Stressed Family Businesses: Chapter 11 Reorganization Must Work For Them

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Their habitat must work for them (photo by Marilyn Swanson)

By: Donald L. Swanson

Family businesses who need to reorganize have a tough go in bankruptcy. There are lots of impediments, both legal (e.g., absolute priority rule) and economic (Chapter 11 is expensive).  The Small Business Reorganization Act of 2019 will help, but it only applies to businesses with less than $2.7 million of debt.

An Extraneous Problem

And then there’s this: “Don’t file bankruptcy in this Court,” the bankruptcy judge insisted! The judge didn’t actually say those words. But he conveyed that very meaning in nearly every action he took and in nearly every ruling he made.

Many years ago, in a bankruptcy court far away, I filed Chapter 11 for a family business. We had a good strategy that could/should have worked. But it didn’t. And that’s because the judge (the one mentioned above) allowed or created impediments in the debtor’s path at every possible occasion.

And then, those who helped administer the bankruptcy system in that court took up the judge’s attitude. “My job is to harass debtors,” one of those administrators boasted. [She didn’t actually use those words, but that’s what she meant.]

When we finally realized that a reorganization could never happen in that case, because of the extraneous impediments, we packed it in. And that was truly a shame for the family . . . and for their employees and suppliers and for many of their creditors as well.

I never filed a case in that judge’s court again . . . ever.

Perplexity

Such attitudes have always perplexed me. Congress created our bankruptcy system under an explicit directive in the U.S. Constitution. And one purpose is to let family businesses reorganize.

Reorganizing is difficult enough for family businesses, under Chapter 11. So, why would a bankruptcy court or an administrator in the bankruptcy system add impediments to the process?

The Reorganization System Needs to Work

If we want family businesses to use the Chapter 11 reorganization system, that system must work for them. And it has to be more than hospice care for a failing business.

The Chapter 11 system must, at least, create the possibility of a solution and then allow for an efficient pursuit of that possibility. Otherwise, family businesses won’t use bankruptcy, except in emergency and desperation circumstances. Debtors and their creditors will opt, instead, for state court receiverships, assignments for benefit of creditors, and other alternative systems—none of which is a tool for reorganization.

Conclusion

As for making the Chapter 11 system work for family businesses in financial stress, we have a long way to go. The system often fails them because, (i) the laws are stacked against them, (ii) it’s expensive, and (iii) attitudes of those who manage the system can provide unwarranted roadblocks.

** 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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