Will Bachman 00:02
Hello and welcome to Unleashed the show that explores how to thrive as an independent professional. I’m your host Will Bachman. Today we have with us Dan Weiner, who’s a partner and founder of the firm Schaffer and Weiner, a restructuring a law firm based in Bloomfield Hills, Michigan, firms 35 years old. They handle national and international restructurings. They’ve turned attorneys, and Dan himself has 40 years of restructuring experience. And I’m so excited to have down the show today. We’re going to talk about both restructuring in general, what are the options? who’s eligible? What does it mean? And then in second half, we’ll get more specific and talk about what’s the implications in the age of the pandemic. So, Dan, welcome to the show. Tell us just help me understand if someone doesn’t know at all the term restructuring like me, you know, somewhat. Tell me What does restructuring mean? And what are the options? who’s eligible, just start giving me an overview?

01:05
Well, well, thanks very much. It’s a it’s an honor to be on your show and very much appreciated. It’s a it’s certainly a broad topic, but I’m going to try to narrow it and give some, some helpful hints and perspectives on what to do. When you have a business, that or an individual that is experiencing distress. And the real key to start when when clients will come here, you have to understand, as best you can quickly, the root cause or causes of the distress. Is it something specific? Is it something that you can point your finger at? Is it a trend? Is it is it a business that still wants to try to make a living making rotary dial telephones? Or is it a business that had a bad quarter, or had issues that you can point to and look at them and say there is a core business here. And this core business has challenges, but we can help to fix those challenges and restore value to the business. So the point in the very beginning is really to understand what the causes are. And that requires some some intuitive experience. It requires document review, it requires interviewing in person, management, so you can look at them, and look in their eyes and watch their body language and understand what they’re telling you because what they’re telling you is not always what’s going on. So you have to be a bit of a detectives, and an analyst and a actually a psychologist in many ways to understand what’s going on and get management to tell you, and so that you can understand what your alternatives are. There are times in terms of identifying what to do it clients will come in oftentimes and say, Dad, I need to see you I need to file a bankruptcy for my business. Or I need to file bankruptcy for myself. And I look at them and ask them why they concluded that and of course they’re not really sure. And the point here is that a decision to restructure or either in court or out of court is an or filing is a conclusion. It is not the first question. It’s very much like I’ll use a medical analogy. I hope it’s still appropriate. where someone goes to the doctor and says, Hey, Doctor, I’m not I’m not feeling well. And I think I need surgery. Well, the doctor says, Wait a minute, wait a minute, hold on. Let’s figure out what’s wrong with you. Let’s run some tests. Let’s do a blood panel. Let’s do an EKG, let’s do a history. And maybe you need surgery and maybe you don’t maybe you need a bankruptcy. Maybe you don’t. Maybe you need a filing. Maybe it’s out of court. consensual restructuring. So we have to get to the issues of why the business is where it is. Yeah. And

Will Bachman 04:54
yes, so you’ve seen you’ve seen hundreds and hundreds of these cases, then you let’s talk which is a little bit more about kind of the range of potential root causes, you gave a couple examples. Your products are obsolete or you had one bad quarter, maybe one big customer failed, went bankrupt and failed to pay you or something. But could you give us a more sort of comprehensive list of the types of root causes that you think about when you’re when you’re doing a diag diagnostic?

05:24
Sure, sure. Well, one of the key issues in any business, of course, is management, management’s ability to execute management’s style in management’s talents, that’s always a tough thing to talk about. Because many, many businesses come in and they, the guy who’s running it, or the woman who’s running, it says, I’m doing a great job. That’s, that’s always, that’s always tricky. But it starts with management, sometimes it’s management’s inability to execute management’s decision that there’s money on the table, let’s not put it away for a rainy day, let’s just take it out of the business, and have no safety, stock of cash, and no safety stock of, of anything that will be necessary in a downturn, sometimes a customer loss major customer leaves, that’s an issue that comes up very often, many times expenses. You know, family gets to family winds up on payroll, more often than then, then is healthy for businesses, especially when they’re not really doing anything. So we have that issue. Sometimes we have a lender, the lender, let’s talk about a business that’s doing fine. It’s, it’s within its covenants, it’s paying its debts, and everything is fine. And, and the term is coming up. And the bank says, you know, we’re changing our portfolio and our concentration in our analysts say that we’re moving out of this sort of sector, they don’t say it exactly that way. They they come up with some different verbiage. But the point is that sometimes you’re doing fine in a bank says we’re not renewing. And that’s of no fault of the business. So we have all kinds of all kinds of issues, some have to do with the business’s failure to, to to be profitable, and some are totally external, that is, are totally beyond the control of the business, like the lender situation that I indicated. And sometimes it doesn’t give the business enough time to pivot. And understand that just because the lender extended the loan three times, all of a sudden, the fourth time, the lender says, you know, not not not going to do it, we’d like you to find another bank. Okay. So the reasons, you know that the reasons are, every time you think you’ve seen it all, you realize you haven’t seen at all. So it’s a it’s, it’s, it’s dynamic, and it’s fluid, and you just, you just have to be able to understand that the clients that come in will have sometimes it’s Same old, same old type story, and you say, you’ve seen this 100 times before, and some will come in, that you’ve never ever seen. So you just have to be a really good listener, a really active listener, and understand what it is that the client needs, even though the client can’t articulate what it is that it needs.

