Bankruptcy Is Not the End for Middle Market Businesses

By James Andrew Hinds, Jr., Partner, The Hinds Law Group, APC

In the middle market the trend lines on bankruptcy cases in the age of the pandemic are growing not flattening.  Despite happy talk from the Administration, many experts predict a tidal wave of bankruptcies beginning in September as the temporary cushion from the Paycheck Protection Plan “(PPP”) dissolves, even with the new extension for use or payback from eight to 24 weeks plays out, SBA loans fund and are used up, and the pandemic does not “simply go away as predicted by the President.”  Looking into my crystal ball I see months of failed businesses, empty malls, and closed restaurants and mall stores.  I see the new norm looking quite different from the old norm.

High-profile Chapter 11 bankruptcies make the news but do not tell the entire story of where we are and where we are going as a Nation.  Everyone hears about  Hertz, Neiman Marcus, Pier One, and  JCPenney.  The number of chapter 11 cases filed weekly with a billion dollars of assets or liabilities is mind blowing.  The courts in Delaware (still the venue of choice), the Eastern District of Virginia (home to the large retail chapter 11s), New York, and Houston (where the oil patch goes to die) are jam packed with the mega cases.  However a local Google search of bankruptcy filings shows that the middle market cannot venue shop and these cases remain “at home” in the local courts.

ABI has surveyed bankruptcy specialists who say they expect to be very busy in the Fall when the PPP money expires, COVID-19 does not go away, and the impact of the national election becomes clear.  The story may be just as simple as the expectations of small and medium-sized businesses that 2020 would follow a bang-up 2019 have fallen flat.  As a result of COVID-19 and local stay at home orders, revenue never materialized along with drastically declining foot traffic.  Social distancing means restaurants can’t turn tables two to three times a night and the added costs of disinfecting the premises is an unrecoverable cost of doing business.  In a few cases nimble management may be able to reinvent themselves and thus keeping their doors open – for a short time.  However, the Summer of 2020 will be lost to retail players and the revenue expected will not materialize.

In our experience working with the middle market businesses, there are a few positives on the 2020 horizon.  We always say that bankruptcy is a tool, but not the only tool we bring to an engagement.  It is always best to approach the constituencies in the case as early as possible to work to avoid the added costs of bankruptcy and to try to work out a “deal.”  These  constituencies include, but are not limited to, employees, landlords, the lenders, and managers.  Engage each in an honest discussion of how to keep the business alive by making every penny count and not killing the Golden Goose. 

However to survive into 2021it may be time to ask very hard questions and engage a third party to help vet the answers.  The hardest clients we have in the middle market are those who refuse to face reality. The old norm is not the new norm.  Face it, embrace it, and learn from it.  If you are running low on cash, find ways to tighten the belts across the board before th bank account is empty.  If you have empty space approach the landlord to find solutions that may be a win-win for both side.  Never approach the other wide without a well thought out “plan” which includes your “asks” and allows the other party a potential win.

Begin by reviewing the causes for poor financial performance in 2020 beyond COVID-19.  Review all overhead liabilities like lease obligations, employee head counts, management salaries, advertising costs, etc.  Be brutally honest and ask if you’ve made any decisions that, in retrospect, were a big mistake.  If you can identify sore points now and tackle them while you have a workable relationship with your financial institution or investors then maybe you can find a pathway to “yes.”

Many experts say the COVID-19 has changed forever the term “business as usual.”  Maybe 50% of your workforce can work from home thus cutting lease size by up to 50%?  Maybe Zoom has replaced face-to-face meeting with new and exiting clients thus cutting travel allowances and costs?  Now is the time to engage all of your employees and existing customers in a direct dialogue to determine how the new normal differs from the old normal. 

The Hinds Law Group, APC is dedicated to the representation of creditors, debtors, trustees, and creditors’ committees before the United States Bankruptcy Courts across the Country, and specialize in Creditors’ Rights, Bankruptcy Reorganization and Liquidations, Assignments for the Benefit of Creditors, Receiverships, Landlord/Tenant disputes, and complex financial law work out litigation matters in courts across the Country.  The matters discussed herein should not be construed to be legal advice on any matter.  The professionals employed by Hinds Law Group, APC may be reached at (310) 316-0500.