President’s Message - November 2017
By Matthew W. Nakon, Esq., President
It is hard to believe, but we are in the home stretch for 2017. There is a lot happening at the Firm. We recently completed the construction of our new board room and conference facilities, which are just off the main lobby as you walk in the building. We are happy to announce that the new board room has been named in recognition of our partner, Daniel A. Cook. We hope you’ll have a chance to see the Daniel A. Cook Board Room on your next visit to the office. We are also happy to announce that Carmen Verhosek and Michael Nakon recently passed the Ohio Bar Exam and have joined our ranks as our newest attorneys. Carmen will practice in our Estate Planning & Probate Group, concentrating in Elder Law. Michael will practice in our Litigation Group handling all manner of business disputes. We hope you enjoy this newsletter focusing on the Firm’s expertise in bankruptcy and creditors’ rights. As this will be our final newsletter of the year, I’d like to take the opportunity on behalf of the Firm to wish you and yours the best of holiday seasons.
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It happens to us all, you watch the A/R (accounts receivable) from a historically good account go past 30 days, sail past 60 days and pretty soon it’s 90 days past due and altogether questionable to ever be collected. Or worse, you get the notice that the customer has entered Chapter 11 bankruptcy. Once your blood pressure returns to Earth, we recommend you evaluate what type of claim you actually have, what does it mean, and what can you do to alter the expected result. It’s about protecting yourself and your company.
Unless you are an employee, a taxing authority, an ex-spouse or a lender, it is more than likely you are holding what will be a general, unsecured claim against your account debtor (your customer or client), should the debtor enter bankruptcy.
To better position your ability to be paid if a bankruptcy is filed, the following options are available:
1. Demand Security from the Debtor. This rarely used technique is likely the best protection. As a secured creditor (particularly with a properly perfected interest in the goods you sold), you move to the front of the line.
2. Payment Plan. Negotiate a payment plan with your client/account debtor to catch up past due amounts. Watch each payment closely with an eye toward a 90-day clock, after which the payment is likely protected from a dreaded avoidance action. To the extent payments are trapped in the 90-day preference window, any Bankruptcy practitioner will advise it is better to have a sizable potential preference than a big claim. Control of the money is always key.
3. COD/CIA. Finally, consider moving the account to COD or CIA. This is an easy step and will require your customer to have credit. But if they are more than 90 days late, provide credit at your own risk.
These are just a few of the techniques and options available to creditors when payments start to get behind.
What in the World is an Unsecured Creditors’ Committee? - November 2017
Consider the following: one of your largest customers has reached its financial breaking point and determined that filing for chapter 11 bankruptcy protection is the last option available to regain its footing and reorganize (or sell) its business. Although this may be beneficial for the company — now a “debtor” in bankruptcy — what options are available to you, one of the debtor’s creditors, and potentially one of the largest?
One aspect of chapter 11 bankruptcy is the formation of a general unsecured creditors’ committee. This committee, appointed under the Bankruptcy Code, will represent the interests of all unsecured creditors of the debtor during the chapter 11 case. Although all unsecured creditors are potential members of the committee, members are typically drawn from the debtor’s top 20 largest unsecured creditors. Thus, one potential option available may be to sit on the committee.
Committees are vital to the chapter 11 bankruptcy process. The committee is authorized to retain legal counsel to assist in monitoring the debtor and its reorganization (or sale) process (the cost of which is borne by the debtor’s estate and not the committee members). But the committee can also flex its considerable “muscle”, when necessary, to ensure the debtor’s actions are in the best interests of the entirety of the debtor’s bankruptcy estate. The committee is a voice and a presence that can provide aid and assistance, but also challenge and contest the debtor.
Current State of Affairs: Chapter 11 Bankruptcy - November 2017
As 2017 creeps into its final quarter, it is worth taking a look at the past 10 months and reviewing what industries have experienced the most significant distress, at least from the perspective of chapter 11 bankruptcy. The purpose of this exercise is not to trumpet the fact that certain industries were less affected, but rather to attempt to forecast the upcoming year and to plan accordingly.