Will Bachman 08:58
So you go in, you do a diagnostic, you try to understand what the root cause of the distress is. And then walk us through what some of the kind of options are that you that are on your mind that you think about that a business could potentially take if it’s in distress.

09:17
Well, you know, notwithstanding that we are very active in the chapter 11 filing world. My first instinct is to understand whether or not we can identify the issues and fix them out of court. Now, you can’t always do that, because sometimes the pressures on the business are such that that’s not an option, for example, if somebody comes with with a multitude of litigation, that pending against the business in different courts, different states It’s simply untenable and too expensive to defend those cases. Sometimes you’ll find them in as best as cases, sometimes you’ll find them. In other tort cases, sometimes you’ll find them in, in, in in retail scenarios. Sometimes there are there are things that that impact the business that are not economic to try to fix out of court, sometimes you can still do those, we’ve certainly done our share. But the the the question really comes up, when you look at this is, what is the what would be the plan that you could use? Who do you talk to? in what order? Who do you negotiate with? What are your goals? What pieces in place do you have to have? And and the order that you have to do those? So when you look at that scenario, you try to figure out, at least what we try to figure out is, is there a basis to reach a consensual plan that is typically far more efficient, and cost effective than an actual filing? And you might think, or people might think, Well, you know, if it’s a bigger business, you can’t do an out of court. That’s not really true. We we’ve had the experience of, of trade debt 25 or $50 million or more with out of court successes. So you really have to understand who the constituents are, where the pressure points are, what the agendas are, how do you go about contacting those constituents, and with what approach and in what order. And before you can do that, in any case, you have to understand the documents, you have to understand the lenders, you have to understand what the rights of the creditors and what rights you have. And you have to be able to start with that right away. Because it’s a hell of a time to figure it out later, you better do it from the get go. Because you do it once and you do it right.

12:34
The situation will then determine which way things can go. One of the benefits of actually the bankruptcy code that it’s a very mature statute by now, the most recent major code was changed in 1979. And then later in 2005. So in some other amendments, but the key here is, if you’ve worked with the bankruptcy code sufficiently, you can understand you’ve seen the movie, you’ve been in court, you have litigated the cash collateral, you’ve litigated the dip financing, you’ve litigated the discharge, you see the movie many, many times. And even though things are still different, in any particular case, you can take the experience from the filings of the cases and use them use that experience to mimic an out of court process. And in other words, you use the bankruptcy code as a tool when you can, rather than an actual filing. Sometimes you have to file. But in many situations, it is worthwhile for the client to be able to go about restructuring as if there was a filing, but not an actual filing. Because you then know what’s going to happen in the filing pretty much, or at least you have a good idea of it. And you can use that to negotiate and leverage where necessary, the creditors and the constituents that you have to solve a by consent, rather than by court order. So that’s where the there’s the there’s the science of the bankruptcy code, and there’s the art of the practice. And that’s where science and art really, really come together and mesh very well together with the experience of the actual filings over all of these years.

Will Bachman 14:44
Okay, great. So Dan, I learned best with like real tactical examples that help illustrate the case. So perhaps you talked about figuring out you know, what the plan is who you need to talk to in what order? And what kind of conversations to have, let’s take a case of doing a restructuring out of court? Could you maybe sanitize an example of a company that you’ve worked with, to help give us a real tactical sense of what it looks like? And, you know, sanitize the company, obviously, but walk us through a case where, what’s what’s the situation? And then who would be the vendors that you’d talk to? Or the creditors? Or the suppliers, or customers? And what kind of conversations you have in what order? And then or is it like renegotiating lease terms or renegotiating payment terms? And just sort of walk us through an example?

