IS CHAPTER 11 BANKRUPTCY RIGHT FOR YOUR SMALL

IS CHAPTER 11 BANKRUPTCY RIGHT FOR YOUR SMALL BUSINESS? SHELTER ROCK BANKRUPTCY GROUP LLP 99 POWERHOUSE ROAD, FIRST FLOOR ROSLYN HEIGHTS, NEW YORK 11577 CONTACT: BLINK@SHELTERROCKBANKRUPTCY. COM CELL: 516 -417 -4545

OUR TEAM Partner Michael D. Pinsky has practiced bankruptcy law for over 30 years, with experience successfully representing small businesses in retail, construction, food service, healthcare, government contracting, music, funeral services, family farming, recreation, and real estate development. He has represented debtors and creditors, at trial and on appeal Partner David A. Gallo has been practicing New York commercial litigation for over thirty-five years. His experience includes representing businesses and lenders in commercial lease disputes, condominium and cooperative closings, and commercial contract negotiations. Partner Robert M. Link has handled numerous trials, and evidentiary hearings, including bankruptcy adversary proceedings pertaining to lien strips, cram downs, and violations of the automatic stay. He tracks pending legislation to keep clients apprised of changes in the law.

The Small Business Reorganizatio n Act SUBCHAPTER V OF CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE AS AMENDED BY THE CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT (“CARES”)

Faster, Less Cumbersome & Less Expensive Subchapter V is the result of efforts to make Chapter 11 more accessible, affordable and effective for small businesses. It has fewer moving parts, takes less time and levels the playing field with creditors.

SUBCHAPTER V OFFERS QUICK RESULTS A case can be filed, confirmed and out of bankruptcy in a few months A report on the debtor’s progress toward negotiating a consensual plan with creditors is due in 6 weeks, a status conference is held 2 weeks after that, and a plan is required to be filed a month later (at the 3 months after the case is filed). There is no need to wait that long to file a plan and proceed to a hearing on confirmation.

DEBT LIMIT: $7, 500, 000 (FIXED TOTAL DEBT, EXCLUDING INSIDER OR AFFILIATE DEBTS) The statutory debt limit of $2, 725, 625 under Subchapter V was raised to $7, 500, 000 by the Coronavirus, Aid, Relief and Economic Security Act of 2020 (the CARES Act) for 1 year At least 50% of the debt must arise from business or commercial activities

7 IS BANKRUPTCY RIGHT FOR YOUR BUSINESS? QUESTION 1 Who runs the business during the bankruptcy?

Debtor-In-Possession Upon the filing of the petition, the debtor becomes a debtor and debtor-in-possession. The term refers to the fact that the Chapter 11 debtor retains its property and continues to operate the business

9 IS BANKRUPTCY RIGHT FOR YOUR BUSINESS? QUESTION 2 How do you file Chapter 11 Bankruptcy?

10 PREPARE FOR REORGANIZATION Your professionals should become familiar with your business, its assets, liabilities, past and future cash flows, business and financial challenges, opportunities and value. If the case is not being filed at the last minute to avoid a foreclosure or other business-ending event, the direction of the case should be understood before it is filed, and preparations to finance the case, negotiate with creditors and to file a chapter 11 plan of reorganization should already have begun.

11 CHAPTER 11 BANKRUPTCY First Day Orders Debtor Interview and Meeting of Creditors Chapter 11 Plan Subchapter V (effective Feb. 2020) • The Debtor seeks • US Trustee • Prompt filing of a • Applies where fixed interim and then schedules debtor restructuring plan total debts do not final Bankruptcy interview to explain (the “Plan”) is key exceed $7, 500, 000. Court approval to new in an SBRA case. • Unsecured or less-then use cash responsibilities as The Plan is a -fully secured creditors collateral, or a debtor in proposal to lose leverage available approval for new possession restructure debts outside of the SBRA to financing to • The interview is and permit the prevent confirmation of maintain payment debtor to emerge followed by a 341 a Plan. of employees, from bankruptcy, • All other things being Meeting in which critical vendors, with prethe US Trustee equal, the case payroll bankruptcy debts interrogates the proceeds quickly to processing, etc. exchanged for debtors re confirmation. obligations under business the Plan. management

12 IS BANKRUPTCY RIGHT FOR YOUR BUSINESS? QUESTION First Steps After Filing? 3

FIRST DAY ORDERS Certain steps should be taken as soon as the case is filed to stabilize the debtor’s business. That includes either getting approval for prearranged debtor in possession financing, or the use of the proceeds of pre-petition lenders’ collateral (known as “cash collateral”); the uninterrupted payment of employees and employee benefits; providing for bankruptcy utility deposits; maintaining some or all of the debtor’s pre-petition financial management arrangements Bankruptcy Court approval is required for the employment of the debtor’s professionals, and those applications and disclosures (to show the absence of disqualifying conflicts) should be filed immediately after the commencement of the case.

