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Articles Posted in Business Bankruptcy

As a result of the current economic conditions many business owners in New York City have decided that they will need to shut down their businesses. They are faced with the decision of how to best do this. Essentially, the options are to liquidate the business in chapter 7 bankruptcy, to liquidate the business by an assignment for the benefit of creditors in state court, or to liquidate the business outside of bankruptcy. For businesses with greater resources another option is liquidating the business in chapter 11 bankruptcy.

1. Chapter 7 Business Liquidation
This involves filing a chapter 7 bankruptcy petition, with supporting schedules of assets, debts and other information with the Bankruptcy Court. A chapter 7 trustee is then appointed to administer the assets of the business and liquidate them to raise cash to pay creditors’ claims.

One major benefit of a chapter 7 bankruptcy is that, immediately upon filing of the bankruptcy case, the automatic stay goes into effect. This stops all further collection activity against the debtor, as well as any pending litigation, foreclosures or judgment enforcement.

Another positive of a chapter 7 bankruptcy for a business is it is a fairly straightforward process to prepare the bankruptcy papers. Our law firm handles these types of cases on a flat fee basis so the business owners know in advance what their legal fees will be.

One of the negatives is that a trustee is appointed to liquidate the assets of the company, and he or she has the ability to investigate financial transactions involving the company and bring lawsuits against insiders to seek to avoid or recover certain transactions. This topic is discussed further in the Frequently
Asked Questions (FAQs) on our website.
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A recent article on MSNBC (NYC restaurants slammed by financial crisis) details the problems currently faced by NYC restaurants. NYC restaurant owners are reporting a significant drop in business in wake of the recent financial crisis. They also have some of the highest rent in the country for space, and face high food, employee, and insurance costs. Faced with a significant drop in revenue, restaurant owners may not survive if they continue to do “business as usual” and will need to adapt to changing market conditions. In exploring their options, restaurant owners and investors should consider all available options, including the bankruptcy restructuring options that are the focus of this blog post. Bankruptcy is not a panacea and is something to consider when other options (such as obtaining additional investment, consolidation of space, altering menus and pricing, etc.) have been fully explored. However, bankruptcy presents some useful tools to NYC restaurant owners and investors that need to be understood.

1. Ability to Sell Below Market Lease Without Landlord Consent.

Often a below market lease in New York City may be one of a restaurant’s most valuable tangible assets. Most commercial leases in NY contain extensive restrictions on a tenant’s ability to sell or sublet space. In bankruptcy, however, a debtor in possession (in a chapter 11 reorganization or liquidation case) or trustee in a (chapter 7 liquidation case) has the ability to “assume and assign” a lease even though the landlord does not agree. The right to do this is not absolute and the replacement tenant must be able to establish an adequate ability to perform under the lease. In addition, defaults under the lease must be cured (or adequate assurance of prompt cure provided) in connection with any sale of the lease. The key point is that in a bankruptcy it may be possible for the value in the lease to be realized even if the tenant is in default under the lease and has been sued for nonpayment of rent (as long as the lease has not yet been terminated). Utilizing this option may allow an unprofitable restaurant to move to another location with cheaper rent where is could be profitable.
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The recent bankruptcy filing by Lehman Brothers Holdings, Inc. in the U.S. Bankruptcy Court for the Southern District of New York caught many people by surprise. It is the largest corporate bankruptcy to date in terms of assets and liabilities.

Holders of bonds, notes and other obligations issued or guaranteed by Lehman Brothers Holdings, Inc. wonder what their options are and whether they need to hire a New York bankruptcy lawyer to protect their rights. People doing business with non-debtor subsidiaries of Lehman Bros. wonder what steps they should take to protect their rights going forward.

There are certain steps that it is advisable for creditors in a bankruptcy case to take:

1. Obtain Legal Advice re Effect of Bankruptcy Filing on Your Rights.

Different creditors have different rights and remedies depending on the nature of their legal and contractual relationship with a debtor in bankruptcy. Provisions of the Bankruptcy Code give particular rights to certain parties (such as financial institutions, forward contract merchants, etc.) for certain type of financial contracts (such as forward contracts, securities contracts, etc.). Whether or not a creditor is subject to the benefit of particular rights specified in the Bankruptcy Code requires review of the legal obligation in question. In addition, the Bankruptcy Code provides for different rights for different categories of creditors, depending upon whether their claims are administrative claims arising after the filing of the bankruptcy, secured claims, etc. As the Lehman Bros. banruptcy case is pending in Manhattan it may be useful to hire a Manhattan based bankruptcy lawyer who is familiar with the Southern District of New York Bankruptcy Court to provide this advice.

2. File a Proof of Claim.

A creditor will often want to file a proof of claim in a bankruptcy case to ensure that it is eligible to participate in distributions to creditors, unless it has been scheduled in the debt schedules filed by the debtor and is satisfied as to how it has been scheduled. While a creditor is not required to hire a bankruptcy lawyer to prepare and file a proof of claim, it is often advisable to do so (particularly if the amount of money at stake is large). A Manhattan bankruptcy lawyer who is familiar with litigating claims objections in the U.S. Bankruptcy Court for the Southern District of New York can provide valuable assistance to a creditor in preparing a proof of claim for filing in that court.
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