15:42
Yeah, that’s, that’s, that’s a really good question. And, and, and there’s one on the tip of my tongue, actually, because I’m in the middle of doing it right now. And of course, I’m a big confidentiality observer. And the names of the innocent shall remain anonymous. But But I can I can respond to your question. I think very, very accurately, we’re in the process right now, of doing an out of court restructuring of a snack food company, the snack food company used to be very successful, it now has millions of dollars worth of debt, and little inventory and little receivables. But it has a brand. And it doesn’t have a lot of cash at the moment, but it’s getting better. But the approach in that kind of situation was, first of all, you have to understand what rights The bank has. And we started with doing an analysis of, of the rights and the extent of the rights of the lender, what collateral they had, what collateral they didn’t tap, whether the what they were perfected on what they weren’t perfected on, were they a big bank, were they a small bank. So we started with the lender, because obviously, there was collateral, and we had a secured creditor. And and that’s, that’s where we started first. And what we did with the lender, was we created a very strong channel of communication. And, and transparency, critical, critical critical to lenders, we had a maturity default. And we did an in person meeting with the lender with a lengthy prison station, explaining the history, the present, the future, the ask and what we needed. So the first thing we did was be able, after some fits and starts, some, some weren’t fun with the lender, they they took some aggressive action along the way, but we were able to negotiate a deal with the bank. That was the really the first thing because if the bank was not going to negotiate and was going to enforce their remedies on default and seize collateral, we wouldn’t have had much much of a choice but to file and obtain the benefits of the automatic stay and deal with them in the chapter 11. But we were able to do a deal with the bank. And part of the deal with the bank mimic some of the things that we would do in a chapter 11. And the bank saw the the the positivity in that. And we signed a deal with the bank. Now, the next thing we needed to solve, and it’s not like we weren’t thinking about it at the same time. But we now had millions of dollars of trade vendors that had cut us off, or maybe we’re CIA cash in advance maybe Cod, but how are you going to de lever the balance sheet with these creditors? And what we did with the creditors is we did a very simple out of court. First of all, we went to the whiteboard, which is should have said that in the beginning, the whiteboard is my best friend. It scans it prints I have color, it’s it downloads to sticks. And it’s a great way at least that that we’ve designed solutions. I’m sure many of you out there know exactly. You are smiling because you do the whiteboard as well. In any event, we came up with an approach with the creditors and it wasn’t a 50 page agreement. It was a it was a total of three pages. One of maybe two pages. One was the summary of a turnaround plan, and the other was a ballot and we circulated did that and we thought very carefully through what actions we wanted to provide to the creditors, and where we wanted the creditors to go. And we relied on some of the experience and classification of creditors under Chapter 11. And decided what we wanted to accomplish with the various creditors depending on how important they were to us. So we sent out this very small package to our creditors, and creditors are voting on those issues.

20:35
Another constituent that we have to saw was the landlord. And of course, not surprisingly, we were behind on the landlord. Now, if we were going to be in chapter 11, we would not have paid the past due rent, we would have dealt with it later. But in the case of trying to stay out of court, we decided to negotiate with the landlord and bring in some fresh capital and catch up, we saw what we would do with them in an 11. But an 11 was more expensive. So we solved the landlord had to pay the landlord, but but you know, that’s pretty critical space, and it was a very, very good lease for us. So in moving was not much of an option. So now we solve the landlord. We also have an equipment lender that has a bunch of the equipment that the first bank, there’s not secured. And some of its pretty critical. And we are again, using some of the principles of the code to negotiate with the equipment lender and deliver the balance sheet by some time. And part of our negotiation with them was, Hey, you know what, when we get back on our feet, we need we need new equipment tell you what you’re gonna get first look, and last choice when we go to a vendor, because we remember who our friends are, and who helped us. So with one eye, you have to look at the past and with one eye, you have to look at what’s going to motivate somebody to want to do business with you. Going forward. So we’re all this is right now is this business, cautiously optimistic, it’s going to get back on its feet, we’re actually starting to get credit. And part of the issue happens to be and this is simply on unplanned, the food industry. Because given what’s going on today, you know, food and grocery stores have, you know, are essential. And while snack foods may or may not be as essential as bread, depending on what your diets are. And maybe you’ll think snack foods and more healthy than bread. But whatever your whatever your dietary view is. There are actually suppliers that are hearing that we’re getting back on our feet and are calling to say, Would you consider buying from us, we might be willing to give you some credit. So in any event, so far, so good with that, we have still many things to solve, but we have, we have the major constituents under control, like we would have to do in an 11 anyways. And the good news is the bank was willing to deal with us, we didn’t have 15 or 20 lawsuits pending out there that, that even if you solve all but two or three of them, if two or three of them go forward, you know, with a lot of expense, it’s it’s it’s not very efficient to to defend them. So hopefully that answers your question of an example of how to go about orchestrating a reorganization, in this case, so far out of court, and I’m fairly confident we’ll be able to continue to achieve that. As as the as as, as the creditors hopefully continue to support the company.

