SEVEN CONCEPTS
Concept 3: Genesis of the Filing- the Problems. In chapter 11, the court must find that reorganization is not likely to be followed by liquidation, the feasibility requirement like in chapter 13. Identify the problems which led to the chapter 11 filing and be prepared to discuss why the problems occurred, e. g., the business problems or the problems with the debtors.
Here, what are the Smiths’ problems? Costs of goods sold(“ COGS”- the direct costs of the construction jobs) is really high so cash flow is negative. The debtors need to learn how to bid and to estimate costs better and how to keep financial records. Explain these and any other problems to the court and explain why they occurred. Show the Court that you understand the problems.
With high costs of goods sold, explain in the first day motions the problem and why it occurred. It may be that the Smiths business had several jobs come in at the same time, it lost control over costs and had a tremendous amount of unbudgeted overtime which the company paid, not the project owner. Perhaps they have no sense of COGS and cost controls. They may understand COGs but lacks the skills to manage them.
Identify every problem for the Court. Identify even small ones as those often can be fixed faster than large problems like the high COGS.
Concept 4: Fixing the Problems. This is the continuation of Concept 3( identifying the problems). This is the cure- Solving the problems. Whatever is broken has to be fixed. Fixing problems is hard. Really hard.
Here is a good example of fixing the problems from a chapter 11 case of mine back in the 1990s. The debtor owned a computer store which was in trouble because two computer chain stores had opened up nearby and had undercut the debtor on price and inventory. We considered the debtor’ s store and the chain stores’ strengths and weaknesses. We identified seven different strategies to create positive cash flow for the debtor. We told the judge what we were going to do.
Two of the solutions worked really well. One was to offer premium services such as installation and training( at a premium price and a high profit margin) to older people. Older people( those over 40 years) really wanted the extra service. The other solution was to market to one local ethnic group by re-doing part of the store to be more comfortable for them and giving them more time to shop while their children watched cartoons on a large screen television. Word spread quickly in the community and they shopped at the store in droves.
The superstores could not match these solutions. The debtor had positive cash flow and his plan was confirmed.
So, let’ s apply Concept 4 to the Smiths. Costs of goods sold at 80 % is very high. This may be poor management or money slipping out the back door. Figure out why COGS is so high. You have to be involved. This also allows you to explain to the judge what went wrong and how it got fixed. Perhaps the debtors do not include a sufficient mark up for materials or labor. Perhaps the debtors need to solicit multiple bids from subcontractors. Fixing this problem can fix the negative cash flow. This will free up more money for the home, for the plan and for your fees.
Beyond COGS, look at the overhead expenses. While they may not seem high, there may be ways to reduce them. Small cuts in overhead can make a big difference to the plan. Ask employees about expenses they believe can be cut. In filings with the court( and served on creditors), identify the improvements.
You, the attorney, may not feel comfortable identifying problems and solutions. My experience is that most debtors cannot correctly identify the problems and the solutions. For help, ask retired business owners, the debtors’ accountant( though most CPAs lack real business experience and have no experience with troubled business), turnaround experts( but their prices are usually too high and the results too meager), industry groups, creditors and employees.
Attorneys incur significant fees in chapter 11 cases and many attorneys will struggle to collect the fees. If you want your fees paid for your work in chapter 11, then you make sure that the problems are fixed and that they stay fixed. This means you stay close to the debtors both during the case and after plan confirmation.
Concept 5: Accepting Responsibility.
Rudyard Kipling said it well:“ I never made a mistake in my life; at least, never one I could not explain away afterwards.”
I have seen debtors explain to the court that someone else caused the problems, that they are victim of someone else e. g., the lender,
National Association of Consumer Bankruptcy Attorneys Spring 2018 CONSUMER BANKRUPTCY JOURNAL 47