The Dragich Law Firm, located in Grosse Pointe, Michigan, is pleased to announce that David Dragich and Amanda Vintevoghel-Backer have been recognized as Michigan Super Lawyers in 2022.
David Dragich — Business Bankruptcy. David has been selected to Super Lawyers every year since 2014, and was recognized as a Super Lawyers—Rising Star from 2011-2013.
Amanda Vintevoghel-Backer — Business Bankruptcy. Amanda has been recognized as a Super Lawyers—Rising Star for five consecutive years from 2018-2022.
David represents businesses in all aspects of complex corporate reorganizations, business bankruptcy, insolvency and distressed asset acquisitions and dispositions. He also represents clients in commercial litigation cases and general corporate matters, including day-to-day business activities, along with other transactions. He is a graduate of the University of Detroit Mercy School of Law, where he now serves as an adjunct professor.
Amanda focuses her practice on business bankruptcy reorganization, business transactions, corporate restructuring, and commercial litigation She is a graduate of the University of Detroit Mercy School of Law, and is an active member of the Turnaround Management Association (“TMA”), and is a past President of the TMA Detroit Chapter.
Each year, Super Lawyers recognizes the top lawyers in Michigan via a patented multiphase selection process that includes peer nomination and evaluation along independent research. The Michigan lawyers who receive the highest point totals during this selection process are named to this prestigious list. Learn more at www.superlawyers.com.
Lots of private equity funding—not to mention venture capital—has flowed to companies over the last couple of years. And, as we all know, that funding firehose is getting turned way down.
That means that there will almost certainly be a host of legally active but operationally inactive portfolio companies needing to be dealt with in the years to come.
Such companies continue to incur costs and pose legal risks as they remain in a state of limbo, including:
Paying taxes/filing returns
Performing corporate formalities
Creditors coming out of the woodwork to assert claims
Unexpected claims arising against unsuspecting officers and directors
These and other issues can pop up as long as a portfolio company exists—regardless of whether it’s operational. In my experience, there’s often a “Murphy’s Law” moment that arises when companies are left to wither instead of properly being wound down.
Don’t procrastinate. Be proactive so you can move forward with confidence that you’ve closed the loop on any lingering liability.
Steps Involved in Winding Down a Portfolio Company of a Private Equity Fund
The specific steps involved in the wind-down process vary by state, but in most cases the following tasks are involved:
Comply with Corporate Requirements. A corporation’s governing documents typically set forth the procedures that must be followed to wind down/dissolve the corporation, such as a shareholder vote.
Comply with Government Requirements. A certificate of dissolution must be filed with a state’s secretary of state office (or equivalent office). A final tax return must be filed, and the IRS provides a checklist of a number of other steps that must be taken in order to wind down/dissolve a corporation.
Collect Debts and Settle Claims. Collecting outstanding debts and resolving outstanding claims is an important part of the wind down process.
Liquidate and Distribute Assets. If any assets remain after paying corporate debts, they will be liquidated and distributed to shareholders.
Administrative Tasks. Minor administrative tasks, such as closing bank accounts, must also be attended to.
No one relishes the idea of winding down their business, and that includes winding down portfolio companies of private equity funds. Unfortunately, it’s sometimes necessary.
And it doesn’t simply entail hanging a “Closed” sign on the door and walking away. In order to avoid personal liability and adhere to various laws and regulations, a dissolution and wind-down process under state law must be undertaken.
Such a process requires the involvement of legal counsel in order to ensure that it’s done right, and owners and officers, and fund managers can walk away confident that they will not face future claims.
To learn more about the wind down process, or for assistance, please contact David Dragich at ddragich@dragichlaw.com.
Last fall, David Dragich checked a box that’s been on his bucket list for years. He began teaching a class as a law school adjunct professor at his alma mater, the University of Detroit Mercy School of Law, and he shared some of the lessons he’s learned in an article he wrote for Law.com.
As David explains in the article, he hears from lots of colleagues who express interest in pursuing an adjunct professor role, and by writing the article his hope is to demystify the process and let others in on what it’s like to be behind the lectern running a law school class.
