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.
Chapter 11 bankruptcy offers corporate debtors many benefits, including the automatic stay, discharge of debts, rejection of unfavorable contracts and promise of a fresh start. However, along with these and other benefits come corresponding responsibilities, such as the requirement to file and prosecute a Chapter 11 case in good faith.
The good-faith requirement is intended to prevent abuse of Chapter 11 bankruptcy by those seeking to use it for reasons other than its primary purpose: to enable debtors to restructure debts and obtain a fresh start despite debt problems while treating creditors fairly.
If a debtor does not file in good faith, a bankruptcy judge can—as the National Rifle Association recently learned—dismiss the case.
The NRA Case
In August 2020, the New York Attorney General (“NYAG”) filed a complaint seeking dissolution of the National Rifle Association. The NRA subsequently filed a Chapter 11 case on January 15, 2021. Several parties in interest filed motions seeking dismissal of the NRA’s case for cause under section 1112(b) of the Bankruptcy Code or the appointment of a chapter 11 trustee or an examiner.
In its opinion dismissing the NRA’s case, the court concluded, “the question the Court is faced with is whether the existential threat facing the NRA is the type of threat that the Bankruptcy Code is meant to protect against. The Court believes it is not.” In re: National Rifle Association of America and Sea Girt LLC, Case No. 21-30085, D.I. 740 (Bankr. N.D.Tex. May 11, 2021).
The court found that, instead of using the bankruptcy courts for their intended purposes, the NRA filed bankruptcy to avoid dissolution. The court’s statement calls attention to the fundamental fact that the bankruptcy court is the proper forum for specific circumstances and should not be used as an instrument to evade claims and judgements in regulatory actions. The court’s conclusion shows the way the good faith requirement is used by the courts as a means to uphold the purpose of the bankruptcy process.
The Good Faith Requirement
While bankruptcy cases are typically easy to file, they do not always stick. In some instances, questions arise about what motivated a filing which may result in a court dismissing a debtor’s case entirely. Under section 1112(b) of the Bankruptcy Code, the court may dismiss a bankruptcy case “for cause.”
Although section 1112(b) does not explicitly require that cases must be filed in “good faith”, courts have overwhelmingly held that a lack of good faith in filing a Chapter 11 petition constitutes cause for dismissal. Marsch v. Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994). “Good faith is a predicate to the right to file a petition in bankruptcy, as only the ‘honest but unfortunate debtor’ is eligible to avail itself of the protections afforded by the Bankruptcy Code.”In re Jer Jameson Mezz Borrower II, LLC, 461 B.R. 293, 297 (Bankr. D. Del. 2011).
The “honest but unfortunate debtor” categorization casts a wide net, and therefore results in only a small number of cases being dismissed for lack of good faith. However, in some situations, such as the NRA case, courts are faced with questions about what constitutes good faith and how to detect when bad faith is present in filing for bankruptcy. Therefore, a discussion of good faith analyses is necessary to understand filing requirements and dismissals in the bankruptcy courts.
The Bankruptcy Code does not uniformly define “good faith.” Accordingly, the standard is applied to determine good faith varies across jurisdictions. The bankruptcy court in the NRA case, citing the U.S. Court of Appeals for the Fifth Circuit Court, explained that “determining whether the debtor’s filing for relief is in good faith depends largely upon the bankruptcy court’s on-the-spot evaluation of the debtor’s financial condition, motives, and the local financial realities.”
Neither the U.S. Supreme Court nor the Sixth Circuit Court of Appeals have adopted a precise definition of good faith, however both acknowledge that an analysis requires a factual inquiry and the weighing of a range of factors.
Courts also differ in the standards they use for evaluating good faith and on whom they place the burden of establishing good faith. Some courts require the debtor to establish good faith whereas others may require a prima facie case for lack of good faith before the burden shifts to the debtor. For example, in the Third Circuit, the burden is on the bankruptcy filer to establish good faith. In contrast, the Fifth Circuit requires the party moving for dismissal to make a “prima facie showing of a lack of good faith,” after which the burden shifts to the debtor to demonstrate such faith.
