In a year that has had many twists and turns, The Dragich Law Firm has been busy serving clients in the areas of corporate restructuring and commercial litigation as a public health crisis resulted in an economic crisis. Here is some of the latest news related to our firm.
David Dragich and Amanda Vintevoghel Recognized in Michigan Super Lawyers Listings
The Dragich Law Firm is pleased to announce that David Dragich and Amanda Vintevoghel have been named to the 2020 Michigan Super Lawyers and Michigan Super Lawyers Rising Star lists, respectively, for their accomplishments in commercial bankruptcy law by Super Lawyers Magazine. The annual listing honors outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement.
Super Lawyers selects attorneys based on a patented multi-phase process, in which peer nominations and evaluations are combined with third party research. Each candidate is evaluated on 12 indicators of peer recognition and professional achievement in an effort to create a credible, comprehensive and diverse listing of attorneys that can be used as a resource for those searching for legal counsel.
The Dragich Law Firm Retained as Counsel to the Assignee in KLO Acquisition ABC
The Dragich Law Firm has been retained as legal counsel to Gene Kohut of Conway Mackenzie, Inc. in his role as the Assignee in the KLO Acquisition ABC. The case involves an assignment for the benefit of creditors, or “ABC,” which involves an entity (“Assignor”) transferring legal and equitable title, as well as custody and control, of its assets and property to an independent third party (“Assignee”) in trust. The Assignee then applies proceeds of sale of the property to the Assignor’s creditors in accord with priorities established by law.
ABCs are a well-established common law tool and alternative to formal bankruptcy proceedings. The KLO Acquisition ABC was established to address the assets of KL Outdoor LLC, a producer and distributor of plastic outdoor products, such as kayaks and related accessories..
To file or not to file? That is the question on many business leaders’ minds these days as lots of companies across different sectors of the economy struggle to gain traction, and an increasing number are turning to bankruptcy.
Corporate bankruptcies are on track to hit their highest level in a decade according to a report released by S&P Global. 424 public companies and private companies with public debt have declared bankruptcy as of August 9, 2020, including household names such as J.Crew, JCPenney, Lord & Taylor, and Neiman Marcus Group. That surpassed the number of filings during any period since 2010.
Accordingly, more businesses are seeking protection under Chapter 11 of the U.S. Bankruptcy Code, with the intention of shedding debt and emerging as leaner, more profitable companies. More small businesses may also be getting into the restructuring mix soon, as Congress, pursuant to the CARES Act, increased the debt levels under the recently passed Small Business Restructuring Act (“SBRA”), thereby making more small businesses eligible for the SBRA’s streamlined Chapter 11 process.
However, despite the recent rise in bankruptcy filings due to the economic downturn, and Congress’ efforts to make Chapter 11 bankruptcy protection more widely available, not every struggling business should attempt to restructure under the Bankruptcy Code. Typically, companies that succeed in restructuring under Chapter 11—and those that don’t—share certain characteristics.
Here are a few guidelines that may help determine whether Chapter 11 is the right option (or not):
A Core Business to Reorganize Around and/or Equity to Protect
A company is a good candidate for Chapter 11 if there is a viable business that can be preserved if given some breathing space from creditor collection activity. Any debtor who has assets with significant equity that will be lost to repossession or foreclosure may also benefit from Chapter 11.
It’s rare that a business that is struggling across the board—that is, has no core business that is viable—will enter Chapter 11 and turn around its business to the point where it can successfully emerge from bankruptcy. Indeed, while Chapter 11 offers a breathing spell from creditor collection actions, it comes with its own costs and complexities that can hinder management’s efforts at restructuring the underlying business.
A Strategic Initiative, Such as a Sale, to Accomplish
Businesses are increasingly making quick trips through Chapter 11 for the specific purpose of selling assets in a transaction under Section 363 of the Bankruptcy Code (called a “363 sale”). Such transactions are done in bankruptcy in order to shed debt and burdensome contracts and transfer assets to a buyer free and clear of claims. The debtor’s remaining assets and creditor claims are then dealt with in bankruptcy.
