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For your information, FactorLaw has prepared the following discussion of how and when chapter 11 can be a viable option for small businesses (or their owners) that are dealing with financial distress caused by the Covid-19 Crisis (the “CVC”). Although the Courts in Cook County and the collar counties right now are largely closed for civil matters, the Bankruptcy Courts in Chicago are open and new cases can be filed and administered during these unprecedented times. We hope you find the following discussion useful and we welcome any questions you might have. The Highly Vulnerable Business The first tranche of businesses likely to face immediate and severe financial distress due to the CVC likely will be those where demand for goods or services is immediately and drastically reduced (or eliminated) and that have high costs that cannot be easily ratcheted down without impairing the business or incurring unsustainable liabilities. Businesses whose cash flow or business model have otherwise suffered critical disruption due to the CVC also are likely to suffer extreme financial distress, as are businesses that were teetering before the CVC. The likely candidates in this category include restaurants, small hotels/motels, small retailers, and businesses that support these establishments. Highly vulnerable businesses are less likely to have sizeable long-term debt and usually do not fund operations through a revolving line of credit, although some may, particularly if the business owns real estate. In many cases, credit relationships exist at the vendor level and major stakeholders are suppliers and landlords. Such businesses also may have used shareholder loans, merchant cash financing or other high-interest products to sustain operations. Depending upon cash reserves and the ability to reduce operating expenses swiftly, the optimal strategy for the highly vulnerable business is to (1) reduce operating expenses as much as possible during the CVC, with the hope of reengaging in the future and (2) exacting concessions from creditors. Highly vulnerable businesses also might try to take advantage of the myriad programs at the Federal and State levels to assist troubled businesses, although the response time for these programs currently is not known and some of these programs may not be available if a business reduces its work force. Pursuing these options may require contacting landlords and other creditors, including high interest rate lenders and labor unions, and requesting some type of forbearance or waiver, which should be reduced to writing if possible, particularly in light of the requirement for modifications to be in writing under the Illinois Credit Agreements Act. Such businesses also need a unified response from management/ownership and if the key decision makers are not aligned, the most effective responses may be unachievable. Although the wisdom of a chapter 11 filing for a highly vulnerable business should be carefully explored, particularly because chapter 11 relief can be a drastic remedy, it can help preclude a recalcitrant lender or creditor from exercising non-judicial remedies, including setting off bank deposits, sweeping cash to apply to the loan or refusing to perform under a bilateral agreement. A chapter 11 bankruptcy also can help to preserve asset value to the extent the CVC or other issues threaten that value, particularly if an operational shutdown threatens important contracts because of termination clauses. On the other hand, the automatic stay may be less relevant to stopping judicial remedies right now because most civil court proceedings and enforcement actions in Cook County and the collar counties have been shut down as part of the shelter in place orders issued in Illinois. Thus, highly vulnerable businesses might consider a bankruptcy filing to (1) liquidate the business in an orderly fashion, including by selling assets, to avoid the loss of all value, (2) impede a pesky lender or other creditor that threatens to exercise nonjudicial remedies or rights that, if implemented, will make re-engaging impossible or very costly once the CVC has passed, (3) stabilize an imploding business so that it can obtain a breathing spell to pursue other options, including the lending programs recently implemented, (4) limit the forfeiture of rights and property, or (5) facilitate prompt access to additional capital. With respect to the first item – liquidating or selling assets in a coordinated fashion – section 363 of the Bankruptcy Code authorizes the sale of assets free and clear of liens. It also gives the purchaser protection from trailing claims, including successorship liability claims. If a highly vulnerable business wishes to engage in a substantial sale transaction and has identified a purchaser, bankruptcy may be a good option for implementing the sale, particularly because it can preserve asset value during the sale process and it sometimes enhances value because of the protec… Read More