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Boston, MA 02116
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Revere, MA 02151
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Quincy, MA 02169
Phone: 617-716-0282
Email:
attorney@bkmass.com
 Experienced, Effective, and Affordable Consumer and
Business Bankruptcy Lawyers
Main Office two blocks from MBTA Copley Stop in
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Chapter 11 Bankruptcy for Businesses in Massachusetts
The Basics:
Chapter 11 is not cookie-cutter.
There are a lot of variations in what a Chapter 11 can be used for and what it can look like.
First of all, a Chapter 11 is usually used to reorganize or sell a business or
its assets. As I wrote on the
main business bankruptcy page, the key question is whether the business can
reorganize it's balance sheet and be viable as a business. Chapter 11 cannot
create revenue for the business, but it might be able to free up cash dedicated
to debt service and allow for the rejection of certain disadvantageous contracts
or leases. We'll look at a few scenarios after laying out the basics.
Why File Chapter 11?
Chapter 11 bankruptcy is usually predicated on a cash crunch. The business may be in work-out mode with creditors or it may
see imminent default on the horizon. The business
has a duty to all stakeholders to enter into some sort of plan to stop the company from
being torn to pieces by creditors. When work outs and negotiations fail,
that plan usually ends up being bankruptcy.
Can Owners Keep the Company in Chapter 11?
The answer is, maybe. There is an important provision of the
Bankruptcy Code called the "absolute priority rule." The absolute priority
rule prohibits business owners from bankrupting a business, shedding its debt, and
walking away with the value of the business--contrary to some myths about business bankruptcy. If you think about the news about big, corporate bankruptcies,
it will make sense to you: new stock is always issued after the company emerges
from bankruptcy, i.e. the original owners have their equity interests wiped out.
There are exceptions to this, however, and sometimes the original owners can
end up owning the reorganized debtor. This usually happens in one of three
ways:
- All impaired classes of creditors vote to approve the Chapter 11 plan.
An affirmative vote of a class does not require unanimity, but it does require
that 2/3 of the dollar amount and one half of the number of claims in the
class vote in favor.
- All debts are paid in full in such a way that there are no impaired classes of claims.
- The owners buy the stock of the reorganized debtor under the plan or
successfully bid for the business assets at a court-approved sale.
We have experience with the type of Chapter 11 plan that results in the
original owners emerging as the new owners of the reorganized entity.
Why Would Owners Ever File Chapter 11 if They Couldn't Keep Their Company?
Even if there is no chance of getting creditor acceptance and owners cannot afford or
do not want to buy back their business,
it often makes sense to file Chapter 11 for a business when faced with the
alternatives. There are two main alternatives.
- Continue to attempt to avoid bankruptcy by negotiation. It is
sensible to try this for a time, but sound judgment must be employed in
determining when the business must conserve cash and use its available time to
seek bankruptcy protection. Usually this coincides with some actual or
threatened litigation.
- File Chapter 7 for the business. The business assets will be sold by
a trustee at a bankruptcy "garage sale." Upon filing, the business
owners immediately lose control of the company. The plus side of Chapter
7 for the business is that it is relatively cheap in terms of legal fees, and
it requires less time and energy on the part of business owners.
Running a company while engaged in debilitating (and doomed)
litigation or participating in endless workout meetings with little leverage is
no way to live. It is also not consistent with the company's duty to its entire
creditor body. First of foremost, Chapter 11 imposes a stay on lawsuits and other collection
activities. It also allows the business owners to stay in charge and draw
salaries while exploring the full range options in Chapter 11, which could
include a sale, reorganization, liquidation, or a combination of these. Chapter
11 also sometime allows business owners to limit their own personal liability by
ensuring that certain debts like wages and taxes are paid. So even
in cases in which the chance that the owners will keep their stock is slim,
Chapter 11 is usually the best of several bad alternatives.
What Happens after Chapter 11 Bankruptcy is Filed?
If you do things right, you stay in charge and run the business as a debtor in possession (DIP). If you do things wrong or have
been operating the business in a problematic manner, a trustee may be appointed to run the business. In most cases,
however, the debtor
continues to operate as a
DIP and its existing owners stay in charge.
There are many procedural and substantive matters to attend to early in a Chapter 11 case, such as motions to employ estate professionals, motions
to use cash collateral and DIP financing, and motions to pay certain pre-petition creditors. DIP bank accounts must also be opened and a procedure
set in place to make monthly operating reports to the U.S. Trustee.
A Chapter 11 Plan
There are quite a few options for what you might attempt in a Chapter 11 bankruptcy. They can involve the sale of all or part of the business and/or
a restructuring of the business balance sheet by reducing the amounts owed on debts. However, the Chapter 11 plan (and
accompanying Disclosure Statement)
is an original document drafted by your attorney and submitted to creditors for voting and, later, to the Court for approval. If the plan
"impairs" any creditor class, the plan must be approved by at least one of the impaired classes. A class of claims approves a plan
if more than a half of the claimants and more than 2/3 of the total dollar amount of the class votes in its favor.
Emerging from Bankruptcy
Once a Chapter 11 plan is confirmed and a few other loose ends are tied up, a business emerges from bankruptcy (unless it is a liquidating Chapter 11 plan). The "reorganized debtor" is
once again free to conduct its own affairs without Court supervision. The duties
that the reorganized debtor has taken on under its plan, such as paying
pre-bankruptcy creditors a partial dividend on their claims, must be performed,
but a reorganized business is often seen as healthy and a good credit
risk going forward.A Brief Word about Personally-Guaranteed
Business Debt
Personally-guaranteed debt is a big problem for small business owners when
the business goes south. Although certain debt payments can be
reversed
as bankruptcy preferences depending many factors, including when a business
ends up in bankruptcy after the payments, business owners sometimes find it
beneficial to pay down personally-guaranteed business debts before a
bankruptcy out of business assets. It really pays to retain an attorney
as soon as possible in this situation.
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