The sickening slide from slow pay to bankruptcy

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By Andrew L. Ersek South Bay Forest Products ,, -... Orange, Ca. -5,

time it made no fter all, a sale time Nameless has operated in the usual manner with none of its customers having even a hint of the .$t6ftach is bankruptcy. Shelves are full of ide to merchandise, since other suppliers go direclly dirdbtly ts&gfitp.qfrd irlace a cqll have apparently shipped foi 'cash 19 gooO old Skip, the owngr s? - which,fl\ameless seems to have Nameless Lumber and Supply,".a pleqjgdf. Why not? He didn't have large retail and contracror yard in ro frt rhe lasr9O days"ryorrh of bills. business for over l5 years. After the There wbr no laile *clamation business over l5.years. After w\po raigeihqclamation usual "He is not inlout/nor back on the door liating-ttrdt ihis estauflrom lunch/left for the day." you lishment was so ;iEhranased ano nail S^kip between errands. He is run inro the ground ttiat-it *fuoroeo c.heerful at first. but as the conversa- to declare ba-nkruptcy. N;rxas-rngF tion continues, you learn about the any court supervi^sioh of ttre dffiffilarge contractor who is not paying tioh of any 'of the assets that'now along with the unaccounted inven- technically-belonged to the creditors. tory shortage, the new Home Depot across the street and -the key employee who left him after 14 years. .1 attornev and since n..l3t,t1:1Y,:j

V OU KNOW rhe scenario: tt's r one o[ your "slow" accounts that has gotten "slower" in the past month. The profit in the order was not that good to begin with, but you figured "it's a sale."

In the past, you could almost always reach Susie, the bookkeeper, and she usually returned your calls (sometimes a day or two later) and after the second or third call. vou usually got a check.

This time, however, Susie isn't in. She has left for the day or she is at the bank. The receptionist answering the telephone (whose voice you do not recognize) assures you that you will be called back, just as soon as Susie comes inlreturns or whatever. The oldest invoice on your aging (aptly named) is now 87 days old-and there are a number of newer shipments since that you ok'd because a sale is a sale. Right?

As your stomach slowly turns, you recall how the last two orders placed by Hank, the buyer for this company, were done briefly, without the usual discussion ofso and so has it for $5 per thousand bm less.

StOfy at a GlanCe

what happens as a ..good,, cuslfi$"rltl"ii.the business he is going tor", urdtns to stop p-aving your Rt irrst blush, you feel relieved. invoices. what to watch for, After all. reorgani2ation means vou thingsyoucandotoprotectyour get your house in order, clean- up interest .why bankruptcy is so loose ends, start fresh, take care of popular.

things. Wrong! What good old Skip is doing is declaring bankruptcy, speci- fically, Chapter I 1. This partiiular chapter allows the existing manage- ment (good old Skip) to stay -in charge and work things out to the betterment of all concerned.

Skip finishes the conversation as' suring you that notifications are going out to all creditors (it is comforting to know you are not alone) and a first meeting will be held at the local courthouse very soon. Of course, he can not pay you for any of the old accounts, but will be happy to purchase merchandise for cash. (Where did he get cash?)

We fast forward to the local courthouse where a few Nameless Lumber and Supply's creditors have gathered. The room that holds 50 people has standing room only. It is interesting to note about 60 days have passed between our fatal conversation with good old Skip and this courtroom drama, during which

Before we return to the overcrowded courtroom let's mention that Nameless is a corporation and while good old Skip and his tamily hold all of the company stock, they have not gone bankrupt, only the corporation. So while his corporation cannot pay its outstanding bills, good old Skip continues to draw his six figure salary, along with his wife, who is also an employee.

Meanwhile, back at the courthouse, good old Skip appears along with his attorney and explains to us there is nothing to worry about and allof us willget our money, if we will just be patient. He is making many changes at Nameless and will have the place showing a profit in no time. Part of these changes include drastic economy measures. You notice. however, that good old Skip drove up in his one year old Mercedes 450SL and is wearing an expensive sport coat. You also happen to know that he still has that cabin at the lake and the registration on the Mercedes shows good old Skip still resides in a fashionable local community. Oh, but these are personal possessions, not to be confused with corporate assets. Generally, those of us who extended credit to his corporation cannot go after his personal assets, no matter how manY there are.

There are, however, two ways to reach personal assets through a corporation. One is for the owner to have given a personal guarantee for his corporate debts, the other is to pierce the corporate veil. That is prove that the corporation and the individual are one and the same. This is almost impossible under current corporate law. Besides, good old Skip has his attorney to keep you from doing this. As for a personal guarantee. Skip was much too clever to give those to his suppliers. Besides, none of us asked. The corporation was good for it - right?

