The Costs of Restructuring A Business

Canada's Slaw raises a point with its Focus on Employees: The Hidden Costs of Restructuring a Business that I think often gets overlooked when restructuring a business (whether in or out of bankruptcy) - the employees. Yes, we know they are there but do we really pay attention?

Planning for a business restructuring often takes months; yet in my experience, insufficient resources are typically devoted to managing the human resources consequences, leading to significant additional or ‘hidden’ costs. The following are some examples of strategies that can mitigate costs and losses associated with terminated or disaffected employees:

* Rumours of a pending sale of a business or layoffs are worrisome and distracting to employees, resulting in lost productivity, higher benefit costs, poorer client relations and service, and attrition of key employees. Emphasize the importance of taking steps to maintain confidentiality throughout the planning or negotiating stages.
*

How fairly employees believe they and laid off co-workers were treated during the restructuring will affect retained employees’ commitment and productivity. Consider what if any steps you can take to minimize the chances that employees will become disaffected and/or leave as a result of the restructuring.
*

If you are considering providing ‘working notice’ of termination for employees, consider the hidden costs of such a plan including increased benefit claims and costs, the potential negative impact on service to clients and customers during the working notice period, and the risk that those employees will not complete critical tasks or facilitate a transition prior to their termination. Offering a closing bonus or increased severance offer payable at the end of the working notice period dependent upon maintaining service levels or completion of the key tasks, is one way to manage those risks.
*

If the sale or closure of a business or business unit is delayed, do not expect that an extension of employees’ working notice will be welcomed by those employees. One consequence of that event is that any negotiations for the final severance packages, if not yet settled, will be negatively affected. If it is reasonably foreseeable that the sale or closure date may be delayed, consider the benefits of agreeing to more generous severance package terms in exchange for an early settlement coupled with a right for the employer to later apportion what part of the severance will consist of working notice and pay in lieu of notice.
*

Business owners who have agreed to sell their business but stay on as an employee after the closing are usually not prepared for and/or underestimate the difficulties associated with the change in control and culture that inevitably occurs. Ensure that any new employment agreements have good severance provisions that can be triggered by the former owner/now employee, and minimize any linkages to payment of the sale proceeds with the length of employment, post-closing.
*

If retention of key employees is a condition of sale, determine what is necessary to secure their employment, or continued employment. Key employees’ leverage increases as costs to negotiate and implement the sale have been incurred, and as closing nears. Consider the relative risks of early communication of a sale that may not close in order to secure key employees, versus the costs of not securing key employees early.
*

Consider the culture of an acquired business when imposing new employment contracts. Even when a purchaser agrees to offer employment to current employees on substantially the same terms, if the form of employment contract (i.e. formality, tone, or one-sided language) is at odds with what the employees are used to, the employee-purchaser relationship will get off to a bad start. That in turn may affect the employees’ willingness to buy into or adapt to operational changes implemented by the purchaser, or result in loss of productivity or other costs associated with attrition.

Lauth Bankruptcy Follow Up

A bit of older news from The Indianapolis Star is Judge: Lauth can operate bankrupt subsidiaries. Interesting to see what they paid out in fees before filing bankruptcy. The real question for a Chapter 11 case is will the business survive the process (which ought to explain the caution and care taken with Chrysler and GM).

Judge Basil H. Lorch III ruled it's in the best interest of creditors and others for Lauth management to continue operating its bankrupt subsidiaries, despite a plea from a major lender that Lauth be removed.

The three Lauth subsidiaries that filed for Chapter 11 reorganization bankruptcy May 1 control dozens of Lauth-developed office, industrial and retail properties across the country.

"Many of the developments are only partially completed, and most are in financial distress," said a court filing by LIP Holdings, a Lauth debtor controlled by Inland American Real Estate Trust of Chicago.

***

The case figures to be one of the largest bankruptcies of an Indiana commercial developer.

Inland, acting through LIP Holdings, accused Lauth managers of trying to bail out the distressed properties with collateral from healthier properties from other subsidiaries. That would benefit Lauth executives who've personally guaranteed debts of some of the properties in bankruptcy, LIP charged.

