Archives for August 2012

Getting a business loan requires planning

A recent article in the New York Times underscores that getting business loans requires thought and planning. http://boss.blogs.nytimes.com/2012/08/16/when-looking-for-a-loan-you-cant-fight-gravity/. More times than I can count, business people have come to me because they put their homes and future income up to obtain a loan for a business that later began failing. Sometimes the loans are used to pay the owners salaries, so that they are in effect borrowing to pay themselves!

Before getting any loan for a business, the owners need to have a plan how the loan is going to be paid back. If the loan is being used to keep the doors open instead of expanding or investing in making the business better, this is a big red flag.

One banker recently confided to me that banks are competing to sign up customers, but the customers they are chasing are the cream of the crop. Otherwise they are not interested. To get the best terms, you the business owner need to make your business model attractive. This requires  well-thought-out planning supported by realistic projections and solid data.

In these tough times, the businesses that survive will be the ones that thrive. Make yours one of the success stories.

For more about avoiding or dealing with business problems, take a look at our website and blog.

The continuing obligation to accurately list all claims and property in bankruptcy: what you do not list can cost you plenty.

In a bankruptcy, I often tell clients they are entering a “fishbowl” in which they have to list and disclose all property. Not doing so can get debtors in plenty of trouble. When what is not listed happens to be a valuable lawsuit, non disclosure can also cost them and the unfortunate attorneys who handle such claims plenty. This is the message from two recent Circuit Court cases, Guay v Burack, 677 F.3d 10 (1st Cir. 2012), and Love v. Tyson Foods, Inc.  677 F.3d 258 (5th Cir,2012). In both cases, a failure to list pending lawsuits in a timely fashion caused the courts to dismiss those suits, under the doctrine of judicial estoppel. In both cases, the debtors in bankruptcy did disclose the lawsuits, but in both cases, the courts held that “too little, too late” was not enough to save the day.

In Guay v Burack, the debtors initially filed under Chapter 11. While they were in Chapter 11,  police executed search warrants and caused alleged damage to their property. Their case was converted to Chapter 7, and 3 days later, Mr. Guay filed a pro-se civil rights suit in federal court. His wife followed with a similar suit. The Guays did not list these claims in their original bankrutpcy filing because the incidents had not occurred. However, they were required to amend to list them, and were later ordered to do so. Instead, they refused, and in fact filed affidavits stating that there was no need to do so as their original papers were accurate. Even though the Chapter 7 trustee learned about the suit and later abandoned the claim as not being of sufficient value, the courts held that judicial estoppel required that their complaints be dismissed, as they had taken inconsistent positions in the bankruptcy and district court, playing “fast and loose” with the system. Interestingly, the suits were not a secret for very long. At the First Meeting of Creditors, the debtors disclosed the existence of the suits to the Chapter 7 trustee, but only after being questioned by counsel appearing for the State of New Hampshire. The Trustee later gave up the claims by filing an abandonment.

In Love v Tyson Foods, Mr. Love filed a federal suit alleging violations of his civil rights and employment discrimination, while he was a debtor in a pending Chapter 13 case. Love did not disclose his claims against Tyson and affirmatively stated “NONE” on Schedule B, item 21, which required the identification of “[o]ther contingent and unliquidated claims of every nature.” On September 22, 2008, the bankruptcy court confirmed Love’s Chapter 13 plan, which did not mention the then-pending EEOC matter and provided that Love’s unsecured creditors would receive no payment. Only after Tyson moved to dismiss the lawsuits did Love file amendments listing these assets. By that time, his Plan had been confirmed. He never moved to amend it to make any money from the lawsuit available for his creditors. The District Court and later the Circuit Court agreed that this was “too little too late”, and that under the circumstances, judicial estoppel should result in the suits being dismissed.

Debtors in bankruptcy have a continuing duty to disclose assets and claims such as these, in the Schedules they file with the bankruptcy court. Disclosure should include assets acquired or claims that arose while a debtor is in Chapter 11 or Chapter 13. Not doing so, these courts emphasize, is playing with fire.

Judicial Estoppel is a doctrine that punishes those who say one thing in one court, and say something materially inconsistent in a later proceeding, in bad faith. Where once a court has accepted the position asserted and acts on that position, a litigant cannot “play fast and loose” by then taking a different position in another court to gain some advantage or with a motive to do so.

Attorneys who handle these types of suits for debtors in bankruptcy have to be careful as well. The risk of judicial estoppel dismissal is only one of the risks or issues presented. Early consultation with experienced bankruptcy counsel is essential.

