Welcome back to The Legal Brief, the show
where we CRUSH the various legal myths and misinformation surrounding various areas of
the gun world. I’m your host Adam Kraut and today we’re talking
about Chapter 11 Bankruptcy Earlier this week, Remington reached an agreement
with its creditors to file for Chapter 11 Bankruptcy. For those of you that missed it, there was
a segment on TGC News which revealed Remington was $950 million dollars in debt. That’s 95 times more in debt than Dr. Evil
wanted to not destroy the world. Bankruptcy proceedings are not something that’s
new to the firearms industry. In fact, Colt filed for Chapter 11 bankruptcy
just a couple of years ago in 2015. As the industry continues to adapt to a market
that is not driven by fear, it is possible we may see more companies looking at this
option. Because most of us don’t put ourselves almost
a billion dollars in debt, we’re going to take a 30,000 ft view as to what Chapter 11
bankruptcy means for these companies. Unlike Chapter 7 bankruptcy, which results
in a business closing and its assets being liquidated to pay the debts, Chapter 11 results
in the restructuring of a company in order to pay its creditors. Chapter 11 is more commonly used by companies
rather than Chapter 7. The proceedings start with a company filing
a petition in Bankruptcy Court, and yes there is a special court for this, along with a
listing of assets and liabilities, current income and expenditures, contracts and unexpired
leases and a statement of financial affairs. In essence, the lists are to give the Court
and creditors an idea of what the financial situation of the company is in. I’ve included a link to Colt’s petition in
the description where you can see what that looks like. After the petition is filed, the company becomes
known as a “debtor in possession”, meaning that the company keeps possession and control
of its assets while undergoing a reorganization under Chapter 11, without the appointment
of a case trustee. Unlike other bankruptcy proceedings, the use
of a case trustee in Chapter 11 is the exception rather than the rule. Rather than an outside person managing all
of the affairs, as would be the case with a case trustee, the company gets to keep driving
the car with a instructor in the passenger seat. The company is also required to submit a plan
of reorganization. It includes an explanation how the company
will repay each group of creditors. Like everything legal related, nothing is
ever simple. There are different classes of creditors who
have a varying rights when it comes to debts owed to them. Those who have the same rights as before the
plan are known as unimpaired creditors. Those who are left in a different position
are known as impaired creditors. The easiest way to describe this is with an
example. Say Remington has an agreement with creditor
A that they are entitled to 5% of the profits. Under the proposed reorganization plan, Creditor
A is still entitled to that 5%. Creditor A is an unimpaired creditor because
nothing changed for them. On the other hand, Creditor B was entitled
to 10% under the original agreement but under the proposed reorganization plan were reduced
to only 5%. Creditor B would be an impaired creditor because
their rights were altered in a negative manner. The impaired creditors vote on the plan to
either accept or deny it. If accepted by them, the plan is put into
action. In the case of Colt, there were nine different
classes of creditors, four of which were impaired and entitled to vote on the plan. I’ve included a link to a case study about
Colt’s proceedings in the description. After a petition is filed, an automatic stay
goes into effect, which provides a period of time where judgments, collection activities,
foreclosures, and repossessions of property are suspended and may not be pursued by the
creditors on any debt or claim that arose before the filing of the bankruptcy petition. Some creditors can pursue those activities,
but need Court approval to do so. Think of it like a time out. While the company is able to continue operations,
it is not without having someone watching over them. The US Trustee is responsible for overseeing
the administration of bankruptcy proceedings. The debtor in possession is responsible for
things like accounting for property, examining and objecting to claims filed against it,
and filing informational reports as required by the court such as monthly operating reports. They also, with the court’s approval, can
employ lawyers, accountants, or other professional persons to assist the debtor during its bankruptcy
case. The U.S. trustee keeps a careful eye on the
debtor and monitors for compliance with the reporting requirements and operation of business. A creditor’s committee is appointed by the
U.S. trustee and ordinarily consists of unsecured creditors who hold the seven largest unsecured
claims against the debtor. An unsecured creditor is an entity or individual
that is owed money which is not backed by collateral. The committee consults with the debtor on
administration of the case, looks at the debtor’s conduct and operation of the business, and
participates in formulating that reorganization plan I mentioned before. The Committee is viewed as an important safeguard
to the proper management of the business by the debtor. After all, they have a vested interest in
seeing it succeed. Once a plan has been successfully approved,
it generally discharges any debt that was held prior to the petition being filed. However, new obligations are created under
the plan and the debtor is bound to those provisions. In other words, the repayment of the debts
approved by the creditors is now the binding agreement. While bankruptcy sounds like the end of the
world, Chapter 11 is a way in which companies can shed debt, come to an agreement with those
they owe money to in order to continue operations and hopefully, emerge a stronger company. However, the restructuring of debt is only
a small piece of the puzzle to running a successful business, particularly in an industry where
innovation seems to drive sales. Time will tell if Remington survives and ultimately
thrives or continues to flounder. As you probably know, ballots for the NRA
Board of Directors are out. In order to make the NRA the organization
we deserve, you the members, need to participate. To learn more about the NRA Board elections,
head on over to my website adamkraut.com. The link is in the description. Sick of bad information finding its way around
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