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Alternatives to Bankruptcy: What Should Business Owners Know?

Bennet G. Young
Jeffer Mangels Butler & Mitchell LLP

The coronavirus pandemic has upended many sectors of the economy in unprecedented ways. Supply chains are disrupted. Businesses that rely on face to face interaction with their customers such as retailers and restaurants, are subject to financial distress. In turn, companies that supply products to businesses impacted by COVID-19 may also experience pressure as their customers delay or cancel purchases or are unable to pay their bills.

These stresses are likely to cause some owners of distressed businesses to explore their legal options. Bankruptcy is only one alternative for a struggling company Two other options are an assignment for the benefit of creditors (ABC) and a voluntary workout. These strategies are available to address a failing company; which can be faster and equally or more effective, at a lower cost, without the publicity of a bankruptcy filing. Business owners should be aware of these non-bankruptcy options and the circumstances in which they can be useful. 

Any discussion of bankruptcy alternatives must start with bankruptcy. Bankruptcy is the most widely known insolvency proceeding and, as the usual course taken by a failing company, forms the baseline. Any alternative should be compared to the likely outcome of a bankruptcy case. The business owner then can balance the bankruptcy and non-bankruptcy alternatives available to him or her to choose a strategy that is the best fit. 

One useful alternative to bankruptcy is an assignment for the benefit of creditors. This procedure, commonly known as an ABC, is a recognized state law procedure to sell the assets of a failing business while shielding the purchaser from liability for the old company’s debts. Usually, a distressed company is running out of cash and has limited runway to sell itself; an ABC provides a non-bankruptcy method to effectuate a prompt sale of the business. 

In an ABC, the company, called the assignor, transfers its assets to a third party, called the assignee, that typically is selected by the company. In legal terms an ABC is a trust in which the assignor transfers title to its assets to the assignee in trust for its creditors. The assignee is a fiduciary tasked with selling the assets and paying the proceeds pro rata to creditors. The assignee must give notice to creditors of the assignment and of the deadline to file claims and creditors can file claims with the assignee.

In California, no court filing is required to commence an ABC. This lowers the publicity dramatically. The proceeding is not secret or confidential, but it is not public in the way that filing a bankruptcy case is. Instead, an ABC is a matter of contract between the distressed company and the proposed assignee. The company’s board and shareholders must approve the ABC. 

The process is fast and flexible. Because the company picks the assignee, an ABC lends itself well to pre-packaging. A distressed company seeking a prompt sale, a potential buyer of the business, and the proposed assignee can negotiate a sale in advance of the ABC occurring on the understanding that the sale will be completed through the ABC. All parties know what to expect and the process can proceed on the parties’ schedule, with no delays imposed by court processes or availability. This enables a sale of a distressed business as a going concern to take place quickly with little uncertainty and minimal disruption to operations. 

Used in this manner, an ABC is a viable alternative to a sale of the business in a bankruptcy chapter 11 case. The speed and flexibility of the ABC process are its chief virtues. Since there is no court the process is usually less expensive than a chapter 11 bankruptcy case and the sale can often be completed more quickly than would occur in a chapter 11. The process provides an efficient method to sell a small to medium size failing company on a going concern basis. 

The ABC process is not without its downsides. A distressed business must weigh these downsides against the speed, flexibility and lower transaction costs of the ABC process. The most important is that the purchaser will not get a court order validating its purchase as it would in a bankruptcy. The purchaser must rely on the integrity of the process to shield it from the distressed company’s creditors. Furthermore, there is no automatic stay to restrain foreclosure as there would be in a bankruptcy case, so the cooperation of the assignor’s secured lenders is essential. Unlike in a bankruptcy case, there is no power to assign leases or contracts without consent. This can cause complications if the company’s contractual relationships are a major asset. Finally, by handing the company to the assignee, the business owner will lose control. This is not necessarily a negative, as it enables the business owner to move on to new opportunities. 

Another useful option is for the distressed company to attempt a voluntary workout with its creditors. This is not a formal process. Instead, a workout is a matter of negotiation between the distressed company and its creditors. The usual concept is to engage in a process that is substantially similar to what would occur in a chapter 11 bankruptcy case by agreement of the parties, without filing a bankruptcy case and without incurring the large legal fees or impact on the business that will result if a bankruptcy case is actually commenced. Chapter 11 thus forms the backdrop for the negotiations. 

Typically, in a voluntary workout the debtor will invite its creditors to a meeting. At the meeting, the debtor will make a presentation to the creditors in attendance regarding its financial condition, how it got there, and what the debtor intends to do to extricate itself from its predicament. The debtor will request that the creditors agree to a moratorium on collection action, similar to the automatic stay in a bankruptcy case, and that the creditors appoint a committee of creditors to negotiate a workout plan with the debtor. In return, the debtor will usually offer to be completely transparent with its creditors, to provide information regarding the business, and to refrain from engaging in any out of the ordinary course transactions. This creates a structure that mirrors what would occur in a chapter 11 case.

