Bankruptcy is a serious wall to hit for any business, but what solutions are available and which is more appropriate for certain scenarios? Craig Kelley, Esquire, Senior and Managing Partner at Kelley & Fulton, P.L. recently spoke with Lawyer Monthly about this topic, detailing what the possible avenues might be, and providing information about the firm, its work in the U.S. bankruptcy sector and its commitment to finding creative solutions to its clients issues.
In what circumstances is bankruptcy unavoidable for a business? What are then the necessary steps to take?
There are two types of bankruptcy available for businesses: Chapter 11 and Chapter 7. A Chapter 11 is a reorganization bankruptcy. It is appropriate when a business has the financial ability to reorganize its debt obligations, but merely needs additional time to repay its creditors on a reduced debt basis. When we first meet with a Chapter 11 client, we will work with that client to assess whether the business has the ability to generate income to pay its current expenses and a little extra to fund a plan of reorganization, which is typically five years without interest to the unsecured creditors. Fortunately, there are many statutory tools available through the Chapter 11 procedure that are not otherwise available in other Courts. For example, we can “strip down” secured claims to the reduced value of the collateral and re-amortize the loan. We can also surrender assets or leases that are a burden and the consequences to the business are minimal. Cost will also play a role in our assessment since a Chapter 11 reorganization can sometimes be a lengthy and complex process. Unfortunately, there are times when a business simply does not have sufficient income to reorganize its debt obligations, and a Chapter 7 liquidation is appropriate: the business closes its doors on the date of the bankruptcy filing, and the Chapter 7 that is appointed to the case liquidates the remaining assets to pay creditors on a prorota basis. A Chapter 7 liquidation may not be appropriate for every business looking to close its doors, but can be a very valuable tool to stop expensive litigation and harassment by creditors.
What are the most recent bankruptcy matters you have been involved with and what have been the professional challenges therein?
We are currently involved in a Chapter 11 case involving copyright law and the ‘first sale doctrine’. The first sale doctrine in copyright law allows owners of copyrighted material to treat that copy in any way desired so long as the copyright owner’s exclusive copyright rights are not infringed. For example, this doctrine is what allows someone who purchases a compact disc to them resell that CD to a third party. In the current case where we are counsel for the Debtor in Possession, the Debtor has developed a platform to resell digital music; however, the Debtor received an adverse ruling from the US District Court in New York holding that the first sale doctrine does not apply to the resale of digital music. Therefore, the platform that the debtor spent years developing had to be taken offline as a violation of copyright law. The Debtor is in the midst of appealing this adverse ruling. Additionally, the Debtor has developed a separate platform that it is confident is not a violation of the first sale doctrine and will allow the entity to market its App to resell digital music and other electronic media, such as songs purchased from iTunes and videos/movies purchased online. We are fortunate to represent this fascinating and innovative Debtor in its Chapter 11 case.
With over 28 years of experience in this sector, how would you say bankruptcy law and the services related have evolved significantly over the past decade?
In 2005. the Bankruptcy Code was completely overhauled with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act, also known as BAPCPA. This made several significant changes to the Bankruptcy Code and was the most extensive overhaul to the Bankruptcy Code in 35 years. The intended purpose of the enactment of BAPCPA was to curb abuse of the Bankruptcy Code. To this end, the most notable change to the Bankruptcy Code was the addition of the Means Test, whereby filers who desire to file for Chapter 7 bankruptcy now had to meet certain income-based eligibility requirements. The purpose of the Means Test was to divert filers to a Chapter 13 personal bankruptcy to repay a portion of the debt owed rather than merely obtain a Chapter 7 discharge of debt. Since the enactment of BAPCPA. there have been many studies surrounding the effectiveness of BAPCPA and the general conclusion is that the Means Test is more of a burden than a benefit. In essence, the Means Test has only precluded a small number of people from qualification for Chapter 7 bankruptcy and only resulted in a marginal increase in repayments to creditors.
Is there any further bankruptcy legislation you believe necessary to be introduced at this point in time?
A hot topic in bankruptcy law is dischargeability of student loan debt. As the cost of higher education has risen exponentially, student loan debt has also increased at alarming rates. Currently, 11% of student loans are in default. Most courts use the Brunner Test to determine whether a debtor can discharge student loan debt. Under this test, the person filing bankruptcy must prove that the student loans create an “undue hardship.” This test is very strict and difficult to meet, but there is evidence that some courts are loosening the reigns on the dischargeability of student loan debt. Some argue that the strict Brunner Test should be reduced to a less strict standard since Brunner was decided at a time when private student loans were still eligible for discharge and there were many examples of predatory lending practices.
As a thought leader, how do you help your clients differently compared with other firms?
Our firm rather enjoys handling the difficult cases: in other words, those cases that other firms may shy away from. We take a creative approach to our representation of our clients. Where others may feel that a prospective client’s case is impossible, we like to think outside of the proverbial box to make the impossible possible. We understand that we may not always be able to get our client their desired result, but we strive to obtain the best result available for our client from all available options. I truly believe that every problem has a solution and my job is to find or create that solution for my clients. Our firm is also unique in that we represent both debtors and creditors. We find that this approach allows us to view a matter from both sides of the coin, which helps us and our clients see things a little bit differently than how our competitors may view the issue. By knowing what the other side thinks and seeks, we can better craft a resolution suitable to all parties and save all parties time and money.
Is there anything else you would like to add?
We understand that bankruptcy is stressful and often an emotional for both debtors and creditors. It has a dramatic impact on both businesses and the personal lives of those involved. We understand that our job includes more than just giving legal advice; we must help our clients deal with the effect that a bankruptcy procedure has on them as people. We go to great lengths to counsel our clients on the most cost-effective and beneficial means to bring each matter to a timely result.
A CASE INVOLVING A LARGE TRACT OF LAND WHEREIN VARIOUS PARTIES CLAIMED VARIOUS INTERESTS IN THE LAND; WE RESOLVED THIS VIA CHAPTER 11 & JUDICIAL SETTLEMENT CONFERENCE.