Despite a lack of uniformity regarding the standards for evaluating good faith under section 1112(b), most courts have used similar, if not identical, factors in their analyses. This is done because the underlying function of the good faith requirement, which is echoed in the court’s opinion in the NRA case, is to ensure the bankruptcy court is being used for its intended purpose. The Sixth Circuit has articulated eight factors that may be “meaningful in evaluating” whether a filing was done in bad faith, including:
1. the debtor has only one asset;
2. improper pre-petition conduct;
3. few unsecured creditors;
4. the debtor has been unsuccessful in defending against the foreclosure of its property in state court;
5. the debtor and one creditor have proceeded to a standstill in state court litigation, and the debtor has lost or has been required to post a bond which it cannot afford;
6. the filing of the petition effectively allows the debtor to evade court orders;
7. the debtor has no ongoing business or employees; and
8. a lack of possibility of reorganization.
In the NRA case, as well as others, the sixth factor weighed heavily in the court’s dismissal of the case. In short, courts seek to determine whether debtors file bankruptcy merely as a method of forum shopping. For example, in the NRA case, the court concurred with the NYAG’s assessment that “the NRA is using this bankruptcy case to address a regulatory enforcement problem, not a financial one.” The court determined that the NRA shopped for the forum that would serve to protect its interests against the NYAG and had not selected the bankruptcy court for its intended purpose of allowing an entity to remain financially viable in the face of ongoing litigation.
Implications of the NRA Case and Good-Faith Filing Requirement
Despite the fact that the “good faith” requirement of section 1112(b) is not concretely defined in the Bankruptcy Code, and courts have not agreed upon a uniform standard to evaluate the requirement, standards have emerged that should inform would-be debtors’ decisions as to whether a filing would be in good faith or not. The NRA case, as well as other other modern cases, illustrate courts’ intentions to preserve the intended purpose of Chapter 11 bankruptcy, deter avoidance or evasion from enforcement actions, and identify instances of forum shopping by enforcing a good-faith filing requirement.
Accordingly, the NRA case underscores the importance of clearly outlining proper purposes for any bankruptcy filing and following corporate governance requirements when making the decision to file for bankruptcy.
The Dragich Law Firm was founded in 2009, in the midst of the Financial Crisis and on the cusp of the automotive restructuring boom. But every wave crashes and restructuring work, particularly the large Chapter 11 bankruptcy filings that keep armies of lawyers busy, eventually slowed down.
For our firm, a new plan was required. Instead of waiting for the phone to ring—it had rung off the hook since the beginning—we had to employ a more strategic approach. And a big part of our strategy involved generating more referral work from our large firm counterparts.
In this article published by Law.com, Dave Dragich discusses how our firm pivoted its approach, which helped us grow and thrive as a small firm and not merely survive.
In short, even when you’re small, you can and should think big.
Federal receiverships are an effective, but often underutilized, option for creditors to enforce their rights. In many instances, a federal receivership can lead to more favorable results for a creditor relative to bankruptcy or a state court receivership.
Receiverships in federal court are permitted under Rule 66 of the Federal Rules of Civil Procedure and codified in 28 U.S.C § 3103. A federal court may appoint a receiver upon “reasonable cause to believe that there is a substantial danger that the property will be removed from the jurisdiction of the court, lost, concealed, materially injured or damaged, or mismanaged.” Additionally, unlike most state receivership laws, federal receiverships apply to both personal and real property (although Michigan and North Carolina recently amended their state receivership laws to make them applicable to more business and asset types). As with all federal court actions, federal receivership proceedings require either a federal question or diversity citizenship between the parties.
There are many similarities between receiverships in state and federal courts. Receivers in both state and federal receiverships act as officers of the appointing court and enjoy similar rights and duties regarding the control and disposition of receivership property. Also, both federal and state receiverships require the receiver to file periodic reports accounting for any expenditures or disposition of receivership property.
Similar to state receiverships, federal courts consider a number of factors before appointing a receiver, including the probability that fraudulent conduct has or will frustrate the creditors claim, imminent danger that collateral property will be lost or will diminish in value, inadequacy of legal remedies, lack of equitable remedies, and the likelihood that appointing a receiver will do more harm than good.
Receiverships in federal court, however, can provide certain advantages over receiverships in state court. Generally, the federal court process is more streamlined and moves faster. Federal courts can also empower receivers to act across state borders, wherever assets are located. This allows the receiver to effectively manage and monetize receivership property without having to receive authorization from multiple jurisdictions.