Most prominently, both casual dining and retail appear to have fallen victim (or, continued to be victims) in 2017. With respect to casual dining, many have speculated that the impact of “millennials” has been the driving force behind worsening sales. Comparing against older generations, some claim millennials place more value on the concepts of “fresh” and “farm to table,” rather than strictly convenience, which has always been the backbone of casual dining. Many chain restaurants are attempting to adjust to the times, but the bevy of casual dining chapter 11 filings tends to weigh against the success of such adjustment.
Retail distress, on the other hand, is almost certainly the result of the increasing popularity of online shopping. While far from a unique thought, the ease of shopping from home or the office — 24 hours a day, 365 days per year — has proven to be enticing to consumers, drawing crowds away from malls and other shopping areas. Given the costs of traditional brick and mortar locations, including, among other things, rent and employee wages, worsening sales has a direct impact on the ability to operate a traditional location at a profit.
WHP’s Bankruptcy and Creditor’s Rights group continually monitors the distress environment, particularly chapter 11 bankruptcy filings, and is prepared to assist clients impacted by those industries experiencing heightened levels of distress.
When an owner of a business is looking to sell the business, the immediate question is “what is it worth?” In a traditional “deal”, the question is often followed by consideration of multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) and industry standards. This exciting time inspires the entrepreneur or patriarch of a small family business to consider what he or she can do with all the money about to be collected from a career of hard work and enterprising. This is commonly referred to as “enterprise value” and there are countless professionals skilled in developing a market to squeeze every last drop of value out of the business to create more “value.” Obviously, in this situation, all creditors are fully paid and little to no consideration is paid to their concerns. With a healthy growing company, “enterprise value” carries the day.
In contrast, bankruptcy allows a debtor to use provisions of the bankruptcy code — namely Section 363 — to generate value for creditors by forcing the sale of assets free and clear of all liens and claims. The goal here, again, is to maximize value, but more often than not, value in a distressed situation (either in or prior to filing bankruptcy) is determined by “what the assets can bring” or “asset value.” This “asset value” serves as a lifeline to the small business owner whose business has fallen on tough times and has its lender (holding, of course, a personal guarantee) demanding an exit from the financing and relationship.
Make sure your business lawyer is willing to listen to your needs and your concerns and is equally as skilled in maximizing the value of your business.
Are You Ready to Close Your Doors? - November 2017
By Anthony J. Cox, Esq. and Mary G. McCarty
When an Ohio company decides to stop doing business, locking the door and turning off the lights is not enough to terminate the company. In most cases, the business entity will continue to exist — and remain exposed to liability — until it is formally dissolved with the Ohio Secretary of State.
The dissolution process varies depending on the type of entity. The most common entities for for-profit businesses are the limited liability company, or “LLC,” and the corporation.
Dissolution of an LLC
Dissolution of an LLC is a relatively simple process: once the members of the LLC have agreed to dissolve, the members must file a Certificate of Dissolution with the Ohio Secretary of State (together with a filing fee) and dissolve according to their corporate documents, satisfying financial obligations first and then (assuming funds remain) distributing remaining cash to members.
Dissolution of a Corporation
Dissolving a corporation, however, is more involved and can take several months to complete. First, the corporation’s shareholders and directors must adopt resolutions authorizing the dissolution of the corporation and the liquidation of its assets. The corporation must also notify the Ohio Department of Job & Family Services, Ohio Bureau of Workers’ Compensation, and the Ohio Department of Taxation of its intent to dissolve and close its accounts, and it must obtain from the Department of Taxation a Tax Clearance Certificate showing no outstanding liabilities (a process which can take 6-8 weeks). Once the corporation obtains the Tax Clearance Certificate, it must be filed along with a Certificate of Dissolution with the Ohio Secretary of State. Finally, the corporation must give notice to each known creditor and/or person who has a claim against the corporation following the requirements of the Ohio Revised Code.
After the entity is dissolved, the corporation must take the necessary actions to wind-down the business (collect assets, resolve its liabilities, dispose of property, etc.). Assistance from competent legal counsel and an accountant is necessary to ensure that your best interests are held and that the process runs smoothly.