Tag Archives: bankruptcy attorney

The Pandemic’s Impact on South Jersey’s Economy: An Insider’s View​

Pandemic……and record DECLINE IN BANKRUPTCY filings.  Yes, as the title of an article in the Wall Street Journal in January read about 2020 “Commercial Chapter 11 Filings Rose 29%, While Personal Bankruptcies Dived.”  We debt relief/restructure practitioners have been following these numbers since the beginning of the Pandemic. 

From the end of March 2020 on, many were expecting a flood, better-yet a monsoon of bankruptcy filings, but the flood never came. Instead, we have seen the lowest number of filings in 35 years! What is going on?  Well, the short answer is that the stimulus packages worked at some level in keeping people employed and many business muddling along! Also, the closing of the courts, delays in foreclosures, almost automatic moratoria for mortgagors, abatements of rent and hold on evictions many posit have slowed the process. So, what is in store for 2021? I tend to lean, with hope, that with the funds coming into the economy through additional PPP funds, extensions of unemployment, extra dollars for individuals and business, perhaps business will reopen, begin getting all those on unemployment back to work and truly bring everyone into the economy without businesses and individuals being compelled by their circumstances to file bankruptcy.  Additionally, the federal government will need to do everything right to ensure that inflation does not “kick in.”  However, I fear that we may now be seeing the beginning of what will eventually be a wave of bankruptcy filings, not necessarily a title wave, but a wave nonetheless. I can just tell you this anecdotally.  As a bankruptcy trustee, I am assigned 45-50 cases approximately once a month to handle. Those numbers went way down during the last eight months.  My January hearings were again up to those numbers with many articulating the COVID-19 pandemic as the cause.  Earlier this month, the Atlantic City Press reported “the Atlantic City-Hammonton metro area, which basically encompasses all of Atlantic County, has been in the top three metro areas in the nation for unemployment rates and increases in unemployment during the pandemic. The other two topping that list were other big tourism and/or gaming sites: The greater Las Vegas area and Kahului-Wiluku-Lahaina in Hawaii.”​ From a business perspective, we have been working very hard to make deals with landlords or for landlords and many other creditors that are either in trouble or causing trouble. However, some of those attempts are blowing up as certain industries are not even able to pay their bills at reduced amounts and creditors are unwilling to take further cuts as their obligations to their own creditors are just too great. 

Stay tuned. I will be putting out a post once a month or perhaps more often, to keep you informed on current filings and the beginning of a uptick that we most certainly think will occur.

Questions? Let Doug know.

Douglas S. Stanger is a shareholder at Flaster Greenberg PC concentrating his practice in bankruptcy, corporate and real estate law. He has served on the United States Department of Justice Panel of Bankruptcy Trustees for 25 years and is an approved mediator for the Bankruptcy Court in the states of New Jersey, Pennsylvania and Delaware. Most recently, Doug was appointed by the U.S. Department of Justice as one of only ten subchapter V trustees in the State of New Jersey.

What Does My Company Need To Know Before Acquiring Another Company In Financial Distress?

We have been asked many times to assist a client in the purchase of another business that has been experiencing financial difficulties. While the purchase can be a significant advantage to your company, there are several items to keep in mind before contemplating such a transaction.

  • Due Diligence—Spend the time, effort, and money to thoroughly review financial information, employment contracts, leases, the work in progress of the company, etc. to obtain as full a picture of the financial position of the company before you complete the transaction.
  • Transaction Team—Enlist key employees and outside professionals to assist in the analysis and interpretation of all information gathered.  Use in-house staff, when possible, as well as engaging outside entities with certain levels of needed expertise (i.e.: forensic accountants, real property and business appraisers, environmental analysts, etc.).
  • Assets free and clear of liens—Often, the target company had loans with a financial institution that has liens on some or all of the assets of the company, and/or personal guarantees of insiders.  Review whether the personal guarantee stays with them or has to be transferred to the purchaser.  Be sure to perform UCC searches to examine any judicial liens, judgments, or any type of tax  liens, that may be in place.  You must obtain releases from all secured parties before completing the transaction.