David answers some of the most frequently asked questions he gets from other lawyers about what it’s like to be an adjunct law professor, including:
Will 2022 be the year of the next bankruptcy wave? That’s a question that many are asking, but no one knows the answer to.
What seems certain, as David Dragich addresses in his most recent article for Law.com, is that if there is a restructuring wave that builds this year, many companies will seek speedier, less expensive alternatives to federal bankruptcy.
Read Dave’s article to learn more about the pros and cons, and ins and outs, of receiverships, assignments for the benefit of creditors, and out-of-court workouts.
In a year that had many twists and turns, The Dragich Law Firm stayed busy serving clients in the areas of corporate restructuring, business transactions and commercial litigation. As we look forward to a rewarding 2022 with our clients and colleagues, here is a quick look back at a few of the ways we helped clients overcome challenges and capitalize on opportunities in 2021. We would like to acknowledge the significant contributions of the other lawyers, consultants and other professionals who we worked alongside in these and other cases.
KLO Assignment for the Benefit of Creditors; Represented Assignee, Gene Kohut from Riveron
We represented the Assignee, Gene Kohut, in an Assignment for the Benefit of Creditors that involved the successful liquidation and wind down of a kayak manufacturing company. Our work included:
Negotiation and resolution of outstanding A/R accounts
Completed sale of real property for the benefit of estate
Assisted company counsel to resolve or dismiss outstanding litigation pending against the company
Termination of 401(k) plans and related employee benefits programs
Completed a voluminous claims process – with payments ultimately being paid to secured creditors and applicable taxing authorities
Sakthi Federal Receivership in the Eastern District of Michigan; Represented Receiver
We represented the Court-Appointed Receiver of Sakthi Automotive Group USA, Inc., a Tier 1 automotive supplier, which previously had approximately $150 million in annual sales to customers including General Motors, Ford Motor Company and Volkswagen. Our work included:
Completed international sale of certain equity interests in Chinese joint venture entity for $20 million; buyer was a Chinese company and also an equity owner
Worked with the buyer to obtain new business license as required in China, as well as assisted in completing related registration tasks
Utilized the sale proceeds to substantially reduce remaining senior secured creditor’s claim against the receivership estate
Represented E-Commerce Business as Seller in M&A Transaction
Completed multi-million dollar asset sale of a Michigan-based e-commerce business to Illinois purchaser
Purchase price was funded by the SBA, with a fractional amount being paid to seller via promissory note
Assisted in the negotiation of an assignment of lease with buyer
Negotiated a consulting agreement for Seller’s sole member to help transition the company under its new ownership
Completed all necessary corporate governance documents to effectuate sale
Represented Debt Collection Seller in M&A Transaction
Completed a multi-million dollar asset sale of a collection company to a private equity firm
Negotiated consulting and employment agreements for selling shareholders
Negotiated placement agreements with seller’s related companies with respect to certain collection accounts and referrals
Completed all necessary corporate governance documents to effectuate sale
When a corporate debtor files for bankruptcy protection, its lender often takes a big financial hit due to the time it must expend and expenses it must incur to protect its collateral. Accordingly, if lenders had their way, most would opt to prevent their corporate borrowers from filing for bankruptcy or at least limiting their power to do so.
One way to do this, it would seem, is for a lender to simply include a provision in its lending documents blocking or otherwise restricting the ability of borrowers to file for bankruptcy. However, it’s not that simple. While there are ways that lenders can minimize the likelihood of a borrower’s bankruptcy filing, outright prohibitions are generally, as a matter of public policy, unenforceable.
Instead of outright prohibitions in lending documents, sophisticated lenders who seek to minimize bankruptcy risk have sought to sidestep public policy concerns by insisting on provisions that limit a debtor’s authority to file for bankruptcy under its governing organizational documents.
Such provisions often include the requirement that a certain independent appointed director’s consent is given or that a majority, supermajority, or all shareholders give consent before an entity is permitted to file. In other instances, a share known as a “golden share” affords an individual shareholder veto power over an entity’s decision to file a bankruptcy petition.