Debtor has Access to Financing
Most Chapter 11 debtors enter bankruptcy with millions of dollars in pre-petition debts—debts they accrued before the filing by withholding payments to lenders, landlords, and other creditors. Accordingly, one might assume that having enough cash to operate the business in bankruptcy would not be a concern. However, in addition to needing cash to operate the business, a bankrupt debtor must pay the costs associated with being in bankruptcy, including administrative costs and professional fees.
As a result, most debtors cannot rely on cash flow alone to get through a Chapter 11, even if a company is aggressively cutting operational costs during the process. In almost all cases of any size, debtors must seek debtor-in-possession (DIP) financing to help them get to the other side.
Debtor has Few Concerns About Scrutiny of its Books and Transactions
Bankruptcy policy requires transparency with respect to a debtor’s business decisions and financial transactions leading up to a filing. Parties in interest, such as a creditors’ committee and the U.S. Trustee, are granted broad investigatory rights related to a Chapter 11 debtor.
To the extent directors and officers have taken prepetition actions that devalued the company, such as issuing large distributions/dividends to themselves, creditors will be highly incentivized to scrutinize every act or omission by such directors and officers. The recovery of assets that may have been transferred fraudulently benefits creditors, as it increases the pool of assets to be distributed to them. Accordingly, a company’s ownership and management should carefully consider whether any actions they took in the period leading up to a possible Chapter 11 bankruptcy filing might give rise to scrutiny that may expose them to liability.
Conclusion
While there are many reasons Chapter 11 bankruptcy might be a good option for a struggling business, there are many reasons why it should be avoided. There are other restructuring options, such as a receivership or assignment for the benefit of creditors, that may be more appropriate given a company’s individual circumstances.
To learn more about various corporate restructuring options, please contact David Dragich at ddragich@dragichlaw.com or 313.886.4550.
It has been years since businesses have filed for Chapter 11 bankruptcy protection at the pace they are doing so today. According to data from Epiq Systems, commercial Chapter 11 filings were up 48% in May as compared to May 2019, with a total of 724 new petitions. The surge in filings comes as little surprise, as many sectors of the economy, particularly retail and hospitality, are being hit hard by the COVID-19 pandemic.
Chapter 11 bankruptcy was a household term a decade ago, as businesses sought refuge from the fallout of the financial crisis, and it’s creeping back into our collective consciousness. Despite its ubiquity in the headlines of the financial press, there are common misconceptions about what Chapter 11 means and what the process entails. As a result, some perceive Chapter 11 as a fix-all “silver bullet” for troubled companies even though it’s not. Others avoid Chapter 11 at all costs, often to their detriment, for fear of being tagged by a “scarlet letter.” The truth lies somewhere in the middle.
Here are five of the most common misconceptions about Chapter 11 bankruptcy:
1. Bankruptcy Means Going Out of Business
Just because a business files for bankruptcy does not mean it is going out of business. While a Chapter 7 business bankruptcy filing involves the liquidation of a company, Chapter 11 allows a business to restructure its debts and remain in operation. A business going through Chapter 11 often downsizes as part of the process, but the objective is reorganization not liquidation. Some companies don’t survive the Chapter 11 process, but many others, including household names such as Marvel Entertainment and General Motors, successfully emerge and thrive.
Fundamentally, the result of most Chapter 11 cases is merely that there is a change in ownership in the newly reorganized entity from equity holders to creditors and bondholders, since creditors and bondholders are entitled to a higher priority on assets than shareholders.
The stores remain operational, the assembly line keeps moving, and the planes keep flying. In other words, the assets remain productive—just under a different ownership and debt structure.
2. Chapter 11 Requires a One-Size-Fits-All Approach
A financially distressed company can seek Chapter 11 protection to halt litigation and collection efforts, negotiate with its creditors, and propose and confirm a plan of reorganization that allows the company to emerge from bankruptcy with a fresh start. While that may be the traditional use of the process, Chapter 11 can be used as a strategic tool to effectuate different outcomes, including the sale of all or substantially all of the company’s assets. Indeed, many companies who enter Chapter 11 have no intention of reorganizing as a going concern. The primary purpose of many cases is to quickly conduct a sale (called a “363 sale”) in which a buyer acquires the debtor’s assets, and the proceeds are used to pay creditor claims.