Additionally, federal receivers are authorized to conduct both public and private sales of receivership property. Unlike most state receiverships, which typically require the receiver to sell receivership property at public auction, the ability to conduct private sales of receivership assets, subject to certain statutory requirements such as obtaining three independent appraisals, streamlines the liquidation process in federal receiverships. The ability to sell assets without taking possession of them, as may be required in a traditional foreclosure, also makes the federal receiver remedy an attractive one for secured creditors. Lastly, creditors have substantial input into the selection and appointment process of receivers in federal court, especially in the absence of an objecting debtor.
A federal receivership also may be more advantageous to a Chapter 11 bankruptcy restructuring because it is not subject to the same procedural requirements as a bankruptcy proceeding, typically involves fewer parties and professionals, no committees, and no plan and confirmation process, among other things. As a result, the federal receivership process tends to be faster and less costly than bankruptcy. At the same time, many of the benefits of bankruptcy, such as the imposition of an automatic stay and rejection of executory contracts, can be obtained through a well-crafted federal receivership order.
In short, federal receiverships offer many of the benefits of state receiverships and federal bankruptcy proceedings, as well as additional advantages in certain cases. In particular, in situations where a creditor is seeking to enforce its rights across multiple jurisdictions, but doesn’t want to incur the time and expense of a bankruptcy proceeding, a federal receivership can be an effective option.
If you have additional questions regarding federal receiverships and how they can be used to enforce a creditor’s rights, please contact David Dragich at ddragich@dragichlaw.com or Amanda Vintevoghel at avintevoghel@dragichlaw.com.
We’re all too aware that the world looks and functions far differently than it did twelve months ago, and the manner in which legal advocacy is conducted is no exception. Our firm, led by trial counsel January Dragich, recently wrapped up the representation of two corporate clients which culminated in a successful trial conducted via Zoom.
Our clients in the case—two South Korean corporations—were sued for breach of contract stemming from an agreement to supply steel pallets used in manufacturing facilities. The case was brought by the plaintiff in Michigan state court.
During the course of litigation, we obtained dismissal of all counts against one defendant. The claims against the remaining defendant included a request for damages in excess of $2 million.
This multi-count breach of contract case involved an intensive and extensive discovery process, which included Zoom depositions of two witnesses in South Korea and the review and production of thousands of pages of electronic discovery documents.
The parties ultimately went to trial and January Dragich led the defense of our client in proceedings conducted by Zoom.
While the court decided in plaintiff’s favor on liability and on the issue of attorney fees, the breach of contract damages awarded—$81,000—were a mere fraction of the $2 million-plus in damages asserted. Given what was at stake, and the plaintiff’s unwillingness to reach a reasonable settlement, by all accounts (particularly our client’s) the trial was a success.
“This three-day trial posed a lot of challenges, from technology to complex witness testimony, including multiple expert witnesses relating to the steel and concrete industries, metallurgy, and lost profits claims,” said January Dragich. “I am thrilled that we could deliver a positive result for our clients who were facing significant liability in a Michigan court while they observed from half a world away.”
According to firm founder David Dragich, “This case is representative of the well-rounded counsel and advocacy we provide to our clients, in general, and a testament to the skill and dedication of January and our commercial litigation team, in particular.”
To learn more about the firm’s commercial litigation capabilities, as well as its corporate restructuring and transaction services, please contact David Dragich at ddragich@dragichlaw.com or 313.886.4550.
The Dragich Law Firm recently concluded its representation of Gene Kohut of Conway MacKenzie, Inc., in his role as assignee for the benefit of creditors. The underlying assignment for the benefit of creditors (“ABC”) proceeding involved the assets of AT Group US, LLC, Ann Arbor Distribution, Inc., and certain other affiliates.
An ABC is an insolvency proceeding governed by state law rather than federal bankruptcy law. In some states, the right to pursue an ABC is rooted in the common law, in others it’s governed by statute. In Michigan, MCL § 600.5201 sets forth the procedural requirements for a company making, and an assignee accepting, an assignment for the benefit of creditors.
Generally speaking, in an ABC, a company (the assignor), transfers all of its rights, title, and interest in its assets to an independent fiduciary (the assignee). The assignee then liquidates the assets and distributes the net proceeds to the company’s creditors.