The U.S. Court of Appeals for the Fifth Circuit, in the case of Franchise Servs. of N. Am. v. United States Trs., offered a useful distinction between the terms “blocking provision” and “golden share,” explaining that a blocking provision was a general term for anything that allowed creditors to limit the individual’s ability to enter bankruptcy. Golden shares, on the other hand, were classified as “[a] share that controls more than half of a corporation’s voting rights and gives the shareholder veto power over changes to the company’s charter.”
Depending on the jurisdiction, and the underlying circumstances, these provisions may or may not be enforceable.
For example, in the case of In re Global Ship Systems, LLC, the holder of a blocking provision was both a shareholder and creditor of the debtor. In granting the creditor’s motion to dismiss the chapter 11 case, the Georgia bankruptcy court held that the creditor wore “two hats” in the case, and “as a Class B shareholder, it [had] the unquestioned right to prevent, by withholding consent, a voluntary bankruptcy case.” In its ruling, the court explained that the same right given to an individual that only held status as a creditor/lender would constitute a waiver of the right to file bankruptcy that violates public policy.
However, facing similar circumstances, some courts have reached a different conclusion. In the case of In re Intervention Energy Holdings, LLC, the court distinguished Global ShipSystems because “the method by which the creditor . . . received its equity interests was not subject to question or analysis.” The Delaware bankruptcy court, in ruling that the provision blocking bankruptcy was unenforceable, emphasized the need to uphold federal public policy, which “assure[s] access to the right of a person, including a business entity, to seek federal bankruptcy relief as authorized by the Constitution and enacted by Congress.”
The court explained that such a provision:
“the sole purpose and effect of which is to place into the hands of a single, minority equity holder [by means of a “golden share”] the ultimate authority to eviscerate the right of that entity to seek federal bankruptcy relief, and the nature and substance of whose primary relationship with the debtor is that of creditor—not equity holder—and which owes no duty to anyone but itself in connection with an LLC’s decision to seek federal bankruptcy relief, is tantamount to an absolute waiver of that right, and, even if arguably permitted by state law, is void as contrary to federal public policy.”
The balancing act between bankruptcy and contract rights illustrated by In re Global Ship Systems and In re Intervention Energy Holdings continues to be the main point of contention in recent cases involving similar scenarios.
Courts that have considered the enforceability of bankruptcy blocking provisions and golden shares have generally conducted fact-intensive inquiries resulting in narrow rulings. It is clear that public policy concerns related to freedom of contract and bankruptcy rights weigh heavily in the courts’ determinations, but that neither interest has clearly outweighed the other across different jurisdictions.
The courts have generally held that if a blocking provision or golden share serves to waive the right to file for bankruptcy entirely the scales will tip towards protections of bankruptcy rights. However, provisions that serve as mere obstacles to filing do not always constitute a waiver and may result in a ruling in favor of the right to contract freely. For lenders and debtors, understanding the case law of the jurisdiction(s) that may be a venue(s) for a bankruptcy filing can inform what blocking provisions, if any, may be upheld by a court.
There has likely never been a time when the term “supply chain” has been so ubiquitous in headlines and our collective consciousness—for good reason. Supply chain problems have led to shortages in goods and have contributed to surging inflation.
And the near-term forecasts aren’t optimistic. Tim Uy of Moody’s Analytics has stated that supply chain problems “will get worse before they get better.”
The effects can be particularly painful for manufacturers that rely on sole-source suppliers. In response, many manufacturers are trying to diversify their supply chains. But that’s a long-term solution to a problem that will persist over the near term.
Manufacturers who count on a sole-source supplier will be forced to ride out the storm. And the storm may get even more destructive to the extent that more suppliers begin to experience financial distress on top of operational challenges.
What is a manufacturer to do? One option, as David Dragich argues in a recent article he contributed to CFO.com, is to adopt an approach used by automotive suppliers and manufacturers for decades. In certain situations, some of the key elements of accommodation agreements—forbearance, financial support, limiting setoff rights—can be used to keep supply chains across industries flowing.
The Dragich Law Firm, located in Grosse Pointe, Michigan, is pleased to announce that David Dragich and Amanda Vintevoghel have been recognized as Michigan Super Lawyers in 2021.