The threat of bankruptcy, itself, can also be used as a strategic tool, allowing a company to reorganize outside of court, such as by negotiating more favorable real property lease terms which could otherwise be rejected in a bankruptcy proceeding.
3. Chapter 11 is a Long, Drawn-Out Process
There have been companies that have languished in Chapter 11 for years, but a bankruptcy case does not need to drag on endlessly. In fact, Chapter 11 cases can wrap up in as little as 24 hours or less. In 2019, Sungard Availability Services emerged from bankruptcy a mere 19 hours after its case was filed.
A lightning-fast bankruptcy is known as a prepackaged case, or “prepack,” which involves the negotiation with creditors and voting on a Chapter 11 plan before the bankruptcy case has even been filed. Pre-negotiated cases are ones where a Chapter 11 plan is developed before the filing with the company’s principal creditors, and the bankruptcy filing is premised on a plan to pursue that plan. Prepackaged and pre-negotiated cases, which take significantly less time than a traditional, “free fall” case, account for the majority of all large Chapter 11 filings, according to the American Bankruptcy Institute.
4. A Bankrupt Company Has Plenty of Money Because it Doesn’t Have to Pay its Creditors
Most Chapter 11 debtors enter bankruptcy with millions of dollars in pre-petition debts—that is, debts they accrued before the filing by withholding payments to lenders, landlords, and other creditors. Accordingly, one might assume that having enough cash to operate the business in bankruptcy would not be a concern. However, in addition to needing cash to operate the business, a bankrupt debtor must pay the costs associated with being in bankruptcy, including the fees of lawyers and other professionals. Such costs can total in the tens, and sometimes hundreds, of millions of dollars in large cases.
As a result, most debtors cannot rely on cash flow alone to get through Chapter 11, even if a company is aggressively cutting operational costs during the process. In almost all cases of any size, debtors must seek debtor-in-possession (or “DIP”) financing to help them get to the other side.
5. Customers and Vendors will Flee
Commencing a Chapter 11 case involves filing a petition and paying a filing fee. Most customers of a bankrupt company will likely never know it is in Chapter 11 unless they’re skimming through the pages of The Wall Street Journal. People are still buying shoes at Neiman Marcus, and renting cars from Hertz. For all intents and purposes, it’s business as usual while the reorganization process unfolds in bankruptcy court.
Most vendors and suppliers, on the other hand, become aware when a customer files for bankruptcy. Those who are creditors of the bankrupt company will receive various notices throughout the case. However, unless a debtor chooses to terminate a relationship, most vendors and suppliers opt to stick around—even when they’re owed a pre-petition debt.
In some instances, such as when there is an existing contract in place obligating them to perform, vendors and suppliers have no choice but to continue the relationship. In other instances, they choose to because they’re entitled to be paid for goods and services they provide as an “administrative expense” of the bankruptcy—a high priority in the claim priority scheme established by the Bankruptcy Code. As long as the debtor has sufficient cash flow and/or DIP financing to operate, the risk of not being paid while the debtor is in Chapter 11 tends to be low.
Dispel the Misconceptions to Make Informed Decisions
We are bound to see more bankruptcies in the months ahead. The wave is just building. Accordingly, it’s important, as a troubled company, or as the customer or supplier of one, to understand the process. The failure to do so can lead to poor decisions and missed opportunities.
Amanda Vintevoghel, attorney at The Dragich Law Firm, has recently completed her one-year term as president of the Detroit chapter of the Turnaround Management Association (“TMA”). While Amanda’s term as president has expired as of June 30, 2020, she will remain on the chapter’s board of directors.
In addition to serving as a board member, Amanda will also take part in the TMA Global Nominations Committee for 2021 leaders. The Nominations Committee is one of TMA’s most important committees, charged with ensuring the steady continuity of TMA leadership and creating a strong pipeline of future TMA leaders. Amanda’s participation will help the committee ensure that TMA continues to be the authority in the turnaround industry during these tumultuous times and far into the future.
“Amanda has done a tremendous job as president of the TMA’s Detroit chapter, which plays an important role in providing valuable educational opportunities and bringing together members of our local turnaround and restructuring community. We are proud of her hard work and leadership,” said David Dragich, founder of The Dragich Law Firm.
