I’m Eric Lanigan with Lanigan and Lanigan
attorneys in Winter Park. Florida, I’m going to talk for a minute
about some fundamentals of Chapter 11 Bankruptcy. And generally speaking Chapter 11 bankruptcies
are associated with businesses. You’ll read about it an airline goes into bankruptcy it’s
almost always a Chapter 11 because as you notice they don’t disappear, they keep operating
that’s what Chapter 11 is somewhat all about. Chapter 11 can also be used by individuals
because Chapter 13 bankruptcy which is for individuals who want to reorganize their debt
and enter into a payment plan has certain ceilings of maximum amount of debt that you
can have in a Chapter 13. And if you go above that ceiling then you’re going to have to
go into Chapter 11 which is more complicated more hands on. So let’s talk about the fundamentals of
Chapter 11. I think the one thing that probably gets everyone from a major airline right down
to a small business into a Chapter 11 is that they become aggressively hounded by certain
creditors and they don’t have the ability to pay them and those creditors have the ability
on any given day to put them out of business by levying on property garnishing bank accounts
they’re out of business. And if you represent creditors you’re always
concerned about racing to the money. Because the second creditor to get to the pot of gold
finds that the pot of gold is empty. So the creditors will typically be racing to see
who can get to the money first and be very aggressive. That’s when a Chapter 11 comes
into play because when you file a Chapter 11 someone will say what’s the most fundamental
thing that will happen? I would say, my answer would be that creditors lose their individual
collection rights. They are now dealing there are no longer individual
creditors they are now dealing with the bankruptcy estate which is operating for the benefit
of all creditors. So the business continues operation and all similarly situated creditors
are treated the same. So there’s no longer this creditor being highly aggressive and
they’re going to put me out of business tomorrow. No they’re not. Because now they’re
under the control of the bankruptcy court and they’re all treated collectively. And
when the bankruptcy is filed, just like a Chapter 7 bankruptcy for an individual or
a Chapter 13 bankruptcy in Chapter 11 an automatic stay or an automatic freeze goes into effect.
All collection activity literally stops. Literally if someone files a bankruptcy and
they’re loading the cars up on the tow truck to take them away they have to stop and put
them down. So everything stops and basically the purpose
of that is to give the debtor some breathing room to try to get things reorganized without
getting things picked up bank accounts garnished each day you can’t operate a business in
that manner. So the automatic stay goes into effect everything
stops. Another fundamental issue of the Chapter 11
bankruptcy is what we call The Debtor in Possession. And where that the debtor in possession comes
about is if a company were to go into bankruptcy and the bankruptcy law was written such that
immediately some outsider, a court appointed trustee is going to come in and run the business
there’s two real problems with that. First of all that’s a very expensive proposition
especially if you get into some of the larger companies. That they’re already in Chapter 11 because
they’re cash strapped. So the last thing on earth that the business can afford is to
bring in a whole new management team that’s very expensive. Another fundamental point
is if that were to occur, not only would it be expensive, prohibitively expensive but
it would probably almost certainly cause the business to immediately collapse. Because
all the relationships between existing managers and customers, existing managers and employees
would all be gone. And this trustee or management team would be coming in in an almost impossible
situation and I think would virtually doom any business that was forced into that position. Therefore the law keeps the existing owner
management team in place to operate the business is what they call the Debtor in Possession
of the business. Now they run under court oversight and supervision.
Basically they run the business for the benefit of the creditors subject to the court’s
supervision. The Debtor in Possession they run the business they examine the creditor’s
claims and they even decide which claims they think should be paid and which ones should
be opposed in court. A Debtor in Possession can be removed for
cause. It has to be fraud, dishonesty or gross mismanagement. No just mismanagement, gross
mismanagement. That’s a heavy burden in any type of legal situation. So there’s a good likelihood that if the
Debtor in Possession follows the basic rules, does the basic reporting that they will stay
the Debtor in Possession and continue to run the business throughout the Chapter 11 bankruptcy. Sometimes there can be a middle ground where
the court would appoint what is referred to as an examiner. It’s not somebody brought
in to run the team but someone to come in to do an in-depth review or examination of
the Debtor in Possession activities and to report if they find anything untoward or should
not be going on. So you hate to say it to a client but the
bottom line was if you’d only been here a year ago when all of this litigation started
going bad, and realize that it had to get cut off and get this into a different court,
none of this would of happened. But because it was too late we’re stuck
in a straight jacket and basically the case was almost basically doomed from the beginning. So don’t wait. If the business is going
south get into a lawyer’s office that knows something about a Chapter 11. Discuss your
situation. Determine whether or not it’s time to file. Or if not, what can be done
to avoid or to deal with a creditor and possibly even to avoid filing a Chapter 11. And again I’m Eric Lanigan Lanigan and Lanigan
attorneys in Winter Park Florida.