
  • Negotiate with your landlords. Don’t be afraid to ask for an extension or a grace period.  Many landlords will negotiate with you.  It’s better to have a tenant paying something than an empty store front or warehouse.
  • Negotiate with your vendors. When you open the ledger and review the list of trade creditors to whom the business owes money, the thought of calling them to negotiate terms can be daunting.  It’s important to remember that as a general rule, 80% of your accounts payable will be owed to 20% of your vendors.  In that same line of thinking, if you owe a creditor a small amount, you are probably not a high priority for them as they seek to collect on their own accounts receivable.  Focus on the big dollar obligations and working with these creditors to make a plan.  Don’t be afraid to show them the budget you prepared with the cash flow projections.  If you want to get concessions, the creditor will want to know he or she is not being hood winked.  If you have been a good customer, the creditor will want to work with you.

Upcoming Committee Formation Meeting: Wednesday, March 18, 2020

Case Name: 20-10553 (CSS)

Location: Sheraton Suites 422 Delaware Avenue Wilmington, DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here. See the petition for relief.

Cole Schotz does not represent the Debtor in this case. We are posting this for informational purposes only. If you have received a notice and have any questions, you should contact Debtor counsel.

On March 9, 2020, Art Van Furniture, LLC, filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Lead Case No. 20-10553).  The Debtor reports assets and liabilities both in the range of $100 to $500 million and estimated 50,000 to 100,000 creditors. The Debtor estimates that funds will be available for distribution to general unsecured creditors.

Cole Schotz does not represent the Debtors in this case. We are posting this for informational purposes only. If you have received a notice and have any questions, you should contact Debtors’ counsel.

On March 9, 2020, Bluestem Brands, Inc., filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Lead Case No. 20-10566).  The Debtor reports assets and liabilities both in the range of $500 million to $1 billion and estimated creditors over 100,000. The Debtor estimates that funds will be available for distribution to general unsecured creditors.

Cole Schotz does not represent the Debtors in this case. We are posting this for informational purposes only. If you have received a notice and have any questions, you should contact Debtors’ counsel.

Upcoming Committee Formation Meeting: Wednesday, March 11, 2020

Case Name: 20-10475 (BLS)

Location: Sheraton Suites 422 Delaware Avenue Wilmington, DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here. See the petition for relief.

Cole Schotz does not represent the Debtor in this case. We are posting this for informational purposes only. If you have received a notice and have any questions, you should contact Debtor counsel.

On March 4 , 2020, Lucky’s Farmers Market of Lexington, KY, LLC, filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Lead Case No. 20-10514).  The Debtor reports assets in the range of $500,000 to $1 million and liabilities in the range of $10 million to $50 million and estimated 1 to 49 creditors.  The Debtor estimates that funds will be available for distribution to general unsecured creditors.  The case has been assigned to the Honorable John T. Dorsey.

Cole Schotz does not represent the Debtors in this case. We are posting this for informational purposes only. If you have received a notice and have any questions, you should contact Debtors’ counsel.

On March 3, 2020, CraftWorks Intermediate Co, LLC, filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Lead Case No. 20-10474).  The Debtor reports assets and liabilities both in the range of $100 to $500 million and an estimated 1,000 to 5,000 creditors.  The Debtors estimates that funds will be available for distribution to unsecured creditors.

Cole Schotz does not represent the Debtors in this case. We are posting this for informational purposes only. If you have received a notice and have any questions, you should contact Debtors’ counsel.

Upcoming Committee Formation Meeting: Wednesday, March 11, 2020

Case Name: 20-10417 (BLS)

Location: Delaware State Bar Association 405 King Street, 2nd Floor Wilmington, DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here. See the petition for relief.

Cole Schotz does not represent the Debtor in this case. We are posting this for informational purposes only. If you have received a notice and have any questions, you should contact Debtor counsel.

On February 26, 2020, Suitable Technologies, Inc., filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Lead Case No. 20-10432).  The Debtor reports assets in the range of $10 million to $50 million and liabilities in the range of $50 million to $100 million and estimated creditors of 200-999.  The Debtor anticipates that funds will be available for distribution to unsecured creditors.  The case has been assigned to the honorable Mary F. Walrath.

Cole Schotz does not represent the Debtors in this case. We are posting this for informational purposes only. If you have received a notice and have any questions, you should contact Debtors’ counsel.