In this case, which was initiated in the Circuit Court for the County of Washtenaw, Michigan, our firm worked closely with the assignee to complete all tasks required to wind-down the assignors, including:
Liquidation of all assets, including rolling stock and other vehicles
Distribution to creditors
Dissolution of all entities, including filing final tax returns, wind down of 401(k) plans and other wind-down activities
Assignments for the benefit of creditors, as well as state and federal court receiverships, are increasingly popular and effective alternatives to Chapter 11 bankruptcy. The Dragich Law Firm has extensive experience representing fiduciaries in such proceedings in Michigan and across the country. If you would like to learn more about our services, please contact David Dragich at ddragich@dragichlaw.com or Amanda Vintevoghel at avintevoghel@dragichlaw.com.
We are pleased to announce that Amanda Vintevoghel has been elevated to partner at The Dragich Law Firm PLLC. Over the last decade, Amanda has shown great dedication to our practice, our clients, and she is an active member of the community. Please join us in congratulating Amanda as she embarks on this exciting new chapter in her career.
Amanda is integrally involved in the firm’s active corporate restructuring practice, representing businesses in restructurings and wind-downs, both inside and outside of court. She is also a commercial litigator who represents clients across a number of industries in state and federal courts, as well as in alternative dispute resolution forums.
Amanda is a member of the American Bankruptcy Institute and the Turnaround Management Association, where she serves as a member of the TMA Board of Directors. She is also the past President of the TMA Detroit Chapter.
A state or federal court receivership can be a viable and effective alternative to a federal bankruptcy proceeding, which often costs more, takes longer, and involves more oversight than a receivership.
A receivership involves the court appointment of a receiver to oversee and, in most cases, operate and/or liquidate a business. A receiver is a neutral and independent third party appointed to act on behalf, and for the benefit, of all interested parties.
Secured lenders typically include clauses in loan agreements that authorize the appointment of a receiver in the event of a loan default. It’s often assumed that, because a borrower consents to the appointment of a receiver by contract, that a court’s appointment of a receiver is a mere formality. It’s not—at least it’s not a foregone conclusion.
The issue of the enforceability of a contractual provision for the appointment of a receiver was at issue in a case, The Huntington National Bank v. Sakthi Automotive Group USA, Inc., before the United States District Court for the Eastern District of Michigan. The court ultimately appointed a receiver in the case, but in doing so did not rely on contractual language alone. As discussed below, it considered common law factors as well in making its decision.
(Editor’s Note: The Dragich Law Firm serves as legal counsel to the court-appointed receiver of Sakthi Automotive Group USA, Inc.’s assets, but was not counsel to the company in the litigation described in this article.)
The Court’s Analysis Regarding the Appointment of a Receiver
As a starting point, the court considered the contractual basis for the appointment of a receiver, including section 11.5 of the Credit Agreement between Sakthi Automotive Group USA, Inc. (“Sakthi”) and The Huntington National Bank (“Huntington”), which entitled Huntington to the appointment a receiver in the event of Sakthi’s default, and provides:
Upon the occurrence of an Event of Default and at all times thereafter, the Lender shall be entitled to the immediate appointment of a receiver for all or any part of the Collateral, whether such receivership is incidental to the proposed sale of the Collateral, pursuant to the Uniform Commercial Code or otherwise. Each Loan Party hereby consents to the appointment of such a receiver without notice or bond, to the full extent permitted by applicable statute or law; and waives any and all notices of and defenses to such appointment and agrees not to oppose any application therefor by the Lender, but nothing herein is to be construed to deprive the lender of any other right, remedy, or privilege the Lender may have under law to have a receiver appointed, provided, however, that, the appointment of such receiver shall not impair or in any manner prejudice the rights of the Lender to receive any payments provided for herein. Such receivership shall at the option of the Lender, continue until full payment of all the Obligations.
A similar provision was included in the mortgage agreement between the parties.
While the court recognized that the appointment of a receiver was a remedy that Sakthi agreed to in the loan documents, its analysis did not stop there. The court explained, in its order denying Sakthi’s motion to delay the appointment of a receiver, that courts “disagree about whether a party’s advanced contractual consent to the appointment of a receiver is dispositive of the issue of appointment or simply a factor that favors appointment.” There are additional factors, found in the common law, that can weigh on the decision.
The common law factors were articulated in the case of Meyer Jewelry Co. v. Meyer Holdings, Inc., 906 F. Supp 428 (E.D. Mich. 1995), and include:
1. The existence of a valid claim by the moving party;
2. The probability that fraudulent conduct has occurred or will occur to frustrate the claim;
3. Imminent danger that property will be lost, concealed, or diminished in value;
4. Inadequacy of legal remedies;
5. Lack of a less drastic equitable remedy; and
6. The likelihood that appointment of a receiver will do more harm than good.
After analyzing these factors, the court found that most, if not all, weighed in favor of the appointment of a receiver. Beyond the existence of a contractual agreement, the court noted that: “Courts contemplating the appointment of a receiver have considered a number of factors but have found the adequacy of the security and the financial position of the [defendant] to be most important.”
