Seven Concepts to Make Small Chapter 11 Cases Work
By Steven R. Fox The Fox Law Corporation Encino, California
Too many attorneys who handle chapter 11 cases do not understand them. They understand the statutes but chapter 11 exists because to address nonlegal problems, e. g., financial problems, accounting problems, life problems, family problems. Chapter 11’ s statutes are only a process; they are not the problems nor are they a cure. This article offers seven Concepts to help you handle a chapter 11 case. These Concepts can make your job easier and more successful.
The Seven Concepts.
They apply to any chapter 11 case, individual or business.
1. The Small, Fragile Case. Most chapter 11 cases( operating business or husband and wife cases) are small, fragile and fail easily. These may be oversized chapter 13 cases with an underwater family home and a small business. Management is flawed and, unlike larger cases, cannot be replaced.
2. Know Your End Game Before the Game Starts. In chapter 11, the end game is to get disgruntled creditors to vote to accept a plan that will pay them little and over time. Before filing the petition, know( 1) how claims will be classified,( 2) the likely distribution to creditors( 3) and who may vote to accept the plan. Without votes, the plan and the case will fail.
3. Genesis of the Case- the Problems. Identify the problems which lead to the filing and explain these problems to the Court to build credibility.
4. Fixing the Problems. You, the attorney, have to push and encourage debtors to do something really hard- fix the problems. Too many people are hard wired to not fix problems.
5. Accepting Responsibility. You must teach the debtors to accept responsibility for the problems that they created. No one else is responsible. They cannot blame others.
6. Following Rules. Make sure the debtors stay inside the rules of chapter 11 even when the rules make no sense. Many debtors are risk-takers. Following rules can be hard. However, following rules helps a court find that a debtor’ s plan is feasible.
7. The Narrative. Control the narrative of the case, what happened, why and what is being done to fix the problems. If you lose control of the narrative to a creditor’ s alternative narrative, then confirming a plan becomes that much harder.
Typical Facts in a Small Chapter 11 Case
Our debtors, the Smiths, are homeowners. The secured debt against the home exceeds the § 109( g) debt ceiling. The husband operates a small construction business, a d / b / a, with two employees. The business generates $ 600,000 in annual gross revenues, its annual costs of goods sold(“ COGS”) average $ 480,000( or 80 %), overhead expenses are $ 150,000( 25 %) leading to an annual loss of $ 50,000. The wife has an outside job where she nets $ 100,000 annually. Half of her income goes to cover business bills. Between the two sources of income, the family has $ 50,000 to live on so cash flow is always tight. They have three children. He graduated high school; she has some college education.
Their basic assets are the family home on a large lot valued at $ 1.2 million more or less, the construction business with its losses, and, some vehicles which are owned free and clear. There are no savings
44 CONSUMER BANKRUPTCY JOURNAL Spring 2018 National Association of Consumer Bankruptcy Attorneys