Bankruptcy & Law Suits

Doing business with businesses in Chapter 11 and trustees in bankruptcy-the importance of getting paid and knowing the ropes

We often counsel businesses that are asked to perform services for a company in Chapter 11 bankruptcy or a trustee for a debtor. Our advice is simple. Make sure you have the proper paperwork and watch that you get paid. A recent decision out of the New Jersey Bankruptcy Court, In re Livore, 2012 WL 2400469 (2012)  underscores this. Mr. Livore owned several apartment complexes. He started in Chapter 11 but soon found himself in Chapter 7. The Chapter 7 trustee decided it was going to be profitable to run these apartment complexes and got section 721 court authority to do so, evidently thinking the complexes could managed,  and sold as a going concern with money left over for creditors. He hired a property management company and real estate brokers. He paid the management company’s bills in the ordinary course of business and paid brokers upon sale of some of the properties. After all that, he found that, contrary to expectations, there would not be enough money left even to pay his fees and expenses, and other “administrative expenses”. Under the Bankruptcy Code, all persons with “administrative claims” for goods or services supplied after the bankruptcy filing that benefit the bankruptcy estate being administered are supposed to be paid first, and if there is not enough money to pay them all, they are all supposed to receive the same pro-rata percentage of the funds available. So the Trustee filed a motion asking the court to order the management company to refund some of the money they got paid because on a pro-rata basis in hindsight, the management company had been overpaid, leaving less money  to pay everyone else with administrative claims, including  the trustee’s attorney and his accountant,   the US Trustee and others.

Chief Judge Wizmur denied the motion, saying in essence that when a trustee (and by extension any Chapter 11 or Chapter 13 debtor) hires someone in the ordinary course of business under authority granted under the Bankruptcy Code, the money paid to such people on an ongoing basis is theirs to keep, and cannot be “clawed back” to “even the pot” for other people who provided services but were not paid. She relied on Bankruptcy Code section 549 which describes when and how a trustee can recover unauthorized post-petition transfers. That section, she said, limited the trustee’s rights to recover payments made post petition to those that were made without court approval or contrary to bankruptcy code authority.  Since the property manager here was not a “professional” and the trustee had hired and paid him in the “ordinary course of business” after receiving the required court approval to operate the apartment buildings as a business, his doing so was authorized under Bankruptcy Code section 363(c)(1).

This decision is well supported. It is good news for most people who get paid by a Chapter 11 or Chapter 13 debtor or a trustee while a bankruptcy is ongoing. It is not good for those who let unpaid bills mount or who do not get the proper court authorization before doing work or supplying value.

The latter group includes those who provide “professional” services, such as brokers, accountants, lawyers and auctioneers. They still have to make sure that the trustee gets court approval of their employment right at the outset. Judge Wizmur opined that the property manager’s role did not rise to that level.

Anyone who deals with debtors in bankruptcy or their trustees needs to know what is required. At a minimum, a written agreement, and a careful understanding of the legal basis for being hired is critcal, as is prompt billing and payment. One interesting note: had the Trustee engaged the property manager with a written contract that preserved the trustee’s right to “clawback” payments made so as to give all administrative claimants the same treatment, the result might have been different.

 

Credit is a two-edged sword: Businesses, like people, have to be careful how they use it

This article in the August 2, 2012 New York Times, http://www.nytimes.com/2012/08/02/business/smallbusiness/for-small-businesses-bank-loan-alternatives.html?_r=1 details how businesses can borrow money from more expensive sources than bank loans, but at much higher cost. It is informative, but it should remind us all that credit is a two-edget sword. Used properly and with proper planning it can help us thrive but used carelessly it can destroy hard earned success and impose a blight on the future.

Too often we have seen business people who used debt, including factoring or asset based lending (described in this article) to paper over more serious problems. If a business wants or needs to borrow, the first questions have to be “why do we need this?” and “how are we going to pay it back?” If borrowing is used to invest in improvements to business operations, or to expand into a profitable new area, it can be the germinator of future success. But if new debt is being used to pay the owners or carry the business, caution is necessary. Too often we have seen businesses that “kicked the can down the road” by borrowing in this way. Sooner or later the day of reckoning comes.

As with anyone using credit, thought and planning is critical. Business owners need to carefully evaluate present and future cashflow. Evaluate how the new money is going to be used, and balance the benefit against the cost. If a business is losing money, borrowing to make up the loss will simply accelerate the losses. Consideration should be given to reducing expenses before borrowing more.

And throughout this process, the best money a business owner may spend is for accounting or legal advice from professionals experienced in business and turnaround issues. No matter the situation, it always helps to understand all the issues and alternatives, including use of Chapter 11 bankruptcy, or bankruptcy alternatives such as business workouts or assignments for the benefit of creidtors.

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