Our firm has extensive experience in these types of business transactions and is available to assist you in the process. For more on any of the information contained in this post, contact Steven D. Usdin, or any member of Flaster Greenberg’s Bankruptcy, Financial Restructuring and Risk Management Department. Steve can be reached at 215.279.9903 or steven.usdin@flastergreenberg.com.

CARES Act to Provide Needed Aid to Small Businesses Dealing with Uncertainty and Disruption

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The “Coronavirus Aid, Relief, and Economic Security Act” was signed into law by the President on March 27th in an attempt to curtail the massive economic fallout that is likely to result from the near complete shutdown of American commerce amid the COVID-19 pandemic. This comprehensive bill provides financial resources that augment the individual states’ responses. This alert will explain some of the relief provided by the CARES Act that affect businesses grappling with these difficult times. It provides only a summary of the highlights of the Act and should generally apprise you of the programs available.

The CARES Act allocates an additional $349 billion to loans and grants through the Small Business Administration (SBA). For small and midsize businesses, the most significant result of the Act is to amend Section 7(a) of the Small Business Act to create the Paycheck Protection Program (PPP).  The PPP provides loans of up to two and a half times a borrower’s average monthly payroll expenses (over the last twelve months) in order to pay employee wages, benefits, insurance premiums, mortgage, rent, and utility payments. “Payroll expenses” include employee pay, leave (vacation, sick, parental, family, etc.), and health insurance and premiums, but is subject to limitations for high earning employees. This program is designed to encourage and incentivize businesses with less than 500 employees to retain their labor force. Eligibility standards focus on whether the business was operational before the crises, not its ability to repay. The CARES Act also waives the “credit elsewhere” test and no longer requires a personal guarantee for PPP loans. All PPP loans have a maximum interest rate of 4%, but as shown below, some or all of these loans may be forgiven. Furthermore, the CARES Act provides that the SBA will pay principal and interest on existing and new SBA loans for six months.

PPP loans are eligible for forgiveness upon meeting certain standards and this canceled indebtedness will not be recognized as income. The SBA will forgive the amount that the borrower spent during the first eight weeks after receiving funds on: (i) payroll costs as defined above; (ii) interest on existing mortgages (iii) payments of existing rents; and, (iv) payments of existing utility service. Since the CARES Act is attempting to prevent job losses, a borrower’s eligibility to have its loan forgiven is proportionally reduced by any reduction in employees compared to the prior year. A borrower’s loan forgiveness is also reduced if an employee’s pay is decreased beyond 25% of his or her previous year’s pay. However, if an employer has already laid off or reduced an employee’s pay, it can reinstate that employee prior to June 30, 2020 without suffering a reduction in forgiveness.

In addition to the PPP, the CARES Act expands the availability of Economic Injury Disaster Loans (EIDLs) and expands the business entities eligible to receive them.  The CARES Act waives the need for personal guarantees for EIDLs less than $200,000 and approval is based strictly on the applicant’s credit score. Any applicant for an EIDL can also request up to $10,000 in an Emergency Grant that the SBA must distribute within three days. The advance payment through the Emergency Grant may not need to repaid but must be used to: (i) pay sick leave to employees; (ii) maintain payroll; (iii) meet increased costs to obtain materials; (iv) make rent or mortgage payments; or (v) repay obligations that cannot be paid due to revenue losses. Emergency funds or EIDLs that convert to SBA loans through the PPP can be forgiven as stated above.

The Act also provides valuable tax credits of 50% of the first $10,000 of wages paid by employers to each employee during the crisis. To be eligible, an employer must have had its operations fully or partially suspended due to a shut-down order or had its gross receipts decline by more than 50% compared to the same quarter last year. There are different rules concerning what wages are qualified depending on the number of employees a particular business employs. In addition to the tax credit, an employer or self-employed individual can defer payment of the employer share of Social Security tax and allows such payments to be made over two years with half due by the end of 2021 and other half due at the end of 2022. Additionally, the CARES Act expands the ability of businesses to offset operating losses and retroactively apply them to previous years (carry-back NOLs).

