Bankruptcy, Restructuring, and Creditors Rights Legal Services
Do you have commercial debt that you need to restructure? Has the coronavirus (COVID-19) “shut down” affected your business? Do you need some guidance on how to move forward? I have worked on all sorts of debt restructurings, both in court and out of court, in bankruptcy and out of bankruptcy.
I started out my career as a New York business attorney in the securities and transactional law area of large New York firm in Manhattan — this is because I wanted a code (or statute) based area of law that I could work within, and there were the Securities Acts of 1933 and 1934 that formed the basis for the code-based practice. That means that I worked on everything to do with stock and other ownership interests in companies, as well as business assets (purchases, leases, financings). I also worked with publicly traded companies, privately traded companies, and stock and asset transfers, securities registrations, and annual and other periodic reports with the Securities and Exchange Commission.
After that I made a move from that group within the firm to work with another group, and that is bankruptcy and restructuring, and creditors rights. I made this move because as a New York business attorney, at that time in my career, I was not getting the excitement I wanted. While nearly each and every other New York business attorney in my group, and our clients, were spectacular, I found that the area of practice was not for me.
So I began to think: what kind of code-based practice is there out there that interests me? Bankruptcy came immediately to mind. Why? Because it is also code-based. I am sure you have heard of the Bankruptcy Code. Well, that’s a code.
There are so many aspects to a bankruptcy practice that it’s incredible and exciting. For starters, it’s not just “bankruptcy,” and includes in and out of court discussions and restructurings, or solutions. The legal work can be performed from the perspective of the debtor, that is, the company that owes the debt; or, the legal work can be performed from the perspective of the creditor, which could be a trade creditor, a bank lender, another type of lender, a merchant cash advance lender, a lender that is a “factor” and bases loans and repayments on the company’s receivables (usually on a rolling basis). As a side note, I worked on a pretty intense litigation representing a personal guarantor in a federal case commenced against him in the United States District Court for the Southern District of New York (not the bankruptcy court), where we prevailed at the early stages of the case where the lender tried to dismiss counterclaims we asserted on behalf of the guarantor. Click here for a copy of the decision and order denying the motion and sustaining our counterclaims.
While this case was not originally a bankruptcy case of the guarantor, an individual, it stemmed from the bankruptcy of his company in Canada, which employed or contracted with over 1,000 security guards. The main business was to provide security coverage across the miles and miles of actual pipelines. I was told at the time that the oil companies are notoriously late in their payments and that’s why the company borrowed against its receivables (this is known as factoring). To do the deal, the lender required a personal guaranty, and since the lender was in New York, it required that any action to recover on the guaranty be commenced in New York, and as a New York business attorney, the case was a perfect fit. We had a trial in federal court. At the end of the day, the guarantor held on for as long as he could, but he wound up filing for personal bankruptcy in Canada the day before he was supposed to testify in New York, so we never got to present the evidence that would support his defenses and counterclaims in the New York case, and as I understand it, the lender continued to pursue the claims in Canada.
From the debtor’s side, a lot of companies tell me that all they need is a loan to get over the hump, and once they do, then their business will improve and they will get back to smooth sailing again. The problem is, they typically use those funds to service debt and take care of current and existing operations. All other things being equal, the issue they run into is the same level of sales, the same level of production and operations, yet more debt. If they could not service their then-existing debt with their then-existing operations, and were on a downward spiral, and then they stabilize without growth. They failed financially at their previous debt and revenue levels. The new issue is that the debt, the new debt, is even more, so if they could not survive before with their previous debt, what do you think happens when the add even more debt and perform at the same levels as before? Yes, they continue to fail, and this time even faster. And for some reason they keep thinking that new debt is the answer. However, the only way that adding new debt makes sense is if the debt is added to spur growth and income and expansion, not to bring the company to pre-existing operational and sales levels, which we already know does not work. And adding more debt without adjusting sales and operations will only delay depleting cash to zero. As a New York business attorney, I see this a lot.
Also as a New York business attorney, I have represented creditors, ranging from trade creditors to lenders to service providers, to everything in between. And there are two main types of creditors in bankruptcy: secured and unsecured. Generally speaking (and there are always exceptions), secured creditors are highest priority when it comes to seeing who gets paid first based on debts incurred before the bankruptcy. These are known as pre-petition claims, because the date the bankruptcy is filed is known as the “petition date.” Debt or other obligations of the company that are incurred after the petition date are called, you guessed it, “post-petition” claims, and these can be referred to as “administrative claims,” i.e., those claims incurred to administer the company while in bankruptcy and keep it alive during the bankruptcy. And while in bankruptcy, a fictional entity is created for the company and it’s called the “bankruptcy estate.” In representing creditors against a company in bankruptcy, my goal is to get the most amount of recovery in the quickest amount of time possible. In some instances, it makes sense to object to relief sought by debtors early and often, so that you can get their attention and achieve the highest possible payout.
The foregoing is simply an overview of issues that debtors and creditors face in the context of distressed financial situations. There is an enormous amount of material and nuances and exceptions that may or could apply, and there are many different variables and factors that could influence recovery and the legal processes and strategies.