Will Bachman 24:32
Okay, that’s a really helpful overview. And a great great example helped me understand it. Maybe we could turn now to situation of a lot of business owners today, which is maybe a little bit different than sort of your run of the mill cases where you’re trying to do this root cause analysis. In this case, there’s hundreds of 1000s of businesses where the root cause is pretty straightforward. A business is going along fine. You know, restaurant owner bar owner nail salon. yoga studio gymnasium, and boom, all of a sudden, the state has just told them to shut their doors. So for businesses like this, where we, we know the root cause? Walk us in these might be smaller businesses, maybe then, you know, larger manufacturer. But what are some of the options that a business like that shouldn’t be thinking of like a business owner who run owns a restaurant or a bar, they may have some debt, you know, maybe the restaurant owner took out some debt to kind of furnish the restaurant, that that maybe, you know, they may be personally liable for it, even if they have an LLC, they may have personally signed against it. What are some options for for the owners in those situations? Yeah,

25:52
that’s a that’s, that’s a very, very good question. And I will do my best to answer it. Because I have some ideas and some approaches, but anybody that tells you they know how all this is going to come out, is is, is delusional. Because talk about situations that, that that is not the cause of the business. This is just, you know, this is not sector related. It is not, it’s, it’s not the auto supply chain rationalization in the late 80s and 90s. And later, it’s not through the real estate recession. In Oh, 708 and some of the financial issues that happen. It’s, it’s, it’s a broad swath of, across across everything, and everybody is trying to react with the flow of information that changes by the hour, or even less. But having said that, um, you know, there’s as serious as this is, if you think through some process, some some approaches, and use them. I think you can put yourself in the best position for these types of businesses as possible. First of all, just just just for the listening audience, and some of you may be familiar with this, some, some not. There are some legal principles here, and then I’ll talk about the the restructuring piece but but before we get there, you’ll hear some terms out there that that are, are apropos. Many times you’ll hear the phrase force majeure for the superior force. It a force majeure for is, sometimes they’re in contract, and sometimes they’re not. But essentially, it’s a concept that allows a business to claim a defense for breaching a contract because of something totally beyond its control, and nothing that it did wrong. And things that just make it absolutely impossible. Sometimes, sometimes it might be a tornado and might be an act of God, it might be a might be a natural disaster. I think today, if this is not forests mature, then nothing is it is a poster child, a forest mature. is so so this, this is impacting many, many businesses. There are also statutory similarities under the Uniform Commercial Code, within practice, impracticability of performance, and things like that, that are putting businesses in in default, through no fault of their own. Now, if the business was already in in big trouble, and this happened, it’s not the same this is this is something that is sort of taking a focused on the situation where businesses are getting along fairly Okay, give or take, even even bleeding some cash, but this makes it very, very difficult to respond to. So with that little bit of background, what do you what do you do today? Um, I have a particular thought about it. In it’s it’s sort of honed, just from the experience of dealing our practices mostly debtor side Once in a while, we’ll represent a secured lender. But But please don’t tell anybody we like to keep that quiet. But, but it pays bills. So, the fact of the matter is that when you’re representing a debtor, I have some hotel clients, okay, highly leveraged hotel clients, or mom and pop, much smaller operation doesn’t really matter. It the approach that I like here is to distinguish our clients in my approach

30:43
from others that just might say, Oh, you know what, the whole world is upside down, you know, I’m not, I’m not able to pay anything, and they just stop paying, and they don’t reach out to their creditors, and they don’t reach out to their lenders. And that may work for a while, but when all of this gets, but but what’s going to happen is when the curve catches up, and the assumption that know that, that, yeah, you know, lenders have their hands full, which they do. But but that’s, that’s not, that’s not a good approach. I think the idea here is, and what we’re advising clients are, you know, what, be proactive, you reach out to your lenders, you make the call, you write the letters, you explain the situation, you be the architect, of an approach. Because that way, you’re a good corporate citizen, you’re responding, you are showing that you acknowledge your obligations. And, and, and, and you get out ahead of it. And, and you might come up with an approach, and that’s, that’s a customized, you know, situation with any particular major supplier or or lender or landlord, or whoever, whomever that you have ongoing obligations to, which is pretty much the world on a regular basis. And if you go about it, that way, you’re going to put the ball in the lenders, or the creditors or the landlord’s court, and when you do that, you look good, you’re trying to help, you’re trying to be proactive. And, and if it turns out that the lender or the landlord, or the creditor is, doesn’t know what to do, and can’t respond or, or is itself unclear, and there’s delay, you’ve put it out there. So when it comes time to be in a courtroom, or it comes time, when to deal with this issue, when things you know, get back to normal on you, you have demonstrated that you are different than some others that simply look at this as a payment holiday. So the court the communication, communication, communication, just like the real estate, people, you know, location, location, location, it’s what it’s all about. And, and, and if you do that, you’d be surprised the forbearance and cooperation and the breathing spell that you can get, if you go about it the right way.

