Arizona Bankruptcy Attorney Blog

Remember the "better to be lucky than smart" approach to avoiding a bankruptcy?

I know. Neither do I.

But recently I've gotten to see a lot of hard luck bankruptcy cases.

The hard luck might be a repair crew on the entrance to the shopping center.

Or it might be a federal raid, as in Gibson Guitar (I sure hope they don't have to file a bankruptcy; they employ a lot of U.S. Workers, and make darn good guitars!).

Or your lease might just run out, as with the Scottsdale Six Drive-in Theater, after a good run for 34 years.

Now, you might think that it's just another drive-in theater that couldn't compete with new technology.

Wrong, Celluloid Breath!

The Scottsdale Six Drive-in Theater had been on track for its best year to date.

When I see a business that does everything right, with employees, that puts money into a local economy, and it gets to close its doors just because of bad luck, that makes me sad.

Oh, yeah.

The bad luck that the business experiences?

That gets doubled for the employees.

So does that mean more consumer bankruptcy cases get filed when businesses are unlucky?

Well, yeah.

Private enterprise uses the word "billion" with a "b" far more than the governmental "trillion" with a "t".

But for a start up, a billion dollars is a lot of money.

A bankruptcy joke may be in the transmogrification process.

The gag used to be "how to make a small fortune? Start with a large fortune, and open a restaurant!"

Then it became, "...and start a dot-com!"; then it was "and invest in consumer real estate!"

The newest iteration seems to be "and build solar panels!"

And the newest poster child for that gag is Solyndra, which has announced that it will file a Chapter 11 Bankruptcy Case.

Solyndra is the third solar company to file a bankruptcy in August of this year, following Spectrawatt Inc. and Evergreen Solar Inc.

Now, there was a half a billion dollar loan guarantee made by the Federal Government on behalf of Solara, and there will probably be political fallout from this bankruptcy.

There will also be more bankruptcy cases, simply because 1,100 employees are now laid off, and that will give rise to more bankruptcy cases.

The City of Freemont, California will also feel a pinch, because stuff rolls downhill. A company that was spending a billion dollars was paying Freemont Restaurants, and there will also be more foreclosures and defaulted rental agreements in Freemont, because when the spigot is turned off with no warning, everybody in the vicinity is left holding the bag.

It appears that the bankruptcy was filed one step ahead of regulators, because the half-billion dollar Solara loan was the subject of a subpoena from the Energy and Commerce Committee.

There is now something that's been called "The Solara Effect", which is the reluctance of investors to jump into solar energy start-ups.

Because investors aren't dumb!

I recently read an article about Spa One, and that article told me that the Spa One locations had "suddenly" closed.

I never hope that any business files a bankruptcy, and sometimes it's not a good idea to file a bankruptcy for a business.

Why?

Well, if you file a Chapter 7 Bankruptcy for a business that has a lot of very angry customers, especially customers who paid for something they didn't get, or who were charged for services they didn't get, the bankruptcy case can get interesting.

"Interesting" is a bad, bad word in the context of a bankruptcy of any kind. "Boring" is my favorite word.

Mind you, I am listed in the Guiness Book of World Records as the "World's Most Boring Man", but that's a story for another day.

Today's story, however, has a moral.

If you continue to take money from spa members by automatic withdrawal after you close the doors of a business, whether the closure is temporary or permanent, you get a lot of very cranky customers.

If you file a bankruptcy on a day when your customers are still cranky because they'd paid for something they couldn't use, like a closed spa, your First Meeting of Creditors will have a strong resemblance to a scene from "The Hunchback of Notre Dame", involving people crying, shaking with anger, and screaming "Burn the Witch!".

This applies to 341 Meetings of all sorts, including cases where contractors owe money on houses they didn't finish, wedding planners who didn't plan after they were paid, and caterers who didn't cate.

And while I'm going to hope that the business reopens immediately and makes all the profit in the world, the smart money always bets against that when a business stops responding to complaints from the Better Business Bureau.

Solon, a manufacturer of solar panels, is closing its Tucson facility.

Sixty more jobs will be lost in Arizona as a result of that closure.

Solon heard that Evergreen Solar, a Mass.-based company, had filed a Chapter 11 Bankruptcy and was planning to sell its assets, after posting a loss of almost five hundred million. And after hearing that, Solon decided that it was time to get out of Dodge.

Or, less metaphorically, Tucson.