Amanda’s time with the TMA began in 2012, and she has served in various roles for the Detroit Chapter, including president of NextGen, which focuses on cultivating membership and participation in the TMA among professionals ages 40 and under. Additionally, Amanda was awarded the 2018 TMA NextGen “Top of the Class Award,” which is given bi-annually to professionals who have reached a significant level of success in the turnaround and restructuring industry before the age of 40.
The Chicago-based Turnaround Management Association (TMA) is an international nonprofit association comprised of attorneys, turnaround consultants, bankers and other professionals dedicated to turnaround management and corporate renewal.
For a recent article published by Crain’s Detroit Business, David Dragich was asked to share his perspective regarding the corporate bankruptcy and turnaround market in metro Detroit. Despite the economic downturn due to the COVID-19 crisis, there have been few corporate bankruptcy filings over the past several months.
The low number of filings is due to several factors, including the availability of government stimulus and accommodations made by banks and landlords for distressed companies. However, Dave and other experts cited in the article expect the number of bankruptcy filings to ramp up considerably.
However, while cases will almost certainly increase from current levels, in the article Dave shares why Chapter 11 is not always a viable tool for a troubled company: “One of the underlying premises for a Chapter 11 bankruptcy is that the business is viable on a go-forward basis; it’s a reorganization tool to restructure contracts and debt. Unless there is and until there is a viable business, companies are not going to just file a bankruptcy for the sake of it. They need a plan in place and right now they don’t have one.”
Click here to read the full article on Crain’s Detroit Business.
The COVID-19 crisis has created a surge in corporate bankruptcies across the globe. As a result, commercial landlords have been forced to deal with more tenants, particularly in the retail industry, who are in, or on the verge of, Chapter 11 bankruptcy.
In a recent article published on CoreNet Global’s blog, The Pulse, David Dragich discusses 5 issues that a landlord should take into consideration in order to understand its rights, exercise its remedies, and recover as much as possible under a lease agreement with a bankrupt tenant.
In the article, Dave answers the 5 following questions:
What is the effect of a tenant’s bankruptcy on a lease?
What are a tenant’s obligations with respect to lease payments during bankruptcy?
What is the “automatic stay” and what impact does it have on a landlord’s ability to enforce its lease remedies?
What are a landlord’s rights when a tenant seeks to assign a lease to a third party?
Is a landlord entitled to damages when a tenant rejects a lease?
Click here to read the full article on The Pulse. CoreNet Global is a non-profit association, headquartered in Atlanta, Georgia, representing more than 11,000 executives in 50 countries with strategic responsibility for the real estate assets of large corporations.
In late March, most automotive suppliers, in Michigan, across the country, and around the world, halted operations as automotive manufacturers closed plants in response to the COVID-19 pandemic. Auto suppliers are now determining when and how to resume operations.
The New York Times recently reported that major U.S. auto suppliers communicated to Michigan Governor Gretchen Whitmer that they are ready to resume production and requested that she provide clarity about when they will be permitted to do so in light of the ongoing state of emergency in Michigan. According to the Times, the Motor & Equipment Manufacturers Association and Original Equipment Suppliers Association told Whitmer that “delays in re-opening facilities would increase liquidity risk for suppliers and jeopardize long-term capital investment and employment for Michigan.” Subject to certain safety protocols being implemented, Governor Whitmer, through Executive Order 2020-77 permitted manufacturing, including auto suppliers, to resume operations on May 11. The automakers have targeted May 18 as the date by which they hope to get operations back on-line.
Regardless of how soon the automotive industry restarts, it will be a tough road ahead for many suppliers. Automakers such as Ford and Fiat Chrysler recently announced billions in losses during the first quarter of 2020, and have predicted even more challenging times ahead. The financial struggles of those at the top will ripple down the supply chain.
In light of these circumstances, it is incumbent on auto suppliers to be aware of signs of financial distress—their own, and that of their suppliers and customers up and down the supply chain. The days ahead will require extreme vigilance and quick, strategic action. Here are some issues that suppliers should be considering, and circumstances they should be on the lookout for, to protect their businesses.