In addition, the CARES Act provides for tax credits for employers who pay the required enhanced leave for employees affected by COVID-19. Employers can receive tax credits for up to $511 per day per employee when they pay employees under sick leave. Much more information regarding paid leave can be found in Adam Gersh’s three part employer’s guide: Part 1 | Part 2 | Part 3.

The CARES Act requires the SBA to promulgate rules promptly that should provide some more details on the available funds, process, and administration of these loans. Interested borrowers should contact the SBA here.  Additionally, funds are available at the state and local level and will be the topic of another Flaster Greenberg post in the near future.

Finally, the CARES Act expanded the number of businesses that can seek Chapter 11 bankruptcy relief under the recently enacted Small Business Reorganization Act of 2019 (SBRA). For the next year, the SBRA is available to businesses that owe less than $7.5 million in total debt, which is nearly three times higher than the original SBRA limitation. The SBRA, like a more traditional chapter 11 bankruptcy, allows a debtor to reorganize its balance sheet with the intention of setting forth a bankruptcy plan that will allow the company to operate profitably in the future. The advantage of the SBRA is that it is designed to provide a streamlined process, reduce costs, and provider a quicker exit from bankruptcy as compared to the traditional Chapter 11 bankruptcy where its cost can be a significant barrier to entry. Although businesses rarely want to consider bankruptcy, it can prove to a significant step toward regaining solvency and emerging from this crisis.

If your company is one of the millions struggling with this disruption, it should consider whether it can utilize the funds available in order to meet the short-term liquidity crunch. As always, Flaster Greenberg’s attorneys are available to assist you and we are here to help your company through this difficult time. The next section contains important links that can provide assistance to businesses.

COVID-19 Resources

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Damien Nicholas Tancredi
 is a member of Flaster Greenberg’s Bankruptcy, Financial Restructuring and Risk Management Department focusing his practice on bankruptcy, specifically representing unsecured creditors and creditors’ committees, chapter 7 trustees and chapter 11 debtors. He also represents businesses in commercial litigation and corporate matters in Delaware, Philadelphia and South Jersey. He is admitted to practice law in Pennsylvania, Delaware and New Jersey as well as the United States District Court for the districts of Eastern Pennsylvania, Delaware, and New Jersey. He can be reached at damien.tancredi@flastergreenberg.com or 215.587.5675.

 

Hot Topics in Bankruptcy Law: Alter Ego Claims

Most of us believe that when we set up a corporation to conduct business, we’ve accomplished many positive things. One of these, in particular, is that we’ve shielded ourselves from personal liability for any of the company’s business obligations. Unfortunately, that may not always be the case.

Usually a corporation is treated as a separate legal entity, and the corporation is solely responsible for the debts that it incurs. However, whether your business is financially sound, or is having cash flow issues, individual owners are not immune from suit by an aggressive creditor, or some other party seeking to recover a claim for a variety of other reasons.

In such cases, a plaintiff may file suit against not only the corporation, but its owners, officers or directors. How and under what circumstances can this type of action be successful? When can you be personally responsible for the debts of your corporation?

Courts have developed a concept known as “piercing the corporate veil.”  Essentially, it is a legal concept in which courts cast aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts under a theory that the corporation is their “alter ego.” Veil piercing is most common in small, closely held companies.

In determining whether a corporate veil may be pierced, which can result in personal liability, courts will look to a number of key factors.

Undercapitalization.  Was the corporation undercapitalized from the outset?  Failing to sufficiently capitalize a newly formed company can not only lead to financial distress, but also leaves its shareholders susceptible to suit.

Failure to adhere to corporate formalities.   Does the corporation have an operating agreement and/or corporate by-laws?  Does it conduct regular board meetings and keep minutes?  If it fails to do follow these and other simple rules, the risk of personal exposure is higher.

