“Kicking the Can Down the Road”: Family Businesses in Chapter 11

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Kickin’ it down the road (photo by Marilyn Swanson)

By: Donald L. Swanson

“Kick the can down the road” is an adage that means this: “to delay or avoid dealing with a problem.”

Before Bankruptcy

That’s what family businesses in financial stress do, outside of bankruptcy. They deal with unhappy creditors by kicking the can down the road. Here’s why: cash resources are tight, and stalling their creditors, delaying payments, and extending due dates is essential. Many times, it’s the only strategy available.

In Bankruptcy

But when a Chapter 11 bankruptcy filing becomes unavoidable, kicking the can must end. The time has come for a strategy to resolve the debtor’s financial problems. Maybe the strategy is a reorganization, or maybe it’s a sale of the business as a going concern, or maybe it’s a piecemeal liquidation of assets, or maybe it’s a combination of liquidation and reorganization, or maybe it’s completely different approach. But there must be a strategy beyond kicking the can.

A “Hard Knocks Rule”

Kicking the can simply does not work for a family business in bankruptcy, absent unusual circumstances.

Here’s why: bankruptcy incurs heavy costs for the debtor. Economic costs are things like legal fees and trustee fees and limitations on use of cash. Non-economic costs include nervous lenders, nervous vendors, and nervous customers.

All-in-all, filing bankruptcy for a family business can be like tossing a bag of sand to a swimmer in distress.  Accordingly, a strategy of prompt action in Chapter 11 to solve the debtor’s problems is essential.

A “Three-Sixty-Two Eleven” Strategy

A decade ago, I received a call from an attorney wanting help with putting his client into what he called a “three-sixty-two eleven.” Since every bankruptcy filing creates an automatic stay under §362 of the Bankruptcy Code, I asked, “What’s that?”

“It’s filing Chapter 11 to invoke the automatic stay,” he said.

After a puzzled pause, followed by a moment of realization, I said: “You mean . . . with no other strategy?”

He responded in the affirmative, to which I replied with some version of, “Not interested.”

A Default Strategy

But what the attorney described as a “three-sixty-two eleven” is what’s actually happening in every Chapter 11 bankruptcy with no immediate strategy for solving the debtor’s problems. It’s the default posture. It’s merely kicking the can down the road.

And odds of achieving the debtor’s goals, whatever those might be, are slim—and become slimmer with each passing day.

–A 1980s Farm Example

That’s what happened with the vast majority of Chapter 11 cases filed by farmers in the 1980s—before Chapter 12 came along. They filed Chapter 11 to forestall foreclosure but had no strategy for resolving the problem: they couldn’t get a reorganization plan plan confirmed and were adamantly opposed to liquidating farmland.

As a result, they hung on in Chapter 11 for as long as possible (some hung on as long as two or three years). But, ultimately, they ran out of cash and couldn’t continue operating.

That resulted in foreclosure, anyway, and a terrible result for everyone: foreclosed assets sold at rock-bottom prices (far less than the secured debt amounts), foreclosure sales resulted in large tax liabilities, farmers lost nearly everything, secured creditors ended up with huge deficiencies, and unsecured creditors got nothing.

–An Exception—Times Two

Over the years, I’ve seen a “three-sixty-two eleven” strategy work—twice. Both times, the debtor won a multi-million dollar lottery.

Still . . . it’s not a good strategy [sarcasm intended].

Conclusion

When a family business must file bankruptcy, it’s time for kicking-the-can to stop. A strategy to actually solve the debtor’s financial problems through Chapter 11 is essential.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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