Protect Supply Chains
Plan for certain of your suppliers of parts and services to fail, or at a minimum experience disruptions, moving forward. Assess and identify critical parts and services, particularly those that come from a single-source supplier, and make contingency plans to ensure continuity of your supply chain. Some suppliers may request price increases, accelerated payment terms, or other forms of financial accommodation. In the event such requests are made, be ready to re-source supply, negotiate new terms, and/or take swift legal action to enforce the terms of the existing contract.
Review the Financial Health of Customers
In every economic downturn, one of the ways that companies try to conserve cash is by delaying payments beyond contract terms. Audit the financial health of your customers. Be diligent about enforcing payment terms. In some cases, amend payment terms to cash on delivery. To the extent your business is experiencing liquidity issues, consider approaching certain of your customers to determine whether they will pay you more quickly.
Demands for Adequate Assurance of Performance
Under UCC Section 2-609, a party to a contract has the right to demand adequate assurance of performance from a distressed counterparty. This demand usually comes in the form of a “demand for adequate assurance” letter. UCC Section 2-609 provides: “When reasonable grounds for insecurity arise with respect to the performance of either party, the other may in writing demand adequate assurance of due performance and, until he receives such assurance, may, if commercially reasonable, suspend any performance for which he has not already received the agreed return.”
Demands for adequate assurance tend to be made more frequently during times of economic distress. To the extent that you suspect that any of your suppliers or customers may be, or may become, unable to perform under a contract, but are not yet in breach, you may want to consider demanding adequate assurance. If a contract counterparty fails to provide adequate assurance, you may be able to repudiate the contract.
If you receive a demand for adequate assurance, it’s important to thoroughly and timely respond to it. Under the UCC, a party has to respond “within a reasonable time not exceeding 30 days.”
Forbearance Agreement
If your business is experiencing financial distress, and has a line of credit or other form of loan agreement with a lender, expect increased scrutiny. Lenders will be closely monitoring whether their borrowers are abiding by the various covenants found in loan agreements, such as maintaining specified debt-to-asset ratios. When a covenant is violated, it gives the lender the right to take a number of actions, including demanding penalty payments, increasing the amount of secured collateral, or terminating the debt agreement, any which can push a company into bankruptcy.
However, in many cases a lender would prefer that a borrower stay out of bankruptcy, and would be willing to negotiate an interim measure, such as a forbearance agreement, that allows the borrower breathing space to move forward. In a typical forbearance agreement, the borrower acknowledges that it has defaulted on its obligations, and the lender agrees that it will refrain from exercising its remedies for such defaults as long as the borrower performs or observes the new conditions set out in the forbearance agreement, and, by a certain date, cures the defaults.
Access and Accommodation Agreements
Because of the interconnectedness of automotive supply chains, in which a single supplier often produces a key part for a number of customers, the failure of such a supplier can wreak havoc on the just-in-time manufacturing model of the automotive industry. Accordingly, when a supplier is experiencing financial difficulties, those likely to be impacted often band together to implement a solution.
A common solution used to address the risk of a disruption in supply from a troubled supplier is for the supplier, key customers, and the supplier’s lender to enter into access and accommodation agreements. Through an accommodation agreement, customers provide certain accommodations (e.g., price increases and/or acceleration of payments), and, in return for additional collateral protection, the lender continues to lend and agrees not to foreclose as long as the other aspects of the accommodation agreement are adhered to. An access agreement typically permits, to the extent necessary, customers to gain access to the supplier’s plant to run operations in order to maintain the supply of parts until another solution can be implemented.
Take Action Now to Protect Your Business
While the automotive industry is gearing up to reopen plants and resume production, the economic downturn is almost certain to cause distress and disruption moving forward. Now is the time to plan for different contingencies and take steps to ensure that you have sufficient liquidity to operate, you understand your rights and obligations under purchase and supply contracts, and your supply chains are protected. If you have any questions about how to protect your rights and shore up your business as the automotive industry prepares to come back on-line, please contact David Dragich at 313.886.4550 or ddragich@dragichlaw.com.
The COVID-19 pandemic has wrought havoc on the economy, and the worst is yet to come. There has been a marked increase in Chapter 11 bankruptcy filings across a number of sectors, with retail and energy being among the hardest hit. However, Chapter 11, which can be a slow and expensive process, and involves lots of oversight, is not always the right option.
