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Wisconsinites can skirt bankruptcy

by Armie Margaret Lee  |  Published October 6, 2011 at 3:26 PM
Owners of distressed companies in the Badger State would be wise to add another number to their Rolodexes: 128.

Chapter 128 of Wisconsin state law provides for the distribution of an insolvent company's assets to its creditors, either voluntarily or involuntarily, much like a Chapter 7 bankruptcy proceeding would, says Doug Mann, a Wisconsin solo practitioner who has acted as receiver in dozens of Chapter 128 cases since 1976.

Also similar to bankruptcy, filing for protection under Chapter 128 puts in place a stay on litigation, pausing debt collection efforts.

Chapter 128, however, is faster, cheaper and more flexible than filing for bankruptcy, says another receiver, Michael Polsky of Beck, Chaet, Bamberger & Polsky SC, because the statue only contains an outline of the process and isn't detailed like the Bankruptcy Code. A Chapter 128 case can be completed in 30 to 60 days, he says, whereas bankruptcy proceedings can last much longer.

Mann points out that state court requires less disclosure than federal court, and there generally aren't creditors' meetings like those required under Section 341(a) of the Bankruptcy Code. He says, however, that though it is definitely less expensive for individuals to file under Chapter 128 than for bankruptcy, the cost for companies could be almost equivalent because the procedures are similar.

Still, the statute is shorter and more simplified than other receiverships nationwide, he says. Mann views it as the best equivalent to bankruptcy in a state court.

The only caveat is that companies that enter a Chapter 128 receivership must sell either the business or its assets.

"The receivership process cannot be used to internally reorganize a financially troubled business," says Polsky, a 31-year Chapter 11 veteran in Milwaukee who also has served as receiver for more than 215 companies, such as ethanol plant owner Olsen's Mill Inc., biodiesel producer Best BioDiesel Cashton LLC and mail order gift company Wisconsin Food Gift Co. "The process in all cases results in an asset sale."

Mann estimates that roughly two-thirds of the restructuring filings in Wisconsin are Chapter 128s and about one-third Chapter 11s, with the latter filings increasing in recent years in part because of attorneys' preferences.

It's a regular part of the restructuring business in Wisconsin to consult with companies considering the filing, Polsky says. Both Mann and Polsky advise companies before they file any documents, they say, about which type of filing would be best. Polsky says he would only advise a company against filing for Chapter 128 if there was a good chance for reorganization.

If a company's business is over and Chapter 7 bankruptcy would be appropriate, Mann says he might advise a company to file for Chapter 128 to try and save its business through a sale. In the past, Chapter 128 has been used for liquidations, Mann says, but more recently he says companies have employed it to complete a going-concern sale to another business.

The first step in Chapter 128 proceedings, after the filing, is the appointment of a receiver, who then supervises going-concern operations and gathers materials for a sale of the company, including information for potential buyers. For the sale, the company could have a stalking-horse bidder or hold an open auction -- similar to sales under Section 363 of the U.S. Bankruptcy Code, Polsky says.

Companies have been sold to affiliated companies as well as third parties, Mann says. He notes the company just has to disclose to its creditors if it's going to be sold to a related entity.

Proceeds from the assets of the estate, in order, go to maintain the value of the estate and then pay administrative expenses, prepetition wages, taxes, secured creditors and unsecured creditors. Any leftover money would be returned to the company.

How many creditors get paid depends on the value of the underlying assets, according to Polsky.

After the assets are sold, the receiver handles causes of action and accounts receivable for the company, Polsky says.

It's like a Chapter 7 for a corporation -- there's no discharge at the end of the case, he says.

Also similar to bankruptcy, a company can file for Chapter 128 receivership itself, or its creditors can file a petition for the company, Mann notes.

He says the statute has been used mostly in the past five to 10 years by secured creditors to realize a return on their collateral. When the receiver runs the business, he or she secures a buyer or can work out a resolution with creditors, Mann says.

"The [Chapter 128] process involves balancing the different interests" of the creditors and the debtor, Polsky says.

If a company files for Chapter 128 receivership itself, the proceeding can't go forward without the consent of secured creditors, according to Polsky. That just means secured creditors can elect for their claims to not be included under the receivership proceedings, Mann explains.

"They can stay outside of the proceedings if they want to, with their collateral," he says. If a creditor chooses to do so, however, nothing is left for the receiver to handle. Under Chapter 128, creditors, whether based in or out of state, must file verified claims within three months of the receivership filing or appointment of a receiver.

Polsky says it's difficult to describe a typical Chapter 128 case, as each must be handled differently.

The end result, however, is similar to that under a federal court restructuring.

"Either proceeding can get you from Point A to Point B," Mann says. "It has the same effect of a bankruptcy -- most of them frankly, result in liquidations."

Tags: Bankruptcy Code | Chapter 11 | Chapter 128 | Chapter 7 | Section 341(a) | Section 363

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Armie Margaret Lee

News Writer: Hedge Funds

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