WRITTEN BY JOSEPH J. BELLINGER Joseph Bellinger has thirty years of experience as a bankruptcy attorney and over twenty years as a bankruptcy trustee, serving on the Panel of Chapter 7 bankruptcy trustees in the District of Maryland, Baltimore Division (1996 – 2017), during which time he administered over 15,500 bankruptcy cases. After serving over 20 years as a bankruptcy trustee in the District of Maryland, I have a fairly good frame of reference for the value of many things, such as residential properties, machinery and equipment, vehicles and boats, to name a few common types of assets. I have also developed a fascination with how we value things –more specifically, how unpredictable value becomes when emotions are the main driver of the seller and/or the buyer. For example: A debtor lists as an asset in her bankruptcy filings, “1 guitar” with a value of “unknown.” As trustee, I would have asked, “What kind of guitar is it?” If the debtor answered, “Oh, it’s some old thing I bought at a guitar shop in Seattle. It is an old Martin guitar.” I would know that a Martin is to a guitar what Rolex is to a watch – almost any Martin guitar will have a value of up to $5,000 just for being a Martin guitar. If I asked the debtor, “Did anyone famous ever play this guitar?” and she answered, “Kurt Cobain played this guitar in Nirvana’s performance on MTV Unplugged.” I would know that this Martin guitar has a value far greater than $5,000. Kurt Cobain’s 1959 Martin D-18E guitar, inverted to accommodate his left-handed guitar playing, sold last week at an auction for over $6 million! The previous record was $3.95 million for a Black Stratocaster owned by Pink Floyd’s David Gilmour. The buyer’s motivation? After the auction, the elated high bidder said, “When I heard that this iconic guitar was up for auction, I immediately knew it was a once-in-a-lifetime opportunity to secure it and use it as a vehicle to spotlight the struggles that those in the performing arts are facing and have always faced.” Strange thing about his motivation for buying the guitar – he does not mention playing it. Go figure! If you wish to talk about the financial worries that keep you up at night, please email us at bellingerlegal@gmail.com or call us at (410) 598-0582. WRITTEN BY JOSEPH J. BELLINGERJoseph Bellinger has nearly thirty years of experience as an attorney working in business bankruptcy cases, advising businesses on insolvency issues, restructurings, and workouts The good news is this recession was caused by the shut down of most of the economy in response to the Coronavirus- a public health crisis - the economy itself was robust. The bad news is the virus is not behind us, and "If people don't want to come out to the ballpark, how are you going to stop them?" – Yogi Berra The National Bureau of Economic Research (NBER) announced today that the U.S. is officially in a recession. The announcement puts an end to a 10-year period of economic expansion, the longest in the nation’s history. Now that the economy is officially in a recession, the questions are, how bad will it get, and how long will it last? There have been well over fifteen recessions since 1920 and two of them were severe. Most recently, the Great Recession of 2007 was caused by the implosion of the subprime housing market and it lasted at least 5 years. The worst of them all (so far) was the Great Depression which was caused by the stock market crash of 1929, and it lasted 5-10-15 years, depending on what you read. This recession is different in that it was caused by the shut-down of the economy as a public health response to the Coronavirus pandemic. This recession was caused by a public health crisis, not an economic crisis. A robust economy brought in the new year and continued in January and February 2020, but as the economy shut down starting in March, the unemployment rate rocketed from a historic low of 3.5% to over 14% and production in many industry sectors came to a virtual halt. The widely-held expectation was that the unemployment rate would hit 20% in May- which would have been the highest since the late 1930’s. However, the jobs report for May shows an addition of 2.5 million jobs. Few of the economic experts saw that coming! The unexpected good news may provide reason for hope that the economy will quickly revive, as businesses reopen, and the recession will be short-lived. On the other hand, the scientists who specialize in pandemics admonish that the Coronavirus is not behind us and remains in charge. If we experience spikes in Coronavirus cases, and deaths, then reopening the economy will likely suffer from stops and starts, and an anemic economy will continue to sputter. The reality appears to be that the virus that caused this recession is still in control of how long it will last and how bad this will be. After all, "If people don't want to come out to the ballpark, how are you going to stop them?" – Yogi Berra If you wish to talk about the financial worries that keep you up at night, please email us at bellingerlegal@gmail.com or call us at (410) 598-0582. This article is intended by the author to provide general information only, and is not intended to create an attorney-client relationship or serve as legal advice. WRITTEN BY JOSEPH J. BELLINGERJoseph Bellinger has nearly thirty years of experience as an attorney working in business bankruptcy cases, advising businesses on insolvency issues, restructurings, and workouts. The Small Business Debtor Chapter 11 process is a streamlined bankruptcy reorganization that is now available to businesses with less than $7.5 million in debt, but this may not last more than a year. The Bankruptcy Code endeavors to balance the interests of the debtor and the interests of creditors in bankruptcy proceedings. As that balance applies to Chapter 11 reorganization proceedings, one nagging concern has been whether the burdens placed on debtors, including monthly financial reporting and other disclosure obligations, and the substantial professional fees and costs of Chapter 11 proceedings, make Chapter 11 relief cost-prohibitive for small businesses. Many of us who represent small businesses in financial distress view Chapter 11 proceedings as a limited tool – it provides a transparent process to conduct an orderly sale of substantially all of a debtor’s assets (sometimes as a going concern) as an effective means to maximize value for creditors. However, for many financially troubled small businesses that wish to reorganize, Chapter 11 drains desperately needed cash and imposes significant burdens on management that is already stretched thin. Consequently, many small businesses resort to negotiating payment plans with their creditors outside the protections of the bankruptcy process. Their success or failure is almost entirely dependent on unanimous support of creditors, because it only takes one dissenting creditor to cause significant disruption to an out of court restructuring.