In a recent article published by CFO.com, David Dragich discusses some alternatives to Chapter 11, including assignments for the benefit of creditors, receiverships, and out-of-court workouts.
Assignment for the Benefit of Creditors
In many states, an assignment for the benefit of creditors (“ABC”) can be an effective Chapter 11 alternative. From lower cost to a faster, more flexible process, ABC proceedings provide many advantages relative to Chapter 11 bankruptcy.
Federal or State Court Receivership
A federal or state court receivership involves the court appointment of a neutral and independent third party receiver to oversee and, in most cases, operate or liquidate a business. A receivership can be an effective option to deal with lender and other creditor claims in an organized fashion when funds are not available to pursue a bankruptcy proceeding.
Out-of-Court Workout
To the extent a troubled company has a viable business to build upon, and relatively good relationships with its creditors, an out-of-court workout can be a viable option.
Somewhat lost amid the flood of news about the COVID-19 health crisis, and even discussions of the economic downturn more generally, is the fact that oil prices have recently plummeted below $20 per barrel, down more than 60 percent from early January. That may be good news for consumers (although there is little use for gasoline these days), but it’s most definitely bad news for oil and gas companies in Michigan and throughout the country.
Oil and gas companies are facing a perfect storm consisting of a rapid contraction in demand due to the economic downturn and an increase in production due to a price war between Saudi Arabia and Russia. These circumstances are leading to distress across the oil and gas industry. The Financial Times recently reported that, among the giants of the industry, Occidental Petroleum announced a 90 percent cut in its dividend, and Chesapeake Energy hired restructuring advisors to help it manage its $9 billion in debt.
But it’s not just those at the upper end of the market who are suffering. Hundreds of smaller, often family-owned oil and gas companies across Michigan are feeling the pinch.
Michigan is not often considered a major energy producer, but oil and gas companies play a significant role in the state’s economy. According to the Michigan Oil and Gas Association, the sector employs 47,000 people in Michigan. If prices remain at current levels for any period of time, it will be difficult for many companies to stay afloat.
Oil and gas exploration and production companies in Michigan, like all others in the industry, face high operating costs for drilling, production and transportation. Many also rely on burdensome and liquidity-constraining debt to fund capital-intensive projects.
While many businesses are no doubt working through out-of-court restructuring options to weather the storm, for some bankruptcy will be inevitable. With no clear end in sight to the current crisis and oil price plunge, oil and gas companies in Michigan should be implementing immediate, across-the-board measures to survive.
Priority number one is increasing cash flow. With few, if any, drilling and exploration projects offering a positive return on investment with prices at (or anywhere near) $20 per barrel, companies need to cut capital spending, as well as variable costs as much as possible to increase cash flow.
To shore up finances, companies should be attempting to negotiate price reductions from vendors and suppliers, and also evaluating their labor forces and instituting layoffs in order to reduce labor costs to offset reductions in revenue.
In addition, businesses should consider disposing of non-strategic assets in order to raise cash. While a down market is not the ideal time to be a seller, businesses may have no choice but to consolidate in order to survive.
Finally, it’s important to evaluate restructuring options available under the U.S. Bankruptcy Code. Chapter 11 bankruptcy offers oil and gas companies the opportunity to have a breathing spell to restructure their debts, streamline their business operations, and emerge as a stronger entity. Many oil and gas companies have used Chapter 11 to regain their footing in recent years, and during this economic downturn it’s likely that many more will be forced to follow suit. Businesses who plan for the possibility of a Chapter 11 filing while they are still viable, as opposed to those who stumble into bankruptcy as a last resort, tend to have far better outcomes.
If you have any questions about restructuring options for your business, please contact David Dragich at ddragich@dragichlaw.com or 313.886.4550.
On March 25, David Dragich of The Dragich Law Firm and Gene Kohut of Conway MacKenzie, part of Riveron, hosted a webinar in which they discussed the immediate steps businesses should take to prepare for the downturn and limit downside risks during the COVID-19 crisis. Among the topics they addressed are the imperative to increase liquidity, Michigan’s stay-at-home order, dealing with suppliers and customers, and the importance of reviewing commercial contracts and insurance policies, among other things. You can view a replay of the webinar below.
