Articles

A bitter legal battle has arisen from the ashes of Toys "R" Us. Creditors, including former employees and suppliers, accuse executives and board members of concealing the company's dire financial state, ultimately leading to massive post-bankruptcy losses and thousands of job losses. The lawsuit alleges a deliberate strategy of piling on $600 million in debt through credit purchases despite obvious insolvency, all while falsely reassuring suppliers of a swift bankruptcy exit. This alleged mismanagement, they argue, violated the board's fiduciary duties and exacerbated the company's downfall. At the heart of the case lies a legal tug-of-war over directors' responsibilities. While directors of solvent companies prioritize the corporation, those of insolvent firms also owe a duty to creditors. The lawsuit essentially questions whether the TRU board exercised due diligence and good faith, or recklessly ignored warning signs while racking up debts at the expense of creditors and employees. The case serves as a stark reminder of the importance of transparency and responsible leadership during financial distress. It also highlights the crucial role of Chief Restructuring Officers in navigating bankruptcy with minimal damage to stakeholders. Robust reporting, reliance on expert advice, and proactive risk management are key takeaways for boards seeking to navigate troubled waters while upholding their fiduciary responsibilities. Ultimately, the court will decide whether the TRU board acted with prudence or engaged in deliberate deception. But even if the former executives prevail, the lawsuit serves as a cautionary tale, urging corporations to prioritize transparency and responsible governance, particularly when facing financial hardship.

This client alert, authored by Kenneth A. Rosen and a team of legal experts from Lowenstein’s Bankruptcy, Financial Reorganization & Creditors’ Rights Department, provides a comprehensive overview of restructuring tools available to businesses facing financial distress. Divided into two parts, the alert begins by introducing the various tools, with a specific focus on Chapter 11 bankruptcy. It emphasizes the advantages of Chapter 11, such as the automatic stay protection, the ability to shed burdensome contracts, and the restructuring of debt. The alert also discusses key stakeholders, considerations before filing Chapter 11, and tools to motivate employees. In the second part, the alert expands beyond Chapter 11 to explore alternative restructuring options, including out-of-court workouts, assignments for the benefit of creditors, state law liquidation proceedings, federal or state court receiverships, and more. The authors stress the importance of consulting with restructuring advisors early on and highlight the nuanced nature of restructuring strategies.

This article addresses a concerning trend in Chapter 11 bankruptcy where unscrupulous actors manipulate the appointment of unsecured creditors committees (UCCs) and their advisors. The problem stems from the cold-calling practices, similar to "ambulance chasing," that exploit apathetic creditors by offering quick and seemingly cost-free appointments without disclosing conflicts of interest. This manipulation turns UCC members into mere proxies, rubber-stamping appointments of pre-selected professionals for kickbacks or perks, undermining the fundamental purpose of UCCs. The consequences of this manipulation are far-reaching, including the erosion of trust in the committee's impartiality, reduced creditor recoveries due to inept or conflicted professionals, unfair advantages for debtors, and reputational damage to the entire Chapter 11 system. The article proposes solutions, urging US trustees to take proactive measures. This includes enhanced oversight through thorough inquiries into committee member appointments, transparency demands for disclosure of any influencing compensation or arrangements, collaboration with judges to address suspected manipulation and push for reforms, public awareness campaigns to educate creditors, and consideration of legislative reforms to tighten regulations. The conclusion emphasizes the urgent need to combat proxy manipulation actively, as ignoring these abuses poses a threat to the foundation of Chapter 11. By taking decisive action, US trustees can uphold the system's integrity, ensure fair representation for all stakeholders, and increase the chances of successful restructuring. Additional updates in the article incorporate recent statistics, specific examples of conflicts of interest, ongoing legislative efforts, and a strengthened call to action for US trustees and other stakeholders.

The COVID-19 pandemic has posed an unprecedented threat to the nonprofit sector, causing financial hardships as doors remain closed and fundraising comes to a halt. This article emphasizes the urgent need for action, especially from professionals versed in law and finance. It calls for a departure from adversarial approaches, advocating for cooperative and empathetic solutions. The piece envisions a role for bankruptcy and restructuring experts as conductors in courtrooms, orchestrating out-of-court settlements and creative restructurings to provide nonprofits with a lifeline. The author urges collaboration, compassion, and a united effort to ensure the survival of nonprofits, emphasizing the profound impact they have on individuals and communities. The article concludes with a call to be champions and advocates for the nonprofit world during these challenging times.

The Chapter 11 bankruptcy process, initially designed for corporate rehabilitation, has seen a series of failures with retailers like Sears, Toys "R" Us, and Barneys New York. The reorganization phase often turns into a desperate struggle for survival, leaving trade creditors financially stranded. Factors contributing to this include the "Spiral of Despair," "Administrative Abyss," and the "Domino Effect of Delay." The "Spiral of Despair" describes the rapid deterioration of retailers by the time they reach bankruptcy court. Lenders lose patience, accelerating the decline. "Administrative Abyss" involves a false sense of security for trade creditors, as debts incurred after filing may not be fully repaid, indirectly benefiting secured lenders. The "Domino Effect of Delay" results from a collective inertia to postpone closure, prolonging the financial agony for trade creditors. A call to arms for trade creditors suggests recognizing red flags, forming alliances for collective action, demanding transparency, and knowing when to cut losses. Reimagining Chapter 11 is proposed, emphasizing early intervention, enhanced transparency, streamlined processes, and protecting trade creditors for a fairer distribution of assets. The collective effort of individual vigilance, proactive restructuring, and systemic reimagining is deemed necessary to transform Chapter 11 from a retail graveyard into a platform for genuine revitalization, ensuring hope doesn't come at the cost of financial ruin.

In Kenneth A. Rosen's insightful exploration of Chapter 11 bankruptcy dynamics, he dispels common misconceptions surrounding debtor-in-possession (DIP) financing, vendor claims, and the promises of 100% payment for administrative claims. Drawing on recent examples like Sears, Barneys, and Toys R Us, Rosen cautions vendors about the risks of extending credit during bankruptcy, highlighting the potential pitfalls of preferences and the often overlooked disparity in treatment between vendors and professionals in administrative claims. The article emphasizes the importance of vigilant due diligence, filing reservations of rights for non-payment scenarios, and strategically adjusting claims ahead of asset sales to maximize recovery. In a landscape where swift asset sales may overshadow plan confirmations, Rosen urges stakeholders to navigate Chapter 11 with skepticism and strategic foresight, closing with a touch of humor to underscore the need for caution in this complex bankruptcy terrain.

In the article titled "Empowering Creditors: Strategic Decision-Making in Chapter 11 Restructurings," Ken A. Rosen, a seasoned expert, provides a comprehensive guide for creditors navigating the complexities of Chapter 11 proceedings. Rosen emphasizes the democratic nature of creditors' committee formation, highlighting the significance of each creditor's input, regardless of claim size, in influencing case outcomes. He addresses challenges posed by "cold calls" offering assistance, urging creditors to exercise caution in proxy decisions. By sharing practical insights, Rosen empowers creditors to make informed decisions, advocating for a vigilant and proactive approach in the evolving landscape of bankruptcy proceedings.