Business reorganization in bankruptcy gets a bad rap. Here’s why: “bankruptcy” deals with failed promises to pay (if you google synonyms for “failure,” the first word to appear is “bankruptcy”) and implies a moral shortfall in the minds of many.
That’s unfortunate because business reorganization can be a good thing. When utilized effectively, it can be good for:
- the business in financial trouble (the “debtor”);
- the debtor’s suppliers and customers; and
- the local community where the debtor operates.
A Counter-Intuitive Illustration
Here’s a counter-intuitive illustration of how business reorganization is good for the debtor’s suppliers:
- suppliers want and need future paying business from a bankruptcy debtor, even when their pre-bankruptcy receivables are discharged.
Businesses compete in the marketplace against one another. But that’s only part of the story. Businesses also support, and are dependent on, each other.
Here’s an example. Two restaurants on the same block compete for customers. But these same restaurants are dependent on the supplier of food and materials that offices a few blocks away. The supplier, in turn, is dependent on the restaurants staying in business and continuing to need and purchase its supplies. So, when the restaurants hit tough times, the supplier hopes they can survive and continue buying its goods and services—that’s because the supplier counts on and needs their continuing business.
If the restaurants go into bankruptcy with a substantial debt to the supplier, the supplier will continue doing business with them anyway. The supplier may get nervous and may change the business relationship to COD. But the supplier will continue doing business with the restaurants for as long as the restaurants survive. And it will do so, even if it never receives a single dollar on its pre-bankruptcy receivable.
That’s how real life works.
An Obvious Illustration
Local communities need commerce. They need businesses that employ people, that consume goods and services other businesses provide, that provide goods and services to the community, that pay taxes, that contribute money to local projects, that provide leadership to community efforts, and that support the community in countless other ways.
So, if a business begins to struggle and is required to liquidate—instead of reorganize—the loss to the community is obvious and significant. And for a smaller community, such a loss can be devastating and can last for years.
A Chapter 12 Illustration
Back in the Farm Crisis days of the 1980s, I saw first hand (as a young lawyer) how Chapter 12 helped the communities where farmers lived and worked.
Before Chapter 12, the 1980s saw the end of farming as a career for many people. It also saw the end of many Main Street businesses who lived and worked to support those farmers.
Additionally, when farmers liquidated, they moved from their local communities to larger towns and cities that offered alternate opportunities. And when they left, so did many of the Main Street businesses that supported them.
The result, today, is a dramatic reduction, since the early 1980s, of populations in those communities. Many farmers are gone from the countryside, as are many of those who supported them with businesses in town.
Chapter 12, enacted in 1986, helped stem that tide. Before Chapter 12’s existence, a farmer’s only reorganization opportunity was under Chapter 11, which did not work for them—farmers could not get a Chapter 11 plan of reorganization confirmed. And so, Chapter 11 became little more than hospice care for financially ailing farms.
Chapter 12, however, offered a viable reorganization opportunity for farmers: many farmers were able to get Chapter 12 plans confirmed, were able to stay in business, and were able to continue providing value to their communities.
A Continuing Problem
Today, Main Street businesses are in the same boat as farmers were in back in the early 1980s: there is no viable reorganization opportunity for them. Moreover, a $4 million limit on farmer eligibility for Chapter 12 puts most career farmer back in the same problem they faced in the early 1980s: there is no viable reorganization opportunity for them.
Accordingly, the only choice available to many farmers and Main Street businesses that support them, today, is to liquidate and leave the local community for alternate career opportunities elsewhere.
And that’s a shame.
Currently pending before Congress are two proposed laws:
- The Family Farm Relief Act (S. 897) would raise the Chapter 12 eligibility limit for family farms to $10 million; and
- The Small Business Reorganization Act (S. 1091) would create a Chapter 12-type reorganization for Main Street businesses.
These two Acts (S. 897 and S. 1091) are vital for family farmers, for Main Street businesses everywhere and for local communities of all types.
They should be enacted at once!
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