This post was written by Michael Venditto and Andy Rahl.
During the first quarter of 2009, business bankruptcy filings were at the highest levels since 2001. If the pace of bankruptcies of large corporations continues at the current rate for the balance of the year, the number of large business bankruptcies will be the highest in history. Last week, the auto industry was the latest victim when Chrysler filed for bankruptcy in New York.
In January, we advised our advertising and media clients to prepare for this unprecedented environment by reviewing their credit policies and limiting their exposure to businesses in troubled industries. And with financial problems spreading to so many sectors of the economy, it is almost inevitable that you will be a creditor by a bankruptcy. While that’s certainly better than being the company filing a petition for bankruptcy, managing the financial impact can be just as devastating. When it happens, you will have many questions. What will happen to outstanding billings? How long will it be until we are paid? How can I get to the front of the line? The questions are endless.
The Chrysler chapter 11 case, although not typical of every bankruptcy, provides some useful lessons. The filing by Chrysler was long-anticipated, since the United States government had set a deadline for an out-of-court restructuring, and the negotiations with the various creditor groups were widely reported in the media. Yet when the petition was filed, advertising agencies and media companies—even those who had taken prophylactic measures—were left exposed to millions of dollars of potential losses. So now, quick action is key to limiting, or even eliminating, those losses.
Creditors who took a proactive approach to Chrysler’s bankruptcy had an opportunity to affect how they would be treated. On the day that Chrysler filed the case, it also filed a number of applications with the court seeking permission to take certain action with respect to its unpaid bills. These applications were filed in the middle of the night and were heard by the court at a hearing early the following morning. By noon, the court had entered orders granting Chrysler the discretion to give special treatment to those providers it considered critical to Chrysler’s future. The orders were not clear whether advertising or media suppliers could benefit from these procedures. More importantly, to some degree the court gave Chrysler the freedom to pick and chose how to deal with each of its creditors.
After this early effort to protect its trading partners, Chrysler turned its attention to a well-publicized battle with a group of dissident lenders, followed by efforts to consummate a sale of its business to a new company that will be controlled by the U.S. government, the United Autoworkers, and Fiat. Could there ever be an odder set of shareholders? This left many advertising and media companies wondering whether and when they would be paid. But, some creditors were in a better position because they got involved in the process and elevated their visibility before the attention of Chrysler and the bankruptcy court was diverted.
How is this possible if the Bankruptcy Code is intended to ensure that similarly situated creditors are treated equally? The reason, to paraphrase George Orwell, is that all creditors are equal, but some creditors are more equal than others.
Creditors that are denominated as “critical vendors” are routinely accorded special treatment, earning the right to have their billings paid in the ordinary course, while other creditors may have to wait months or years until the case concludes. And since some other creditors are accorded payment priority by several provisions of the Bankruptcy Code, obtaining a special classification is the key to surviving the process with as little downside as possible.
To be one of the “more equal” creditors in any bankruptcy case, you must understand the Bankruptcy Code, as well as the orders the court may have entered authorizing special treatment for certain creditors. Most of these special treatments have time deadlines, so a lack of diligence can be costly. Timely and expert legal advice is critical to benefitting from any special priorities that might be available.
So finding a law firm with experience to assist you through the minefield is essential. While Reed Smith, with its experience in advertising, media and bankruptcy law, is available to assist you whenever these cases arise, our best advice to you is to get qualified counsel, whether it’s Reed Smith or another top firm. As the saying goes, the clock is ticking …