Behind The Curtain—Chapter 11 From The Inside—Chapter 3—Prefiling

MORE FROM FORBESBehind The Curtain-Chapter 11 From The Inside-Chapter 1

Brett has now met with his attorney, Jeff, and has decided that a chapter 11 may make sense. What he liked, even more, was the realization that bankruptcy is the last option, not the only option.

The first meeting was spent with Jeff again going through the process and the various options. Jeff said that once the case is filed, Brett cannot pay anyone who was owed money when the case was filed. He also said that anyone Brettco owed money to had to stop trying to collect (more on both of those later).

Jeff explained the major players and their roles in any chapter 11 case, including the Judge, the Office of the United States Trustee, and the chapter 11 trustee. Brett said that, even though he had never been in court before, he has seen a lot of law shows on TV, so knows the role of the Judge. Jeff explained that the Office of the US Trustee is part of the Department of Justice and their role is to oversee all bankruptcy cases. The chapter 11 trustee is brand new and only applies in cases under the new Small Business Reorganization Act (also called Subchapter V). This person will oversee Brettco’s case and will take an active role during the case.

Jeff then explained that the end game of any chapter 11 is for the company to come up with an exit strategy, which will be in a “plan of reorganization.” The plan will explain how much Brettco will pay its existing creditors and how it will successfully operate going forward. The plan is submitted to all of the creditors and they get to vote on it. 

If the Court approves the plan, it will be binding on both Brettco and all of its creditors. Jeff also explained other important aspects of the bankruptcy, including the initial motions, the first time Brett will need to be in Court, the first time Brett will meet with the United States Trustee and the financial documents that will need to be filed.

Brett was concerned about how the filing would affect his employees since they all pretty much live paycheck to paycheck and every dollar is important. Jeff explained that one of the “first-day motions” is a motion to pay pre-petition wages. 

Since Brettco pays its employees every other week, with a one week delay, the checks issued on August 8 would cover the pay period of July 15-31. If Brettco filed on August 5, then there would be 5 days of “prepetition time.” The wage motion is filed so there will be no disruption in payments to the employees. 

Since Brettco has less than $7,500,000 in debt, it qualifies for the expedited process under Subchapter V. Jeff explained the new law and how it could help Brettco. The most important aspect is that the case could be over in less than 6 months and it may be a fast as 4 months. Jeff explained that the case is started with the filing of the Petition, a list of Brettco’s creditors, and the twenty largest unsecured creditors. Also, certain motions will need to be filed on the first day of the case, including (1) a motion for use of cash collateral, (2) a motion to pay wages that were owed to the employees, and (3) a motion to continue utility services. 

Brettco will also need to file some financial documents, such as the most recent balance sheet, P&L, cash flow, and federal tax return.

At the end of the first meeting, Jeff gave Brett the forms that Brettco will need to fill out at the beginning of the case. The first thing is the petition. This is a short “fill in the blank” form where Brettco will provide basic information, such as Brettco’s name, address, type of business, the approximate number of creditors, assets and liabilities. Jeff also told Brett that the other things that will be needed to start the case are (1) a corporate resolution saying that Brettco is authorized to file and (2) the names and addresses of all of Brettco’s creditors (called the matrix). Jeff also gave Brett copies of other documents that will need to be filled out early on in the case (the Schedules and Statement of Financial Affairs). 

Jeff also told Brett that he will need to prepare financial projections, one for two weeks and one for at least one month. Jeff told Brett that, if Brettco files, these projections will be presented to the Bank and the Court and will form the basis of what Brettco can spend during the early part of the case.  

While Brett listened intently, one thought kept going through his mind: “even though this type of bankruptcy is supposed to be the ‘simple’ one, it still seems complicated.” Brett asked if there was some way Jeff could negotiate with Brettco’s creditors to avoid needing to file for bankruptcy. So, rather than hiring Jeff to simply file for bankruptcy, Brett hired Jeff to negotiate with these parties. There are two good reasons for doing this. First, Jeff may be successful in negotiating what is, in essence, an out of court workout. That will save Brettco the time, expense, and uncertainty of filing. Second, even if Jeff cannot reach an agreement with these parties, they will know that bankruptcy is likely and, in the case of the bank, start addressing “cash collateral” (which will be addressed in a subsequent chapter). 

The first call was to the bank. Jeff called Brettco’s banker introduced himself and told him why he was calling. After a brief conversation, the banker said he would have to speak with the workout people and call the bank’s lawyer. This is a good thing, as Jeff was pretty sure that the lawyer he will be speaking with has been down this road before. That is exactly what happened. Two days later, Jeff received a call from Natalie, the bank’s attorney. The two have known each other for many years and have had many cases together. This is important because both respect and trust each other. While each is representing their clients, they also know the process, and working together is the best way for both sides to be successful.

Natalie had looked at the Brettco loan documents and knew that, for the most part, Brettco had been current on its payments. Natalie also knew that the bank had a security interest in all of Brettco’s assets, had a personal guaranty, and a second mortgage on Brett’s home. 

So, while Natalie knew that the bank had a lot of leverage, she also knew that the bank was better served with having Brettco continue to pay on the loan, rather than closing down the business, trying to sell the assets (at a fire sale) and foreclose on the house (where the bank would probably get nothing). After going back and forth, it became clear that an out of court solution would not happen.  

Now that it became clear that Brettco was going to have to file for bankruptcy, Jeff and Natalie discussed how Brettco would operate during the case. Since the bank has a security interest in all of Brettco’s assets, including its accounts receivable, bankruptcy law requires that Brettco can only use the money (called cash collateral) with the agreement of the bank or after authorized by the court. 

Jeff contacted Brett and told him to prepare a two-week budget and a three-month budget (yes, he asked him for it before, but Brett forgot). Jeff also asked Brett to provide him with employee information, so the employees will be paid any amounts that they are owed between the last pay period and when the discussed in later chapters.  

Jeff called Brett and told him that Brettco will need to file, Brett provided Jeff with the information for the petition, the list of the creditors, the corporate resolution, and the financial information.

Next—the First Day Motions.  

MORE FROM FORBESBehind The Curtain-Chapter 11 From The Inside-Chapter 2-The Initial Meeting

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