Thursday, August 27, 2009

Chapter 11 Bankruptcy

A long time purchaser of your inventory has just filed bankruptcy under Chapter 11 of the Bankruptcy Code while still owing you a large sum of money. A creditor's initial reaction is often despair. They believe that it is the end of the world and that they will be lucky to recover a few cents on the dollar. Do not despair! There is some hope for recovery of your money.

Plan of Reorganization

In a Chapter 11 bankruptcy, the debtor's goal is to reorganize and reemerge as a functioning entity. This goal is accomplished by developing a business plan, which must be approved by the bankruptcy court.

A Chapter 11 bankruptcy may be beneficial to both debtors and creditors. Debtors benefit because they continue to operate their businesses while creditors cannot seize their assets. Creditors benefit because there is the possibility for recovering the debt owed and because long standing business relations can be continued. The theory behind allowing debtors to remain in possession of operations is that current management is familiar with the business dealings and is best equipped to restore it to viability.

The Automatic Stay

Debtors also benefit from the "Automatic Stay in Bankruptcy". The Automatic Stay is immediately effective, and operates to prohibit actions against property of the debtor's estate. It provides the debtor with breathing space to allow it to formulate how best to pay off its creditors and reorganize its affairs.

Debtors are also provided with additional benefits under Chapter 11 of the bankruptcy code. Under certain circumstances, debtors may sell property free and clear of liens. In addition, when appropriate, the debtor in possession may assume, reject or assign executory contracts or unexpired leases, even if the terms of the contract do not permit it. Nevertheless, creditors may be surprised to discover that the Automatic Stay not only assists the debtor, but can also serve to protect a creditor. By staying all actions against property of the debtor's estate, the assets of the debtor can be preserved and a single creditor cannot deplete all of the debtor's assets to the detriment of other creditors. The Stay allows for orderly distribution of assets to creditors and/or time for the debtor to formulate a plan to treat all of its creditors fairly.

Creditors may also obtain relief from the Automatic Stay upon a showing of cause warranting such relief, such as the proof of a lack of adequate protection for creditors or failure to pay post-filing obligations on contracts and leases. Property with no equity and that is not necessary for an effective reorganization may be subject to relief from the Stay.

Benefit to Creditors

Creditors can also benefit from a Chapter 11 reorganization if the debtor is able to reemerge as a functioning entity. A Chapter 11 reorganization plan may lead to payment of the debt. While the payment may not be immediate or in full, it is often more than what would have been received in a Chapter 7 liquidation.

Finally, creditors will have an element of control over the debtor. Upon the filing of a Chapter 11, the debtor provides the court with schedules listing all of its assets and liabilities. These schedules inform the creditor as to where all of the debtor's assets are located and what priority will apply to the creditor. The creditor can therefore monitor the debtor's reorganization and assert some control over the debtor's actions. In short, a creditor will discover that the filing of a Chapter 11 bankruptcy is not necessarily the end of the world and that the creditor as well as the debtor can actually benefit.

The above is not meant to replace legal counsel. If you'd like to speak to one of Gross & Romanick's attorneys, please contact the firm directly by calling (703) 273-1400 or by filling out our online information request form.

Wednesday, August 19, 2009

What Happens To A Security Deposit During Bankruptcy?

What happens to a tenant's security deposit after the tenant files bankruptcy? If rent is owned, can the landlord apply the deposit to unpaid rent?

An informal poll of area Bankruptcy Lawyers reveals a belief that a security deposit can be used as a set- off against both pre-petition damages and lease termination damages under Section 553 of the Bankruptcy Code. The set off is subject to mitigation by the landlord, including releting the premises. The safest process is to have a court grant relief from stay before applying the security deposit; but this procedure may cause a debtor to file an objection. Right or wrong, most Landlords simply keep the deposit.

Some attorneys also argued that Landlord can assert a "secured claim" up to the amount of the security deposit.


The above is not meant to replace legal counsel. If you'd like to speak to one of Gross & Romanick's attorneys, please contact the firm directly by calling (703) 273-1400 or by filling out our online information request form.

Wednesday, August 12, 2009


Last month, the Supreme Court of Virginia held, for the first time ever, that when a parent relinquishes the supervision and care of a child to an adult who agrees to supervise and care for the child, the supervising adult has a duty in tort to exercise reasonable care in the supervision of that child. Kellerman v. McDonough, et al.

In Kellerman, the father of a 14 year old girl from North Carolina (Jaimee) dropped his daughter off in Virginia to visit her friend (Becka). Before leaving, the father instructed Becka’s mother that Jaimee was not to ride in cars with inexperienced drivers. He specifically said: “No boys with cars”.

Later that day, Becka’s mother was supposed to pick up the children, but instead agreed that a 17 year old teenager (Nate) could drive the children home. The girls left the shopping mall in Nate’s car. He began to drive extremely recklessly. He lost control of his car and it slammed into a tree, killing Jaimee. Jaimee’s father brought a wrongful death lawsuit on Jaimee’s behalf against Becka’s mother, claiming that she was responsible for Jaimee’s death. The lower court dismissed the case for failing to state a cause of action. The Virginia Supreme Court reversed the lower court’s ruling.

The Virginia Supreme Court held, for the first time ever, that there is a common law duty in Virginia for adults to use reasonable care in supervising child guests. Accordingly, adults that fail to exercise reasonable care in supervising guest children can be liable in tort for injuries to the guest children, even if those injuries are directly caused by the actions of third parties (such as Nate).

The impact of this ruling can be quite substantial. According to the dissent, the ruling implicitly makes the host parent “the virtual insurer of the guest child’s safety”. While this remains to be seen, adults that supervise child guests are now more likely to be named as defendants in lawsuits stemming from injuries to child guests (even if directly caused by third parties).

The above article is not meant to replace legal counsel. If you'd like to speak to an attorney, please contact Gross & Romanick by calling 703-273-1400 or emailing law@gross.com

Monday, August 10, 2009

We're Twittering: FairfaxLawyer And LawBusiness

Are you up on twitter yet? We are.

You may already be following Jeff Romanick--his username is @fairfaxlawyer.

But how about Ed Gross? He's twittering under @LawBusiness. You can follow him here.