By: Donald L Swanson
A family business in Chapter 11 (whether in Subchapter V or a regular Chapter 11) has one task that stands above all others in importance. It’s this:
- The business must generate a positive cash flow.
The Lawyer’s Impossible Task
All the favorable bankruptcy rules that exist, and all the favorable bankruptcy court rulings that a debtor’s attorney might obtain, will all come to naught, if the debtor fails to generate a positive cash flow.
I’ve filed Chapter 11 petitions while declaring (mostly to myself) that the success or failure of the case will turn on the debtor’s ability (or lack thereof) to generate a positive cash flow. I hate that reality and uncertainty, because it’s something over which I have no control.
There are family business cases, granted, where the debtor’s owners have deep pockets and can fund a negative cash flow over an extended period of time. But those cases are rare—and usually have funky circumstances.
Most reorganization cases, where the debtor cannot achieve a positive cash flow, will crater (i.e., end in liquidation) when negative cash flows drain the the last of the debtor’s reserves: it’s a cash-flow asphyxiation.
A Small and Easy Thing?
It seems like a small thing, that a family business in Chapter 11 must be able do that one thing. But it isn’t a small thing: it is the CENTRAL thing, upon which all else turns. And qualifying for Subchapter V relief changes nothing: a positive cash flow is still essential to bankruptcy success.
Generating a positive cash flow in bankruptcy should be an easy thing to do. Right? After all, the automatic stay eliminates the need to fund, (i) daily withdrawals on merchant cash advance loans, (ii) periodic withdrawals on secured loans, and (iii) weekly repayments on delinquent obligations to vendors.
But the automatic stay often fails to relieve cash flow pressures, despite the relief from such payments. Here’s why — the bankruptcy filing creates a level of nervousness that did not exist before:
- customers become nervous by the bankruptcy filing and are reluctant to entrust the debtor with advance deposits;
- vendors become nervous and demand cash up front;
- secured creditors become nervous and demand adequate protection;
- insurers become nervous and demand immediate payments;
- utility providers become nervous and demand advance deposits;
And on top of all that, debtor’s management is embroiled in an entirely-new level of administrative activity: preparing the bankruptcy Petition, preparing the Schedules and Statement of Financial Affairs, providing information for first-day motions, preparing monthly operating reports, preparing a plan and disclosure information and all the financial and historical details that those require, etc.—and doing so under penalty of perjury, no less. These are monstrous tasks.
All the foregoing can be an oppressive burden for a family business, especially when financial analysis and reporting have never been the business’s strong suit.
It’s like a struggling swimmer: instead of throwing a life vest to the swimmer, a Chapter 11 can be more like throwing the swimmer a 20-pound bag of sand and saying, “Good luck!”
Conclusion: Success v. Failure
But it is upon surviving all such things, and still generating a positive cash flow, that the success or failure of a family business in Chapter 11 can turn. And it’s over such things that the debtor’s lawyer has no control.
Such are the uncertainties and risks that a debtor’s lawyer must try to manage. And it can be a daunting task.
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