The goal of the process is for the debtor and the appointed committee to negotiate a repayment plan on behalf of all creditors. The plan can take whatever form the parties negotiate. Often the plan will consist of the debtor’s agreement to pay a percentage or even all of its profits or positive cash flow to its creditors over a period of time in exchange for the creditors agreeing to discount their debts in some amount. Another common structure is for the creditors to agree to a discount in return for an immediate cash payment funded by new capital contributed by a new investor. 

Once the debtor and committee have negotiated a plan, the plan is circulated to creditors to accept or reject it. Participation is voluntary. Only creditors that accept the plan are bound, so the debtor generally will insist that a high percentage of creditors accept the plan in order for it to go into effect. If a sufficient number of creditors accept the plan, it will go into effect. If the required majority do not accept, the debtor likely will end up in a chapter 11 case. The plan thus needs to provide a result that is at least as good, if not better, than the result would be in a chapter 11 case.

The voluntary workout thus can be a viable alternative to a chapter 11 case. The benefits of the process are its flexibility and reduced legal fees which can mean more funds available for creditors. A workout often is faster than a chapter 11 case, there is no public filing and therefore less publicity, and the business owner remains in control. On the other hand, a workout depends upon cooperation between the debtor and its creditors. If that cooperation is absent because creditors do not trust the debtor or for other reasons, a voluntary workout might not be possible. The process also depends upon creditors cooperating with one another and accepting equal treatment. There is no automatic stay, so creditors are free to pursue collection actions and to attempt to jump to the head of the line. If some creditors pursue collection actions and seek to improve their position relative to other creditors, the process can break down. Finally, creditor participation in a plan is voluntary. There is no way to bind creditors that reject the plan. Holdouts thus can create major hurdles.

The selection of the non-bankruptcy alternative depends upon the result the business owner desires to achieve. If the goal is to sell the business as a going concern, an ABC is a useful tool. Usually a distressed company is running out of cash and has limited runway to sell itself, and the ABC provides a non-bankruptcy method to effectuate a prompt sale. On the other hand, if the business owner’s objective is to retain his or her stake in the enterprise and to negotiate a payment plan with creditors globally, a voluntary workout can be a less costly way to achieve this goal.

Bankruptcy is not a one size fits all solution. There are other routes available to a distressed business which can be just as effective at a far lower cost. Owners of troubled companies should be aware of these options and should evaluate whether one of them might provide a better fit.

Bennett G. Young is a partner at the law firm of Jeffer Mangels Butler & Mitchell LLP. He represents parties in insolvency matters and has extensive experience in workouts, restructurings, bankruptcies, and assignments for the benefit of creditors. Ben is a member of the Bench-Bar Liaison Committee for the United States Bankruptcy Court for the Northern District of California and is a former Chair of the California State Bar’s Insolvency Law Committee, a past president of the Northern California Chapter of the Turnaround Management Association, and has been a member of the Board of Directors of the Bay Area Bankruptcy Forum. He is recognized by Best Lawyers in America® in the area of bankruptcy. Contact Ben Young at BYoung@jmbm.com

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Innovation – Emerging Agribusiness Technologies

Originally Published in Oct-Dec 2019 Quarterly

Sheri McClure

Good business leaders are always trying to do the best for their stakeholders, their employees, and their customers; but they don’t always have the time to research new ways to make their businesses more efficient and sustainable. Luckily, talking to experts is what we do best. We want to share three emerging technologies that can help you streamline your agribusiness in remarkable and eco friendly new ways.

Basil and lettuce being grown hydroponically in a large greenhouse. Water usage is only 1% of regular farming!

Vertical Farming

Traditional farms require mass quantities of acreage and are subject to issues like unseasonable weather, fallow land, and pests. With increasingly unpredictable weather, a growing aversion to pesticides, and an ever increasing population to feed, agricultural areas are feeling additional pressure. Vertical farms have become one way farmers can address these issues.  

It may be helpful to think of vertical farming as the technologically-advanced urban cousin to traditional greenhouses. Of course, each company offers systems with different features, but the overall goal is to utilize vertical space in a safe, controlled environment that greatly lessens each farm’s carbon footprint. Vertical farms can also be housed in old warehouses or other unused buildings, which could help boost the economy of underutilized urban areas and bring fresh, local produce to these communities.

I spoke at length with Niko Kurumaa, the International Sales Manager for Netled (pronounced net led) about Vera, their closed vertical farming solution. Netled has its roots in tomato farming, but was developed as a daughter to their greenhouse business after 20 years in industry. Their primary crops are leafy greens, like basil and lettuce, and they are expanding into the cannabis industry. Netled were pioneers in LED grow lights back in 2007, and have continued to push the technology of indoor agriculture with Vera. 