In his ruling, the judge ordered Lauth not to "cross-collateralize" any assets in bankruptcy or issue new debt.

Resop said Lauth's court filings show it paid $100,000 to a Chicago law firm for debt counseling in November, an indication Lauth contemplated filing for bankruptcy long before Inland made its move in April to take control of some Lauth-developed properties.

GM Bankruptcy Moving Forward

So reports The New York Times:

A federal judge approved a plan by General Motors late on Sunday to sell its best assets to a new, government-backed company, a crucial step for the automaker to restructure and complete its trip through bankruptcy court.

I suppose being GM does get a judge to work on a holiday weekend (some holiday) and work he did:

In his 95-page opinion, Judge Gerber wrote that he agreed with G.M.’s main contention: that the asset sale was needed to preserve its business in the face of steep losses and government financing that is scheduled to run out by the end of the week.

“Bankruptcy courts have the power to authorize sales of assets at a time when there still is value to preserve — to prevent the death of the patient on the operating table,” Judge Gerber wrote.

With the approval of the restructuring plan, G.M. and the government are seeking to close the sale by Thursday afternoon, when a four-day stay of the judge’s order expires. The government, which is financing the reorganization, had given G.M. until Friday to win approval for the sale or risk losing its bankruptcy financing.

***

If completed by Friday, G.M. would be near the end of an unusually quick trip through the bankruptcy courts, turning itself into smaller company with fewer brands and a new focus on fuel-efficient cars.

Under the terms of the revised deal, G.M. would sell its most desirable assets, including the Chevrolet and Cadillac brands, to a new company owned largely by the American and Canadian governments and a health care trust for the United Automobile Workers union. The Obama administration anticipates taking the company, which will still bear the General Motors name, public next year.

Let us hope that is not old wine in new bottles for several reasons - our tax dollars, the employees, the economy and, frankly, the bankruptcy system.

And now from the creditors' side (or is it just some of them?):

It is possible that creditors who objected to the terms could file an appeal. Lawyers for several opponents argued during the hearings that the G.M. sale stripped them of their rights as creditors. A lawyer representing three dissident bondholders urged Judge Gerber to call what he said was the Obama administration’s bluff on the July 10 deadline.

Er, I think Obama is anything but a bluffer. Not something I would want reported in any newspaper. The fact is that this kind of case - really any Chapter 11 - there is a bit of gamesmanship, of gambling, to get the biggest slice for one's clients without killing the business. More can be gotten if the business is merely lamed and good chance of nothing if the business is in an iron lung.

Bankruptcy - Southern District of Indiana - New Rules

Effective July 13:

http://www.insb.uscourts.gov/WebForms/notices/prodchange.pdf

Also:

There is a new notice posted regarding a revised general order on the use of electronic filing and a new ECF administrative policies and procedures manual.

http://www.insb.uscourts.gov/WebForms/notices/ecfadminnot.pdf

Bankruptcy News

I wish this site had an RSS feed (which is really rather odd) but still it seems a worth add to the bookmarks for bankruptcy news. Which is all it is - a page with links to other sites with information on bankruptcy. It has even caught the news on the Chrysler bankruptcy.

Bankruptcy News

Is there any surprise in any of these headlines?

Bankruptcies surge as recession takes toll comes from the Indianapolis Business Journal's reporting

The number of U.S. businesses and individuals declaring bankruptcy is rising with a vengeance amid the recession, despite a three-year-old federal law that made it much tougher for Americans to escape their debts, an Associated Press analysis found.

"There's no end in sight," said bankruptcy lawyer Bryan Elliott of Hickory, N.C., who is working seven days a week and scheduling prospective clients a month in advance. "To be doing this well and having this much business, it is depressing. It's not a laugh-a-minute job."

Then we have Bankruptcies booming again from The Indianapolis Business Journal's NewsTalk blog:

U.S. Bankruptcy Court for the Southern District of Indiana, which includes Indianapolis, logged 2,936 bankruptcies last month. That was a heady increase from a year earlier and nearly three times the level of 2006, when federal law was changed to make filing more difficult.

