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Businesses turning to “shadow” restructuring system to avoid bankruptcy costs

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “What is Chapter 11 Bankruptcy?”


The number of businesses that filed for bankruptcy in the State of Texas in 2014 declined by twenty percent compared with 2013, according to Androvett Legal Media. Business bankruptcy filings in the Lone Star State are down by more than half over the past five years.

Business 101 Mecklenburg Bankruptcy Lawyer North Carolina Chapter 7 AttorneyAs the United States’ economy sputtered into and out of recession in 2009 and after, the Lone Star State’s economy has boomed, leading some pundits to argue that Texas has been propping up the nation’s economy as a whole.

The state’s booming economy may be reducing bankruptcies, but it was not the booming economy that had a gathering of some 100 Energy Future Holdings advisers gasping in a boardroom last month. The gasps followed the revelation by former American Airlines general counsel Gary Kennedy that the airline’s daily legal bills in its recent bankruptcy ran to about $500,000 per day. Kennedy said businesses should seek alternatives to bankruptcy because, he said, the costs of a business bankruptcies have spiraled out of control.

Martin Sosland, a partner at Weil, Gotshal & Manges—a Dallas, Texas-based law firm—did not dispute that business bankruptcies can be expensive, but he cited the American Airlines bankruptcy as a perfect example of how a Chapter 11 proceeding can help a struggling business “restructure debt, renegotiate union contracts,” and merge or consolidate business operations in a manner that returns the business to profitability. Sosland said the airline’s creditors were paid 100 cents on the dollar and that American’s stock skyrocketed from 31 cents at the time of the bankruptcy filing to over $50 today.

Despite that, many financially struggling companies are choosing to bypass the federal bankruptcy system and are turning to “private sources of relief” in its stead, according to the Dallas News. Those sources of relief, more often than not, are private equity firms and hedge funds, said bankruptcy attorney Lydia Protopapas, who works in Winston & Strawn’s Houston office. The equity firms and hedge funds target distressed companies “in otherwise strong business sectors,” Protopapas said, and have “basically created a private out-of-court restructuring program for companies they think have long-term viability.”

Bankruptcy attorney Josh Daniel of Vinson & Elkins said the arrangement between distressed companies and the equity firms or hedge funds is often quite simple. Many times, he said, a struggling company simply “turns over the keys of the business to the new creditors.”

The problem with that, said Fort Worth, Texas-based bankruptcy attorney Mike McConnell, is that the equity firms or hedge funds that purchase the debt obligations of struggling businesses are taking advantage of artificially low interest rates to refinance the acquired businesses’ debts “without addressing core restructuring” issues of the businesses.

This serves, in effect, to kick down the road solving the more fundamental issues that led a business into financial trouble in the first place, issues that the bankruptcy process forces upon a business.

If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.



About the Author

Bryan 1Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.

Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.

In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.







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