Articles Tagged with Restructuring Community

Published on:

You have fresh goods delivered to your largest customer daily, as has been the case for as long as you can remember.  You noticed over the last few months that payments have become less frequent—weekly instead of twice weekly—and occasionally have been paid over a week late.  On top of that, rumor in the industry is that your customer is suffering liquidity problems and may ultimately file bankruptcy. So, what do you do? Stop deliveries, despite the fact that you are still receiving timely payments, and possibly exacerbate your customer’s cash flow problems? Or, do you continue delivering goods and accepting payments, which, if your customer ends up filing for bankruptcy, runs the risk of having a bankruptcy trustee seek to claw back any payments you received for an entire 90-day period before the bankruptcy was filed?

It is a scenario that is all too common in the insolvency world, which, thankfully, has been addressed with vendors in mind by the courts.  The facts in the recent Eleventh Circuit case of Kaye v. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC), 899 F.3d 1178 (11th Cir. 2018) are not unlike our hypothetical.  Blue Bell delivered fresh ice cream daily to Bruno’s Supermarkets, a 60-store grocery chain located in Alabama and Florida.  Bruno’s payments to Blue Bell began to slip, going from twice weekly to weekly, but Blue Bell continued its deliveries up until the point that Bruno’s filed for bankruptcy.  After the filing, Blue Bell found itself in the unfortunate position of being on the receiving end of a lawsuit from the bankruptcy trustee to recover all payments made to Blue Bell during the 90-day pre-bankruptcy period as “preferences” under 11 U.S.C. § 547.

Congress—recognizing that vendors should be encouraged, rather than discouraged, to extend credit to financially troubled entities—included in the Bankruptcy Code what is known as the “new value” defense, which is found in 11 U.S.C. § 547(c)(4).  In short, the new value defense prevents a trustee from clawing back payments made to the vendor when the vendor has provided subsequent “new value” to the bankrupt customer (e.g. in the case of Blue Bell, new ice cream deliveries).

Published on:

One important attribute of any successful entrepreneur or business owner is knowing when to enter a new line of business or invest in equipment or employees to bolster an existing, growing service line. Another (perhaps even more important) attribute is knowing when to stop spending time, money and effort on a venture that will likely never work out or is not proceeding as planned. These two decision points—when to move forward and when to make a strategic retreat—are central to the success of any venture.

It is extremely hard to walk away from a project in which an executive is personally and financially invested. But the future viability of the organization always requires clear thinking, with all sentimentality, preconceptions, and vested interests cast aside. This inability or refusal to make a sensible, financial, and analytics-driven decision after a significant investment has been made in a project or an idea is known as the “sunk-cost fallacy.” As one textbook puts it:

“The sunk cost fallacy is the view that sunk costs should matter. Whenever issues involving sunk costs arise, it is always seems natural to think that it would be a pity to waste all the money that has been spent already. But that natural tendency does not lead to the best decisions. . . .”[i]

Published on:

As we learned during the downturn in 2008, the economic climate can change rapidly. When things are going well, many businesses forget the lessons of the past. No matter what industry your business is in, there may be occasions when you are asked to enter into a relatively long-term contract, i.e. longer than three years. Such agreements are sometimes favorable because of the stability and predictability they can provide. However, before entering into such an agreement, you should consider that the longer the contract, the greater the risk of a change in the contract counterparty’s financial situation. A safe credit risk in 2017 might find itself filing for bankruptcy by 2020.

If your response is: “I am not concerned about the other party filing bankruptcy. I had my attorney include a bankruptcy termination clause in our agreement,” then you may want to think again. The U.S. Bankruptcy Code has a lot to say about the rights of both the debtor and the non-debtor party once a bankruptcy is filed – often to the chagrin of the non-debtor party.

It is true that many business agreements contain clauses which provide that a party filing bankruptcy is deemed to have breached the agreement, and the other party may terminate the agreement (a “Right to Terminate” clause). Or the provision might say that if one party files bankruptcy, that party’s rights terminate automatically (an “Automatic Termination” clause).

Published on:

As a creditor, the news of a debtor who owes you a substantial sum of money filing bankruptcy is often the most alarming news you can learn—that is, until you seek advice of counsel and learn that payments the debtor made to you within 90-days prior to the bankruptcy will be the subject of a lawsuit and likely recoverable by the bankruptcy estate as a “preference.”  This is usually the point I offer soothing chamomile tea to the client.

Recovery of “preference” transfers in bankruptcy cases, though seemingly unfair to the individual creditor, serve an important role and offer a degree of protection to the creditors as a whole.  The primary elements of a preference transfer are relatively straightforward: a debtor who is insolvent, makes a payment or payments to a creditor, within 90 days[1] prior to the bankruptcy filing, to satisfy at least a portion of a pre-existing debt[2], and the creditor receives more than it would have had the debtor filed a chapter 7 (liquidation) bankruptcy case.  Though the “don’t rob Peter to pay Paul” concept appears clear enough, the Ninth Circuit has recently illustrated how complicated the matter can become in In re Tenderloin Health[3] where the court addressed the often overlooked final element to a preference—the “greater amount” test.

As the Ninth Circuit noted, the “greater amount test … ‘requires the court to construct a hypothetical chapter 7 case and determine what the creditor would have received if the case had proceeded under chapter 7’ without the alleged preferential transfer.” Id. at *7.  This task of creating a hypothetical chapter 7 liquidation grows ever more daunting as a case grows more complex, leading to uncertainty for a creditor client, especially when unresolved legal issues come up within the hypothetical bankruptcy.

Published on:

We asked some of our financial advisor colleagues to give us brief read outs on what they felt 2017 has in store for us now that we have gotten beyond the inauguration and into the first weeks of the Trump administration.  Their thoughts follow:

https://www.southerncaliforniabankruptcylawyersblog.com/files/2017/02/2012-03-31-10.05.15-214x300.jpgWe have been seeing a lot of highly leveraged deals that impact the performance of the business. These deals are leading to reduced spending on capital expenditure, marketing and even experienced management.  Once new ownership is in place, these strictures prevent the company from operating with the same efficiency as in the past, let alone growing.  Another scenario we have been encountering is companies getting beyond the management ability of the founder as the company increases revenues from $25M to $50M and then to $100M or more. In either case, increasing interest rates will cause dislocation, because it does not take much to push these companies into a zone where they are showing significant financial stress.

That being said, we are also seeing that lenders are still being lenient because it’s really hard to get a full recovery in a liquidation, and appraisal firms always seem to be the first to hedge on their ability liquidate inventory en masse.  Also, my sense is that lenders don’t really want to sell their loans to exit a credit as it hurts their reputation.  Still, we are finding that lenders keep getting surprised with over-advances for many reasons.  When we are called in to assist in such situations, we focus our efforts on trying to fix the operating issues of the businesses and make a reasoned re-allocation of limited resources.