Indianapolis bankruptcy attorney Mark Zuckerberg noticed a marked uptick in January. People hoped for a good Christmas, then at the start of the year were hit with bills, bad economic news and other realities.

Most have lost jobs and their health insurance, Zuckerberg says. As a result, a medical problem tips them into bankruptcy.

Indiana Bankruptcies Up

Is news of more bankruptcy filings in Indiana any real surprise? Bankruptcy filings up in Indiana comes from The Indiana Lawyer:

"Bankruptcy cases in federal courts have increased more than 30 percent in the fiscal year ending in September as compared to the 2007 fiscal year. In Indiana, bankruptcy cases have increased more than 25 percent in the U.S. District Court's Northern and Southern districts."

I no longer represent debtors in bankruptcy court and my wife is wondering whether that is a good idea. I do not because of the burdens imposed by BAPCA (the bankruptcy law since 2005). That bankruptcies continue to rise in Indiana shows just how badly off is Indiana. See, the new bankruptcy law was to curtail Chapter 7 filings. Doug Masson has a fuller discussion of why they are increasing here.

I do want to mention that creditors need to get counsel that has both bankruptcy court and collection experience. I have that kind of experience but I limit my work to the Southern District of Indiana.

How to Protect Yourself From a Customer Close to Bankruptcy

MarketWatch had a very gloomy headline last week: More Tribunes, Lehmans likely in coming months. The truth contained in that headline makes it even gloomier.

Considering the talk - if not the pushing - of the Big three Automakers towards bankruptcy court, this drive towards bankruptcy seems likely. I am on the side of those who think the bankrupting the Big Three is a dangerous idea. Unlike service industries (and those being financial services and newspapers) and even unlike the favorite of television pundits, the airlines, these manufacturers have a long chain of suppliers.

What worries me is what is called preferential transfers. Put simply, money paid to a creditor within 90 days of filing a bankruptcy can be disgorged from the creditor. Which means the creditor gives back money owed to it and which was probably need to pay its own creditors. The statute is 11 USC 547 and reads as follows:

(b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if—

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

The statue also sets out what transfers cannot be set aside:

c) The trustee may not avoid under this section a transfer—

(1) to the extent that such transfer was—

(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange;

(2) to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was—

(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms;

(3) that creates a security interest in property acquired by the debtor—

(A) to the extent such security interest secures new value that was—

(i) given at or after the signing of a security agreement that contains a description of such property as collateral;
(ii) given by or on behalf of the secured party under such agreement;
(iii) given to enable the debtor to acquire such property; and
(iv) in fact used by the debtor to acquire such property; and

(B) that is perfected on or before 30 days after the debtor receives possession of such property;

(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor—

(A) not secured by an otherwise unavoidable security interest; and
(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor;

(5) that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the debt secured by such security interest exceeded the value of all security interests for such debt on the later of—

(A)

(i) with respect to a transfer to which subsection (b)(4)(A) of this section applies, 90 days before the date of the filing of the petition; or
(ii) with respect to a transfer to which subsection (b)(4)(B) of this section applies, one year before the date of the filing of the petition; or

(B) the date on which new value was first given under the security agreement creating such security interest;

***
(9) if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $5,000.

When I lat researched this kind of case a few years back I found cases where even the Internal Revenue Service lost to the bankruptcy trustee.

I also came to a very firm opinion that without proper preparation by the business owner, even the best lawyer will lose these cases without the assistance of pure, blind, dumb luck. When a business' debtor appears close to bankruptcy the business must get its attorney in for a consultation on how to deal with the potential bankruptcy. Waiting till getting the bankruptcy notice is too late. Counsel needs to see what is owed, what is the subject of the debt and needs to work on getting the debt into the category of a non-preferential transfer.

Returning to the larger picture, I assume GM's (or Ford's or Chrysler's) suppliers have made what will turn out to be preferential transfers which will be forced from their creditors and those creditors will moving towards bankruptcy court themselves. And then their creditors. Just like a row of dominoes they may all be heading to bankruptcy court.

