In our second panel, Duane Morris partners Gerard Catalanello and William Heuer teamed up with Esther DuVal, Managing Director of CBIZ MHM, LLC; and Robert Katz, Managing Director of Executive Sounding Board Associates LLC, to discuss how to prepare for bankruptcy. Moderator Lawrence Kotler, a partner in the Philadelphia office of Duane Morris, asked the tough question:

“Our earlier panel talked about why the economy is flat and why bankruptcy is flat. Is there hope?” 

It’s all about strategy, said Robert Katz, President of consulting firm Executive Sounding Board Associates LLC. “Here is where you really start to ask the question and examine, is it a good thing to file for bankruptcy? What’s the purpose? Can you afford the cost in both dollars and time? Those are two issues to assess because the cost in and out of court becomes a big issue.”

Professionals have, at times, pushed for alternatives to bankruptcy. “We’ve utilized a cheaper alternative, Article 9 of the UCC, known as a friendly foreclosure,” said Katz. Jurisdiction is important, too. “Assignments for the benefit of creditors (ABCs) have been done for years in the West and Midwest and are becoming more prevalent now in the East. If you have a favorable state court, it can also be a more flexible process, such as utilizing a receivership,” he said.

“I see a rise in the use of the ABC,” said Esther DuVal, Managing Director at consulting firm CBIZ, referring to an assignment for the benefit of creditors, a private process to liquidate a business outside of bankruptcy. “You need to have some synergy between what it is you’re assigning and to whom you are assigning it. If you are assigning a business to an individual and not another business, you could lose all the value of that business.”

“The buyer often calls the plays,” said Catalanello, a partner in the New York office of Duane Morris.

He noted: “The manner or process in which you try to restructure or liquidate is often dictated by the buyer who is waiting in the wings. A buyer looks at an asset that is troubled and decides whether an Article 9 sale gives it the type of title it needs. Sometimes, an out-of-court process just doesn’t give a buyer the finality it believes is necessary to get the benefit of its bargain. While the company may have an appetite for a certain strategy on how to proceed, it’s the buyer or the end game that usually dictates where and how you do it.”

Transparency For The Win

There are inherent power dynamics in the process, particularly if you have a renegade creditor. Said Catalanello: “If you are transparent and open to sharing information with even the most difficult creditor, if that creditor is looking for an economic return rather than pure punishment, then you have a chance of convincing that creditor to come on board with the process.”

DuVal agreed. “It’s very difficult when you have creditors who have interests that are not economic considerations,” she said. “I’ve had out-of-courts fall apart because of political issues—maybe you’re dealing with an organization that doesn’t want to do anything precedent setting, or maybe people are angry and just would rather see someone go to jail than get whatever pittance they would get in an out-of-court process.”

Bring The "A" Team

Said Catalanello: “If you are going to travel down the road of a non-judicial workout or liquidation, it’s best to put in place the same professional team that you would have as if you were in a formal bankruptcy. That’s because it adds to the credibility of the process. To have the most likely chance of succeeding in an out-of-court restructuring, choose the right team.”

“If your out-of-court doesn’t work,” said DuVal, “you don’t want to have to bring in a whole new team of professionals and bring them up to speed. You’ve got a learning curve that’s already met.”

If the decision is made to file a Chapter 11 petition, venue can be an issue, noted DuVal, due to potential political issues.

“As is cash flow,” said Katz. “Make sure you have enough. There’s always a hiccup, there’s always a reason, but it goes to the credibility” of the team of professionals who are dealing with the creditors and other parties-in-interest, he said. “If you’re good the first month, you have flexibility.”

Slow And Steady Wins The Race

Speed is necessary sometimes, but be warned: Its impulsive younger brother, haste, can make waste.

“In the last few years, there’s been almost an acceptance or normalcy for a 45- to 60-day sale period from filing,” said Catalanello. “It’s incumbent on the company side or creditors’ committee side to continue to push back on that. It’s really detrimental to the entire spirit of a fullsome sale process. If there is a fire that needs to be put out, I get it, but I think we have to push back to see if it really is a fire. In this race to the finish line, people are getting destroyed before the race begins. We’re pushing a boulder up a hill. We shouldn’t just accept as status quo that this asset has to be sold in 45 to 60 days.”

In addition, those filing chapter 11 petitions need to be prepared for contingencies. “The days of just filing a chapter 11 case and then figuring out what you are going to do next are long over,” said Catalanello. “You need to be prepared from the moment you file with your plan A, which might be a complete restructuring; plan B, which may be a partial restructuring with a sale of some non-core assets; or plan C, which is ‘we’re going to sell everything.’”

A Section 363 sale is not always a clear cut approach, and its results may vary over time as new case law emerges. “There is push at times,” said Heuer, a partner in Duane Morris’ New York office, “to do a Section 363 sale because of the quality of title you get, but I question whether the full scope of these protections is going to be available in the long term.”

“You have to be prepared to shift and move quickly in this environment,” said Catalanello. “On day one, the case could be over,” he continued. “If you take the wrong turn early on, whether it’s cash collateral or agreeing to some ridiculous restrictions on sale procedures, then the case is baked in stone. If you feel that you have the better side, fight on day one. Set the tone and try to take control of the case. If you don’t, you’re letting someone else control the case and possibly the outcome.”

DuVal pointed out that in addition to slowing down the process, transparency is important. “We had a case where the CFO and all the officers had a personal vested interest with a stalking horse bidder,” she recalled. “They did their best to chill the offers. With transparency, the value add is creating a fair process.”