Like a couple of months ago when Chrysler filed for
bankruptcy, this week brought another moment to an
essential American industry that did not really come as a
surprise, but still sent shockwaves through the economy
that are certain to be felt for a long time to come.
Another of the "big three" auto makers in the United
States, General Motors Corporation, filed for Chapter 11
bankruptcy protection. The company now will begin a
process of reorganizing itself from top to bottom, with
changes in ownership, credit owed, and even merchandise
that will be placed on the market all being certain
consequences of the bankruptcy. If you have always been a
loyal purchaser of GMC products, you may need to be
prepared for the reality that your favorite vehicle may no
longer be on the lot the next time you visit your local
dealership. Instead, as sanctioned by the deal brokered by
the federal government, perhaps you instead will find
yourself going for a test drive in an energy-efficient car.
As we know from the countless media reports, Chrysler and
GMC are far from alone in its dire financial circumstances.
Many other well-known companies, from Mrs. Fields Cookies
to Linens 'n' Things to KB Toys, have all filed Chapter 11
over the past couple of years.
It certainly is not just these large, marquee corporations
that are feeling the effects of our nation's current
recession and ending up in bankruptcy court. Right here in
the state of Texas, we have witnessed many of our local
businesses that have been forced into the position of
filing Chapter 11 paperwork. In the first quarter of 2009,
the number of Chapter 11 filings in the Lone Star State
doubled from the same period the previous year, from a
total of 129 up to 259. Wall Homes Inc., based in San
Antonio, filed for Chapter 11 in January. Introgen
Therapeutics, Inc., based out of Houston, made its decision
to claim bankruptcy official at the end of last year. That
same month, Texas-based Pilgrim's Pride also filed a
voluntary position for relief. These recent filings
demonstrate just a few examples of how business owners in
Texas are struggling and taking the drastic steps needed to
remain afloat.
What exactly is Chapter 11 bankruptcy and what are the
repercussions that a company can expect to face once the
paperwork is officially in the hands of the court? While
this option is available both to businesses and
individuals, Chapter 11 is most commonly known as
"reorganization" of a corporate entity. This is unlike the
Chapter 7 process of liquidation of assets with which most
people are already familiar, and a topic on which I wrote
an article last week. Chapter 11 can be filed in
bankruptcy court either through a voluntary petition by the
debtor who realizes the need for restructuring or the
petition may be involuntary, which occurs when creditors
step in and demand legal recourse. The federal Bankruptcy
Code requires the debtor or another interested party to
develop a plan for addressing the needs of the creditors,
with the period given to produce a reorganization proposal
usually being 120 days. This plan must be agreed upon by
the bankruptcy court and the company's creditors. A United
States trustee is assigned by the court to make sure that
the plan is followed and to provide oversight of the
company's efforts moving forward. As it is usually in the
best interest of creditors for the bankrupt company to keep
its doors open to consumers, the debtor is able to remain
in possession of its assets and continue to operate the
business. Debtors may be able to emerge from a Chapter 11
bankruptcy in as little as a few months or within several
years. In some instances, however, a productive
reorganization never occurs at all. Chapter 11 filings
having a success rate of ten percent or less.
Since GMC is in the news right now and most readers are
familiar with the company, the current situation of this
auto maker provides a great example for a better
understanding of Chapter 11 bankruptcy. Before bankruptcy,
Chrysler and GMC had been in negotiations for months with
its primary creditors in an attempt to reach a payment
agreement without the need for bankruptcy. When these
efforts were unsuccessful, the Chapter 11 paperwork was
filed.
Regarding the Chrysler bankruptcy, the Treasury Department
will supply Chrysler with $8 billion in new loans, on top
of the previous $4 billion given as part of the earlier
bailout. This money will allow Chrysler to function while
working through bankruptcy, as well as operate without
interruption once the company is able to exit bankruptcy.
Once Chrysler emerges from its Chapter 11 status, the
United Auto Workers will own 55% of Chrysler and the car
maker Fiat will own a 20% stake with the option of
increasing it to 35%. The United States government, also
known as the American taxpayers, will own 8% of the company
and even Canada, which has fronted some loan money to
Chrysler, will have a 2% stake. The workers will feel the
effects of this week's decision, as all plants are
scheduled to shut down starting on Monday and stay closed
until Chrysler comes out of bankruptcy. Under the
agreement, these men and women will receive around 80% of
their normal pay through unemployment checks and union
benefits.
These negotiations recently completed by Chrysler, with the
proposed resolution now in the hands of a federal
bankruptcy court, are similar to those currently underway
by businesses across Texas. While the option of having
your debts reorganized and partially forgiven while still
maintaining the ability to stay in business seems quite
appealing, and often is the best alternative for a
struggling company, the consequences to your creditors,
your company's composition, and your good name are quite
real. If you are a business owner and you are considering
a Chapter 11 bankruptcy filing, detailed and attentive
legal counsel is essential. There are attorneys who
practice solely in the area of bankruptcy law and their
expertise will be needed as you navigate through this
process and hopefully come out a more profitable and
healthier company on the other side. Do not make the
mistake of taking the first step on the Chapter 11 road
without having a knowledgeable lawyer by your side.
About the Author:
Tony R. Bertolino is the managing partner of Bertolino LLP,
with attorneys in Austin, Houston, and San Antonio who
practice Texas bankruptcy law. To learn more about
Bertolino LLP or find a Texas bankruptcy lawyer, please
visit http://www.belolaw.com .
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