Articles Tagged with Chapter 11

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When a business becomes unable to meet obligations such as employee salaries, day to day invoices, and bank debt, management may turn to Bankruptcy law to liquidate or reorganize. As a rule, Courts prefer reorganization over liquidation, provided reorganization would be viable, preserve jobs, keep assets productive, and enhance the local economy. To begin with though, the question of whether Bankruptcy is the best way to deal with business challenges depends on several factors, including:

  • The form of the business (sole proprietor, partnership, corporation, LLC, etc.)
  • Whether the person(s) behind the market are also personally liable for debts
  • The number, amount, and type of debts that were incurred by the company
  • Whether it makes more sense to close the business or to keep it running

There are three basic types of Bankruptcy available for businesses: Chapter 7 liquidation, Chapter 11 reorganization, and Chapter 13 reorganization for sole proprietors. Continue reading

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7th Circuit Court Seal

In re: Great Lakes Quick Lube, LP
7th Circuit Federal Court of Appeals
No. 15-2093 Decided Mar. 11, 2016

In this case the value of unexpired commercial leases was put to the test. When a popular auto-repair/oil-change franchise went into Chapter 11, its unsecured creditors sought to recoup the value of 2 unexpired leases it relinquished just before filing. The 7th Circuit analyzed the issue under 2 provisions of the Bankruptcy Code and ultimately decided that the terminated leases were an asset of the Estate and that letting them go was tantamount to an improper pre-filing transfer.

Factual Background

Great Lakes Quick Lube LP (Great Lakes) owned oil change and automotive repair stores throughout the Midwest. Its business model included selling stores to shareholders and leasing them back. One such arrangement was made with T.D. Investments I, LLP (TDI), which leased 2 stores to Great Lakes. But in 2012, under mounting financial pressure, Great Lakes terminated its TDI leases.

Adversary Case in Bankruptcy

Ultimately, Great Lakes sought Chapter 11 Bankruptcy protection less than 60 days after terminating the TDI leases. The Estate’s Unsecured Creditors’ Committee filed an Adversary action contending that those lease terminations amounted to either a preferential or fraudulent transfer by Great Lakes to TDI, and that the value of those leases should be disgorged to the Bankruptcy Estate. The Bankruptcy Court denied relief to the Unsecured Creditors’ Committee because, in its analysis, termination of the TDI leases was not a “transfer” at all – much less a preferential or fraudulent transfer.

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7th Circuit Court Seal

EAR vs. Brandt/Brandt vs. Horseshoe Hammond, 14‐2174
Appeal from District Court (ND IL ED) 12‐cv‐00271
Decided Oct. 13, 2015

Introduction

In an Adversary Proceeding in the Chapter 11 Bankruptcy case of Equipment Acquisition Resources (EAR), Plan Administrator William Brandt (Brand) sought to avoid and recover the so-called “fraudulent transfers” made to EAR’s founder that he subsequently lost gambling at Horseshoe Casino.

Facts

EAR was established in 1997 to manufacture and refurbish machinery for use in creating technology products. Beginning in 2005 however, it also began defrauding creditors through crooked equipment financing activities. As a result, founder Sheldon Player and a company Officer named Malone pocketed about $17 Million each.

It was not until September 2009 that an outside forensic accounting firm hired by EAR’s Board of Directors detected the fraud. In response to the revelation about the wrongdoing, the company’s Board and all Officers resigned. EAR’s shareholders then elected William Brandt as the sole Board Member and Chief Restructuring Officer. Shortly thereafter the company sought Chapter 11 Bankruptcy protection.

Procedural History

Brandt filed an Adversary proceeding against Player and Malone in the Chapter 11 case pursuant to 11 U.S.C. 544, 548, and 550 to avoid and recover the transfers made to them. Brandt prevailed, then had to collect from Horseshoe.

In the ensuing case in the District Court, Horseshoe moved for Summary Judgment under the aegis of the statutory “Good Faith” defense in 11 U.S.C. 550(b)(1). Horseshoe prevailed in the District Court.

Brandt appealed the District Court’s ruling, arguing that it had misinterpreted §550(b)(1) and, in addition, it should have granted his prior Motion to Compel production of documents related to investigations conducted by Horseshoe concerning Player.

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7th Circuit Court Seal

Unsecured Creditors’ Comm. v. Ind. Family & Soc.Servs. Admin.

7 Cir. Court of Appeals Case No.14-2420 Date August 28, 2015

Facts

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In the recent case of Beeman et. al. v. Borders Liquidating Trust et al. from the Circuit Court for the Southern District of New York decided on October 29, that Court examined what ought to happen when relief that could be granted, for practical reasons is not.

This controversial policy, referred to as “Equitable Mootness” means certain judgments will not be issued – even though they could – because doing so upsets the established order in a Bankruptcy case. It is obviously a touchy subject, but squarely within a court’s discretion.

Here, more than $17 Million had been distributed to creditors of Borders Bookstores in its Chapter 11 reorganization when 3 of its customers whose store gift cards became useless when it went bankrupt sought to be placed in a special “class” of claimants. The Plaintiffs started in the Bankruptcy Court but did not get traction there, so they proceeded in District Court.

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So you’re doing business as usual and notice that payments from your customer are getting later and later. Turns out that customer is struggling to navigate in the sputtering economy. Waiting for your money is bad enough; but what if you receive a demand to refund what you’ve been paid? And not because of anything you’ve done but because your customer has filed for Bankruptcy?

Sound like a nightmare? Actually, it happens everyday. So what do you do if you’re next? That was the question addressed in the recent New York case of Davis vs. Clark-Lift, in which a reorganizing Chapter 11 Debtor paid vendors later and later as it listed towards Bankruptcy. But even those lucky creditors who got paid could not escape the demand of the Trustee (Davis) to fork over what they had received.

As the Court in Davis explained, to set aside a payment as a “Preferential Transfer” under Section 547(b) of the Bankruptcy Code the moving Creditor or Trustee must established that the Debtor made it:

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Let’s face it. Things are tough economically. Most talking heads agree the economy is undergoing a structural change that will affect everybody. Sadly it looks like not everyone is sharing the pain of the Great Recession, however. The rich are getting richer, while the rest of the population keeps on

sliding,

At a time like this who wouldn’t want to get everything they can? What if you were part of a company that wasn’t doing well and decided to make the best of it by jumping on opportunities unearthed by the company?

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Everything Was Going Fine Until…

Your customer or borrower has been paying like clockwork and you, the creditor or vendor, have been dispensing goods and services as promised. Then your customer starts to pay a little later, then later still. Why not? Times are tough. So you do the decent thing and take their payments without complaining. Next thing you know, your customer seeks bankruptcy protection, leaving you holding the bag for thousands, tens of thousands, even hundreds of thousands of dollars worth of goods and services. Money you’ll never see again. 

The Worst Part Is (Not) Over

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Written by Jonathan Trent and Mazyar Hedayat  Edited by Mazyar M. Hedayat, Esq.

Small business remains the backbone of the most vibrant economy in the world. America leads in innovation and hard work thanks in large part to small businesses and entrepreneurs. But despite the best intentions of their owners small businesses have a high failure rate; especially in the first few years of operation. 

But why the high failure rate? One of the most common reasons is that the business owner, entrepreneur, or manager of the business 

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