In an effort to address greater access to Chapter 11 reorganization proceedings for small businesses, the formulation of an expedited and streamlined Chapter 11 proceeding for the “Small Business Debtor” began with amendments to the Bankruptcy Code enacted in 1994. In general, a debtor qualifies as a “Small Business Debtor” if it is engaged in lawful commercial or business activities (other than primarily owning or operating real property[1]) and if its total debt is no greater than $2 million. The advent of the Small Business Debtor has provided significant benefits of an expedited and therefore more cost-effective Chapter 11 process for small businesses to reorganize. However, many practitioners have supported broader eligibility for Small Business Debtors by increasing the debt ceiling to $5 to $10 million. Fast forward to August 2019, when Congress passed the Small Business Reorganization Act of 2019 (“SBRA”) that went into effect in February 2020. The SBRA further streamlines Small Business Debtor Chapter 11 proceedings and thereby improves access to affordable Chapter 11 relief for small businesses. The COVID-19 virus was not the reason for the passage of SBRA, but it went into effect on the eve of the outbreak; a fortuitous morsel of good news for small businesses. Unfortunately, SBRA only increased the debt ceiling for eligibility as a Small Business Debtor to approximately $2.7 million. For advocates of broader access to Small Business Debtor bankruptcy relief, SBRA was a missed opportunity to fix the affordable access to Chapter 11 challenges faced by small businesses. In March 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was passed into law. Among other things, the CARES Act increased the debt ceiling for Small Business Debtors from $2.7 million under SBRA to $7.5 million, which is a substantial expansion of eligibility to proceed as a Small Business Debtor in Chapter 11 bankruptcy proceedings. However, the increase of the debt ceiling to $7.5 million will expire in March 2021 and revert to $2.7 million unless the deadline is extended by new legislation, and that is by no means a certainty. For at least the next year, small businesses that fall within the debt ceiling of $7.5 million have access to a streamlined and efficient Small Business Debtor Chapter 11 reorganization process. The benefits and protections afforded to Small Business Debtors are substantial and come at a time when so many small businesses are going to need every advantage to survive this unprecedented shut-down of our small businesses caused by the COVID-19 virus. If you wish to learn more about Small Business Debtor Chapter 11 proceedings or to talk about the financial worries that keep you up at night, please email us at bellingerlegal@gmail.com or call us at (410) 598-0582. [1] Debtors whose primary purpose is to own and/or manage real property are not eligible to proceed as “Small Business Debtors” because there is a similarly streamlined Chapter 11 process for “Single Asset Real Estate Debtors.” This article is not intended as legal advice and readers are admonished not to consider the content as legal advice or as recommendations they should follow. WRITTEN BY JOSEPH J. BELLINGERJoseph Bellinger has thirty years of experience as an attorney working in business bankruptcy cases, advising businesses on insolvency issues, restructurings, and workouts A significant aspect of my work is advising small and mid-sized companies coping with financial distress. This is Part Three of a three-part series that describes some of the principles I have learned about the challenges faced by the decision-makers when their company is suddenly faced with financial distress. Of utmost importance is that the decision makers can make the paradigm shift from focusing on profitability to survival mode. This section provides a discussion of strategies for identifying expenses that might be deferred, reduced, discounted, or eliminated as part of a company’s survival plan. .A company’s survival plan requires that decision makers scrutinize the company’s expenses, line by line, and for each expense item, consider whether that expense might be deferred, reduced, discounted, or eliminated. This review of expenses should be undertaken frequently, so that no cash is spent that could have been retained.
