Podcast: Corporate Bankruptcy A to Z - Ep 4 Part 1 Bankruptcy Traps (Guest Josh Eppich)
Neil Goldstein (AKA the Workout Guy) is the founder of Elementary Business Inc., a specialized consulting firm for distressed businesses and entities in transition, and hosts the ‘Corporate Bankruptcy A to Z’ podcast. With many successes in his portfolio, Mr. Goldstein focuses on the needs of the owner to achieve results in profitability, sale of the company or finding a partner for growth.
Transcription:
You're listening to Corporate Bankruptcy A to Z a show designed to educate you on the ins and outs and the do's and don'ts of corporate bankruptcy. On this show, you will hear experts from every step of the bankruptcy process answer the questions you will need to know, from the simple to the complex. Your show host is Neil Goldstein, AKA the workout guy, a chief restructuring officer who has spent the last 25 years helping over 75 clients take on the bankruptcy process. Alongside him as co-host and legal expert Steven Raven of Saul Ewing Arnstein & Lehr law firm. He's a bankruptcy lawyer with over 40 years legal experience under his belt. Take it away Neil.
Neil Goldstein (00:41):
Return with me now to those thrilling days of yesteryear, you are about to put a DVD in the player and realize there is already a tape in the machine. Uh oh, it is a rental from Blockbuster and it is due back. Now it's 9:00 PM and the store near you is closed. You throw on some clothes, get in the car and drop the DVD in the night dropbox. Leaving the store, you wonder, "Would Blockbuster get it in time to avoid the late fee?" On your next visit to Blockbuster, how did you feel waiting for the clerk to check your account fees? Fortunately, Netflix changed all that. Blockbuster to try to rival the Netflix formula with their total access program that let customers rent videos online and return them in stores. The program worked, but the cost was prohibitive and caused problem with franchisees, leading to Blockbuster filing for bankruptcy a few years later. Lessons learned, try not to make your profits off delinquent fees and try harder to stay ahead of the competition. For those who are unfamiliar with the bankruptcy process, this episode will be an eye opener of a out the small-print of the bankruptcy contract. In this episode, "The traps of Bankruptcy", we will be discussing preference claims, look back periods, personal guarantees, and more. Of all our podcasts. this one needs your full attention to be aware of the drawbacks of bankruptcy. Sir, Isaac, I believe you said we had an interesting question from a listener.
Speaker (02:35):
So Steve, here's a question that I actually wrote in for, for a submission. I go to auctions on a regular basis because they're fun. And the times I've been to a bankruptcy auction, the stuff sells for a lot less than retail or wholesale price. Is that the best way for a company to liquidate their assets in order to get that money back for their debt?
Steve Raven (03:04):
There's different ways to liquidate assets in a bankruptcy. A lot of it will depend on what the demand is for those assets. If, for example, you're selling, uh, let's say it's a jewelry store. Jewelry will typically liquidate for higher value than something like shoelaces. For example, if I'm, uh, a home Depot, for example, and I file bankruptcy, I will likely wanna liquidate that over a period time, cuz I'll get more money for each sale. Now, of course, on the other side, you have to look at what the expense is. So if I'm that home Depot and I have to pay rent for six months and insurance and utilities and employment, that's gonna calculate into the formula to how I'm gonna liquidate the assets. On the other hand, if I have 30 days to vacate because the landlord is about to regain possession, I'm not gonna have the luxury of a going outta business sale or an orderly liquidation. I'm gonna have to have an auction and get out quickly. And, uh, whatever the low margin is, it is, you know, each method of liquidation will be based upon the facts in that situation.
Neil Goldstein (04:36):
Just a brief, thanks to our resident experts, Steve Raven, who takes time away from his busy practice to join us for these episodes.
Steve Raven (04:45):
It's funny people in this profession, whether it's advisors or attorneys or others, love to talk about it, you know, can talk about it till the cows come home.
Neil Goldstein (04:57):
For this episode, we have a special guest. The podcast is extremely happy to have Josh epic of bonds, Ellis and epic. Josh, tell us something about you and your firm.
Josh Eppich (05:11):
So I I've been a bankruptcy lawyer since I started practicing really back in law school, I guess an interesting story. I went to my civil procedures professor and said, I wanna be an M&A lawyer. And she said, why don't you go work for a, uh, a bankruptcy judge for a summer and see if you still wanna be an M and a lawyer. So I, I got to work with, uh, judge Lynn here in Fort worth, which is where we're based. And haven't looked back, been a bankruptcy lawyer ever since. So our firm, we opened up about five years ago. Um, five of us left a larger firm and, uh, we've now grown it to about 20 lawyers we're based out of Fort worth, but we work all over the country and the firm does a lot of bankruptcy work and litigation and some corporate work.