Substantial intermingling of corporate and personal affairs.  Are there significant intercompany transfers, or are funds being paid out of the corporation that are clearly not business related?  When business owners use their various corporations to shuttle funds back and forth between them, or they utilize their corporation as a personal piggy bank from which they can withdraw money at will, the corporate form will be disregarded.

Use of the corporate form to perpetuate a fraud.   Does someone with whom you do business routinely appear to be starting up, then shutting down, his corporations?  Clearly, where individuals set up companies solely and knowingly to shield themselves from liability, they will be found to take on the liabilities of the company.

Recently, veil piercing through an alter-ego theory was tested by two courts in Pennsylvania, with opposite results.

In Liberman v. Corporacion Experianca Unica, S.A., — F. Supp. 3d —-, 2016 WL 7450464 (E.D. Pa. Dec. 27, 2016), the U.S. District Court decided in favor of business owners where the plaintiff sought to pierce the corporate veil.  There, the plaintiffs were not paid rental profits from their investment in a time share in Costa Rica.   In their subsequent suit, the plaintiffs attempted to pierce the corporate veil in order to hold the defendants and defendants’ principal liable for all resulting damages.

The court rejected the plaintiffs’ arguments outright.  First, the court drew a distinction between undercapitalization and underperformance, the latter of which does not lend to a successful veil piercing claim.  Also, the court found that the need to borrow money at the beginning of a project was not evidence of undercapitalization and noted the absurd result that could stem from such a ruling.

The plaintiffs’ argument that the defendants failed to observe corporate formalities was also rejected.  The court noted that each defendant maintained separate board meetings, shareholder meetings, insurance, tax returns, officers, title to assets, books and records and financial statements as evidence that the defendant corporations were all maintained as separate entities.  Finally, in rejecting the plaintiffs’ contention that intermingling occurred, the court found that the fact that funds were being transferred and booked, between different companies actually supported the defendants case, because it was evidence of the maintenance of separate books and records.  Importantly, the court stated that common ownership was not evidence of intermingling and did not support an alter ego theory of liability.

In stark contrast to the District Court’s decision in Liberman, the Superior Court of Pennsylvania upheld a verdict by the Court of Common Pleas to pierce the corporate veil in Power Line Packaging, Inc. v. Hermes Calgon/THG Acquisition LLC, 2017 WL 90617 (Pa. Super. Jan. 10, 2017).  In Power Line, the plaintiff supplied a line of mists, lotions and shaving gels to the corporate defendants.  When the corporate defendants failed to pay, the plaintiff sued them, as well as the defendants’ principals.  After a non-jury trial, the Court of Common Pleas issued comprehensive findings, holding the defendants’ principals personally liable.

First, the Court found that the defendant corporations were undercapitalized in that they were never solvent and never had any substantial assets at any time.

In addition, unlike the defendants in Liberman, the Power Line corporate defendants held no board meetings, kept no minutes and had board members that never participated in the companies’ business affairs.  Moreover, the corporate defendants distributed dividends to shareholders with absolute disregard of their investment in that corporation, or the corporation’s financial ability to pay a dividend.  Thus, the court held, corporate formalities were not observed.

The Court also found that the defendants and their principals frequently comingled their assets, stating, in fact, that one principal operated under the assumption that all of the money in all of the companies belonged to him and could be used at his leisure.

Finally, the Court held that the principals of the defendants used the defendant corporations to perpetrate a fraud and render the defendant companies insolvent.  The court highlighted multiple misrepresentations from the defendants to the plaintiff that caused the plaintiff to continue to do business with the defendants, at a substantial loss. 

When conducting business, it is important to be mindful of the red flags that can result in personal liability for corporate debt. In order to minimize these risks, it’s helpful to have a sound business model at the outset, maintain accurate business and financial records and comply with the standards of conducting a business that have been discussed above. Flaster Greenberg’s attorneys provide advice and counseling on business formation and risk management, and when litigation is unavoidable, we represent our clients tenaciously to resolve the dispute as quickly and efficiently as possible. If you have questions about managing risk or ways to avoid personal liability for your business obligations, please contact Harry Giacometti or Damien Tancredi.

 

 

 

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