Vendors: With respect to vendors, rather than pay their invoices on their terms (i.e., net 30 days), consider stretching payment of vendors’ invoices out 60 days, or 90 days, depending on what the vendors will tolerate and continue to do business with the company. Communication with vendors generally will go a long way toward their tolerating slow payment of their invoices in order for the company to survive and remain a loyal and valuable customer. Payroll: Perhaps the most difficult part of implementing the expense side of a “cash is king” strategy is the employees. Payroll is one of the company’s biggest recurring expenses. Decision makers must be dispassionate and objective when determining if it is feasible for the company to retain its entire staff during the survival period, or if furloughs or layoffs are the only way for the company to survive. Contractual Payment Obligations: Several other recurring expenses are subject to contractual obligations, such as rent and equipment leases. Triggering a payment default might prove disruptive to the company’s operations, but the parties can negotiate temporary payment deferments or reduced payments to provide the company with relief on the expenses while precluding a contract default. Any such agreements should be put in writing and signed by the parties. Bank loans: For debt service, decision makers must be sure to take advantage of all concessions made for payment of loans to banks. Converting monthly loan payments to interest only payments as a written modification to the loan keeps the company current on the loan obligations and substantially reduces the amount of the monthly payments. The only way to keep a hole from getting deeper is to stop digging. Individuals form legal entities to conduct their business in order to shield personal assets and income from the debts of the business. In general, the owners of a legal business entity are not liable for the business entity’s debts. When companies are suffering from a shortage of cash, owners may defer payment of the company’s taxes to retain cash in the company. Accrued, unpaid tax liabilities of a business entity are usually personal liabilities of the owners and possibly others who are deemed to be a person with sufficient control over the company’s cash management. If a company is unable to pay its taxes as they come due even after adopting a survival mode budget, rather than taking actions that expose ownership and/or management to personal liability for the company’s debts, it may be time to stop digging. If you need bankruptcy advice for you, your business, or both, or other legal assistance, please email us at bellingerlegal@gmail.com or call us at (410) 598-0582. This is not intended as legal advice and readers are admonished not to consider the content as legal advice or as recommendations they should follow. WRITTEN BY JOSEPH J. BELLINGERJoseph Bellinger has thirty years of experience as an attorney working in business bankruptcy cases, advising businesses on insolvency issues, restructurings, and workouts. A significant aspect of my work is advising small and mid-sized companies coping with financial distress. This is Part Two of a three-part series that describes some of the principles I have learned about the challenges faced by the decision-makers when their company is suddenly faced with financial distress. Of utmost importance is that the decision makers make the paradigm shift from focusing on profitability to survival mode, and if they do not know the company’s financials, they must learn them fast. This section provides a discussion of some of the factors that decision makers may wish to consider when considering whether (and when) to sell assets to generate cash as part of a company’s financial survival plan. Cash is King & Know the Numbers Cash is king requires decision makers to undertake a thorough, line by line, highly skeptical and dispassionate examination of every items that appears in the company’s financials. The financials must be complete and accurate, and the decision makers must know the numbers, or any survival plan they formulate will have built-in flaws. At the core of a financial survival plan is the edict, cash is king, which requires a close scrutiny of all possible ways to generate cash, including liquidating assets, even if some of those assets are considered crucial to operations. How do decision makers determine whether an asset is “saleable?” While there is no one formula for all purposes, a starting point might be: An asset is “saleable” if it can be sold promptly at a reasonable price (allowing for a liquidation discount) and the net cash proceeds will provide a significant or necessary contribution to the company’s survival plan. Decision makers should review all of the assets on the company’s balance sheet and identify every asset (or category of asset) that could be liquidated and turned into cash, and whether the anticipated net proceeds would make a significant or necessary contribution to the company’s survival plan. Keep in mind, at this stage, the decision makers are only identifying the assets that could be turned into cash resulting in net proceeds that would make a significant or necessary contribution to the company’s survival plan. Identifying an asset as “saleable” does not necessarily mean the asset will be immediately liquidated – it permits decision makers to have in mind what assets might be sold at a reasonable liquidation value as may be needed for the company to survive. However, the decision makers are likely to find low hanging fruit in the initial review of what assets can be liquidated for cash. Current Assets: Converting current assets into cash is often an effective way to generate cash outside the ordinary course of business. For example:
