Morris Bauer has wanted to be a lawyer since he was a little kid. Between his junior and senior years of college — he graduated from Dickinson College in 1985 before getting his J.D. from Hofstra — he spent a summer clerking for a distant relative, a Long Island judge, and remained sufficiently intrigued to apply to law school.
But he never knew he had a taste for bankruptcy. Right out of college Bauer took a job with Arthur Andersen. His first assignment was analyzing payments made by Coleco, of Cabbage Patch doll and table hockey fame, 90 days prior to its bankruptcy, and he was hooked.
When Bauer was rolled off the Coleco project he continued in bankruptcy work, including the Federated Department Stores bankruptcy. His next career move was to Ravin Greenberg, where he spent 16 years working with both debtors and creditors involved in bankruptcies, including those of Grand Union and Emerson Radio Corporation. He is now a member of Bridgewater-based Norris McLaughlin & Marcus’s bankruptcy and creditors’ rights group (www.nmmlaw.com)
“What I love about bankruptcy law is that you get to learn about a lot of different businesses,” says Bauer, “and you get to practice law.” His work reaches into real estate and corporate law, breach of contract, and tort claims.
Bauer will present “Bankruptcy ABCs for Healthy Companies: What You Need to Know When Your Customer or Supplier Goes Bankrupt,” on Friday, March 27, at 7:30 a.m. at Norris McLaughlin & Marcus, 721 Route 202/206 in Bridgewater. The event, co-hosted by the Somerset County Business Partnership, costs $40 to attend. To register, go to events.scbp.org or call 908-218-4300.
Any business, whatever its financial state, might end up being a creditor in a bankruptcy and should understand the basics of the bankruptcy process, suggests Bauer. He begins by distinguishing between the two most common types of bankruptcy — Chapter 7 and Chapter 11.
Chapter 7, commonly known as a “straight liquidation,” is initiated when a company files a document with the bankruptcy court that discloses assets and liabilities, income, income distributed in the nine days preceding the filing, and current lawsuits. A Chapter 7 trustee is charged with locating and recovering assets that will generate dollars for distribution to the company’s creditors. If not, the case will be closed and the creditors will get nothing.
Chapter 11 is a tool for negotiating with all of a company’s creditors without having to pay any of its old debt. Creditors are of three potential types:
— Secured debt, for example, bank debt or lines of credit. The bank usually has a lien on all the company’s assets, and the company may negotiate a restructuring deal that extends the debt over a longer period. Or it may look for a replacement lender if the existing one wants out of the loan.
— The second option — tax debt — is less likely in today’s downturn. “Businesses that are failing, in order to help their cash flow, foolishly stop paying taxes,” says Bauer. If they have not paid withholding or sales taxes, in bankruptcy they will have to negotiate with the taxing authority for payment over time.
— Unsecured creditors. “The bankruptcy stops their collection against you, but they will have to negotiate a deal to pay a certain percentage back,” says Bauer.
Chapter 11 can also be used to liquidate companies, but in a controlled way. Even though the business might not be viable, it could have enough value to pay back the secured debt. It stands a better chance of doing so if current management remains in place.
The bankruptcy process is fairly straightforward:
Filing of bankruptcy petition and first-day motions. To maintain business as usual, the company in bankruptcy may file motions to borrow money for continuing operations or to be able to pay wages, salaries, commissions for work during the week preceding the bankruptcy.
Appointing the creditors committee. Attached to the bankruptcy petition is a list of the company’s top creditors. By mail they will get a paper, which they must return to the office of the United States Trustee, inviting the agency to a meeting at which creditors will be selected to sit on the committee.
The committee then retains an attorney and an accountant, paid for by the debtor. The committee itself represents all the creditors in the case and has the right to request financial information and documents from the debtor to ensure that salaries are in line and the business is viable. If it feels the business cannot make it, the committee can ask the court to liquidate the company.
Filing proofs of claim. Every creditor should automatically receive in the mail a proof of claim form. If not, the form should be available on the bankruptcy court’s website. Filing the proof of claim puts the debtor on notice that a creditor is owed money; if the debtor objects to the claim, the bankruptcy court will conduct a hearing.
Negotiating a deal. Counsel for the bank, the debtor, and the creditors committee will try to negotiate a deal where the bank gets paid, the unsecured debtors get something, and the debtor survives.
Filing the plan of reorganization and voting on it. The unsecured creditors can’t bring action until a plan is proposed, but in the case of Chapter 11, creditors get the right to vote on the plan when it is filed. They decide based on information they receive in the mail about what the plan will include.
The real issue for creditors, suggests Bauer, is weighing the percentage they will receive from the debtor against the likelihood that the company is going to exist after the plan of reorganization is approved by the court.
If a business is sold during the bankruptcy proceeding, creditors face one of two possibilities: Either the new owner will assume a contract and pay what is owed or the contract will be rejected and the creditor must file a proof of claim with the old company.
Many businesses have to reckon with whether they should do business with a company in Chapter 11 as it is trying to reorganize. “Don’t be scared away,” says Bauer, “but just as you deal with a company not in Chapter 11, you have to assess credit risk.” He recommends keeping the company on a COD basis. “ If they are paying you up front, there is no downside,” he says.
But what if a longstanding customer in Chapter 11 asks for credit and promises to put you at the top of the pecking order if the business has to shut its doors? In this case, a business has to decide how much it would be willing to lose, because whatever the promises, it still might not get paid.
In the end it comes down to the numbers for Bauer. “I look at cases from a business perspective as much as a legal perspective,” he says. “My recommendations to clients are economically driven.”
He raises the example of someone who is owed $1,000, but in a reorganization will get only $200. But if the company stays in business, continues to be a good customer, and pays on a COD basis, 20 cents on the dollar may be a reasonable compromise. “I try to get the constituents to make an economic decision, not an emotional decision,” concludes Bauer.