The scope of uncertainty that the COVID-19 outbreak has created stretches from what the world will look like after the virus crisis to how many people have died from the virus day-to-day and when the government restrictions will be lifted to the status of various financial programs that have not yet been fully disbursed even though Congress has allocated the money.
To date, there are 23,338 positive cases and 758 deaths in California, according to the state’s COVID-19 website, and the state remains under a stay-at-home order issued by Gov. Gavin Newsom on March 19. Executive order N-33-20 aims to slow the spread of COVID-19, according to a press release.
The resulting shut down of businesses has attorneys preparing for a wave of entrepreneurs who are expected to explore bankruptcy as an option out of their COVID -19 financial woes.
“We have not yet seen a huge uptick yet, but everyone is getting ready for it,” said Sharon Kopman, an attorney and principal with sk2 Partners in Calabassas. “Everything is static right now but our industry expects there to be a large number of bankruptcy filings.”
There are, however, state alternatives to federal bankruptcy petitions outlined below.
Forbearance. “We are encouraging our clients and business owners to get on the phone with creditors and negotiate now,” said Lei Lei Wang Ekvall, a Southern California attorney with Smiley Wang-Ekvall. “Figure out solutions in the interim by talking with the landlord and secured creditors. It’s for everyone’s benefits not to do anything drastic.”
Ekvall recommends requesting forbearance for three months, which means no late fees or penalties are added onto a balance that will be paid off later.
“Business owners can sit down with a CPA or legal advisor to write a reasonable proposal that can then be offered to creditors,” said Ekvall. “The larger, more sophisticated creditors may have terms in place already to present to their borrowers and tenants but smaller mid-size businesses are not as comprehensive in their approach. They may require some back and forth discussion.”
Assignment for the Benefit of Creditors. Also known as ABC, this California state law is an alternative to liquidation under Chapter 7 bankruptcy law in which the company transfers all assets in trust to an assignee of its choosing and the assignee becomes a fiduciary for all creditors, according to Kopman. A drawback, however, is gaining the consent of creditors.
“If you have a difficult lender, an ABC is not easy but if they are on board, it can be quick and less costly than bankruptcy,” Kopman said. Other features include the fact that the assignee, not the business owner, is tasked with monetizing assets, communicating with creditors, administrative duties and operating according to a pre-arranged ABC budget funded by company cash, lender cash or proceeds from asset sales. Caveats are that secured creditors must agree to payments from the ABC budget, consent to the sale of the assets and the use of cash by the assignee.
The applicant must meet certain requirements, however.
“The assignee must be willing to assume duties,” Kopman said. “There must be a path to funding the ABC budget and the fiduciary obligations must be satisfied before the ABC.”
State court insolvency proceeding. Receivership is an alternative because the rules are different and more flexible than in bankruptcy proceedings since there are state statutes to follow, not federal bankruptcy code, according to Byron Z. Moldo, an attorney with Ervin Cohen & Jessup in Beverly Hills.
“It is a drastic remedy because the business owner answers to the receiver,” Moldo said. “A receivership typically happens when there’s fraud, mismanagement or assets transferred.”
The upside is that receivership is temporary and the receiver, with a court order in hand, does all the work, such as liquidate the business, solicit offers, retain a business broker, hire an accountant or lawyer.
“Someone you’ve never met or talked to could be appointed to take possession of your business,” Moldo said.
The downside is that a judge makes all final decisions.
“If the receiver decides to sell your business, it requires a separate court order,” said Moldo. “The owner can object to the sale and also oppose the request to appoint a receiver in a court hearing but it’s up to the judge to decide.”