Finally, the court considered the balance of harms between the parties should a receiver be appointed. Here again, the court referred back to the contractual agreement in ruling in favor of Huntington Bank, explaining that when a party contractually agrees to not to contest the appointment of a receiver, “[T]here is little harm in enforcing the terms of the parties’ bargain.”
Contractual Agreements Weigh Heavily, But are not Dispositive
A receivership provision in a loan agreement will weigh heavily, but will likely not be dispositive, in a dispute as to whether to appoint a receiver. A lender seeking appointment of a receiver should also be prepared to make a showing that the common law factors outlined above support the appointment of a receiver.
Bankruptcy is an option that no business wants to contemplate. However, when a business is struggling, failing to consider bankruptcy soon enough often serves to hasten its arrival. Putting bankruptcy on the table as a strategic option can have the opposite effect—it can help a business avoid bankruptcy altogether. When experiencing financial and/or operational distress, an experienced bankruptcy attorney can help your business realize many of the benefits of bankruptcy—reduced debt, streamlined operations—without the expense, time investment, and potential loss of control that comes with a Chapter 11 filing.
Many businesses have filed for bankruptcy this year. Through October, according to the American Bankruptcy Institute, approximately 28,000 commercial bankruptcies have been filed in 2020. That’s an average of over 130 commercial filings every day.
But 28,000 commercial bankruptcies is a relative drop in the bucket when you consider the full scope of the economy. Instead of filing for bankruptcy, many businesses have simply closed down this year. According to Yelp’s Local Economic Impact Report, approximately 100,000 businesses closed as of September, and that only reflects the limited data set of businesses within Yelp’s network.
Despite changes made to the Bankruptcy Code in the past year to make it easier for more businesses to file for bankruptcy, for most it’s still not a viable option. Even if it’s not the right ultimate option, it doesn’t mean that businesses shouldn’t consider bankruptcy and seek counsel from a corporate bankruptcy attorney. The credible threat of bankruptcy can create a variety of new options that may not otherwise be available.
The threat of bankruptcy can create leverage that allows a business to renegotiate and restructure debts in ways that allow it to continue to operate. From lenders to landlords, secured and unsecured creditors, in most cases, will be better off if their debtors avoid bankruptcy.
For example, with the threat of bankruptcy in its back pocket, a business with an above-market-rate lease can utilize a bankruptcy attorney to approach its landlord to negotiate better terms. The landlord may not be happy about engaging in such discussions, but the business will have leverage because the landlord will be motivated to avoid a bankruptcy filing. In a bankruptcy, the business will be able to reject the lease, leaving the landlord with a vacant space and a potentially worthless unsecured claim. Particularly in this environment, in which commercial real estate is struggling, an operating tenant who is paying lower rent is better than a bankrupt tenant and a rejected lease.
By working with a corporate bankruptcy attorney before bankruptcy becomes the only option available, a business can pursue a holistic approach that lowers its debts across the board, rather than dealing with parties on a one-off basis. We commonly work with clients to address their debts through an out-of-court workout or restructuring as an alternative to Chapter 11 bankruptcy. This process involves negotiating and entering into a contractual agreement with a business’ creditors in order to resolve debt obligations and move toward financial stability.
The out-of-court workout process involves discussions with a business’ secured and unsecured creditors for the purpose of putting cards on the table—including discussions about the issues that created a company’s financial distress, its current revenues and debt structure, and the plan for moving forward. Negotiations to restructure debts, establish payment plans for past due debts, and address new payment terms then ensue. The end-game is to convince the creditors that a workout is their best opportunity for payment, and to strike a comprehensive agreement memorialized by contractual agreements. Typically, none of this is possible unless creditors believe there is a credible threat of bankruptcy should negotiations fall apart.
One of the key reasons it is important to engage the counsel of a corporate restructuring attorney at the first signs of distress is that restructuring attorneys are both specialists, in their core areas of expertise, and generalists in many other disciplines. Because they are brought in to help businesses address a wide spectrum of issues across the business, they must be competent to advise clients in areas such as real estate, labor, intellectual property, contract issues, financing, and litigation, among others. At a minimum, they must know enough to spot an issue that merits calling in a specialist. They are quarterbacks who survey the field and make the right play calls.