Neil Goldstein (06:07):
Josh, we have been preparing our listeners for this episode by alerting them the bankruptcy processes like a minefield, each step may have an unexpected, the disruption to their plan. Can you name some of the traps for the listeners?
Josh Eppich (06:24):
So I guess one side views them as a trap, the other side views them as a tool, right? And, you can refer to the bankruptcy process as a minefield, or you can view it as a giant a puzzle. But when you look at a bankruptcy process, a lot of times you have a company that has a finite amount of resources and the resources aren't sufficient to pay off all the debt. So you have creditors who are trying to find a way to either get a larger share of that pie than they would normally get. Or they're trying to come up with a way to expand the pie. And sometimes in order to expand the pie, they go after what you would call a minefield, where they use litigation or certain provisions under the bankruptcy code to try to go beyond just what's in the bankruptcy pot.
Neil Goldstein (07:28):
So included in that attempt to get back some funds to pay all the creditors would be preference claims and look back periods, personal guarantees, and looking at the ownership of the company.
Josh Eppich (07:43):
Sure. So you have a lot of what are called avoidance actions. And, I guess the first thing you have to do though, is, is kind of break up the cases into different, into different groups. Because when you look at the different size of case, that kind of on where creditors are gonna look to try to expand that pot. So you've got small, mid and large cap companies, right? So if you're looking at, what a creditor's gonna do in a large cap company, it's gonna be a little bit different than if you're looking at a smaller midcap company. The other way you could break this up, way you could look at it is, companies that are still run by their founders, and companies that are no longer run by their founders. Whether they're publicly traded companies or they're just really large companies that have kind of moved past, where there's so many shareholders or unit holders that the main shareholder no longer has the personal guarantees that they once had when it was a smaller company. So, would it be better to start with the smaller companies and talk about that?
Neil Goldstein (09:06):
I would think so because the larger companies have in-house lawyers and enough funding to hire firms like yours and Steve's. I'm talking more about the ones you referred to earlier, the ones that are in difficulty, have less cash, and have less guidance about what the bankruptcy process is. For an example, most of the clients that I've dealt with, never heard of a preference claim, didn't know what it is, and because of their lack of experience in the bankruptcy world were puzzled about what it meant. So maybe we can begin with a preference claim. Can you describe what a preference claim is?
Josh Eppich (09:51):
Sure. What if we do like a running hypothetical that may help describe a lot of the questions? So you have Bob who started a trucking company, a logistics company, and Bob has grown his logistics company to 20 million in revenue, and he's got 40 trucks, and they're running routes all over the Southwest United States. So he's leveraged up on his trucks. He's gone ahead and say he's factored some of his receivables, and he can't make his payments to the bank. Now likely when he entered into his loan with the bank, he signed a personal guarantee because the bank's not gonna lend him any money if he doesn't backstop it. So he starts talking to the bank and he starts talking to the factoring company, and he has a bunch of vendors who he's gotta pay a bunch of, you know, contractors and he's got employees.
Josh Eppich (10:54):
And so he is looking at having to file for bankruptcy on October 1st. And he knows that he has some creditors that if he doesn't pay them, they're not going to continue to provide him services. Say for example, his fuel card that he's gotta pay to keep his trucks going. So he goes ahead and he picks certain creditors, whether they're secured or unsecured, or they're creditors who he has personal obligations on, and he pays a couple of those before the bankruptcy within the 90 days. And that 90 day window is really important because the typical preference look back, unless you're looking at an insider, under the bankruptcy code, is 90 days. So he files for bankruptcy on October 1, but he made a bunch of payments to different creditors on say, bankruptcy day minus 20, minus 40, minus 60. What'll happen is he goes into bankruptcy...
Josh Eppich (11:59):
If it's a typical chapter 11, he'll be what's called a "debtor in possession". So he's still running the company, but he has to work with the creditors, mainly his secured creditors, and those have a lean on cash. And in this case, a factoring company, which can be very aggressive to continue to have cash, to operate. Well somewhere along the line, if an unsecured creditors committee comes into play, they may wanna do what are called preference actions because there's not enough money to pay the unsecured creditors. So what they're gonna do is they're gonna go back the 90 days before bankruptcy, and they're gonna look at all the payments that were made and theoretically they could sue every single one of those parties saying that they got a preference, and they're supposed to do an analysis and look to see if there's any reasonable defenses, and then there's there's floors on how much the claim can be. But they go back and they sue the parties who got that money, and they try to bring the money back into the estate to be shared amongst the creditors. Now, the secured lender, if they're looking to say liquidate the company or, or the plan doesn't provide for them being paid in full, because their secured position or their assets aren't enough to, to pay them off - they also have an unsecured claim. They'll look to the owner of the company under his guarantee to try to get paid as well.