David Dragich — Business Bankruptcy. David has been selected to Super Lawyers every year since 2014, and was recognized as a Super Lawyers—Rising Star from 2011-2013.
Amanda Vintevoghel — Business Bankruptcy. Amanda has been recognized as a Super Lawyers—Rising Star for four consecutive years from 2018-2021.
David represents businesses in all aspects of complex corporate reorganizations, business bankruptcy, insolvency and distressed asset acquisitions and dispositions. He also represents clients in commercial litigation cases and general corporate matters, including day-to-day business activities, along with other transactions. He is a graduate of the University of Detroit Mercy School of Law, where he now serves as an adjunct professor. He lives in Grosse Pointe Shores.
Amanda focuses her practice on business bankruptcy reorganization, business transactions, corporate restructuring, and commercial litigation She is a graduate of the University of Detroit Mercy School of Law, and is an active member of the Turnaround Management Association (“TMA”), and serves as a member of the TMA Board of Directors. She is also the past President of the TMA Detroit Chapter. She lives in Grosse Pointe Farms.
Each year, Super Lawyers recognizes the top lawyers in Michigan via a patented multiphase selection process that includes peer nomination and evaluation along independent research. The Michigan lawyers who receive the highest point totals during this selection process are named to this prestigious list. Learn more at www.superlawyers.com.
The promise of Chapter 11 bankruptcy is that it can offer a corporate debtor a fresh start through the confirmation of a plan of reorganization. That is non-controversial. What is almost always controversial is when a plan seeks to shield non-debtor parties, typically corporate officers and directors, from liability through the inclusion of a non-debtor release provision.
The ability to confirm a plan with non-debtor releases, however, may be coming to an end.
Recently, members of Congress introduced proposed legislation known as the “Nondebtor Release Prohibition Act of 2021” (the “NRPA”). The bill seeks to prohibit the release of non-debtors through non-consensual third-party releases in Chapter 11 cases by altering the way bankruptcy courts interpret the application of Bankruptcy Code Section 105(a) and 524(e), which are the key provisions related to non-debtor releases. The NRPA builds upon previously proposed legislation known as the Stop Shielding Assets from Corporate Known Liability by Eliminating Non-Debtor Releases (SACKLER) Act.
The introduction of both bills comes after pharmaceutical giant Purdue Pharma filed for Chapter 11 bankruptcy in September of 2019 and subsequently proposed an exit plan in 2021. The plan sparked concern from states and families of victims of the opioid crisis because it included a release of non-debtors including owners, officers, and directors of Purdue Pharma. The plan provided for the release of the Sackler family, owners of Purdue Pharma, from liability claims stemming from hundreds of thousands of deaths caused by the opioid crisis.
How Courts Evaluate Non-Debtor Releases
While legislation has been introduced to end the use of non-debtor release in Chapter 11 bankruptcy, it is uncertain whether it will become law. Until then, bankruptcy debtors and practitioners are left to grapple with how courts have interpreted and ruled upon non-debtor releases, and in particular courts’ analysis of Bankruptcy Code Sections 105(a) and 524(e).
Section 524(e) states: “Discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”
Section105(a) states: “The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”
Section 105 is considered the Bankruptcy Code’s equitable catchall provision, used by bankruptcy courts to grant relief and fashion remedies for issues that aren’t squarely addressed by the statute. This includes bankruptcy courts across the nation interpreting and reconciling Section 524(e) and its relation to a bankruptcy court’s equitable powers under Section 105(a) to determine whether there is a right to release non-debtors. Their conclusions have differed.
The majority of jurisdictions have determined that Section 524(e) does not bar release of non-debtors. The Seventh Circuit summarized the majority approach in Airadigm Communs., Inc. v. FCC (In re Airadigm Communs., Inc.), in which the court set forth three important concepts: “1. Bankruptcy code section 524(e) does not prevent bankruptcy courts from granting third-party releases; 2. Bankruptcy courts have the affirmative power to grant third-party releases; and 3. The applicable standard for granting a third-party release is that the release must be necessary for the reorganization and the release must be as narrowly tailored.” The Second, Fourth, Sixth and Tenth Circuit have joined the Seventh Circuit in this stance; that is, non-debtor releases are permitted to the extent they are “necessary for the reorganization” and “narrowly tailored.”
