Articles & Media

In the face of escalating financial challenges for hospitals in the aftermath of the COVID-19 pandemic, this article explores the critical need for reform in Chapter 11 bankruptcy proceedings for nonprofit hospitals. Authored by Kenneth A. Rosen, Chair of the Bankruptcy, Financial Reorganization & Creditor’s Rights practice group at Lowenstein Sandler LLP, the piece emphasizes the unique complexities of hospital bankruptcies, where emotional ties, political considerations, and conflicting interests often hinder objective decision-making. The author proposes a pivotal change to the bankruptcy code, advocating for the mandatory appointment of an examiner with a distinct mandate as a public advocate or ombudsperson. This examiner would provide impartial assessments of community and public interests, ensuring bankruptcy judges receive independent advice for informed and public-centric decision-making in hospital bankruptcy cases.

Kenneth A. Rosen, leading the legal team at Lowenstein Sandler, has been chosen as counsel for the Official Committee of Unsecured Creditors in the Chapter 11 bankruptcy of Exide Technologies. Exide, a manufacturer and recycler of automotive batteries, filed for Chapter 11 protection in May 2020, citing $817.4 million in funded debt. Notably, Rosen previously represented the committee in Exide's 2013 bankruptcy. The two-year engagement covered various issues, leading to Exide's successful emergence from bankruptcy in 2015. Now, under Rosen's leadership, the Lowenstein team will guide the committee through the complexities of the current Chapter 11 proceedings.

Toys "R" Us, Sears, and Forever 21, despite being retail giants, faced Chapter 11 bankruptcy and left vendors unpaid while covering professional fees. This pattern reveals a lack of financial transparency, highlighting the need for reform in the Chapter 11 process. The problem lies in unfulfilled promises, unpaid bills, and a broken trust system that undermines the intended purpose of Chapter 11. The bankruptcy judges, though empathetic, lack resources for thorough financial analysis. Debtors prioritize securing post-petition credit over fairness to vendors, with the pressure from secured creditors complicating matters. Chief Restructuring Officers (CROs) play a crucial role, but their effectiveness depends on transparency, and consequences should follow failures or overruling by the board. Proposed Solution: To address these issues and protect vendors, the following reforms are proposed: Publicly Available Monthly Reports: Detailing open purchase orders and payment status. Listing unpaid post-petition liabilities and available liquidity. Filed with the court and accessible on the debtor's website. CRO and CFO Accountability: Overseeing report preparation and certifying accuracy. Facing consequences for failures in transparency or mismanagement. Conclusion: Implementing reforms that emphasize financial transparency and hold key players accountable is crucial to preventing Chapter 11 from harming unsuspecting vendors. This will contribute to a healthier bankruptcy system, safeguarding those who support companies in their critical time of need. Call to Action: It is imperative to adopt these proposed measures to foster a more transparent and accountable Chapter 11 process, preventing it from becoming a graveyard for vendors.

In this article, Kenneth A. Rosen discusses the impact of accelerated Chapter 11 bankruptcy sales on unsecured trade creditors. He notes that Chapter 11 has increasingly become a chapter for selling assets rather than reorganizing, and this trend may have significant consequences amid the economic shocks caused by COVID-19. The author highlights concerns about Section 363 of the bankruptcy code, which allows debtors to sell assets outside the ordinary course of business. He argues that this trend may result in unsecured trade creditors receiving less than expected from Chapter 11 cases, as assets are quickly sold, leaving little room for traditional reorganizations. The article suggests that creditors, especially those struggling during the pandemic, should be vigilant about the potential challenges they may face in recovering their dues in Chapter 11 cases.