Neil Goldstein (13:37):
So in that 90 day window, should the vendor from their perspective or the company from theirs take into consideration what a preference claim might arise when filing?
Josh Eppich (13:55):
So this is always an interesting question, because if you represent somebody a, a creditor and they're being dangled with some money in front of them, it's hard to tell them not to take the money. Because they could take the money and if they get sued for an avoidance action they can always try to settle it out, or they may have reasonable defenses under the bankruptcy code to defend against that. And some of those are getting paid in the ordinary course of business, providing new value, etc. If you're a secured creditor, then that's almost an absolute defense cause you don't fit under the preference definition. But avoidance actions are more than just the 90 days. If you're an insider, you look back a year. So if you made payments, for example, distributions to yourself as the owner, during that one year, and those were outside the normal operations of the business then someone will come back and look at those...
Josh Eppich (15:01):
...normally either a trustee or a committee or the debtor itself, technically has an obligation to go back and look at those. And you also have what are called fraudulent transfers, and they can go back two years, or if you go under state law, sometimes four years, depending on the state. But when you're looking at fraudulent transfers, it's not a typical fraud, it's a math calculation of reasonably equivalent value. So for example, we can stick with the trucking company is he's got five rigs and each rig are worth $300,000 and he sells those rigs to somebody for a $100,000 a piece. Well, they didn't put in reasonably equivalent value. I guess that's a sale, but you can do it the other way, too. It's it's all about trying to claw back in the assets.
Neil Goldstein (16:01):
Well, let's stay on Bob's trucking company for a moment. And the example you gave was he needs fuel for his trucks. So he makes payments, maybe in excess of what is owed, to get into the good graces of the trucking company, knowing he would need them after the filing. And the court comes back and says, "okay, a preference claim occurred. We want some of the money back." Would that fuel company have any future claim the company or after they gave back the money due to the preference it's a debt issue?
Josh Eppich (16:39):
Well, if I were the fuel provider, I'd call it a prepayment. And so it's a preference defense. I wouldn't pay any of the money back.
Neil Goldstein (16:46):
But let's say you had to, let's say you were doing the correct thing and the money went back. Can the fuel company make a future claim against the company?
Josh Eppich (16:56):
I dispute the characterization "is doing the correct thing" Neil. I know where you're headed, but, you know, I have a job to do here. So let's just say that the fuel company got what could allegedly be a preferential payment, right. And they had to money into the estate. So your question is, can the fuel company go after the estate?
Neil Goldstein (17:21):
Yes.
Josh Eppich (17:22):
Well, the fuel company has a claim against the bankrupt company because they have an amount now that's unpaid, that's outstanding. So they would have a claim against the estate, just like any unpaid creditor would have. So they would then share Pro Rata in their respective class to get a payment.
Steve Raven (17:50):
Often times, Neil, when there is a preference claim against a party, and that party starts talking to the trustee or the creditors committee about settling, part of the settlement will be that the creditor will waive their entitlement to a claim in the bankruptcy. So that's often a component of these settlement discussions.
Neil Goldstein (18:16):
My experience with clients has been that certain vendors are so angry at the filing and the preference claim that when the company in bankruptcy tries to do business with that vendor in the future, the vendor raises the prices with the goal of getting back some of the money they lost due to the bankruptcy. Is that legal?
Josh Eppich (18:44):
So I take care of that a different way. On the first day of the bankruptcy I file what's called a critical vendor motion. And if I have certain vendors that have to be paid to keep the business going, I request court approval to pay their pre-petition claim on the condition that they will continue to do business with the debtor under the pre-petition terms. But that's the threat, right? If you're the vendor, is that you'll stop doing business with the debtor and you'll cause them to shut down. So say you're the fuel provider of the trucking company. And you say, "if you don't pay me I'm just not going to, uh, to provide you fuel anymore, and your trucks are gonna be stranded. I'll just shut off your debit cards, your credit cards." Now, the question would be whether that's a violation of the automatic stay and you have to go and look at the agreements that are in place between the debtor and the vendor, the fuel provider, and see if the fuel provider has those rights.
Neil Goldstein (19:59):
Well, let's delve deeper into look back periods. The look back period, you said was 90 days for vendors. Should a company plan when to file based upon the 90 day period? Is there an advantage to the company when looking at a specific date to file?
