If you're considering business bankruptcy, then you have a variety of options, and the path you choose will depend on the specifics of your business. If personal liability is an issue, then Chapter 7 bankruptcy may be the appropriate route. With Chapter 7, an automatic stay is placed on creditor actions, including foreclosure, repossession and garnishment.
Investors and creditors were hoping for more information on the recent Chapter 11 bankruptcy filing by GT Advanced Technologies Inc., which had plans of manufacturing synthetic sapphire for use in Apple Inc.'s new smartphone screens. However, a confidentiality agreement with Apple prevents GT from discussing the details of the supply and financing arrangement between the two companies.
In one of our recent posts, we discussed a drug maker's decision to file for Chapter 11 bankruptcy protection, which provides the company with an automatic stay against creditor actions. While Chapter 11 certainly has its benefits, such as letting the filer continue operations while restructuring, business owners should be absolutely certain that bankruptcy is right for their particular situation.
The need for Chapter 11 bankruptcy protection can arise under a wide variety of circumstances. For antiviral drug maker Siga Technologies Inc., a costly judgment in a licensing dispute not only jeopardizes the company's viability; enforcement of the judgment could prevent Siga from producing and delivering an important smallpox drug to the national stockpile.
Risk is a part of business. You can take action to minimize risk, but there may still be unforeseen events that result in losses. The Bankruptcy Code takes into account risk and offers protections for debtors and creditors. At Shulman Hodges & Bastian LLP, we help businesses choose the appropriate debt relief option, whether it's restructuring the business through Chapter 11, a liquidation under Chapter 7, an out of court workout, an assignment for the benefit of creditors, or a formal dissolution.
The U.S. Bankruptcy Appellate Panel for the Ninth Circuit ("BAP") recently held in Wu v. Markosian (In re Markosian), BAP No. NC-13-1339-JuKiD (9th Cir. BAP March 12, 2014), that a bonus earned by the debtor by his employer for services performed while the case was pending in Chapter 11 reverted to the debtors upon conversion of the case to Chapter 7 and was not the property of the Chapter 7 bankruptcy estate. Earnings received post-petition in a Chapter 11 case are generally the property of the estate under Section 1115(a)(2) of the Bankruptcy Code but are not the property of the estate in a Chapter 7 case under Section 541(a)(6) of the Bankruptcy Code. The BAP based its decision on Section 348(f)(1)(A) of the Bankruptcy Code which excludes a debtor's post-petition earnings from the property of a Chapter 7 estate upon conversion from a Chapter 13 case. The BAP found no difference between the conversion of a Chapter 13 case to a Chapter 7 case versus the conversion of a Chapter 11 case to a Chapter 7 case. However, in Markosian, the case was originally filed as a Chapter 7, converted to Chapter 11, and then converted back to Chapter 7. The BAP, citing to Magallanes v. Williams (In re Magallanes), 96 B.R. 253, 255 (9th Cir. BAP 1988), found that property of the estate is determined as of the filing date of the Chapter 11 petition, not the conversion date. In this case, on the Petition Date, the case was originally filed in a Chapter 7 case, so Section 541(a)(6) of the Bankruptcy Code excluded post-petition earnings from the estate. Thus, income that came into the Chapter 11 estate is recharacterized as the property of the debtor upon conversion. Query whether the Court would come to the same result if the filing was originally commenced as a Chapter 11 such that on the petition date, post-petition earnings were property of the Chapter 11 estate.
A number of relief options are available for businesses with heavy debts. Depending on your financial situation and how your business is structured, there may be out-of-court solutions such as a negotiated settlement with creditors or debt restructuring. In other cases, the best option may be business reorganization through Chapter 11 bankruptcy.