The Costs of Restructuring A Business

Canada's Slaw raises a point with its Focus on Employees: The Hidden Costs of Restructuring a Business that I think often gets overlooked when restructuring a business (whether in or out of bankruptcy) - the employees. Yes, we know they are there but do we really pay attention?

Planning for a business restructuring often takes months; yet in my experience, insufficient resources are typically devoted to managing the human resources consequences, leading to significant additional or ‘hidden’ costs. The following are some examples of strategies that can mitigate costs and losses associated with terminated or disaffected employees:

* Rumours of a pending sale of a business or layoffs are worrisome and distracting to employees, resulting in lost productivity, higher benefit costs, poorer client relations and service, and attrition of key employees. Emphasize the importance of taking steps to maintain confidentiality throughout the planning or negotiating stages.
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How fairly employees believe they and laid off co-workers were treated during the restructuring will affect retained employees’ commitment and productivity. Consider what if any steps you can take to minimize the chances that employees will become disaffected and/or leave as a result of the restructuring.
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If you are considering providing ‘working notice’ of termination for employees, consider the hidden costs of such a plan including increased benefit claims and costs, the potential negative impact on service to clients and customers during the working notice period, and the risk that those employees will not complete critical tasks or facilitate a transition prior to their termination. Offering a closing bonus or increased severance offer payable at the end of the working notice period dependent upon maintaining service levels or completion of the key tasks, is one way to manage those risks.
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If the sale or closure of a business or business unit is delayed, do not expect that an extension of employees’ working notice will be welcomed by those employees. One consequence of that event is that any negotiations for the final severance packages, if not yet settled, will be negatively affected. If it is reasonably foreseeable that the sale or closure date may be delayed, consider the benefits of agreeing to more generous severance package terms in exchange for an early settlement coupled with a right for the employer to later apportion what part of the severance will consist of working notice and pay in lieu of notice.
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Business owners who have agreed to sell their business but stay on as an employee after the closing are usually not prepared for and/or underestimate the difficulties associated with the change in control and culture that inevitably occurs. Ensure that any new employment agreements have good severance provisions that can be triggered by the former owner/now employee, and minimize any linkages to payment of the sale proceeds with the length of employment, post-closing.
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If retention of key employees is a condition of sale, determine what is necessary to secure their employment, or continued employment. Key employees’ leverage increases as costs to negotiate and implement the sale have been incurred, and as closing nears. Consider the relative risks of early communication of a sale that may not close in order to secure key employees, versus the costs of not securing key employees early.
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Consider the culture of an acquired business when imposing new employment contracts. Even when a purchaser agrees to offer employment to current employees on substantially the same terms, if the form of employment contract (i.e. formality, tone, or one-sided language) is at odds with what the employees are used to, the employee-purchaser relationship will get off to a bad start. That in turn may affect the employees’ willingness to buy into or adapt to operational changes implemented by the purchaser, or result in loss of productivity or other costs associated with attrition.

More Premier News: Owner to be Arrested

As reported by the Indianapolis Business Journal:

The Marion County Prosecutor's Office today filed three felony charges against Christopher P. White, the founder of bankrupt development firm Premier Properties USA Inc.

The charges include fraud on a financial institution, check fraud and theft-all Class C Felonies stemming from a $500,000 bad check that authorities say White deposited into an account with The National Bank of Indianapolis in January.

The check was drawn on an account at JP Morgan Chase that never had a balance of more than $1,000, the prosecutor's office said.

White, 50, will be arrested and faces an initial hearing later this week, said Matthew Symons, a spokesman for the prosecutor's office.

The IBJ maintains a web page on this case here.

Premier Properties to Be Liquidated

So I interpret Trustee working to determine Premier assets from The Indianapolis Business Journal:

The auction of chairs, tables and other furniture-most of which has been stored in Premier's former offices in the Echelon building near 86th Street and Allisonville Road-will be handled by Christy's of Indiana Inc. No date has been set.

U.S. Bankruptcy Court Judge Basil H. Lorch III reclassified Premier's bankruptcy status to Chapter 7 in late May, clearing the way for the trustee to liquidate remaining assets and eliminating White's hopes of resuscitating the developer of Metropolis mall in Plainfield and several other retail projects across the U.S.

The judge also granted a motion today from the Indianapolis Colts, releasing the team from an agreement with Premier for a suite in Lucas Oil Stadium.

What to make of this case? I know nothing of the company other than the reports in the newspapers and what I make of it is based on those reports and a few assumptions.

1. I doubt a bankruptcy alternative such as a receivership or an assignment for benefit of creditors would have worked here. The company waited just too long.
2. While most Chapter 11 cases turn into Chapter 7 cases, I suspect the owners of Premier did not want to face up to the most important fact: the business had failed. Just as the owner waited too long for utilizing a bankruptcy alternative, the wait was too long for an effective Chapter 11.