Josh Eppich (20:21):
Absolutely. One of the first things you do when, you're preparing for filing is you get a list of all the payments that have been made and you look at who they're being paid to. And you can certainly try to push out the date when you filed, to get certain payments outside of those 90 days.
Neil Goldstein (20:42):
How about for insiders? You mentioned that insiders have a, you said a one year look back period?
Josh Eppich (20:47):
Correct.
Neil Goldstein (20:50):
So insiders are different than creditors. What would the trustees office be looking for in the one year look back period for insiders?
Josh Eppich (21:02):
Well, an insider is a creditor. Typically they're also an equity owner. So you're looking for distributions. You're looking for payments that satisfied debt obligations. So let's use your guarantee example, is say you have an owner of a company who guaranteed an obligation, but from the company's perspective that obligation is an unsecured claim. But from the owner's perspective he would be liable because he guaranteed that. If he directs the company to pay off that obligation then that is a transfer of funds that could be a preferential treatment, or a preferential payment because he got the benefit to the exclusion of other creditors.
Neil Goldstein (21:53):
Are there any other examples you can give of what would be, I guess you would say a violation? Or a questionable item in that insiders one year look back period?
Josh Eppich (22:09):
If you decided to make yourself a very large distribution, and you don't normally make that distribution.
Steve Raven (22:17):
Or if the principle of the company loaned the company money and got paid back within a year prior to the filing. That is a clear preference.
Josh Eppich (22:31):
Yeah. I would go the step forward though and see how payments were made. If it's outside of the typical payments that are being made, but it is a preference, it's just then whether or not you have defenses to it.
Neil Goldstein (22:45):
Steve and I worked on a case for a paper company where the owner would make purchases from his personal funds. He put the personal funds into the company, make the purchase, sell the paper, and then pay himself back from the proceeds of the sale. And what I learned from Steve was each of those transactions was subject to the one year look back period for insiders.
Steve Raven (23:13):
Well, was that the company that did file bankruptcy or did not file bankruptcy? Cause there were two.
Neil Goldstein (23:20):
Well, you picked the one that would give us a better story for the podcast.
Steve Raven (23:26):
Well in one of them there was no bankruptcy so there would be no preferences. Because a preference is a creature only of the bankruptcy code or other state court or solvency proceedings. So in a non-bankruptcy, like the paper company, there were no preferences. There would've been had the company been forced into bankruptcy, or filed bankruptcy.
Neil Goldstein (23:54):
But I remember the conversation we had with the paper company when you told him that those transactions might be considered an insider transaction and his reaction of, "what do you mean I have to pay back a million dollars?" I think the listener should be aware and speak to their council about situations like that.
Narrator (24:19):
Sorry to interrupt Neil. We need to take a moment to thank this episode. Sponsor
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Narrator (24:44):
We hope you are enjoying this episode of Corporate Bankruptcy A to Z. Want more of the podcast? Well be sure you listen through to the very end of this episode for a bonus segment where Neil and Steve take Josh into overtime. For now, let's go back to the show.
Neil Goldstein (25:00):
Are there other examples that either of you could give about insight or transactions for the year?
Josh Eppich (25:08):
Car purchases, airplane purchases, moving assets of the company off the books of the company. People get really creative.
Neil Goldstein (25:20):
Let's say that Bob at the trucking company bought a, uh, a Lamborghini during that past year. I'm sure that would be considered a violation as that is not part of his normal course of business, but what would happen in that situation? What would the court do?
Josh Eppich (25:40):
So if the company bought the Lamborghini and before bankruptcy, he moved the Lamborghini over to his personal, you know, as a personal asset, then the trustee or the committee would Sue to recover or file a turnover action to have the Lamborghini come back into the estate. And then it would be sold as an asset of the estate. The, the same could occur if you, he went back to what would be considered a fraudulent transfer is if the company owned the Lamborghini and, and Bob bought the Lamborghini for $10, knowing that it's worth 150,000, clearly that's not a purchase for reasonably equivalent value. And he acquired an asset that greatly exceeded what he paid for it. So that would fall under a fraudulent transfer statute.
Steve Raven (26:33):
Or if the company sold the Lamborghini to Bob's brother, for similarly low consideration, the trustee would go after the brother to bring that Lamborghini back into the company.
