Pub. 14 2019-2020 Issue 6

WWW.NEBANKERS.ORG 18 D URING MY DECADES OF REPRESENTING BOTH BANKS AND debtors in bankruptcy, I’ve observed this: debtor’s bank is often the primary beneficiary of a successful business reorganization. Bankruptcy is not always good for a bank, of course: e.g., when collateral values are less than the balance owed or when lien documentation is defective. That’s never good. But let’s change the circumstances to these: (i) Customer’s owners and operators are good people who’ve hit a bump, and their unsecured debt is out of hand, (ii) Bank’s collateral values exceed its loan balances, (iii) Bank’s loan documents are per- fect, and (iv) liquidation of Customer’s low-basis real estate and fully-depreciated equipment would result in catastrophic taxes on Customer’s owners (i.e., Customer is a Sub-S corporation or an LLC, with pass-through taxes). In such circumstances, bankruptcy can help both Customer and Bank. That’s because a plan of reorganization might, (i) keep Customer in business, while discharging unsecured debts and paying Bank’s claim in full, and (ii) authorize conversion of the Sub-S or LLC to a C corporation, in which taxes from a subsequent liquidation would not pass-through to owners. I’ll try to explain and suggest a proactive response tomanage the circumstances. When Customer’s Need for Bankruptcy Can be Managed for Bank’s Benefit: A Proactive Response Donald L. Swanson, Koley Jessen