Will Bachman 33:50
So help us with some of the language. So let’s say we have a restaurant owner, and has a lease and has, you know, refurbish the place when they set up the restaurant, so got a loan for that for all the fixtures and, and redecorating and so forth. So they have maybe a bank lender, they have a landlord, and perhaps I don’t know if restaurants typically will get terms from their suppliers of, of raw food and materials. So that three main groups, right, so what would you advise that kind of client to talk to the landlord about in terms of what offers that? I mean, if say, my restaurants been shut down, the doors are shut altogether, or maybe it’s a bar so they can’t even do takeout. To the landlord, would you say look, can you give me a Can I just not pay rent for until this thing passes and my doors are open again? And then we can you know, increase the rent when we reopen. And I can pay that three months back over a period of three years or, like what what would sort of a reasonable thing to say Be to, to the landlord, how would you advise a client to negotiate that piece?

35:09
is not a good question. And of course, it’s all fact dependent. But But you’re looking for maybe a generalized approach. And some common concepts to think about. So let me, let me try to to address that, I think it’s key to understand the difference between rent, and that you pay to the landlord and the operating expenses that the landlord has to its utility companies, it’s in the water and, and the expenses that the landlord has to pay whether, you know, regardless of depending on you know, your your lease may say that the, the lease may be triple net, but that’s your obligation to the landlord, that has nothing to do with the landlord’s obligation to the to the utility companies. So, so one thought is to distinguish between rent and expense. And rather than just say, I can’t pay anything for two months. You know, there’s, there’s, there’s a, there’s a better approach that the landlord is going to say, you know, what this business is thinking, and it’s trying to come up with something that is not strictly a payment holiday. So, so sometimes it’s a combination of that. Sometimes it’s a combination, also, have you understand the timing, that what a landlord is going to have to do to process an eviction proceeding. And although courts, at least in I can’t, can’t speak to every state, but right now, in Michigan, as in many other places, everything’s by telephone. There’s no, there’s no, the courts are open, but they’re open telephonically. They’re not open in person. Now, that may, that may differ in in, in critical criminal matters. Um, and I, it’s not my area. So but in the civil arena, it’s it’s a, there are delays that are built in already, because of docket issues, and court clerks working at home and all of that. So the landlord approach may be a combination of that, plus a deferment and a restructuring of the lease, the the permutations and combinations are, are unlimited. And it really depends on is the business seasonal? Is the business going to have? You know, is it a, is it a business that come July 4, and hopefully this is all over? Well before that, but are there liquidity events that the company can reasonably hopefully, point to, and to tie some of the obligations that have been deferred to those or simply or simply a lease modification. And it’s, it’s sort of, it’s sort of a complete mixed bag of, of concepts, but, but I think I would start with the rent versus cost approach. And then feather in the rest of the of the, of the proceedings as necessary. I think also, what’s going to be helpful is if we take this in small bites, because nobody really knows how long this is going to be. And, and I think those who stay in contact with their creditors, even if it’s a, it’s a two month deal, or a three month deal, the timing of it is much, much more likely to be successful, than if you try to take eight, if you try to eat the elephant in one bite, you’re gonna get you’re gonna get well, you’re not going to be pretty. How’s that?

Will Bachman 39:37
Yeah. So this so with landlords, you know, trying to figure out a way to potentially at least pay the utility costs their marginal cost of the property and asking for potentially a deferment on the rent. And to your point, you know, from their perspective they could try to evict you. But if every restaurant in the city is shut down, and every non essential retail business The shutdown, they can all get evicted, but it’s not like they’re going to be able to replace you with someone that easily. Yeah. And, and I think the attitude, look, get out, whoever puts out a robe, you know, you know, gets dressed in the morning and brushes their teeth and eats breakfast and, and, and and you know, it we’re all we’re all in this together and if you if your approach is responsible, I think the the, the attitude today is even even Congress is getting along at least better than they have before, you know, and there’s some actual bipartisanship that’s actually going on. Well, you know, if there’s a if there’s a landlord that appears to be, you know, I’m just using the landlord example, aggressive, or unnecessarily. So, you know, what, judges, judges aren’t going to like that. And, and that’s very different than if you just walk, walk into an eviction hearing shrug your shoulders and say, Corona, it’s the corona defense, you know, all these bad things happened, you know, now the equitable balance of, of, of, of what the legal rights are in today’s world, and how that changes those not legally necessarily, but just from a, from a humanistic standpoint, that’s going to be a big difference. So, so I think landlords that that are evicting businesses. I’m not sure what what the what the benefit of that is, especially if there is some some sort of proposal because the courts aren’t going to want to be hearing those today. I think in Michigan, by the way, for individuals, I think the governor imposed, I think it was just yesterday, I believe, a moratorium on individual evictions, you know, landlord tenant, not business, but Imperial matters, and maybe some foreclosures as well. It’s so fluid, it’s hard to keep up. But over aggressive landlords are, you know, act at their peril. You have to give them a reason to look bad. If they decide to, to, to play hardball. We talked about the landlord’s a bit What about lenders, banks and lenders? What kind of conversations should a business owner whose businesses shut down be having with the lender?