These qualities are critical to help distressed businesses address their financial and operational challenges. Chapter 11 bankruptcy may be the right forum for a business to gain a fresh start, but not always. Many times, the mere threat of bankruptcy, bolstered by the presence of an experienced corporate bankruptcy attorney, is enough to remain out of court and achieve the desired outcome.
No one relishes the idea of winding down their business. Unfortunately, business dissolution is increasingly common these days due to the economic hardship caused by the COVID-19 pandemic. While the big Chapter 11 bankruptcy cases get all the headlines, there are far more businesses that simply shutter outside of bankruptcy because there’s no hope of reorganizing. Data from Yelp suggests that, as of August 31, approximately 98,000 businesses have permanently closed since March 1—and that’s just within the relatively small sample set of businesses on Yelp’s platform.
As anyone who has gone through the process of winding down a business comes to learn, 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 must be undertaken. Such a process often requires the involvement of legal counsel in order to ensure that it’s done right, and owners and officers can walk away confident that they will not face future claims.
A common issue faced by businesses going through a dissolution and wind-down process is dealing with outstanding creditor claims. There are a number of reasons why a business may be winding down, including financial distress, the retirement of a sole shareholder, or the sale of assets to another business (which include the core business continuing, at least to some extent, as a going concern). Regardless of the reasons, if a business is winding down, it’s likely to have at least some number of creditors with debts owed by the business at the time of dissolution. The length, complexity, cost, and certainty of a wind-down process will be determined, in large part, by how the business deals with its creditors.
Communicating with Creditors During a Wind-Down
Michigan’s Business Corporations Act (the “BCA”) provides that, when a business chooses to dissolve under state law, the winding up of affairs includes the collection and sale or transfer of the corporation’s assets, the payment of any outstanding debts and liabilities, and any other actions required to liquidate the business. The BCA requires that the business provide notice to creditors of the corporation’s dissolution. Once notice is given, creditors have a limited amount of time in which to pursue a debt or liability against the corporation.
However, such a notice is not the end (and often not the beginning) of discussions with creditors concerning past due debts. Because creditors won’t, in most instances, simply accept their fate and disappear once they learn their customer is winding down, it’s best to be proactive and form a creditor communication strategy from the start. There are risks for failing to do so:
The business may get swamped with inbound demands for payment that bog down those responsible for executing the wind down;
The reputations of the business leaders may be negatively affected, which may inhibit their ability to do business in the industry in the future; and/or
Certain creditors, feeling jilted, may be more likely to pursue business owners/officers for personal liability.
So what should a communication strategy look like? First, it should be tailored to address each unique creditor cohort. For instance, the frequency and extent of communication with a secured lender, or other creditor holding a debt subject to a personal guaranty, is obviously going to be more robust (and led by legal counsel) than what is afforded a business’ smallest unsecured creditors.
For the larger swath of unsecured creditors, a communications strategy should be context dependent. The term “wind-down” can encompass various scenarios. Is the business shuttering altogether? Is it significantly downsizing but continuing to operate in some limited capacity? Are core assets being sold to a third-party buyer who is also bringing the business owner on as an employee?
In any wind-down scenario, the best approach is to be proactive and honest. There is little upside in hiding from unsecured creditors, given the risks outlined above. Once the business wind-down strategy is determined, the communication strategy should involve transparently addressing creditor concerns, including the extent and timing of any payments they may receive. In situations involving significant secured debt, there may be no distribution to unsecured creditors, and a business can avoid lots of questions by laying out why there will be no money left over to pay unsecured debts.
In short, there is no one-size-fits-all approach to communicating with unsecured creditors in a wind-down. Experienced legal counsel should be involved in developing the strategy. Communication missteps can lead to bad outcomes, such as extra work and expense in the wind-down process, and the possibility of claims of personal responsibility that owners/officers must contend with. A smart communication strategy helps smooth the road for an organized, streamlined wind-down process.
If you have any questions, or require assistance, in determining the best path forward for your business please contact David Dragich at ddragich@dragichlaw.com or 313.886.4550. From restructuring to wind-down, we help our clients address challenges, mitigate risks, and maximize the value of assets.