The urgency of open communication with lenders during periods of uncertainty, such as economic downturns or disruptions, is emphasized in this guide. Maintaining financial stability requires transparency and a proactive approach. Initiating contact before a crisis occurs and demonstrating preparedness by outlining cost-saving efforts convey responsibility and respect. The importance of avoiding surprises through direct communication, regardless of the nature of the crisis, is highlighted. Leveraging the FDIC's recommendation and utilizing existing lines of credit are suggested strategies. Senior management involvement, along with qualified legal and financial advisors, is emphasized to convey seriousness and control over the situation. The guide recommends preparing thorough financial projections and considering a liquidation analysis for negotiation strategy. Sequential negotiations with lenders are outlined, emphasizing a careful balance between assertiveness and patience. The threat of bankruptcy is discussed as an option for uncooperative creditors, with the implications and potential drawbacks highlighted. In conclusion, the guide stresses the significance of open communication, proactive measures, and the involvement of qualified advisors in successfully navigating uncertainty and collaborating with lenders. Cooperation is presented as mutually beneficial for preserving the going-concern value and facilitating business recovery.

Facing financial distress doesn't necessarily mean bankruptcy; creditor compositions provide an alternative for businesses to restructure debt and potentially recover. A creditor composition, or debt settlement agreement, is a voluntary pact between a debtor and major creditors, proposing modified payment plans through negotiation. If accepted by a significant majority of creditors, it becomes binding, protecting the debtor from further legal action. Compared to bankruptcy, creditor compositions offer cost-effectiveness, speed, and efficiency, allowing business continuity and potentially higher returns for creditors. They are suitable for companies with a limited number of known, supportive creditors, strong relationships with creditors, and a lack of aggressive collection efforts by individual creditors. Key steps in the creditor composition process involve negotiating with creditors, selecting a debtor representative, maximizing creditor consensus, preparing for the creditor meeting, and crafting the formal agreement. Challenges include securing creditor consent, potential non-consent from some creditors, and the need for professional expertise in negotiation and structuring. In conclusion, understanding the creditor composition process, its benefits, and challenges can help businesses decide if this approach is a viable path for debt restructuring, financial recovery, and sustained success.

Source: eNews (National Association of Credit Management) Author: Kenneth A. Rosen In the current economic climate, it is imperative to exercise heightened vigilance and closely monitor the creditworthiness of your customers. It's prudent to operate under the assumption that all customers are either already in financial distress or will likely face it in the near future. If they haven't yet reached out for relief, it's highly probable that they will soon. This situation is understandable, considering that a significant number of companies are either partially or fully shut down. Even those still operational are grappling with delayed payments from their own customers. Before making decisions to extend additional credit or restructure existing debt, a set of specific questions must be posed to comprehensively assess the associated risks. The goal is to avoid becoming a vendor who unwittingly provides more collateral for a customer's bank lender. The last thing you want is to extend credit only to find yourself entangled in a bankruptcy or workout scenario down the line. For those who have already extended credit, the objective is to ensure equitable treatment compared to other creditors. Therefore, it is crucial to ask these questions and not shy away from probing deeply. If satisfactory answers are elusive, there is a reason for concern. It is entirely acceptable to communicate that the timing is not conducive to extending credit if the responses are unsatisfactory. Letting your customers know that you won't be taken advantage of is always a prudent approach.

The COVID-19 pandemic has placed businesses and property owners in unprecedented financial challenges, prompting the need for relief from lenders and landlords. In this context, understanding mortgage loan documentation, specifically rent assignments, is crucial for protecting rights and negotiating effectively. A rent assignment, a common clause in commercial mortgages, grants lenders access to rental income upon a borrower's default. Three types exist: Absolute Assignment, Absolute Assignment Conditional Upon Default, and Assignment for Security Purposes. Identifying trigger events such as missed payments or covenant breaches is vital to avoid activating the rent assignment and maintain control over rental income. Chapter 11 bankruptcy, while a powerful tool for debt restructuring, comes with drawbacks. For borrowers, it can be expensive and time-consuming, especially in a prolonged market recovery. For lenders, it may delay payments and hinder foreclosure during market lows. Success lies in knowledge and proactive planning. Before negotiating with lenders, thoroughly review mortgage loan documentation, understand rent assignment clauses and trigger events, seek legal counsel, and develop a comprehensive plan addressing potential defaults and alternative solutions. To navigate the challenging landscape, staying informed and proactive is essential. Additional resources, like those provided by GlobeSt.com, can offer valuable insights. This revised article maintains the original message, offering a contemporary introduction, clear explanations of legal concepts, and an emphasis on proactive planning and legal counsel.