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What makes a Chapter 11 Business Reorganization a “Work of Art”?

A Chapter 11 reorganization proceeding facilitates a business’s ability to actually stay in business. A successful Chapter 11 is a creative composition thoughtfully sculpted from the good will of a business, crafted by the Chapter 11 attorney into an effective masterpiece of productivity and often with the patronage of key creditors added as the finishing touch. While a work of legal art that revives a business into profitability and longevity is always the goal with Chapter 11 proceedings, it is not always the case. The statistics on successful Chapter 11 reorganizations are discouraging, with over half not making it to the point of a confirmed plan.

So what is it that differentiates a Chapter 11 statistic from a Chapter 11 success? How can you know if your business has what it takes to survive the bankruptcy process and reemerge as a profitable going concern? As a Chapter 11 attorney having represented various types of businesses in reorganization proceedings, I would say the essential element present in every successful reorganization is the business’s ability to survive “but-for” the events that created the downturned circumstances. Phrased differently, if the business has what it takes to survive this economy and pull positive cash flow if only certain issues were not part of the equation, then it may have what it takes to achieve a positive result in Chapter 11 reorganization.

First, identify the factors that are causing the business to ail. Most common ailments are provided varying levels of flexibility in Chapter 11: income and sales tax liabilities, lease problems and commercial eviction, a pending balloon payment on secured financing, unmanageable unsecured debts or monthly payments, judgments, even pending lawsuits and adverse administrative actions such as liquor license posting—all of these can be positively resolved in Chapter 11. However there are some issues that even the Rembrandt of bankruptcy attorneys cannot artfully compromise: a truly defunct business venture that cannot compete in any marketplace will probably not be resurrected even with the benefit of Chapter 11. Knowing what forms of relief are applicable under Chapter 11 for the different business conditions is the starting point from which a successful  reorganization proceeding can launch toward success. Achieving those goals during the course of the Chapter 11 proceeding and sanctifying the results in a confirmed plan of reorganization is the art form.

Ultimately, every business is dependent on a favorable market and no amount of artistry in Chapter 11 can create a market that does not exist. But if your business has a track record of good will and also the tools to move profitability into the future, Chapter 11 may be the silver lining in a dark cloud. Just like in the paintings of late-19th century realism that depicted the ferocity of nature, even the bleakest landscape has a glimmer of hope on the horizon.

Attorney Lynn Wartchow has represented Chapter 11 business reorganizations proceedings involving restaurants, bars, nightclubs and other businesses in Minneapolis since 2008.

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