In general, vertical farms cut the farm’s carbon footprint and transportation costs. They even allow farmers to utilize more layers of soil since most of the good soil has already been used. Vertical farms can also be housed in old buildings or even skyscrapers–urban spaces where traditional agriculture would not be possible on the same scale. 

So what exactly is Vera and what prompted Netled’s recent 11 million dollar contract with EU company Astwood Infrastructure? Niko began by explaining Vera’s automation benefits. “Vera uses 95% less water than traditional farming,” he said. This decrease is primarily attributed to the water circulation system. The plants are watered, but when they give up additional moisture through natural processes, the AC system captures it, condenses it, and reuses it. The Netled engineering team has proven that Vera circulates 98% of the water used, which makes this type of farming more sustainable and aids in doubling average crop production. Recycling water in these closed environments also keeps chemicals out of the soil, which is helpful because the chemicals can affect future crops and contaminate drinking water.

But I believe Netled’s success is about more than a great product. “We see ourselves as a technical partner, not just a technical supplier,” Niko explained. The company has their own testing facility in Finland, where they are based. (Although they are actively looking for partners in the US and an operator in Indiana.) Netled is constantly improving the product and will test their customer’s crop in their own facilities to make sure everything is working optimally. In addition, Vera comes with a 10 year maintenance agreement, and their software connects all of the Netled farms globally to their tech. In other words, whether you’re in Finland or California, their team can help ensure that your vertical farm is functional and efficient. 

Management Software & Services

Agribusiness consists of a lot of moving parts. It is important to have reliable methods for tracking things like production, shipping, sales, and compliance. There are companies like AgriCare, located in the Central Valley, that manage some or all of these aspects for businesses. But there is also a growing list of vertical software technology that you can manage with or without additional support to keep your business organized. 

One of these resources is Chasqui (pronounced cha-ski), a platform managed by Ciclo. I met Oscar Aguilera, Co-Founder and VP of growth at Ciclo, at the NCIA’s Cannabis Business Summit and Expo in July 2019. I was impressed by their services, and was even more excited to learn that their product can be customized for any type of agribusiness. 

Ciclo places a huge emphasis on meeting their customers’ needs. In the legal cannabis industry, there is an enormous need to remain compliant despite everchanging and dense guidelines. Their platform, Chasqui, helps to keep growers and distributors compliant. But the software can also be customized for more traditional crops and their agricultural needs. 

For customers who would like additional support, Ciclo is there to provide managed services for Chasqui customers. You can use the software straight out of the box, but Ciclo wants to ensure that your and your businesses needs are reflected in your software customization and support. They begin by speaking with new customers over the phone. Their representatives want to understand your business, including its challenges, workflow, and processes, so you can customize the software to work best for you. This preliminary call is followed by hands on and face-to-face site visits, so you can feel comfortable with the product and its uses. They even have representatives who are fluent in both English and Spanish, so everyone involved in your business can have their voice heard. 

Management software like Chasqui makes it easier to keep tabs on all aspects of your business from anywhere at any time. It is important to find the best product for your business needs, but finding one that marries customized software and face-to-face customer service sounds like a promising start.

Alternative Energy

Notice that this section is not called Solar Energy. Solar can be a great way to go, and there are great companies like Sunworks Solar Power in Roseville, Wildwood Pools and Solar in Fresno, and SPURR in Concord. But these days everyone knows at least something about solar energy. What you may not know is that you can take solar on or off the grid. The companies listed above can help customers learn to bank their own solar energy and use it when they need it most instead of selling it back to large energy corporations. And Dr. Micro Grid consultants can help you get off the grid entirely. But solar is not the only option.

We met the Executive Vice President and Senior Account Manager of Ice Energy at the Southern California Facilities Expo back in May, and we were fascinated by their innovative solution to the high cost of cooling commercial spaces. Instead of using a conventional HVAC unit, use ice. In many ways, their Ice Bear and Thermal Bear thermal storage AC units are the opposite of solar energy. When ambient temperatures and energy costs are lower, these units make ice. When temperatures and energy costs are higher, they use these huge chunks of ice to cool the coils that in turn cool your space. 

If you are currently envisioning a large block of ice in a big bucket a la Looney Toons, think again. These are slick, HVAC sized units that easily replace traditional units. Ice Energy claims their customers can save up to 40% on their overall energy costs, and up to 95% on their peak energy usage. They also have a pretty impressive list of big name customers in agriculture, retail, and industrial, including New Belgium Brewery, Staples, AT&T, Lithia Chevrolet, and Panda Express.

Each business is unique and requires different supporting services. We love speaking with experts about what they do, what they offer, and what they know. And we are always happy to pass along that information to our readers. Hopefully some of these new innovations piqued your professional interest and will help you learn new ways to run your business more efficiently and sustainably.