42:59
That’s it that is that assume someone’s picking up the phone at at the at the bank or somebody is responding, because they are inundated. And the lenders have their own issues because the that their portfolios are in in, you know, significant distress themselves. But the approach with the Deloitte the landlord, excuse me with the lenders, um, you know, again, it’s it, it’s, it’s all going to depend, but the lenders really don’t want your assets, obviously, they want to get paid in there better be a good reason

43:39
to

43:41
it. Look, let me go back, if you take the payment holiday voluntarily, not not gonna look so good. That may be you may, you may say that a lender, look, you know, what, we’re gonna see what happens in the next 30 days, we’ll be back here, then. I can’t I can’t pay this month. And again, the small bite approach, because nobody really quite knows where things are gonna go. Hard to give you a real specific approach. A lot of it depends on where you current before or are you four months in arrears. Not going to matter for the next month, but the attitude with the lender may be different. Well, I also, if you don’t mind, just wanted to mention something before we conclude that I think is potentially helpful to your audience. There is a brand new small business Reorganization Act, which became effective on February 19. Brand new and certainly prescient. Congress normally isn’t prescient, and I think this was not being Pepsi, but, but it sort of looks, it sort of looks that way. So okay. This is a an amendment to title 11. And it’s an amendment to the bankruptcy code. It doesn’t repeal chapter 11. But it’s a new sub chapter five. And it is for small businesses in very, very important ways. The debt load has to be when I say debt load, I mean a combination of secured and unsecured all in liquidated secured unsecured debts that are not contingent of $2,725,625. If it is that or less, you are eligible in what in a in a real nutshell, this chapter 11 for small businesses streamlines and simplifies and makes easier business, the ability of a business to reorganize with a plan of reorganization that is filed within 90 days of the case can be filed on day one, as well. And it it, it eliminates by and large creditor committees, generally speaking, okay. There’s no creditor committees, equity, can can hold on to equity, even though the creditors don’t get paid 100 cents. It’s an opt in provision. It’s brand new, and it allows businesses to, to get through a process with Far, far less cost. There’s no disclosure statement, for those of you who are familiar with that in a chapter 11. And it’s a it’s a time that it’s a statute that is so timely right now. And it will enable many businesses to efficiently reorganize. Under this brand new statute, there’s only a few cases that have been filed in the country. But I kind of like that, because it allows it allows us to, to, to write on a whiteboard, you know, in and we can be the architect of of many creative, many creative approaches. And I think it’s something that that is going to become very, very popular. And and for very good reason.

Will Bachman 47:49
I’m glad you pointed that out. Dan, we haven’t talked about this part yet. Could you explain just what is chapter 11? bankruptcy? You mentioned a couple times, but what does it entail? What do you need to prepare to go into it? How much does it actually cost for the professional services to go through it? Like what what is bankruptcy for people who are looking into the void and seeing that that might be the path or one one potential path? Like what what does it even mean?