I suggest every business needs to sit down with counsel who has knowledge of bankruptcy. For those with Indiana businesses, please feel free to give me a call.

Bankruptcy Conference - Chicago in April

The following information came to me via e-mail:

Seventh Annual DePaul Business & Commercial Law Journal Symposium

Into the Sunset: Bankruptcy as Scriptwriter of the Dénouement of Financial Distress

Thursday, April 16, 2009

10:30 a.m. – 5:00 p.m.

Westin Michigan Avenue

909 North Michigan Avenue

Chicago, Illinois

For Better or Worse: Chapter 11 in the Post-BAPCPA Downturn

BAPCPA, the 2005 Bankruptcy Code overhaul, brought some significant changes to corporate reorganization, leading some to dub Chapter 11 as the "National Foreclosure Act." This panel will examine the myths and realities behind this description by focusing on the more sweeping BAPCPA amendments: time restrictions on assumption or rejection of commercial leases, the limited plan exclusivity period, 20-day administrative expense claims and the attempted reigning in of executive compensation.

A Fistful of Dollars: Hedge Funds, Private Equity and Bankruptcy

The presence of hedge funds and private equity in bankruptcy has become more prevalent in recent years, altering, sometimes dramatically, the outcome of troubled companies' reorganization efforts. In addition to exploring the impact of these non-traditional bankruptcy players, our experts will also discuss the latest twist—what happens when these entities themselves are threatened with insolvency.

The Importance of Being Earnest: Bankruptcy's Disclosure Rules

Bankruptcy is a transparent process and the transparency begins with the disclosure requirements of Bankruptcy Rules 2014, 2016 and 2019. These rules require that certain professionals working in the bankruptcy system disclose their connections with a variety of entities, including their past or present engagements, their fee arrangements with their client in the case, the identity of clients if more than one is represented and more. This panel will discuss pertinent provisions of these important bankruptcy rules, highlighting what must be disclosed and the sometimes dire consequences that follow a failure to comply.

Tickets are $85.00 on or before March 16, 2009 and $100.00 after that date. Price includes luncheon and written materials. Judges and students are free. CLE credit offered. For more information, contact Megan Bosau or Chalet Braziel at (312) 362-6178 or depaul.bclj@gmail.com.

Bank Bailout Causing Bankruptcy Reform?

Maybe a possibility and one I would call a necessity.

If consumer groups and some legislators had their way, the $700 billion financial bailout bill would have included a provision to let federal bankruptcy judges lower payments on subprime mortgages to help homeowners who had fallen behind on their payments avoid foreclosure.

Still, it's possible that bankruptcy reform provision could get taken up by Congress next year, observers say. And while East Bay Democrats have indicated they would support the reform, any attempt to do so is likely to face strong opposition from Republicans and the powerful mortgage, home building and banking industries.

Supporters contend that letting bankruptcy judges lower interest rates and principal due on a homeowner's primary mortgage would help delinquent borrowers make payments and keep their homes, help stop the downward spiral of housing prices that hurts all homeowners and protect lenders from financial losses associated with foreclosure.

"Having a loan modified in lieu of foreclosure is a far preferred outcome for borrowers, for lenders, for neighbors and for taxpayers as well," said Paul Leonard, California director of the Center for Responsible Lending. The Center estimates if bankruptcy judges could modify existing loans, up to 600,000 homeowners nationwide, including up to 120,000 in California, would avoid foreclosure.

For more see Bankruptcy reform provision could return next year from The San Jose Mercury News.

Bankruptcy - Chapter 13 - Two States Disallow Plans Paying Only Attorney Fees

It is always good to learn something new. The New York Bankruptcy Attorney Blog's Missouri, Following New York, Holds that Chapter 13 Bankruptcy Plans That Pay Legal Fees Only Are Not Allowed taught me something new:

"You are eligible for a Chapter 7 bankruptcy discharge only every eight years. In addition, the U.S. Supreme Court in Lamie v. U.S. held that any Chapter 7 legal fees for pre-bankruptcy services must be collected by the time the bankruptcy is filed. That means if you haven’t paid your Chapter 7 bankruptcy lawyer in full by the time the case is filed, you cannot be forced to do so afterwards."