As to Skip's attorney, this is not free. He is not even cheap. Skip had to pay attorney fees up front before any law firm would take his bankruptcy. He must also pay certain ad,,rministrative costs beflore any creditors see a dirpe.

But we digress. Skip continues his reassurances that all will be well. The flow is ope4ed flor questions and it is obvious thai some of the gathering have not had expbrience at "reorganizations." One poor soul asks if he can be paid since Nameless Lumber owes him six months of reSi:f' charges on its forklift, and he cannot

Do Yotr Know?

In Chapter I I bankruPtcy the debtor is allowed to operate the business under the protection of the federal bankruPtcY codes while he attempts to work out a satisfactory arrangement with his creditors.

In Chapter 7 liquidation all assets of a business are sold in an attempt to satisfy creditors.

- Manv bankruptcies are blamed on interhal or eiternal flraud, rather than poor business Practices.

Poor bookkeeping or accounting practices are also blamed for many business failures.

Audited financial statements sometimes give a false sense of security, since CPA firms are usually not in a Position to comment on how well the business is run. Their opinion is confined to generally accepted accounting nractice.

- Bankruptcy laws tend to favor the debtor. Reforms are needed.

meet his next week's payroll. (Good luck!)

As we leave this hapPy gathering, the attorney assures us there will be subsequent meetings to keeP us uP to date on the "reorganization." On the way home, we glance at the list of creditors for Nameless Lumber and Supply and notice at the toP that good old Skip "borrowed" from Uncle Sam by not paying the withholding taxes on his employees for the last 3 months. Needless to say, Uncle does not stand in the same line and will be paid first. That is fair, is it not?

There is also the matter of back rent on the propertY that Nameless leases. It is four months behind. (Bet the payments on the 450SL are current.) The landlord also stands ahead in line since he can start eviction proceedings with the permission of the courts. Do you get the idea that Skip may have been in a little deeper than meets the eye?

Four months Pass as You anxiously watch the mailfor some word on the reorganization. What you get is notification from the court that the attorneys and the accountants, along with the administrators, will be paid. (With whose money?)

Finally, a creditors' committee is formedthe l0 largest excluding the l.R.S. and landlord. And guess what? You qualify. While this meeting is open to all creditors, onlY a hand full show up. The others aPparently have lost interest.

'

The mood at this second meeting is mo'r? somber. Sales are down, collections are slovl an4expenses are up in spite of. good :old Skip's best efforts. lt looks like a long "reorgan- ization." i"

Let's see 1vhere,rrcw6. Wb have a company that wgfostrrg money under normal conditiohs. Along comes Chapter I 1 Reorganization, wher€Ihe, same company. under the same circumstances with the same mahagement. tries to make money bY having to pay up-front attorney and administrative fees. Don't forget the court supervision. Flash back to when you visited Nameless after the bankruptcy. Did you see any supervision?

F-ast forward to a year and a half later. (Many bankruptcies go on for years.) Nameless is still in Chapter I I, reorganizing. Your numerous calls to the attorneY have mostlY been ignored. When You do connect with one of the law clerks, you are told the reorganization is "progressing." Your attempts to contact the court appointed bankruptcy referee are even more futile. Especially after you learn that she has dozens of cases to monitor and as long as the monthly reports are filed by Nameless, nothing happens.

The creditors' committees stopped meeting six months ago, because you learned that to get anything done, you must hire Your own attorney to talk to good old Skip's attorney, who in turn, talks to the courts.

If you think this story has a happy ending, you probably own a bridge somewhere. Before you are through, you learn another form of bankruptcy. It is called Chapter 7, better known as liquidation, which is exactly what happened to Nameless Lumber and Supply.

After operating approximatelY two years under court Protection. good old Skip, depleted the net worth his corporation had when he entered Chapter ll and whY not? Nothing changed, he kept right on doing whatever he did to cause him to go bankrupt in the first place. When the IRS and the landlord got their share along with the attorney and other administrators, there was those who r money, are not rewarded with addi- "' tional time to finish the iob?

As to good old Skipwhat happened to him? Did he go to debtor's prison? Is he working two jobs to repay all his debts? Not exactlY. He seems to have gone into business again and is now running No-Name Lumber and Supply Company, just down the street from his old location. You guessed it. He no longer drives that three year old Mercedes. He has a brand new one.