Josh Eppich (26:43):
So you also have to look at it another way is, what a Bob owns different entities? And you have a really interesting entity structure where you have a holdco that owns various subsidiaries and the holdco operates more than just the trucking company, but the trucking company starts moving valuable assets over to other entities that are owned by holdco, leaving holdco with just the debt. Then those could also be considered fraudulent transfers. So you can expand this out beyond just the individuals and start looking at entities. One of my more interesting things that I feel like I've worked on was looking at a leveraged buyout and whether or not the leveraged buyout actually resulted in a fraudulent transfer because of the amount of debt that was loaded up into the target entity. Whereas the value was pushed off to another entity.
Neil Goldstein (27:53):
One question I have about the actual bankruptcy filing could one violation or a series of violations have an impact on the filing itself? So the court says, “no, I don't accept this as a bankruptcy filing”?
Josh Eppich (28:12):
Well, what it becomes is a motion to dismiss the bankruptcy. And there are lots of different ways that that can happen. I mean, it can, it can be people who intentionally don't list everything on their schedules or statement of financial affairs, which those are basically a list of all of your assets and liabilities. And if you have too many errors there's case law out there that says it was a bad faith filing,
Neil Goldstein (28:44):
Most business owners had to give a personal guarantee somewhere along the line. How are personal guarantees made by owners treated in a corporate bankruptcy? And can you give us an example?
Josh Eppich (28:57):
So the personal guarantee is outside of the bankruptcy and at least under Texas law, and the way most of the loan documents are drafted, the lender can go after the individual, because he's not a party to the estate. So he doesn't get the protection of the automatic stay. The automatic stay is important because when the bankruptcy's filed, it's supposed to give the debtor breathing room to be able to reorganize. And so the collection actions against the debtor halt, or eventually move to the bankruptcy, or someone files a motion to lift the automatic, stay in the proceeding state court. Now the owner of the company is not a party to that estate. And so he can be sued in the bankruptcy. Also the bankruptcy doesn't put in an injunction or keep the creditors from going after him for the full amount of what's owed or the full amount under his guarantee. Now there are things you can do. You can file a motion with the bankruptcy court and say that the automatic stay for a certain period of time should be applied to the owner of the company because he has to operate the company and the estate is gonna be irreparably harmed if he he's having to fight these lawsuits against him personally, in state court at the same time as trying to reorganize the company.
Steve Raven (30:37):
On that note, it used to be that what Josh is talking about would be a motion to extend the automatic stay, to protect the individual/guarantor. And in my experience, at least in New Jersey courts, those motions were routinely granted early on and then as time went on, and let's say 15 years ago, it became more and more difficult to get to convince the court to extend the automatic stay. And now it's a rarity as opposed to it used to be common.
Josh Eppich (31:18):
Yeah. I mean, I think you have to go in now and, and really show the court that he or she is gonna spend so much time fighting that lawsuit that essentially the person can't run the company. I think the problem you get into is when you hit that point, when you're arguing that you're almost substantiating someone, if they wanna file a motion to put in a trustee or settle on, on a pointing a chief or structuring officer, because if, if the person operating the company has that many issues, you know, there's a question as to whether or not they should still be operating the company. So Bob's got to walk a fine line. He needs to pay his fuel vendor and then walk a fine line, right?
Neil Goldstein (32:10):
In your experience, do lenders generally wait and give the company and the owner time to work out a deal with them? Or when they hear about the bankruptcy, do they immediately file papers and go after the owner for the personal guarantee he made or she made?
Josh Eppich (32:31):
So in my experience, I've had pretty good luck with having the bankruptcy run its course before the lawsuit gets filed against the, the owner. But it also depends on how long the company's sitting in bankruptcy. If it's a pretty quick bankruptcy, generally I've had them wait and they see how much they're gonna get paid. I mean, obviously you can't recover twice unless they're just really frustrated with the owner and think he or she's been a bad actor and then they will go ahead and file the lawsuit. When I restructure companies out of court, I would say 90% of the time the lawsuit holds off until we've gone through and tried to work with the bank and maximize the value of the assets.
Neil Goldstein (33:22):
Josh and I are working on a case where owner of the company had given a personal guarantee to a lender, and it was about six or seven months later when a deal was struck and the owner paid, or is in the process of paying, a structured loan settlement for about seven years. After exiting a bankruptcy, can the company pay for personal guarantees given by the owners with company funds? Because I get this all the time. The client asks me well, after I'm out of bankruptcy, can I pay everything? So my point in asking this question is to alert the listener that once they're out of bankruptcy the court no longer has any control over them and they can pay whatever they want.