Revisiting Assignments for the Benefit of Creditors

For my regular readers - the loyal handful of you - you may see a decrease in my output here. About a year ago, I submitted an article on assignments for benefit of creditors to the Indiana Bar Association magazine. The articles committee returned it with suggestions but I have not had time to write a second draft. Between this blog and my Indiana Family and Divorce Blog, and with trying to get my practice running again, time has been scare. I figure something has to give if I really want to get it done and so it must be the blogs.

You can find a small part of the article by reading my prior post on Assignments by clicking here.

Before I start revising, I decided to see what was new online. Google had little new information. (As an aside, I ought to mention that one commentary on my article was why I used Google instead of Westlaw or Lexis for a survey of--
articles dealing with this subject. I remain undecided if I am the one myopic or it is my reviewer. If I had been interested merely in articles on Assignments published by law journals, I think the sealed universe of the big legal databases might be more useful and certainly more costly. Considering Google's breadth of information and my interest being in current news about Assignments, I think Westlaw and Lexis too costly to justify their use.)

As for news, Assignments appear in Wired Magazine's PR Firm Sues Star Trek Online Developers about a California company.

The PR firm also alleges that Perpetual sold devalued company assets -- including the Star Trek Online license -- to a satellite company known as P2 Entertainment before filing for a "Assignment for the Benefit of Creditors", a Californian bankruptcy alternative that allows corporations to avoid lengthy court cases and great costs to themselves.

By shifting these assets to P2, Perpetual maintained peripheral control of them but could claim that since they no longer technically owned the assets, they could not be subject to any court rulings.

This particular case caught a lot of attention that turned up on Bloglines:PR Firm Sues Star Trek Online Developers, Star Trek Online Devs Sued by PR Firm,Perpetual Litigation, Perpetual Entertainment: Former PR guys sue Perpetual, In Space, wishes may come true, and Kohnke v. Perpetual - The Opening Round.

Bloglines also caught news about a Canadian Assignments case, GCO Declares Bankruptcy.

I also learned through The End Of Bolt.com that Bolt.com filed for an Assignment in California. (If you read this article note the melding of Assignments with bankruptcy is not quite right. Two different sorts of law but for the general public, bankrupt is a synonym for insolvent.)

California retains the appearance of being the leading state for Assignments. Certainly Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005) brought wider attention to California's law on Assignments. I was aware of this case when I did my original research but you can find articles here and here and here (these last two being articles I missed the first time). Bottom line: the Assignments statute cannot give the Assignments trustee the power to set aside a preferential transfer equivalent to a bankruptcy trustee's powers.

I wonder if California has its thriving high tech industry more for its Assignments statute than for its anemic enforcement of non-compete agreements (see my post on that subject here). Or a combination of the two. I do know I do not have the time or resources to do much but speculate.

My view that Assignments provide an alternative for business bankruptcies gets support in the following paragraph from As BAPCPA Enters Its "Terrible Two's," BAPCPA Guru Catherine Vance Surveys Its Unruly Landscape published by The Bankruptcy Litigation Blog (and I added the emphasis):

The most disfavored business amendment was the time limit on rejection or assumption of unexpired leases, which garnered 40 percent of the votes. Seventeen percent selected the new administrative expense for pre-petition trade debt and 14 percent voted to repeal the fast-tracking of small business debtors. On this last issue, another question suggested that attorneys are advising small business clients to avoid bankruptcy; 23 percent of respondents said they had recommended a non-bankruptcy alternative, such as an assignment for the benefit of creditors, because of the fast-track amendments.

Another lawyerly article not found earlier was Bankruptcy Alternatives in the Face of Recent Bankruptcy Abuse Prevention and Consumer Protection Act from the Utah State Bar. The description given of Utah's Assignments statute corresponds to Indiana's procedure. I am also inclined to agree with this as applying to Indiana but not the point of endorsing the view:

An assignment usually is not feasible if there is substantial secured debt. There are several other potential drawbacks. In bankruptcy, a trustee may exercise statutory avoiding powers to recover pre-bankruptcy preferences and fraudulent transfers and thereby increase the "pot" for distribution to creditor. An assignee does not have that power, although individual creditors do have standing to pursue fraudulent conveyance suits but for their own and not general creditor benefit. Also, Utah statutes do not provide the detailed framework for resolution of disputed claims that is available in a chapter 7 bankruptcy.

Follow this link here to see another good reason to use Google. It has nothing to do with Assignments for the Benefit of Creditors but it shows how non-lawyers are using the web. Nothing prevents a non-lawyer from publishing a form for an Assignment to the web and its use by another non-lawyer. We of the Bar need to remember our competition is not only one another but civilians and not even necessarily civilians residing in the United Staes. My article takes the general position of a debtor, but the law most often is a two-edge sword - increased use by debtors means more employment by creditor's attorneys.