Operating assets: Selling operating assets such as vehicles, equipment, or machinery (this article refers to them as “assets”) is a more cumbersome process but selling assets to raise cash must be included in the decision making. Decision makers should identify all of the assets on the company’s balance sheet that meet at least these three conditions: (i) the asset is not indispensable; the company could survive without the asset (or if there are several units of a type of asset, the company could survive with a fewer number of the asset); (ii) the asset (or some portion of a type of asset) could be sold for a reasonable price (allowing for a significant liquidation sale discount); and (iii) the net cash proceeds the company would receive would make a significant or necessary contribution to the company’s survival plan. In addition, no decision is a bad decision for long, provided that the decision makers go back and review their prior decisions as often as practicable, and no less often than the start of each 30-day survival plan cycle. Once all the saleable assets are identified, the next question is which assets (or categories of assets) should be sold now. It may not make sense for a company to sell an asset if all or most of the following are true: (i) the expected or offered sale price for the asset (even after allowing for a liquidation sale discount) is unreasonably low based on an objective valuation model; (ii) the cash proceeds would not provide a meaningful contribution to the company’s ability to pay expenses; (iii) conducting the sale of the asset requires a significant investment of time; or (iv) the cost to replace the asset when the company needs to replace the asset is substantially higher than the proceeds received by the company. Conversely, survival of a company may require the immediate liquidation of assets, even at an unreasonably low prices, in order to meet pay payroll, pay debt service or operating expenses, and to avoid a shut-down. Decision makers should not consider any decision final. Review and reconsider every decision previously made, and question their own assumptions as often as possible, and no less often than the start of each survival plan cycle. The final Part Three of this series will cover what expenses might be deferred, discounted, or eliminated. If you need legal assistance, including bankruptcy advice for you, your business, or both, please email us at bellingerlegal@gmail.com or call us at (410) 598-0582. This is not intended as legal advice and readers are admonished not to consider the content as legal advice or as recommendations they should follow. Written by Joseph J. BellingerJoseph Bellinger has thirty years of experience as an attorney working in business bankruptcy cases, advising businesses on insolvency issues, restructurings, and workouts. A significant aspect of my work is advising small and mid-sized companies coping with financial distress. This is part one of a three-part series that describes the principles I have learned about the challenges faced by the decision-makers when their company is suddenly faced with financial distress. Of utmost importance is that the decision makers can make the paradigm shift from focusing on profitability to survival mode. Even after recognizing that their company must shift to survival mode, decision makers may not know how to approach the questions that arise because survival mode is very different than focusing on profitability. Hopefully, this three-part series will be helpful to decision-makers who must shift their thinking to survival mode for their business to survive this near complete shut-down of the economy due to this global health crisis. The key to a company’s survival is for its decision makers to shift focus from profitability to survival mode. The COVID-19 pandemic has caused a sudden trauma to the financial condition of the markets and most businesses. Survival for those businesses hard-hit by this pandemic depend on the ability of the decision-makers to make the paradigm shift from profitability to survival mode. Decisions that will determine a company’s survival must be made now –they cannot be put off until we have credible information regarding the magnitude or duration of this pandemic. Survival-based decisions must be made now -before decision makers know whether their company is eligible for any state or federal financial relief, or the amount or duration of any such relief, or when or how any such financial relief will be infused into the markets. Develop a short-term financial survival plan, share at least the main points the plan with the company’s workforce, and focus on implementing the plan for survival. Financial distress can challenge anyone’s fortitude. The best antidote to the stress and distraction it causes is to develop a plan of action and focus on implementing the plan. After I help clients hammer out a survival plan, it is apparent that a tremendous weight has been lifted. While they may say that developing the survival plan was a miserable exercise, they are relieved to have a plan, “Now I know what to do.” There is tremendous value in that mindset. A company’s survival plan should be focused on the short term. The measurement of “short term” is often dictated by circumstance. I have had new clients whose immediate focus was, “How do we fund a payroll at the end of the week?” While there may be some very short terms needs to plan for and manage, in general, companies tend to operate on a monthly basis, and a 30-day (monthly) short-term plan often works well. While less vital than the short-term plan, develop a longer term 60 to 90-day plan for the company. In this time of uncertainty, there is little utility in forecasting or planning beyond the next 60 to 90 days for most companies. Any financial survival plan is based on complete and accurate financials, especially an income statement and a balance sheet. To the extent possible, develop a survival plan on a cash basis and for each 30-day cycle of the survival plan the two most fundamental questions are:
The greater the cash deficiency that results from answering these two questions, the more important it is to re-examine every aspect of a company’s operations and processes. What adjustments can be made to get the cash deficiency at or near zero so that the company is at least meeting its expenses- surviving? For example, restaurants are implementing survival plans intended to keep all or most of their employees on the payroll relying solely on take-out/delivery. This is by no means an ideal lifestyle choice, but it is a sound survival tactic many restaurants are implementing to survive and keep their staff employed. Fundamental to the survival plan is whether the company and its workforce can be sustained in this crisis, or does the company’s business model require an overhaul for all or some portion of the business to survive? If you need legal assistance, please email us at bellingerlegal@gmail.com or call us at (410) 598-0582. At Bellinger Legal Services, we take ownership of your business challenges and alleviate the pressure involved with legal distress. Our team is here to help. This is not intended as legal advice and readers are admonished not to consider the content as legal advice or as recommendations they should follow.
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