Pub. 14 2019-2020 Issue 6

NEBRASKA BANKERS ASSOCIATION 19 Discharging Unsecured Debt. Vendors with unpaid receivables, typically, prefer ongoing business over enforcement of an aged receivable, if they must choose. And they’ll consent to a plan of reorganization offering ongoing business that pays. Moreover, unsecured debts for struggling businesses, these days, often include merchant cash advance loans: i.e., high- interest loans (commonly 50% to 125% per annum), repaid by automatic and daily withdrawals fromCustomer’s bank account that can be discharged in bankruptcy. The existence of such loans is a sure sign of a problem and a harbinger of doom for the business: one of these high-interest loans creates the need for another, which creates the need for a another, etc., and busi- nesses rarely recover from the cash drain. Conversion to C Corporation. Many businesses are Sub-S corporations or LLCs. The pur- pose is to save taxes during profitable operations: taxes flow through to owners, so income is only taxed once. But in a liquida- tion, pass-through taxes can be catastrophic for owners, which is a frequent impediment to a voluntary liquidation. Moreover, the Eighth Circuit Bankruptcy Appellate Panel, back in 2001, declared that a corporation’s conversion from a Sub-S to a C corporation, during insolvency, can be set aside as a fraudulent transfer. This is a problem. One solution is confirmation of a plan of reorganization that explicitly authorizes conversion from Sub-S or an LLC to a C corporation. That’s important because, if Customer needs to liquidate after confirmation, the pass-through tax impediment to a voluntary liquidation is thereby removed. A Proactive Response. When it’s time for a Bank to act, in response to Customer’s financial struggles, here’s what the response could be: as a condi- tion of loan renewal, require that Customer retain a professional with bankruptcy expertise to evaluate the circumstances and recommend a course of action. The professional’s mandate would be to, (i) evaluate Customer’s financial circumstances and goals, (ii) consider Bank’s concerns and goals, and (iii) recommend a strategy that might be advantageous for both. Customer could then decide whether to retain the professional, further, to help implement the recommendation. Bank could provide Customer with a list of one-or-a-few professionals that Customer might use. Before creating the list, Bank should interview candidates for the role, to Bankruptcy — continued on page 20 Since 1857, Cline Williams has devoted attention to the unique needs of the banking and nancial services industries. Since then, we have provided our clients with the resources they need in the areas that are most important to them – from lending and collections, to regulatory compliance, to mergers and acquisitions, and so much more. We’re more than a law rm. We’re a partner for your bank. | | | | |