Not going for broke | As business bankruptcies climb, attorneys offer options
Remnants of Jim Picariello’s good idea are everywhere. His Wise Acre Frozen Treats ice pops, made from sweetened tea, are sold in grocery stores up and down the east and west coasts, in New Jersey and in parts of the Midwest. In total, shoppers can wander into the freezer department in about 600 stores nationwide and purchase Wise Acre’s one and only product. Not only do major chains like Whole Foods and Hannaford Bros. Co. love him, but Amazon.com and distributors as far away as California want his frozen delicacies.
Problem is, last September Picariello ran out of money. His investor didn’t deliver $1 million in promised funding and suddenly Picariello found himself scrambling for venture capital in one of the tightest markets in decades. His ice pops were selling at a modest pace, but without any money to market them, the monthly revenue wasn’t enough to retain his 14-person staff. Or hang onto the lease to his pops-making facility in Blue Hill. Or pay his overdue bills enough so his vendors would even consider supplying him again.
Today, Wise Acre’s ice pops still sit in stores, but Wise Acre the company has melted away. On March 26, Picariello received what he expects will be the first of many summonses to go to court to settle a debt with a vendor. Picariello guesses he owes banks, credit card companies and vendors about $750,000. It’s money he doesn’t have.
The failure of a company that appeared to be sprinting toward success only a year ago has understandably shaken Picariello, who says with bitter enthusiasm that he’s planning a party to celebrate his call to court. He’s going to declare personal bankruptcy, partly because he doesn’t have the money to file Chapter 11 to reorganize the company.
“Since I am at the very end of the line of people who signed on [to the company’s bills] there’s no real need to spend the thousands of dollars for [Chapter 7 or Chapter 11] bankruptcy,” says Picariello, 37. “We’re probably just going to explode and disappear the good, old-fashioned way.”
David Clough, state director for the National Federation of Independent Businesses, says this year he’s seeing more cases like Picariello’s — small businesses folding under the pressure of too many bills, too little capital. “These people can’t afford to pay a lot for a bankruptcy lawyer to see if they can restructure their debt,” Clough says. “People are feeling very vexed that to try to go into Chapter 11 to work out their debt would cost them too much money and so they’re thinking of closing down their business rather than restructure their debt.”
But few would argue the appeal of Picariello’s decision to take a hit to his personal credit because of his professional failure. Mainebiz interviewed three prominent bankruptcy attorneys about what they’re seeing in the business bankruptcy world lately, and what businesses need to know about debt before they drown in it.
Early action key to solvency
“What you’re seeing by and large with bankruptcy filings today is circumstances where sales have significantly declined and revenue derived from sales simply hasn’t kept pace with the cost of operating the business and the debt service,” says Bob Keach, a bankruptcy lawyer with Bernstein Shur in Portland who has represented companies like Red Shield Environmental in Old Town and Wood Structures in Biddeford. “The earliest you can plan, number one, you can avoid having to file at all and, number two, you can increase your chances of success to preserve asset value and cash. The best time to file is when you have cash.”
The number of businesses approaching Keach for help filing bankruptcy or negotiating a work-out, in which debt is settled outside of court, is five to 10 times the number he was working with just three months ago, he says. Keach blames the spike on the credit crunch and the recession. While work-outs can be cheaper than heading to court, Keach says that’s not always the case, especially with businesses with many and diverse creditors.
“One of the things you have to be careful about is not to exhaust your resources in a work-out that has a lower chance of success,” he says.
But attorney Peter Plumb, of Murray, Plumb & Murray in Portland, says work-outs make sense for a lot of Maine companies because of a sharp increase in the average cost of Chapter 11 after changes to the bankruptcy law in 2005. Plumb says legal fees for a small- to medium-sized business now typically total at least $30,000 to $50,000, and that’s twice what it would have cost the same business five years ago. He points out that Keach’s Red Shield bankruptcy, a notably complex filing that after more than a year is still in court, has racked up between $750,000 and $1 million in legal fees.
Businesses that owe most or all of their debt to banks probably don’t need to go to bankruptcy court, Plumb says. Bankruptcy court, he says, is often necessary in cases like Red Shield, which has several unsecured creditors, like vendors, to wrangle with. But most of the Maine businesses Plumb works with have stayed current with their vendor payments and only fallen behind with banks. Plumb says banks, whose loans are secured by the company’s assets, are often willing to participate in work-outs because they can resolve debt payment quicker and cheaper than bankruptcy court.
“The key to the whole thing, if you’re a business in trouble — be proactive, be prepared, be hardnosed,” says Plumb.
Be proactive by coming up with a reasonable cash-flow projection for the business: “What can [the business] do at this point in its life?” Plumb says. Be prepared by communicating your financial challenges to your bank. Try to negotiate lower payments, or a return of some of your inventory. If you bought too much equipment, offer to let the bank auction it off to relieve some of your debt. Be hardnosed about managing your debt to keep your company on its feet.
“My job is to show banks what we can do to keep businesses alive and in business and employing people,” says Plumb. “[A work-out is] better than what the bank would take out of bankruptcy court should they force that company into bankruptcy. It means banks frequently write off a large part of the debt — a lot of the interest is forgiven, a lot of the principal is forgiven. It happens every day of the week.”
Ben Marcus, an attorney at Drummond Woodsum & MacMahon in Portland and co-chair of the bankruptcy and reorganization section of the Maine State Bar Association, says negotiating with creditors can be like “herding cats — everybody’s going in different directions.”
Marcus says work-outs are very popular now because of the cost of filing bankruptcy. Like his peers, Marcus encourages business owners worried about their debt-to-income ratio to be proactive about seeking advice from a turnaround specialist, accountant or lawyer, before it’s too late to keep the company afloat.
“Small companies have assets that are fragile and critical,” Marcus says. “If you go into default on a lease, for example, and the lease is terminated, guess what? You can’t put that Humpty Dumpty back to together again.”
Back in Blue Hill, Picariello knows what it’s like to see Humpty Dumpty fall apart. On March 15, Wise Acre was forced to leave its production facility because of unpaid rent. That’s when Picariello says the business truly closed. He’d struggled for months just to scrape together enough revenue to keep the doors open, and on that day he gave up even that fight. His best plan to get out of debt now is to sell his company, but at the moment he doesn’t have any interested buyers.
“It’s just this cascading list of bills,” Picariello says. “It’s not like I can throw $5,000 at it and see what happens. It became $100,000 just to keep the lights on.”
Sara Donnelly, Mainebiz managing editor, can be reached at sdonnelly@mainebiz.biz.
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