Remember while Assignments presents a possible alternative to bankruptcy, the United States Bankruptcy Code looms over Assignments. In the Sherwood Partners, Inc case, the Bankruptcy Code trumped the Assignment but not quite so in Involuntary Bankruptcy Is Even Riskier Than You Thought.

I might as well mention a book being sold by the American Bankrutpcy Institute, General Assignments for the Benefit of Creditors, 2nd Edition: The ABCs of ABCs. Which can be found here and be had for $15.00.

This blog post has news about Georgia's Assignment's statute: AppForge sells assets; firm owes $1.8 million. Again, a high tech company uses an Assignment statute. Following up on this story, I found Hays published some of the Assignment documents online. There are found here.

Speaking of Georgia, The Georgia Bankruptcy Blog published Is Assignment For The Benefit Of Creditors A Viable Alternative To Bankruptcy In Georgia?. I got to like any article justifying my own theory about Assignments:

With the increases in Bankruptcy filings over the past 20+ years, state law alternatives are used far less often. Many lawyers are not even aware of how some of these alternatives work. One example is the state law created, and infrequently used, Assignment for the Benefit of Creditors ("ABC"). Both individuals and other entities may make use of an ABC.

Between this post and the post about Appforge, I would guess that Assignments are viable in Georgia.

That wraps all the new stuff I found and have read on Assignments. With any luck I can get my article on Indiana's Assignments for Benefit of Creditors back to Res Gestae this weekend.

Bankruptcy Alternatives for Businesses

Indiana INdiana Business published this article a while back but I still think I can suggest An Overview of Alternatives to Bankruptcy.

Other articles here discuss bankruptcy alternatives. Click on the link below next to the word label.

If you think you need to discuss bankruptcy alternatives for your Indiana business, then feel free to contact me.

Good advice about debt and credit

Yes, it is from the Scottish Sunday Herald, but Tackling debt must start with some real home truths has some good advice transcending borders:

If you are struggling to cope with your debts, there are several ways to get your finances under control.

The first rule is not to ignore the problem - it won't go away. You need to face up to your debts and discuss the situation with your family.

Next, draw up a budget and honestly assess your incomings and outgoings. It will help you get things straight and could be useful if you have to negotiate with creditors. Ask yourself whether you can cut down on spending, or cut the cost of your debt. You might, for example, be able to find a cheaper mortgage or a credit card with a lower interest rate.

Some people consolidate their debts into one loan that runs for 10 or 15 years. The longer term brings the monthly payments down, but you will pay more in total interest, which could make the situation worse. Experts also warn of the risks of taking out a bigger mortgage to pay off debts or arranging a separate loan secured against your house. If you fall into arrears, you could lose your home.

Try to prioritise your debts. Boden Wilks said: "You know when a debt is a priority because you will lose something if you don't pay it. So, pay your mortgage, rent and essential household bills." Finally, contact creditors if you are struggling to meet commitments.

Bankruptcy filings down in 2006

A press release from The U.S. Court site (which is the official site for the United States federal judiciary) says that bankruptcy filings were down for 2006. I was unimpressed with just the comparison with 2005 - that being the year that the 1984 Code came to an end - but the page shows statistics back to 2000.

The release only reports the gross numbers without any explanation of why the decline. I do not think anyone ought to use this information as a premise that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) has prevented bankruptcy abuse via curtailing frivolous petitions.

My observations from Anderson is a bit different. I stopped my bankruptcy practice and so did some others. I stopped for two reasons: 1) I did not think that the market here would allow for the volume needed to maintain a viable practice at the price level needed for increased work and risks needed to comply with the new law, and 2) I decided that the new bankruptcy law is so anti-lawyer that I did not need the hassle. I believe that there are four attorneys in Anderson who continued practicing under the new law. From conversations with two of them, they do so with a great deal of trepidation at the penalties that might befall them for failing to dot all the i's. I do not miss that kind of stress. My practice has enough of the ordinary stress.

I also think BAPCA's consumer credit counseling and income averaging requirements delay filing a petition. A petition cannot be filed without some sort of consumer counseling. I imagine he detailed financial declarations are not time consuming. I suspect with procedural delays, fewer attorneys doing the work, and more work for the attorneys and clients to do, and higher attorney fees, there should be fewer bankruptcies filed last year.

I doubt it will take a long time to find out if collections attorneys are recovering more funds now than what they did before BAPCA - if meaningful statistics can even be found for that kind of activity. I suppose something similar might be learned from the charge offs made by creditors under BAPCA.

I do not really miss the consumer bankruptcy work. I always had a bias for the creditor side, but I cannot say anything good about BAPCA. From a professional standpoint, it is a poorly drafted law created to protect special interests. I do believe that anyone contemplating filing bankruptcy or practicing bankruptcy law needs to review alternatives to bankruptcy. I have already written about assignments for benefit of creditors. There will be more on these bankruptcy alternatives in the near future.