Although I decided in 2005 to close my consumer bankruptcy practice, I am a little surprised that anyone thought this could fly.

Lehman's Bankruptcy Petition

Courtesy of Findlaw: http://news.lp.findlaw.com/hdocs/docs/lehman/20080914bankruptcy-petition.pdf

Getting Out of Student Loans

It cannot be done, but I suggest reading Shouldn’t you be able to discharge your student loans in a bankruptcy? that I found through The e-Legal Lawyer Blog. Anyone thinking of taking out a student loan needs to think about this.

More Surprises in Premier Bankruptcy

The Indianapolis Business Journal reports that Ron White cannot be found to be arrested:

Local law enforcement officials plan to cast a wider net in their quest to track down and arrest Christopher P. White, the founder of defunct developer Premier Properties USA Inc.

The Marion County Prosecutor's Office filed three felony charges against White a week ago. But White hasn't turned himself in, and couldn't be found by law enforcement, including at his Lake Clearwater home.

An attorney for White, 50, told the prosecutor's office that he was in Florida but later said he no longer represents the developer, according to Matthew Symons, a spokesman for the prosecutor's office. Symons would not name the attorney.

More Premier News: Owner to be Arrested

As reported by the Indianapolis Business Journal:

The Marion County Prosecutor's Office today filed three felony charges against Christopher P. White, the founder of bankrupt development firm Premier Properties USA Inc.

The charges include fraud on a financial institution, check fraud and theft-all Class C Felonies stemming from a $500,000 bad check that authorities say White deposited into an account with The National Bank of Indianapolis in January.

The check was drawn on an account at JP Morgan Chase that never had a balance of more than $1,000, the prosecutor's office said.

White, 50, will be arrested and faces an initial hearing later this week, said Matthew Symons, a spokesman for the prosecutor's office.

The IBJ maintains a web page on this case here.

Premier Properties to Be Liquidated

So I interpret Trustee working to determine Premier assets from The Indianapolis Business Journal:

The auction of chairs, tables and other furniture-most of which has been stored in Premier's former offices in the Echelon building near 86th Street and Allisonville Road-will be handled by Christy's of Indiana Inc. No date has been set.

U.S. Bankruptcy Court Judge Basil H. Lorch III reclassified Premier's bankruptcy status to Chapter 7 in late May, clearing the way for the trustee to liquidate remaining assets and eliminating White's hopes of resuscitating the developer of Metropolis mall in Plainfield and several other retail projects across the U.S.

The judge also granted a motion today from the Indianapolis Colts, releasing the team from an agreement with Premier for a suite in Lucas Oil Stadium.

What to make of this case? I know nothing of the company other than the reports in the newspapers and what I make of it is based on those reports and a few assumptions.

1. I doubt a bankruptcy alternative such as a receivership or an assignment for benefit of creditors would have worked here. The company waited just too long.
2. While most Chapter 11 cases turn into Chapter 7 cases, I suspect the owners of Premier did not want to face up to the most important fact: the business had failed. Just as the owner waited too long for utilizing a bankruptcy alternative, the wait was too long for an effective Chapter 11.

Bankruptcy and Gift Cards

Not a lot of good news and the linked article's title pretty much says it all.

Bankruptcy Makes Gift Cards Worthless: "As more retailers file for bankruptcy or go out of business, more than $75 million in gift cards are at risk of becoming worthless pieces of plastic this year."

Consumer: Debt Relief Agencies

Before 2005, I had a consumer bankruptcy practice. I learned to dislike the consumer counseling agencies for promising much and delivering on nothing. Which is why I read The New York Times' Debt Relief Can Cause Headaches of Its Own with interest and quote it at length below.