Evergreen Solar had received tens of millions of dollars in subsidies and tax breaks, which is itself irritating. And it had earlier this year announced a move to manufacturing in China, which cost 800 U.S. jobs. It plans to continue operations in China, depending on Chinese Investors.

After the Evergreen move to China was announced, I stopped being a member of the cheerleading section, so the Chapter 11 did not cause my tears to flow.

And the fact that Evergreen had possession of technology developed at MIT, and hundreds of millions from U.S. investors and lenders and subsidies and tax breaks, and now China will reap the benefits; yeah, I could get cranky about that if I thought about it.

So I won't think about it!

It's entirely possible that SAAB will be the subject of an involuntary bankruptcy.

And if that happens, do you think creditors will get paid more, faster, or less, slower?

My intuition is that creditors who use a threat of involuntary bankruptcy play a dangerous game.

Here in the United States, it's a threat that is seldom-used, because it's...dumb. If a debtor is forced into such an involuntary bankruptcy, the least that happens is that the mind-set of the debtor changes.

Take SAAB, for instance.

Right now SAAB wants to pay its creditors.

That's not easy when it doesn't have all the parts it needs to build cars, of course.

But once it becomes the subject of a reorganization, it may change its plans, because now it has the tools to work with, and the worst that could happen did happen!

And if SAAB believes that it will be the subject of an involuntary bankruptcy in a venue it doesn't like, do you think it'll look around for a debtor-friendly venue and a DIP financing package?

And do you think that irritating creditor will get paid last and least, if SAAB can manage it?

Just a thought.

The Law Of Unintended Consequences is one of my favorites; although I'm also fond of 11 USC 362.

So one unintended side-effect of the announcement of the proposed liquidation of the remaining 399 Borders in the United States was that the gift cards sold by Borders are being used like crazy, because folks believe that they won't have value in the future.

Note to Amazon: if I were you, I'd make a deal to honor Borders Gift Cards. It would make you look like a hero, and once the hubbub died down, the redemption percentage would die down, as it always does with gift cards.

Just a thought!

p.s. a lot of people (including one Arizona Bankruptcy Attorney with a beard) purchased Borders Memberships just prior to the Chapter 11 Filing; some smart bookstore should honor those, too, because they might just pick up some sad bibliophiles on the rebound, looking for a home!

There are a lot of Dodgers fans in the United States, and every single one of them has an opinion.

Most of the people who are writing about the Dodgers story side with Major League Baseball and Bud Selig.

And that's probably pretty smart for people who care about continued access to baseball information generally!

But I always have a soft spot in my heart for the underdog; and in this case, that underdog is Frank McCourt.

Frank spent lavishly, and engineered a deal with Fox Sports that would fund the Dodgers for years, and would also pay off his former wife in his divorce case.

And he's being criticized heavily for plugging in payments to his former wife; but does anybody think that during a heavily contested divorce, the value of the team would not be an issue? Or that it's wrong to make alimony and support payments when a marriage is over?

At least as I see it, Frank McCourt is a resourceful guy who found a way to solve for multiple equations simultaneously; he found a way to fund the team for almost twenty years with a multi-billion dollar contract, and to get a relatively quick settlement in what could have been the celebrity divorce of the century.

Alternatively, he could have found a neat way to snooker his wife out of any payments whatsoever; I personally think he was on the right track, and that he did a good job of finding a way to make everybody except Bud Selig happy, and to keep paychecks moving in the direction of the players.

Now, the usual outcome when somebody ticks off Bud Selig is that they get squashed like a bug, because Major League Baseball has Major League Power built into its contracts.

On the other hand, a U.S. Bankruptcy Judge has remarkable powers built into the gavel, because that Judge is tasked with a daunting job; finding a way to help make a broken business work right, under the direction of the Debtor and Debtor-in-Possession.

And once again, it looks to me as though Frank McCourt made a smart play in a difficult situation; a Bankruptcy Judge, as a general rule, keeps the Responsible Party in place during the reorganization process.

Not always; but normally, a little thing like an "ipso facto clause", which is a paragraph saying that in the event of a bankruptcy filing, this, that, and the other will take place, is simply disregarded by Bankruptcy Judges.

After all, if ipso facto clauses worked perfectly, they would be in every contract, and all Chapter 11 Cases would be doomed from the start.