48:19
Sure, Cat Cat, Chapter 11 is a is a tool mostly used by businesses, but it can be used by individuals to restructure a balance sheet. And I guess let me let me let me give you the first piece of it, when you when a business needs time to to in a breeding spell from its creditors. When you file Linda’s business, if there’s a lender that is bearing down on your landlord, that has an eviction hearing, or many different reasons, above all, filing a chapter 11 creates what we call an automatic stay, it is a big stop sign. It stops creditors in their tracks by and large forum can can from commencing or continuing their efforts to collect a debt, it stops and it allows the business now the business has to be able to, to at least break even during chapter 11. It was it, you know it. If it’s losing money hand over fist, then something is going to have to happen like a sale or an angel or different investors or equity needs to tap personal resources. So but but the point of the 11 is it gives the business the exclusive have a right to file a plan of reorganization for 120 days, it’s four months, we’re only the debtor gets to provide a plan. Of course, there’s always exceptions here or there. But But let’s talk about the general rule. And that is, and it’s pretty, pretty solid. statutorily, there’s 120 days. And during that time, this is chapter 11, above all, is a forum for negotiation. That’s what it is, in the big picture, it takes everybody and puts them under your tent, and, and ties their hands for a period of time where you can negotiate, hopefully negotiate a consensual treatment of those creditors. And rather than the the business, showing up at trials in litigation and having to spend the time with, with with trying to stay alive, it gives them a breathing spell and an opportunity. Now, Chapter 11 can be to reorganize, where equity keeps equity, or chapter 11 can be a liquidating process where a business is sold. Some of you may be familiar with section 363 of the bankruptcy code, it allows the sale of substantially all of the assets of a business on free and clear of claims of creditors. And, and free and claim free and clear liens of secured creditors. And many times, that is a good way to sell a business. Maybe the business, maybe the owners want to get out. And and the bank is not going to renew a loan, you can have a very robust sale process in chapter 11. And focus on maximizing value of the collateral and value to the estate, rather than running around and trying to put out fires here and there. So it’s a very, very useful tool. And the the real successful cases, or the more successful cases are ones where you do the homework and the hard work in the beginning. You don’t file and say, Okay, well, gee, I got time now and figure it out later, you have tried to sometimes you can’t help, but you try to figure out as much as you can going in. So you have a game plan. And the steps that you take are all consistent and point towards achieving the game plan or game plans that you that you are, are focused on. And by the way, in case someone is wondering, it is not either or, you can file a Chapter 11 to reorganize and decide in the middle of the case or sometime later, you know what I think we need to liquidate so so you can it’s a very flexible tool. But above all, it’s a forum for negotiation.

Will Bachman 53:20
What’s sort of the range of what a smaller business should be expecting that this is going to cost in terms of professional services? I’m sure it’s a wide range, you know, but just sort of 80% interval, if we’re talking about business with, you know, three to 10 employees and its revenues are, you know, in the low millions, perhaps just what what would your typical guess be? Does it even make sense to for a business that size to go into bankruptcy? Or like what what does it cost roughly?

53:55
Yeah. Let me let me focus on my crystal ball. Because it’s not always that clear. And I don’t mean to be cavalier about it. But much depends on the attitude and the actions taken by, by by the other parties in the case, okay? if, if, if you can get everybody under the tent, and it’s efficient, and it’s a small business, and things go the way that that that you’re hoping they go, then you know the cost of an 11 is could be as as as as low as $20,000 $25,000. Now, now, you know that and and some of that is paid in a retainer and some of it is paid over time. If you wind up with lots of fights and lots of court time, you know, you’re talking You know, could be substantially more than that. But the key here is to pick the battles that you really need to fight and be very selective on, on who you marry, and who you fight with.

55:11
So,

55:14
but but restructuring professionals will will work with the clients so that they can afford a retainer, and also get paid throughout the case. Sometimes they work out, sometimes they don’t. But it’s it’s a very, it’s flexible. It really just, it really just depends. It’s a great question. And I wish I could give you, you know, a rule of thumb, but it’s, the key is that you have communication with your professional and you see how the case goes. And if you trust the professional in there’s good communication, things may happen in the case, where were you talk to the client, say, you know, what, this, this is going to get too expensive, and it’s not going to get solved very well. Let’s do something different. Okay. So it’s, it’s, it’s, it really depends on many, many factors.

Will Bachman 56:14
Yeah. You mentioned one thing, which is that the business, at least on a marginal or variable basis has to be breaking even during the course of the bankruptcy proceeding. So is that even an option for a business where, you know, just because of the pandemic, the doors have been shut, and they have no revenue at all?

56:32
Yeah, that Yeah, very, very good. I’m glad. I’m glad you mentioned that. By the way, and let me let me let me get a little more specific on on that comment before because I can understand how it, it may be, it may have been too broad. There’s got to be, there’s got to be, I’ll talk generally, and then answer your specific question. A business can lose money in chapter 11, it just has to have an end game, where there’s going to be a solution, or at least, an event that is reasonably designed to create the business’s ability to, to, to make a payment proposal on the antecedent debt. So So sometimes a business loses money and an 11. happens actually happens quite a bit. But there’s got to be a rational story and approach to how that is going to stop. Now, specifically, to your question, you know, here’s a, we’ll use your restaurant example. The, the, the governor just said, you know, no in it, you know, other than carry out, you can’t, you know, restaurants are closed, well, of course, they’re losing money. And, and many businesses are going to be losing money. I think the attitude, and the temperature, in in these cases is going to adjust accordingly. Because when if these businesses have to file, I think, if they’re responsible, and if they are proactive, they’re going to get all the benefits of the doubt that that they’re entitled to and probably some more in the general scenario, because this is affecting everybody, I think, I think the the, the there will be understanding and relaxation and lateral given take by the court system, and in an audit be by the creditor, because this is nobody’s fault. So I think the point here is that businesses are going to get an extra bite at the apple or a few bites at the apple, more bites at the apple than they ever would before. Because this is in a situation where the owner of the business decides to buy a boat. When that cash needed to stay in the business. I just use that as an example that bankruptcy trustees LOVE, LOVE TO FIND boats, and they seem to be, you know, demonstrations of access that don’t play very well, you know, in the in the courts. So that’s just an example. But the idea here is there’s plenty of I think if you do this, right, you can buy a lot of time.

