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There is little joy in overseeing the final days of a failing business. Employees lose their jobs. Customers may never have their orders delivered. Vendors might not be paid in full.

At Beane Associates, we deal with these situations day after day. Our goal is always to help our client, whether it be a creditor or the business itself, maximize its return (or, more accurately, minimize its losses) during those final days.

For years, the most common route to dissolution of a business that holds significant assets has been through the federal bankruptcy courts. Recently, there has been movement by creditors to sidestep the federal system and use a receivership established under a state court instead. Depending on the situation, this alternate route can save time and provide greater flexibility is disposing of the failing company's assets.

The feature article in this newsletter discusses some of the advantages of using receiverships.

We hope you find these ideas helpful, and we encourage you to forward this newsletter to anyone you think might find this information valuable.

As always, your comments are welcome, and we look forward to hearing from you.

Sincerely,
President CMC CIRA

Receivership or bankruptcy, consider these factors:

Are the company’s assets concentrated in one state?

Is prompt disposal of the company’s assets a priority?

Might there be a choice of dissolving the company, restructuring or finding a new owner?

If you answered "yes" to all three questions, filing for a receivership in a state court may be a better option.

Since the passage of the Bankruptcy Reform Act of 1978, creditors have had the benefit of a clear road map in seeking the dissolution of insolvent businesses.

Rather than deal with laws that could vary from state to state, they could take advantage of the certainty that comes from having a uniform set of rules that would apply nationwide. Because the reach of a federal court extends beyond state lines, a bankruptcy judge in Delaware, for example, could make decisions involving a company's assets in areas as remote as Arizona or Alaska. In addition, the filing of a bankruptcy petition, in most situations, serves as an automatic stay that halts proceedings anywhere in the world against the debtor entity and its assets. That prevents authorities in other jurisdictions from taking actions that could deprive the creditor of access to company assets to which it has a legitimate claim.

But the uniformity of the federal bankruptcy system comes at a price: litigants lose flexibility, and they often lose time, a critical factor when an efficient dissolution of assets is desired.

For these reasons, the parties in dissolution matters are now returning to the state courts, such as Delaware's Court of Chancery, and are seeking the appointment of receivers to oversee the final months of an insolvent business or, in some cases, to perform enough short-term damage control to make the business appealing to new investors.

Working within a state court system to establish a receivership is especially appealing when virtually all of the insolvent company's assets are located within a single state, says attorney Kevin J. Mangan of the Wilmington office of Womble Carlyle Sandridge & Rice.

"According to leading practitioners, the principal reasons to file for a receiver in the Court of Chancery are speed, low cost, and the flexibility of the remedy," Delaware Vice Chancellor J. Travis Laster wrote in Delaware Lawyer magazine in 2010. Moreover, Vice Chancellor Laster suggests that receiverships have become a more common vehicle for creditors.

"It comes down to speed and flexibility, and that's a great benefit to the lender," Mangan says. "The lender has to weigh the cost," and a receivership is often the less expensive option, he says. And, he adds, a receivership arrangement likely permits disposal of real property in less time than it takes to go through a foreclosure proceeding.

Interestingly, the flexibility that state courts offer in receiverships is now making it an attractive option in certain other situations. Attorney Samuel Guzik, writing on the Corporate Securities Lawyer blog, pointed to a pair of cases decided in March 2013 in which Chancery judges appointed receivers to handle the affairs of solvent companies because of evidence of extreme corporate misconduct. READ MORE

To view additional articles, please go to:
http://www.beaneassociates.com/news/newsletter/

Situation: A public golf course and training facility, once ranked in the top ten in the nation in annual revenues, overextended itself by building a premier clubhouse, lounge and restaurant. The owner was unable to manage its expanded property, nor could it plan and account for continued defaults and losses. Increasing financial distress distracted the owners from their business operations. This neglect resulted in a downward spiral of credibility, deteriorating management of the property and increasing discontent among employees.

Result: Beane Associates Inc. was appointed receiver to take possession, manage, operate and maintain all assets of the course. Because of numerous claims against assets combined with the disgruntled personnel, we immediately secured the facilities, reconciled inventory and established new operational arrangements to stem further decline of the site. Uncontested assets were returned to owners and turnkey grounds operations and security were established, allowing a successful transfer of ownership, on schedule and under budget.

Situation: The resort country club was trapped with private status in a remote, undersold and underbuilt community and was unable to establish sufficient income to appropriately maintain operations.

Result: At first, Beane Associates was sent in to oversee a court-appointed receiver. The receiver, although very experienced in golf operations, ultimately resigned from the assignment. The court then appointed Beane Associates to step in as receiver. We were able to secure and maintain the facility. Our efforts included contracting with a professional golf management company to reduce operational costs and provide alternate market directions that led to the sale of the business and full debt recovery for the secured creditor.

Situation: A highly leveraged family-run advertising agency with blue-chip clients experienced cash flow problems that threatened its ability to service debt. Beane Associates was introduced to the borrower and recommended immediate preparation of a 13-week cash flow to assess the company's ability to service short-term debt.

Result: Laying out future receipts at a granular level enabled the borrower to plan for a short-term cash crunch which prevented missing debt service payments. Eventually, the credit was transitioned back to a relationship manager.

Situation: The secured creditor held a $12 million mortgage note from a landlord whose primary tenant was undergoing severe cash drain due to reductions in Medicare reimbursements. Financial data provided by the property management company was unclear because it was not prepared according to generally acceptable accounting principles.

Result: Beane Associates' experience with landlord accounting practices enabled a quick assessment of the borrower's financial picture. While it first appeared that the borrower would need cash to stay afloat, Beane Associates determined that the entity had enough cash to survive on its own and even service minimal interest. During preparation of a cash-flow projection Beane Associates learned of additional cash accounts that had been used to cover fit-out costs for a new tenant. The secured creditor relied upon both discoveries in its ongoing negotiations with borrower.