But now depositions are being scheduled in the Dodgers Chapter 11 Case (and I think they're probably 2004 examinations instead of actual depositions, but I've been wrong before; a Rule 2004 Exam is far broader in area of search than a deposition, and is the correct tool of choice for a fishing expedition by bankruptcy lawyers).

Now, I have buddies who are hard-core litigators, and if they were handling the case, I would expect the depositions or Rule 2004 Exams to be filmed, so that they can be used to affect public sentiment.

And the counter-move would be an attempt to have the video depositions sealed.

The nice thing about life is that the longer you live, the more you see.

Small businesses file bankruptcy (or just close the doors, and let the owners file bankruptcy) for a lot of reasons.

The most common is under-capitalization, and the second is bad luck. Like the city deciding to tear up the street in front of your store for six months.

But high overhead makes any bad luck badder, because the business has a higher "burn rate".

Now, I just read an article suggesting that some small biz owners can now buy into an insurance package of the sort formerly available only to big business owners.

Maybe it's wonderful, maybe it's lousy.

And I don't get a commission for telling you about it.

But if it lowers overhead for some small businesses, and their employees stay working because the business owner didn't have to file a bankruptcy because of excessive overhead, that would make me happy.

This is my happy face.

See?

A company that sold craft supplies to Walmart and Jo-Ann has filed bankruptcy: Westrim Crafts. 

Their sales had dropped from about $125,000,000 to $30,000,000 over a five-year period prior to the decision to file a Chapter 11 Bankruptcy.

And that's a pretty steep drop!

  

I always like a happy ending to a story.

Especially a story that starts, "Once upon a time there was a Bankruptcy, and..."

I get to talk to business owners frequently, and generally there's something that can be done to fix their problems.

But if you intentionally hire illegal aliens, and get caught, and you intentionally fail to pay the IRS (that is, you evade rather than avoid taxes), and you get caught, then Bankruptcy Court would probably not be your cup of tea.

I remember when a gold-and-silver sales company filed a huge (for the day) Chapter 11 in Arizona; it was approximately a minute and a half after the owner asserted his fifth amendment rights that the Bankruptcy Judge appointed a Chapter 11 Trustee to run the case.

According to the allegations in an article by Max Jarman in the Arizona Republic, the owner of Chuy's Mesquite Broiler restaurants in Arizona and California was arrested, and the restaurants were shut down; and the article discussed an investigation involving illegal aliens and tax evasion, and the arrest of the company accountant. 

Now, I'm not suggesting that a Chapter 11 isn't a useful tool for a business in trouble.

But I am suggesting that Bankruptcy Judges are unlikely to have much sympathy for those who intentionally defraud the IRS, or who run two different pay systems, for legal and illegal employees.

AT&T has recently filed for permission to buy T-Mobile.

It gave reasons that included a need to add new capacity to handle the iPhone-related volume of traffic, so there won't be so many dropped calls, says Matt Rosoff, writing for the San Francisco Chronicle.

Now, does that mean AT&T will file a Chapter 11 Bankruptcy?

Of course not; a big business, as opposed to a small business, can make mistakes, see them, and fix them, using big business resources.

That's why I feel sorry for my small business clients when they need to file some species of bankruptcy to start over.

In a small business, you have absolute freedom to make a mistake.

Your first, and your last.

I recently talked to a highly intelligent young man who had a bundle of issues left over from a failed business or two.

And he was really, really smart; he'd done a ton of homework, and knew in advance that he qualified for one of the means test exceptions, which made me happy.

He had a workable game plan to scrape off the two million in debt, and get back to work as a productive citizen.

I love it when that happens.

I also thought he had a nifty turn of phrase, which I had not heard previously; talked about his bankruptcy as "an exit strategy" from his failed business.

And I thought about it, and darn if I didn't agree with him.

There's a construction company called MyddletonParker Builders LLC which just recently filed bankruptcy; you know it because of the pretty house remodel done on the television show "Extreme Makeover."

According to one news article, there are personal bankruptcy filings involved, which doesn't surprise me a bit.

Most folks who run a small business need to file a personal bankruptcy when the business files, because of the personal guarantees of the business debt.

 

This is just a shameless plug for a book by friends of mine.

I know Tom Salerno the best of the trio; he was a crackerjack, high-end Chapter 11 bankruptcy lawyer from the day he started his practice, and he had the opportunity to study with the best.

And now he generously teaches what he knows, in seminars to lawyers and Judges, and in books.

So if you want to read a fine work by excellent bankruptcy attorneys in Arizona, here you go!