Josh Eppich (33:13):
So I would have to argue that that's really a situation by situation basis, because all right, let, let's take a company that goes through bankruptcy and emerges, but they have to take on new debt obligations in order to function, to reorganize, there's likely covenants under that new debt obligation that would not allow for funds to be used to pay prior personal guaranteed debt obligations. I agree with the comment that once the company has emerged from bankruptcy, the court no longer has control over what the company's doing. And the company can use its funds, but it's still bound by it's fiduciary obligations the company has to its creditors going forward.
Steve Raven (35:04):
And there's another issue, which is that if the principle of the company or the company had a deal with a creditor to pay that creditor more post bankruptcy, and that deal was not disclosed, that could be a problem for the debtor in the future, if creditors catch wind of that.
Josh Eppich (35:29):
I mean that could come close to being a bankruptcy crime.
Steve Raven (35:33):
Yeah. Because Neil, a big part of bankruptcy is disclosure. I mean all throughout the bankruptcy code and the process, it's all about disclosure. And you have an undisclosed transaction, that's a problem.
Josh Eppich (35:53):
But I think you can change the scenario a little bit and arrive at a result that I think works or the client in that the client is still personally obligated on the personal guarantee. The company that's reorganized, a reorgco, is operating and operating efficiently, that company can still make distributions and pay income to the owner. And the owner can then use those funds to pay his personal obligations, as long as there's no quid pro quo between the creditor during bankruptcy and post-bankruptcy.
Neil Goldstein (36:30):
Steve, you talked about disclosure and I'm working on a chapter 11 case where the client just wouldn't give up information, and it took myself and the attorney working on the case probably 30 to 45 days to finally get all of the necessary information submitted to the court on the bankruptcy petition. Is that normal in both your practices to have to pull teeth to get the information from the client?
Steve Raven (37:05):
It's normal to a degree. It's a function of how hard you have to pull those teeth. Sometimes it just requires a little wiggling of the teeth, and the information starts coming out. But there are situations like the one you're talking about where you really have to tug and get that tooth out on the metal plate before the information starts coming out. And the fact is, it has to be explained to the principle that a party can move to dismiss the bankruptcy or appoint a trustee where the debtor will lose control, unless the information is disclosed, and sworn to as being accurate, by the way.
Neil Goldstein (37:51):
Well, in my case, the client was holding back two pieces of information, having promised them and not delivered. And the concern was that these two pieces of information would be compromising to the company. We finally did get the information, but, again was like pulling teeth. Josh, if you had instances like, like that or find it comment, getting the information from the client?
Josh Eppich (38:25):
I think there's always a question as to whether you're getting the full story, until you've worked with the client for some time, but getting the information to actually fill out the bankruptcy pleadings. Generally I try to do to avoid that issue post petition is I require the clients to start filling out their schedules and statement of financial affairs prior to my willingness to put the entity into bankruptcy, and that generally gives me a pretty good idea as to how difficult it's gonna be to get the documents and how forthcoming the company will be. Some clients I get all the information I need within about 48 hours for a first draft. If it takes a few weeks to get the information, it generally requires a long talk with the client to explain to them what's about to happen when they file. And if that's something they really wanna do. So, I mean, I think every lawyer can say they've experienced it both ways. I don't think anybody can say they just have this 100% ratio of getting clients that give up everything. You have to gain that confidence with the owner.
Neil Goldstein (39:42):
Let's talk about the ownership of the company. Can the owners keep their equity in a company during a bankruptcy?
Josh Eppich (39:51):
Sure. They just have to pay everybody off in full. There is another way to do it. And, and it's an interesting scenario, but it requires the equity owners to provide new value to the company while it's in bankruptcy. It's almost like buying your equity back by putting in a capital contribution post petition. And it's not something that I think is easy to get. We've done it before, but generally your equity value goes to zero.
Neil Goldstein (40:29):
So in Bob, the truckers case, he has to pay money into the company or new value in order to keep his ownership?
Josh Eppich (40:39):
Well, he'll still own the company, but it has no value, right? Or he'll have to strike a deal if he's not paying everybody in full that he has to give up part of the company to creditors sometimes. It kind of depends. I mean, it's pretty common when you're in...and I'll go back to the mega cases then... When you're in a mega case, a lot of times what happens is you have bond holders or the second lean holders who essentially do a debt for equity swap and they come out and they own a significant portion of the company. And then unsecured, creditor groups will own a minority share kind of a token to get through the case. But certainly you can restructure a small company and still have the owners operating the company.
Neil Goldstein (41:30):
In Bob's case, when you said the company would have no value, could you expand on what that means?
Josh Eppich (41:36):
Well, the equity value go to zero, right? A lot of times, I guess what you can do is you can say that your interest in the company are canceled and new interests have to be issued in, in reorgco.