Each of the circuits that permit non-debtor releases identify Section 105(a) as the basis for the court’s discretionary power to approve plans that allow for non-debtor release. The Sixth Circuit, in the case of In re DOW CORNING Corp., illustrated the practice when it concluded, “11 U.S.C.S. § 105(a), along with § 1123(b)(6), provides the bankruptcy courts with broad authority to approve plans of reorganization that include provisions affecting creditors’ rights to recover against non-debtors, if the provisions are necessary to carry out the plan”
Since the decision in In re DOW Corning Corp., some courts have cited the so-called “Dow Corning factors” to determine when releases in a plan will be affirmed. The factors include:
An identity of interests between the debtor and the third party, usually an indemnity relationship, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate.
The non-debtor has contributed substantial assets to the reorganization.
The injunction is essential to reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against parties who would have indemnity or contribution claims against the debtor.
The impacted class, or classes, has overwhelmingly voted to accept the plan.
The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction.
The plan provides an opportunity for those claimants who choose not to settle to recover in full.
The bankruptcy court made a record of specific factual findings that support its conclusions.
Other courts, including the Fifth, Ninth and Tenth Circuits, have reached a different conclusion, and interpret Section 524(e) to bar non-debtors from release. The Ninth Circuit, in In re Am. Hardwoods, concluded, “Section 105 limits the court to ordering those injunctions ‘necessary or appropriate to carry out the provisions of this title . . . While endowing the court with general equitable powers, section 105 does not authorize relief inconsistent with more specific law.” Subsequently, in Resorts Int’l v. Lowenschuss the Ninth Circuit further solidified its stance stating, “this court has repeatedly held, without exception, that § 524(e) precludes bankruptcy courts from discharging the liabilities of non-debtors.”
The Implications of the NRPA
The Nondebtor Release Prohibition Act of 2021 would end the debate among the circuits about the permissibility of non-debtor releases by ending the practice of shielding owners, officers, or insiders of bankrupt entities from claims.
In a press release, the sponsors of the the bill explained that: “The Nondebtor Release Prohibition Act of 2021 would prevent individuals who have not filed for bankruptcy from obtaining releases from lawsuits brought by private parties, states, Tribes, municipalities, or the U.S. government in bankruptcy by: (1) Prohibiting the court from discharging, releasing, terminating or modifying the liability of and claim or cause of action against any entity other than the debtor or estate. (2) Prohibiting the court from permanently enjoining the commencement or continuation of any action with respect to an entity other than the debtor or estate.”
Along with Purdue Pharma’s proposed plan, the practice of shielding non-debtors gained national attention through other highly publicized bankruptcy cases including the Boys Scouts of America, USA Gymnastics, and the Catholic dioceses.
In each case, potential tort actions dealing with highly sensitive claims against third parties may be affected, which has sparked backlash similar to the statements made by members of Congress in connection with the introduction of the NRPA.
Some argue the NRPA would negatively impact the discretionary power of the bankruptcy courts and may alter the efficiency and speed of future bankruptcy cases.
Time will tell whether the NRPA becomes law. Until then, we are left to deal with the splintered, majority/minority approach to non-debtor releases that currently exists. We will continue to keep you apprised of further developments in this area.
In the meantime, if you have any questions regarding Chapter 11 bankruptcy, please contact David Dragich at ddragich@dragichlaw.com or Amanda Vintevoghel at avintevoghel@dragichlaw.com.
To file or not to file for bankruptcy? It’s a question that no business leader wants to consider, but sometimes it’s necessary. Indeed, given the challenges and uncertainties of the last 16 months, it has been a top-of-mind issue for many companies across different economic sectors.
However, despite the ongoing need for large businesses to seek bankruptcy protection, and Congress’s efforts to make Chapter 11 bankruptcy protection more widely available to small businesses, bankruptcy courts are not the right option for every struggling business.
If you have any questions about the various restructuring options available to your business, please contact David Dragich or Amanda Vintevoghel at 313-886-4550.
