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Business Bankruptcy
South Texas College of Law Houston
Hague, David R.

 
PROFESSOR HAGUE
BUSINESS BANKRUPTCY
SPRING, 2015
 
THE DECISION TO REORGANIZE
–          Deciding whether to liquidate and what losses might occur:
o   Employee jobs
o   Leases
o   Future profits
o   Time spend, opportunity costs
o   Reputation in the community
–          Deciding to do a workout and non-bankruptcy rights of separate creditors:
o   Disadvantage of BR
§  Not enough money to go around
§  Atty fees/legal fees (will you get paid as their atty)
§  Reputation of debtor
§  Filing a Chp 11 does not mean the plan will be confirmed, it could go into a 7
§  Different creditor rights
–          If workout fails, must file for BR
o   BR creates an automatic stay
§  Starts the minute the BR is filed
§  Creditors don’t have to know about it
§  No evictions, no lien enforcement, stops all creditor actions
o   Finding cash to keep the business running
§  Business has to operate still à 2 sources in which cash may be available:
·         Regular business operation à generating cash à cash collateral
§  Borrowing money
–          Debtor in possession – (DIP)
o   Debtor that is now in possession of the BR estate and continues to make business decisions.
o   Typically no trustee is appointed.
–          Understanding financial statements of a business: (looking @ pg. 59)
o   Audited financial statements are prepared from start to finish by independent accountants?
§  False.  Sometimes it is just the secretary.  Bigger firms uses in-house finance teams.
o   Does the balance sheet tell the story of what has happened over the past year or is it a snapshot of the company’s financial position at one point in time:
§  Snapshot
o   BALANCE SHEET:
§  Assets – liabilities = stockholders equities a/k/a owner’s equity or net worth
§  A – L = SE, thus L + SE = A
§  What does book value mean?
·         Value at which assets are listed on the balance sheet
§  Does that mean assets will sell for the book value listed on the balance sheet?
·         No.  They often sell for a lessor/distressed amount.
o   INCOME STATEMENT/STATEMENT OF OPERATIONS
§  When are expenses incurred?  à when they are shipped
§  When is a company treated as having the revenue? à when product was shipped
§  Income & expenses are not treated as the date the cash came in or went out.
o   In analyzing statement of operations you want to concern yourself with the operating profit instead of loss because if you have ample profit it can be used for reorganization.
o   Current asset v noncurrent asset
§  Current assets – assets that will be turned into cash or used up within yr.
§  Noncurrent is everything else.
·         Cash in bank = current
·         Machine being used in business = noncurrent
·         Product waiting for shipment = current
·         Patent/trademark = noncurrent
o   It is important to have a healthy level of current assets for your current liabilities.
o   FIFO v LIFO
§  FIFO means that the product that were made the earliest were the ones that were sold first.
§  LIFO means “last in, first out” thus last products made were the first sold.
o   STUDY SLIDE SHOW – WEEK 2 – FOR QUESTIONS ON OPERATION SHEETS
PRE-FILING:
–          BR CODE §109
o   Who can file for Chp. 11 BR?
§  109(a):  Person that resides or has a domicile, a place of business, or property in the US may be a debtor
§  109(b):  Who cannot file a Chp. 7
·         Railroad, domestic insurance company, banks, foreign insurance company
§  109(d):  Only a railroad, a person that may be a debtor under chapter 7 of this title and an uninsured state member bank may be a debtor under chapter 11 of this title.
o   Chapter 13 requirements
§  109(e): Only an individual
·         2 requirements
o   Unsecured debt of less than 383K
o   Secured debt no more than 1.149M
o   Insolvency requirement
§  Person does not have to be insolvent to file.
§  Insolvency measured in 2 way
·         Balance sheet insolvency – L’s are greater than A’s
·         Failing to pay debts as they come due.
–          BR Code §303 – Involuntary BR
o   Only certain groups cannot be brought into a 303 BR
§  Farmers & charitable entities
§  Only chapter 7 or 11
o   303(b): Procedure
§  If the debtor has more than 12 creditors, at least 3 of the creditors must file and the unsecured creditors have to equal at least 15,325.
§  If there are less than 12, then any ONE creditor can file but still have to meet the 15,325 requisite.
o   303(h):  Also, have to prove debtor is not paying or subject to a bona fide dispute.
o   303(i)(1):  These creditors will have to pay atty fees and costs if they cannot prove these things.
o   303(i)(2):  If done in bad faith the DAS for proximate cause can be awarded.
o   303(f): (wont deal with this much in class):  GAP period
§  Deals with the in between time of the petition period and the time in which it is being determined whether the elements of the involuntary BR have been met.
§  The debtor gets to operate accordingly; operate as if the BR has not happened.
§  The automatic stay still comes into place.
–          BR Code § 11.1112(b) – Jurisdiction
o   Can convert or dismiss a case à always work in the best interest of the creditors.
o   Authorizing filing is usually found in the bylaws of the corporation or operating agreement.
o   Deepening insolvency
§  There is an independent action against board of directors if they breach their fiduciary duties:
·         Fraudulent balance statements (lying about value)
·         Actions made in bad faith, increasing losses of creditors
·         No intent factor but negligence is weighed.
–          BR Code § 28.1334
o   (a): District crt shall have original and exclusive jx over all cases under title 11
o   (b): DC’s shall have

ange the membership of a committee appointed under this subsection, if the court determines that the change is necessary to ensure adequate representation of creditors or equity security holders
o   (b) A committee of creditor will consists of 7 of the largest claims but the US Trustee may appoint more if necessary;
§  A committee of equity shareholders appointed under (a) will consists of 7 of the largest amounts of equity securities.
o   (b)(3) A committee appointed under (a) shall:
§  Provided access to information for creditors who:
·         Hold claims of the kind represented by that committee; and
·         Are not appointed to the committee.
o   MAJORITY RULE FROM CASE:  UNDER-SECURED CREDITOR WITH LIENS ON THE MAJORITY OF PROPERTY OF BUSINESS SHALL NOT BE APPOINTED TO THE COMMITTEE
–          BR Code §1103 – Powers and duties of committees (CRIPP)
o   1103(c):  A committee may (committees are appted by US Tee à 1102)
§  Consult w/the trustee or DIP concerning the administration of the case.
§  Investigate acts, conduct, assets, liabilities, & financial condition of the debtor
§  Participate in formulation of a plan, advise those represented by such committee of such committee’s determinations as to any plan formulated and collect & file w/the court acceptances or rejections of a plan;
§  Request the appt of a trustee or examiner; and
§  Perform such other services as are in the interest of those represented.
–          BR CODE §1104 – Appointment of trustee or examiner (see pg 48 in Worley outline)
o   On request of a party in interest or the US Tee and after notice & hearing the court shall order the appointment of a trustee –
§  For cause, including fraud, dishonestly, incompetence, or gross mismanagement of the affairs of the debtor by current management OR
§  If such appointment is in the best interest of the creditors, equity security holders, and other interests of the estate.
o   Cardinal case re §1104
§  Gross management was the issue; mismanagement or competence alone is usually not enough.
§  Court merged (a1) and (a2) together; found cause & best interest of the estate b/c of lack of confidence from the interested creditors
§  NOTE:  Q LIKE THIS ON TEST, ANALYZE THEM TOGETHER.   THESE ITEMS ALONE MIGHT CONSTITUTE CAUSE & IT IS IN THE BEST INTEREST OF THE ESTATE