Neil Goldstein (41:51):
So if Bob owned a hundred percent of the company prior, does he keep his hundred percent, even though it has no value?
Josh Eppich (42:00):
He's not keeping the same 100% in the old co. What I try to explain to people is that reorg co, kind of look at it as a new co.
Steve Raven (42:11):
Well, the value of the company is valueless, or at least the value of the stock is because the debt outweighs the value of the assets. So in order for the principle to end up with ownership, he'll, he'll have to put something in. But I do wonder Josh, if there's no competition to own the company, the stock of the company, who would compete with the owner in a plan of reorganization for the ownership?
Josh Eppich (42:51):
Well, in that case, it rides through, right? I mean, he'll have the company coming out. Yeah. But a case by case basis where if you just look at what the law says, it's not always what practically happens. I think that's a better way to say it. I mean, I get clients all the time that say, "I have this company that's worth $10 million". And I look at them and I say, "well, where's the buyer?" Because practically speaking, they may say the companies worth $10 million, but it's not because they can't liquidate it. So you can run through bankruptcy and that person's gonna continue to run the company coming out.
Neil Goldstein (43:25):
In closing Josh, is there something you would like to share with the listeners?
Josh Eppich (43:30):
About bankruptcy?
Neil Goldstein (43:33):
Anything. That's part of the podcast.
Josh Eppich (43:35):
About how fun it is to file for chapter 11?
Neil Goldstein (43:38):
Anything you'd like to share, meaning anything.
Josh Eppich (43:41):
Let's see. You know, I had one client come in and after a while of working with me, he looked at me and he goes, "You know, Josh, I just don't know how you do this every day of your life." And I looked at him and I said, "It's all perspective." Like I said, at the beginning to me this is all a giant puzzle. To you this is probably something you never want to go through again. But look, bankruptcy and Chapter 11, it sounds complicated, it sounds frustrating, but it's just another tool that I think business owners have to look at as a way to accomplish their goals. And this is my philosophical self is, you know, America's a great place because we don't have debtors prison, and we have a bunch of laws that are designed to promote entrepreneurship. And one of those is the bankruptcy code and America doesn't kick you to the curb for taking a risk. They try to find a way to support you and allow you to take another risk.
Neil Goldstein (44:45):
Josh, can you share some highlights from one of you a more interesting bankruptcy cases?
Josh Eppich (44:53):
Well, there's been quite a few. I mean one of them that I thought was really interesting was we sold off a car dealership and it was a major manufacturer . And buying a car dealership isn't that easy. You have to be approved and go through all this certain process. So we were able to find a buyer and then run the sales process through and get the sale approved in 10 days. And that was a really interesting case. Learning that it's really the dirt that has all the value in a car dealership. It's not necessarily the actual car dealership. There's always interesting ones where owners do creative things in order to try to maximize their own value and their own recoveries. But those are kind of specific.
Neil Goldstein (45:48):
Steve, anything you'd like to share?
Steve Raven (45:51):
Well, generally speaking, one of the, I guess attractions of being a bankruptcy lawyer is that every case, or at least nine out of 10 cases are different from one another and interesting in their own right. You know, you can have a given day and I'm sure Josh can say the same thing, and in fact you Neil too, where you can work on six or seven companies in any particular day, and the companies are totally different from one another. But the common denominator is that they have debt issues. But beyond that, their issues are very different from each other. And you have to be a Jack of all trades and a master of none to get through the typical day.
Neil Goldstein (46:43):
Josh, can you tell the listeners where they can reach you?
Josh Eppich (46:48):
Sure. My email address is joshua@bondsellis.com or they can go to my website www.bondsellis.com.
Steve Raven (19:05):
Josh, I was looking at your website (eppichbusiness.com) earlier today. It's very interesting. I love like your personal writing style. It's quite entertaining and educational.
Josh Eppich (19:17):
Ah, thanks. They can also go to epicbusiness.com, which is my blog.
Narrator (48:30):
So this is where the episode is supposed to end. However, we have some bonus overtime content where our panel of professionals talk a little bit more about their experiences.
Neil Goldstein (49:03):
We looked at your website and we noticed that you were interview Josh by somebody for your blog eppichbusiness.com?
Josh Eppich (49:16):
Yeah. I was interviewed about bankruptcy issues. So it gives a little bit of my views about factoring in there, I think, and factoring companies.
Neil Goldstein (49:27):
Are you for them or against them?
