Dean A. Langdon 2014-01-16 06:56:27
Keeping Your Corporate Clients Through Bankruptcy Dean A. Langdon is an attorney with the firm of DelCotto Law Group PLLC in Lexington. His practice focuses on representation of business and individual debtors in Chapter 11 and Chapter 13 reorganizations. Mr. Langdon is licensed to practice in Kentucky, the Sixth Circuit and the United States Supreme Court. Many lawyers who advise their corporate clients have seen them struggle financially since the Great Recession. No doubt, some of you have lost clients or seen work decline from such clients during the past several years. And sometimes, the financial distress is so overwhelming that a client may ask you about their options, seek bankruptcy relief, liquidate assets or simply shut the business down. How can you — as corporate counsel — help keep such clients afloat and help them return to profitability? By enlisting competent bankruptcy counsel to work with you. It seems counterintuitive, but here’s a brief description of how it might work. Chapter 11 bankruptcy offers a protected environment for a company to deal with its creditors, restructure its affairs, and emerge as a viable business. It is a statutory system which intersects with state law property rights and other regulatory schemes applicable to the particular business. A company filing a Chapter 11 begins a new financial life in many ways. A new set of books must be created, pre-filing debts cannot be paid, the company assets form an estate, and the company is a “debtor in possession”— entitled to continue operating its business in the ordinary course, but required to obtain court permission for other transactions. A unique aspect of Chapter 11 is the requirement that professionals working for the debtor be both disinterested, and not hold any interests adverse to the bankruptcy estate. There is a definition for a “disinterested person,” which provides you may not be a creditor, equity holder, insider or hold an adverse interest to the estate or any class of creditors because of a direct or indirect relationship, connection or “any other reason.” 11 U.S.C. § 101(14). Counsel representing the debtor in Chapter 11 must limit their representation to the debtor in possession, which has fiduciary obligations to act in the best interest of its creditors, in addition to shareholders or others invested in the company. Long-time corporate counsel providing services in specialized areas may themselves be a creditor, may have represented individual owners, directors or officers, or represented creditors on unrelated matters. As a result, corporate counsel may not qualify as disinterested. However, that doesn’t preclude their involvement before, during, and after a successful Chapter 11 case. Corporate and other outside counsel are critical to a level-headed analysis of options as objective third-parties who may clearly see the extent of financial distress when principals or officers deeply invested in the enterprise are in denial or simply at a loss for how to cope. Existing counsel is usually an excellent source of information on corporate structure, transactions and litigation issues. All of these play an important role in bankruptcy, and often no single officer or employee has the same perspective as counsel. In addition, in-house counsel may be working with multiple outside counsel in areas as diverse as tax, trademark, labor and employment and health care issues. Acquiring such perspective from existing counsel instead of starting from scratch streamlines the pre-filing assessment to determine if Chapter 11 is a necessary or viable option. If Chapter 11 is selected and filed, court approval is required for the company’s retention of professionals, including counsel. Companies with substantial operations will often seek and obtain court permission to hire “special counsel” to deal with specific areas or expertise or conflicts. Special counsel is not required to be disinterested, but cannot hold an interest adverse to the debtor for the matter for which they are being retained. However, with bankruptcy court approval, they may continue to provide ongoing services on specific matters. Bankruptcy counsel should be consulted for advice on how to maintain the legal resources the company will need while it navigates the bankruptcy process. If you have been representing the company in a specialized area, your services will likely still be required during the bankruptcy process, but you will need to get court approval. If you serve as general counsel, the same is true, although in-house counsel may fall under the “ordinary course of business” umbrella, making court approval unnecessary. So, a company’s entry into the world of Chapter 11 doesn’t end the need for ongoing legal services, it simply requires court approval of ongoing representation. In addition, professional fees approved by the bankruptcy court are administrative expenses, which are given priority for payment. While no guarantee, this greatly improves the chances of being fully paid for services rendered during the bankruptcy process. A “successful” Chapter 11 means an ongoing business exits the system, continuing operations and needing ongoing legal services. Bankruptcy counsel rarely, if ever, fulfills this role, but redirects the company to its existing pre-bankruptcy counsel for such services. Accordingly, an early assessment of financial distress and referral to bankruptcy counsel can actually result in preserving a client that will continue to require your services for many years after the bankruptcy concludes.
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