2 PATHS TO CONFIRMATION The Bankruptcy Court will confirm a negotiated, consensual Plan according to its terms. A Subchapter V trustee will be appointed by the government to assist in the negotiations. Alternatively, the Bankruptcy Court will cramdown a nonconsensual Plan over creditor objection.

REQUIREMENTS FOR NON-CONSENSUAL PLANS Treatment of secured creditors must be “fair and equitable” i. e. , the standard chapter 11 requirements The Plan must commit the debtor’s projected disposable income to fund distributions to unsecured creditors (trade debt, etc. ) under the plan over a period of 3 years, or such longer period of up to 5 years as the Court may fix.

PLAN TO INCLUDE LIQUIDATION FINANCIAL PROJECTIONS The best interest of creditors test still applies The Plan must be feasible ANALYSIS, • Creditors must receive at least as much as they would have received if the business were liquidated. • Supported by reasonable revenue and cost estimates projected over the Plan period. (The Subchapter V trustee can help with this. )

SOME HOME MORTGAGES MAY BE MODIFIED TWO ELEMENTS This applies only to mortgages on an owner’s home not principally for the purchase of the home, e. g. , SBA second mortgages to secure an owner’s loan guaranty. The loan proceeds must have been used primarily in connection with the business.

18 COMMERCIAL LEASES

19 THE LEASE IN A CHAPTER 11 BANKRUPTCY You cannot force the Landlord to modify a commercial lease in bankruptcy Rejection = breach, but the termination decision rests with the lessor following the rejection. Defaults (i) may be cured within a reasonable time or (ii) the lease may be 'rejected' and (if the lessor plays ball) renegotiated.

20 POTENTIAL RESOLUTIONS Rent Forbearanc e Rent Abatement Lease Re. Negotiation • This is essentially what the Courts and New York PAUSE have already accomplished. The landlord cannot evict you but your installment payments will all be due and owing on June 8. • Entitles the tenant to suspend rent payments or pay only a portion of the rent. Should be in writing. • The parties execute an amendment to the contract to memorialize new terms and contractual due dates. Ex: excusing or restructuring payments.

21 THIS IS A NEGOTIATION Timeframe for Eviction? Provisions of Lease? Personal Liability, Force Majeuere, etc. Other Options?

22 OTHER TOPICS

23 SBA ASSISTANCE Economic Injury Disaster Loan Assistance (EIDL) up to 2 million dollar loan for businesses with less than 500 employees. Emergency Economic Injury Grant (EEIG) a 10 thousand dollar grant in conjunction with applying for an EIDL. Paycheck Protection Program (PPP) federally guaranteed loans to qualifying small businesses with possibility of forgiveness if spent on payroll New York City Assistance Programs https: //www 1. nyc. gov/site/sbs/index. page

24 INSURANCE CLAIMS Business Interruption Coverage insures directly affected operations; and contingent business interruption coverage insures indirect losses, such as when suppliers or customers are affected by the interruption. Civil Authority Coverage – insures in certain cases where government authorities restrict access to the area where your business is located or an area that the business depends on for its operations Virus or Bacteria Exclusion – insures in certain cases where a virus, bacterium or other microorganism induces or is capable of inducing physical distress, illness or disease

25 PENDING LEGISLATION S 8125 A/A 10224: provides “in response… [to COVID-19] shall have all rent payments suspended for ninety days following the effective date of this act…” The bill further provides any landlord who faces hardship as a consequence of “being deprived rent … shall receive forgiveness on any mortgage payments for such property for ninety days. . ” S 8139/A 10247: temporarily modifies the lease agreement for small businesses so that they either pay contractual rent or 30 percent of business income where “business activities have been substantially curtailed resulting in a loss of income as a result of government ordered restrictions. ” In case of a non-payment, the court conducts an in camera review of finances to determine if the 30 percent was accurate. Over 50 proposed laws at the state level alone dealing with coronavirus and economic impact

THANK YOU! The information and materials available are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Prior results do not guarantee a similar outcome.