Josh Eppich (49:30):
I'm not a huge fan of factoring. I think it has its place, but I think generally speaking, if a small business is gonna start factoring, at the same time they should go talk to a restructuring professional. I think when you factor you give up a lot of control and the factoring company gets a really big grip on the receivables of the company, and it makes it more complicated to run the bankruptcy process. You almost have to have takeout financing, in my experience, in place, if you're going to put someone into Chapter 11 who has factoring agreements that control the majority of their receivables.
Neil Goldstein (50:17):
See, factors and MCA's are different in one respect to me, in the fact that I have so much leverage against an MCA because of the nature of the two types of advances, loans, whatever you wanna call them, but with a factor you have to pay. With an MCA, they are much, much happier to take a settlement.
Josh Eppich (50:44):
I try to avoid factoring. I almost would go to alternative lenders prior to go with factoring.
Neil Goldstein (50:50):
I'll disagree with you because if you do the factoring the right way, you get a factor who only takes specific invoices. So, I agree with you that they need a business professional to help them, but if they could factor one invoice, as opposed to every invoice, it gets a new company or a growing company through their payroll period or their tax period, and all they're giving up is one invoice, and let's say 10% of that invoice. If their gross profit allows for it, then they can, they can take the hit. But when the gross profit is 20% and you're giving up 10%, now you, of course you have a problem.
Josh Eppich (51:32):
I think that's a very different situation. In my experience, when a company goes and starts factoring receivables, they're entering into a factoring agreement that allows the factoror to pick and choose whatever receivables they want to acquire. And it almost makes it impossible to pay off the debt that's also associated with those factoring agreements because of the high interest rates that apply. I mean, I think selling a single receivable is a completely different scenario than selling multiple receivables, or an ongoing transaction.
Neil Goldstein (52:10):
I agree. In fact, there's a factor in DFW who takes single invoices. So it's easy to work with her because you only have to do one in time of need. But yes, I agree with you.
Josh Eppich (52:27):
Yeah. I mean, I would view that very differently.
Neil Goldstein (52:30):
Some of my practice early on was exactly what you were talking about. The lender a factor told the client, "You have to leave". The client could not get new financing because of what you described as the inability to pay a factor entirely because of the nature of the beast. So I would get a new lender to give 80% or 90% of the loan. And the original factor would do a term loan for the difference between what they received from the new lender and the amount of the loan. I did very well with that.
Steve Raven (53:07):
Well, you know, beggars can't be choosers. Sometimes you have to take what you can get. It's like the personal guarantee question, everybody would prefer to not give a personal guarantee, but if they can only get a loan to save their company by giving a personal guarantee, they're gonna have to give the personal guarantee. So in the case of factors, if you can do better with a different type of lender, you should do the different type of lender. But, if you don't have many options you have to take what you can get.
Josh Eppich (53:47):
There's always an easy solution.
Neil Goldstein (53:50):
Oh yeah?
Josh Eppich (53:52):
Yeah. Just don't go into business. No, that's not any fun, right?
Neil Goldstein (53:56):
No. Then what would we do for a living?
Steve Raven (54:02):
I think, as far as advice goes, a lot of people or companies get into lending situations which they really don't understand. You know, they sign on the papers, they get the money, but they don't know what's gonna happen after that or how the loan's gonna work or what the interest rate's really gonna be. So my suggestion would be to these business owners to make sure, and Josh mentioned it be before, speak to your professional to make sure you understand what you're getting into.
Josh Eppich (54:34):
Yeah. I mean, this is really one of those cases where spending a couple thousand dollars up front can save an awful lot of money and difficulty on the back end.
Neil Goldstein (54:44):
My favorite factoring story was I had a client, and I was sitting in the meeting where he was getting his factoring contract and he looked at the factor and said, "I'm gonna read this". And the factor said, "I hope you do. If you find anything there in that contract that benefits you don't worry. I'll take it out." True story
Josh Eppich (55:07):
That's about right. Look. Well, I think we're lucky to get to be in this profession. We get to meet a lot of interesting people. See a lot of interesting businesses. Hopefully we get to help a few along the way. I think they're all interesting whether I'm working on something that's a couple million dollars or something that's hitting the billions of dollars. So I'm glad that my civil procedure professor pushed me into this. I've been lucky to get to work with really interesting people and good people who I think are really trying to help companies.
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Welcome to Corporate Bankruptcy A to Z, a show designed to educate you on the ins and outs and the dos and don'ts of corporate bankruptcy. On this show, you will hear experts from every step of the bankruptcy process answer the questions that you will need to know, from the simple to the complex.
Email your questions for the experts to neil@elementarybusiness.com and to sravin@saul.com Their door is always open and they will respond.