While I no longer practice on the consumer side of bankruptcy law, I give you this advice: if you have the problems discussed below you need to talk to a bankruptcy attorney to get an accurate estimate of your problems and possible solutions and you need to do it now instead of letting the problem fester.

"What can borrowers do to extricate themselves?"

If belt-tightening suffices, one option is a debt management repayment plan in which interest rates, but not balances, are reduced.

Ronald J. Mann, a law professor at Columbia University and a credit expert, describes credit industry practices as intended to enslave borrowers in a “sweat box.” He recommends a Chapter 7 bankruptcy that wipes out most credit card debt.

Many consumers, however, are loath to file for bankruptcy protection, said Mark S. Zuckerberg, a bankruptcy lawyer in Indianapolis. And others may find that they cannot qualify for a Chapter 7.

Then there is debt settlement, when a debtor and creditor agree that payment of a negotiated, reduced balance will be payment in full. Debt settlement generally works best when consumers can offer a lump sum, the experts said. But consumers may face taxes on the amount the creditor has forgiven.

“Done correctly, it can absolutely help people,” said Cyndi Geerdes, an associate professor at the University of Illinois law school who also runs a consumer debt clinic.

Consumers can arrange debt settlement themselves, and many Web sites offer advice. Consumers can also hire a lawyer or use debt settlement companies, many of which advertise online and on television. The experts agree, however, that “buyer beware” is the best advice when considering debt settlement companies.

***

Debt settlement companies are regulated by state attorneys general and the Federal Trade Commission, but they are rarely prosecuted. To improve regulation of this interstate business, the Uniform Law Commission, sponsored by state governments and based in Chicago, is promoting a model law that covers credit counseling and debt management companies. It was in force in four states last year, and an estimated five state legislatures will vote on it this year, said Michael Kerr, the commission’s legislative director.

Tax sales and bankruptcy: New Indiana Court of Appeals Decision

Debtor owning real estate files bankruptcy. Debtor owes property taxes and so real estate put up for a tax sale which freezes out lender. Buyer at tax sale file to quiet title and mortgage company wins at trial level and then at the Indiana Court of Appeals.

Decided on January 31, 2008, ATFH REAL PROPERTY, LLC, v. STEWART (PDF format) has a good description of the process of buying real estate at a tax sale and a warning for buyers of tax sale property.

Consumer Law: Countrywide Mortgage Fab

So reports the New York Times and I suggest those with mortgages read this article.

The Countrywide Financial Corporation fabricated documents related to the bankruptcy case of a Pennsylvania homeowner, court records show, raising new questions about the business practices of the giant mortgage lender at the center of the subprime mess.
***

The documents were generated in a case involving Sharon Diane Hill, a homeowner in Monroeville, Pa. Ms. Hill filed for Chapter 13 bankruptcy protection in March 2001 to try to save her home from foreclosure.

After meeting her mortgage obligations under the 60-month bankruptcy plan, Ms. Hill’s case was discharged and officially closed on March 9, 2007. Countrywide, the servicer on her loan, did not object to the discharge; court records from that date show she was current on her mortgage.

But one month later, Ms. Hill received a notice of intention to foreclose from Countrywide, stating that she was in default and owed the company $4,166.

Court records show that the amount claimed by Countrywide was from the period during which Ms. Hill was making regular payments under the auspices of the bankruptcy court. They included “monthly charges” totaling $3,840 from November 2006 to April 2007, late charges of $128 and other charges of almost $200.

A lawyer representing Ms. Hill in her bankruptcy case, Kenneth Steidl, of Steidl and Steinberg in Pittsburgh, wrote Countrywide a few weeks later stating that Ms. Hill had been deemed current on her mortgage during the period in question. But in May, Countrywide sent Ms. Hill another notice stating that her loan was delinquent and demanding that she pay $4,715.58. Neither Mr. Steidl nor Julia Steidl, who has also represented Ms. Hill, returned phone calls seeking comment.

Thanks to The Indiana Law Blog for tipping me off to this New York Times article. I will repeat this from the ILB: bankruptcy attorneys take heed of this stuff.