I’m Eric Lanigan with Lanigan and Lanigan attorneys in Winter Park.
Florida, I’m going to talk for a minute about some fundamentals of Chapter 11 Bankruptcy.
And generally speaking Chapter 11 bankruptcies are associated with businesses.
You’ll read about it an airline goes into bankruptcy it’s almost always a Chapter
11 because as you notice they don’t disappear, they keep operating that’s what Chapter
11 is somewhat all about.
Chapter 11 can also be used by individuals because Chapter 13 bankruptcy which is for
individuals who want to reorganize their debt and enter into a payment plan has certain
ceilings of maximum amount of debt that you can have in a Chapter 13.
And if you go above that ceiling then you’re going to have to go into Chapter 11 which
is more complicated more hands on.
So let’s talk about the fundamentals of Chapter 11.
I think the one thing that probably gets everyone from a major airline right down to a small
business into a Chapter 11 is that they become aggressively hounded by certain creditors
and they don’t have the ability to pay them and those creditors have the ability on any
given day to put them out of business by levying on property garnishing bank accounts they’re
out of business.
And if you represent creditors you’re always concerned about racing to the money.
Because the second creditor to get to the pot of gold finds that the pot of gold is
empty.
So the creditors will typically be racing to see who can get to the money first and
be very aggressive.
That’s when a Chapter 11 comes into play because when you file a Chapter 11 someone
will say what’s the most fundamental thing that will happen?
I would say, my answer would be that creditors lose their individual collection rights.
They are now dealing there are no longer individual creditors they are now dealing with the bankruptcy
estate which is operating for the benefit of all creditors.
So the business continues operation and all similarly situated creditors are treated the
same.
So there’s no longer this creditor being highly aggressive and they’re going to put
me out of business tomorrow.
No they’re not.
Because now they’re under the control of the bankruptcy court and they’re all treated
collectively.
And when the bankruptcy is filed, just like a Chapter 7 bankruptcy for an individual or
a Chapter 13 bankruptcy in Chapter 11 an automatic stay or an automatic freeze goes into effect.
All collection activity literally stops.
Literally if someone files a bankruptcy and they’re loading the cars up on the tow truck
to take them away they have to stop and put them down.
So everything stops and basically the purpose of that is to give the debtor some breathing
room to try to get things reorganized without getting things picked up bank accounts garnished
each day you can’t operate a business in that manner.
So the automatic stay goes into effect everything stops.
Another fundamental issue of the Chapter 11 bankruptcy is what we call The Debtor in Possession.
And where that the debtor in possession comes about is if a company were to go into bankruptcy
and the bankruptcy law was written such that immediately some outsider, a court appointed
trustee is going to come in and run the business there’s two real problems with that.
First of all that’s a very expensive proposition especially if you get into some of the larger
companies.
That they’re already in Chapter 11 because they’re cash strapped.
So the last thing on earth that the business can afford is to bring in a whole new management
team that’s very expensive.
Another fundamental point is if that were to occur, not only would it be expensive,
prohibitively expensive but it would probably almost certainly cause the business to immediately
collapse.
Because all the relationships between existing managers and customers, existing managers
and employees would all be gone.
And this trustee or management team would be coming in in an almost impossible situation
and I think would virtually doom any business that was forced into that position.
Therefore the law keeps the existing owner management team in place to operate the business
is what they call the Debtor in Possession of the business.
Now they run under court oversight and supervision.
Basically they run the business for the benefit of the creditors subject to the court’s
supervision.
The Debtor in Possession they run the business they examine the creditor’s claims and they
even decide which claims they think should be paid and which ones should be opposed in
court.
A Debtor in Possession can be removed for cause.
It has to be fraud, dishonesty or gross mismanagement.
No just mismanagement, gross mismanagement.
That’s a heavy burden in any type of legal situation.
So there’s a good likelihood that if the Debtor in Possession follows the basic rules,
does the basic reporting that they will stay the Debtor in Possession and continue to run
the business throughout the Chapter 11 bankruptcy.
Sometimes there can be a middle ground where the court would appoint what is referred to
as an examiner.
It’s not somebody brought in to run the team but someone to come in to do an in-depth
review or examination of the Debtor in Possession activities and to report if they find anything
untoward or should not be going on.
So you hate to say it to a client but the bottom line was if you’d only been here
a year ago when all of this litigation started going bad, and realize that it had to get
cut off and get this into a different court, none of this would of happened.
But because it was too late we’re stuck in a straight jacket and basically the case
was almost basically doomed from the beginning.
So don’t wait.
If the business is going south get into a lawyer’s office that knows something about
a Chapter 11.
Discuss your situation.
Determine whether or not it’s time to file.
Or if not, what can be done to avoid or to deal with a creditor and possibly even to
avoid filing a Chapter 11.
And again I’m Eric Lanigan Lanigan and Lanigan attorneys in Winter Park Florida.