WTOP’s Vanessa Roberts recently sat down with Michael Lichtenstein, Chair of the Firm’s Bankruptcy, Restructuring and Creditors’ Rights practice to get the answers to 5 Questions about Business Bankruptcy. The article is below and can be found HERE on WTOP.COM.
Bankruptcy lawyers get a bad rap, rather akin to how people respond when someone says they work for the IRS.
In reality, most commercial bankruptcy work focuses on trying to put a business back on the path to success, points out Michael Lichtenstein, chair of the Bankruptcy Restructuring and Creditor Rights Practice at Shulman Rogers in Potomac, Maryland.
“The general purpose of Chapter 11 is to allow companies the opportunity to pause their payments to creditors, reorganize, restructure their debt and then emerge as leaner, meaner operations,” he said. Yes, sometimes Chapter 11 cases do lead to immediate liquidations like their less complex Chapter 7 counterparts. As an example, Lichtenstein pointed to Sports Authority’s bankruptcy and those of other large failing retailers in particular in recent years.
But really helping a business survive and come out stronger on the other side of the process is what Lichtenstein calls the epitome of a successful Chapter 11 — and incredibly gratifying work too.
WTOP asked Lichtenstein to share advice and insights that can help business owners better understand bankruptcy, what to expect, the legal ramifications and potential pitfalls.
LICHTENSTEIN: Well, I’m a bankruptcy lawyer, and I always tell potential clients, “I don’t want you to file for bankruptcy unless you need to.”
By the same token, it does not have the stigma attached to it that it did 30 or 40 years ago. Companies file for bankruptcy — humongous companies file for bankruptcy — every day of the week. And if it’s a means to reorganize and to restructure your debt and allow your company to stay in business, you absolutely should do it. If you can avoid it, great.
When I advise clients, I always recommend they go to their lenders first. I say, “Let’s talk to them, and see if we can we work it out. If we can’t work it out, we’re going to file for bankruptcy. But that’s our last option. We’d rather work it out.”
I represent a lot of lenders too, and in my experience, they’d always much rather work with a borrower than default the loan. They’re not in the business of holding on to real estate or closing down businesses unless they need to.
The biggest problem I see is that business owners, especially if they’re small business owners, stick their head in the sand and take the ostrich approach to life. That doesn’t generally work out.
If you acknowledge that there are financial issues, and then you start taking steps to cut and be more efficient, you’re generally going to end up — even if you have to restructure somehow — getting more sympathy from your lender. They then view the borrower as having been more proactive than a borrower who just says, “I’m too busy to deal with that.”
In the latter case, when that business all of a sudden runs out of money and is in financial trouble, there are no choices. At that point, the lender and all the creditors are not willing to give the business an opportunity because they say, “This has been going on for a year. You should have cut 20 employees a year ago. You should have stopped spending money on something.”
It’s always better to be realistic about where the business is going.
LICHTENSTEIN: Definitely. If your business is really struggling, bring in a restructuring officer.
I’ll give you an example. One of the lenders that I represent had a meeting with a borrower and on the phone was a restructuring guy who the borrower had brought in.
You might think a lender would be sort of taken aback, but it was quite the opposite. The lender was very happy to hear that the borrower had taken proactive steps, recognizing that their business was in trouble, to hire somebody.
A lot of businesses when they realize they’re struggling, hire what’s known as a CRO, a chief restructuring officer. Many business people — and especially those in professional businesses, like doctors and accountants — don’t really know what they should focus on or be doing to better run their businesses.
When you bring in a chief restructuring officer, who does this for a living, they’re able to say to you, “Here’s how you can be more efficient. Here’s how you’re able to continue. Here’s what you need to cut. Here’s what you need to focus on.”
LICHTENSTEIN: One of the reasons that companies file for bankruptcy — and one of the benefits — is there’s something called the automatic stay. What that means is that if companies are in the midst of being sued and they file a bankruptcy petition, they also file a notice in the court where they’re being sued by a creditor and that lawsuit is immediately stopped.
The filing allows them not only to put that lawsuit on hold and try to figure out a way to restructure that part of the debt, but it also allows them to focus their energies on doing their day job, which is actually running the company and not being a litigant. That’s one legal ramification that obviously has a lot of benefits.
If you confirm a plan of reorganization, so you’re actually reorganizing, then you obtain a discharge. So what that means (just using hypothetical numbers), if a company has $10 million of debt and it manages to confirm a plan that allows it to pay $5 million of debt and it makes those payments, it gets a discharge. It doesn’t owe the other $5 million.
If you can reduce your debt, your balance sheet looks a lot better. Obviously, it also may allow you to get funding. It has a lot of ramifications in that sense. And those debts are gone, nobody can come after them.
If you can discharge a significant amount of your debt and maintain your equity in the company, it’s a big deal. It allows you to retain your company, you’re a much more efficient company, and hopefully you can have positive cash flow going forward.
LICHTENSTEIN: Absolutely not. There are rules. There’s a bankruptcy code and then there are bankruptcy rules. Plus, there is a lot of established case law. That all dictates how a plan gets confirmed by a bankruptcy court.
Who gets to vote? How many people does the business need to get the approved vote? How do you separate creditors into different classes? How do you treat the equity security holders, the people who own the company? Can they keep the company?
There’s a priority scheme. And if unsecured creditors and creditors don’t get paid in full, the owners can’t hold on to the equity unless they put new money into the company. It’s very complicated, and it can be expensive.
But it can work. I represented PMI, the parking company. It’s a public record case. We proposed a plan, we confirmed it, and they’re still in business. We cut down the number of parking garages they had, and they’re still operating. It worked out great. But there was a lot of litigation in that proceeding, which we didn’t initiate.
A few of the creditors decided to file a suit contesting the bankruptcy. That’s totally out of the control of the debtor. When you anticipate that the whole process is going to cost X, there’s an unknown there. Your total cost could double or triple X — depending on how litigious the bankruptcy is. It can be a very expensive procedure, and not everything is within your control. There are some unknowns.
But if your company is facing having to shut the doors and there is a possible way to reorganize, in my view, it’s always better to at least try that if you can.
LICHTENSTEIN: Where people run into trouble often is if they have run their company like a “mom and pop store” and treated the company like their own personal piggy bank.
The thing about bankruptcy is that it’s 100% transparent. A debtor — within 14 days of filing a Chapter 7, 13 or 11 petition — must file schedules of assets and liabilities and a statement of financial affairs. Those documents are signed under oath. The schedules identify all of the assets the business owns and all of the people to which it owes money — secured, unsecured, priority, taxes, employee wages, etc.
When that statement of financial affairs identifies payments that were made within the last 90 days to people who own the company or payments to insiders within the last year or so, that’s where you can get into trouble.
If you’ve been running this company and you haven’t been paying creditors, but you’ve been paying yourself bonuses, or you’ve been paying your country club dues — all sorts of things like that — everybody’s going to look at those payments, and somebody’s going to come after you for that. That’s where people run into trouble a lot. It’s never a good idea to act as if it’s your own piggy bank.
Stay up to date with all the latest news and events.