Will Bachman 59:40
That’s really encouraging to hear. And I have one one final question about leases. So if let’s say in a restaurant even could be doing delivery, but let’s say like a, you know, a bar or a nail salon, that’s totally shut down. If the owner has a you know, let’s say a five year lease agreement What typically happens? Is it possible to get out of those lease agreements? If the business does decide to shut down entirely? and kind of go out of business? Is it? Or typically, the owner is able to get out of those lease agreements through some forced mature type clause? Or are they going to be personally on the hook to pay the rent for the next, you know, three and a half years?

1:00:25
Are you talking about a situation where an LLC or a corporation is the tenant, but the landlord was able to get a personal guarantee by the owner? Or the member? Is that? That’s, that’s your question. Yeah, that’s

Will Bachman 1:00:36
the question, which, which probably, I would guess might be a common thing for smaller businesses, a dry cleaner, you know, a yoga studio and nail salon, the owner might have had to sign a personal guarantee, since the business didn’t really have any, you know, significant equity.

1:00:54
Yeah, well query whether that personal guarantee is worth anything in the first place. Because typically small business owners franchisees many times, you know, they put that they are highly illiquid. And if they have started a small business with an SBA loan, a seven a or other, or other SBA products, and they have pledged, you know, granted a second lien on real estate, and have given guarantees and collateral to the SBA lender, they’re likely uncollectible anyways, for for a for a landlord, but, you know, or for or for a lender, but in your situation with with the with the space. I don’t think I know, I think the Zeitgeist of the times right now. I don’t, I don’t I don’t think attendant that is in attendance in communication and cooperative with the landlord, and doesn’t play games and doesn’t hold on to keys and doesn’t, doesn’t start pulling stuff out. That that is that did not become a fixture. Or if it did become a fixture, excuse me. If if there’s a run on the space, and you really tick off the landlord, okay, now you bought yourself a fight. But I think the likelihood generally of a responsible tenant, even with a personal guarantee, having to pay that guarantee is, is is generally quite small. For for all of those reasons. And on top of the fact that the landlord that is, maybe having issues with other properties, has to decide where it wants to spend its money. It’s got space to try to refill, and there’s going to be a glut of space on the market. So either the personal guarantee issue is generally pretty solvable.

Will Bachman 1:03:05
All right. Well, then we’ve gone You know, past the hour, this has been hugely informative to me. Where can people find you if they wanted to follow up with your firm? What what’s the best place for people to find you?

1:03:20
Well, I’m our office, our office is open optional. People that you know, feel comfortable working at home can work at home. people that feel comfortable and come again come in. That may change depending on what happens. But here’s the key. I’m awfully available. The Do you want contact information? Is that what you were?

Will Bachman 1:03:50
It’s up to you, Dan, do you want to give a website or what’s the best place if people wanted to find out more about your firm and yeah,

1:03:55
yeah, I think I think please look at the website. www dot Schaffer and weiner.com Schaffer, SC h. AFER and spelled out Wiener Wiener w e i n e r.com. My email is Dee whiner the initial dw Ei n er che for unguided calm. The general phone number is 248-540-3340 and all calls are being processed and routed accordingly. And if it’s easier to call find it, it’s easier to email fine. If if you if you want to meet you can be at one end of the office and I’ll be at the other but I’ll meet with you.

Will Bachman 1:04:47
Then you’re extremely extremely generous for sharing your your experience here on this call. Thank you so much listeners. You can we are working at Umbrex we have 100 volunteers working to build a pandemic playbook with a checklist for small business owners, you can visit umbrex.com and click on the pandemic playbook link. We’re looking for volunteers to serve as coaches or consultants pro bono to small businesses. And we’re also welcoming small businesses that are looking for help you can get some pro bono consulting, you can click on that link as well. So, Dan, I’ll include your link to your firm in the show notes. And thank you so much for joining. Pleasure, I enjoyed it and thanks for the opportunity to help