Reckoning day: Lawyers ready for tidal wave of bankrupt businesses

The federal government’s $2 trillion coronavirus relief bill kept many people and businesses afloat over the spring and summer. But with key components — such as the Paycheck Protection Program, increased unemployment assistance and a moratorium on evictions expiring or set to expire soon, a tidal wave of foreclosures and bankruptcies looms. 

The numbers are startling. In a survey, the U.S. Chamber of Commerce found 43% of small businesses expect to close permanently by the end of 2020. Meanwhile, the American Bankruptcy Institute reports that Chapter 11 commercial bankruptcy filings rose 48% in May over May 2019.  

That's why Ryan Reinert, a bankruptcy attorney with Shutts & Bowen in Tampa, is one of several area bankruptcy lawyers who expects to be busier than ever in the coming months. That's particularly true in the first and second quarters of 2021, when reality will begin to set in for many companies that have been able to stave off the inevitable via coronavirus relief aid. 

“By the end of the year, you're going to start seeing more filings of foreclosure cases,” Reinert says, “and then those go through litigation, and then you end up with bankruptcy as an option.” 

‘By the end of the year, you're going to start seeing more filings of foreclosure cases, and then those go through litigatio,n and then you end up with bankruptcy as an option.’ Ryan Reinert, bankruptcy attorney with Shutts & Bowen in Tampa

Bankruptcy might not be an outcome business owners wish for, but that doesn’t mean they can’t plan for it, says Reinert, 38, who has handled bankruptcies for large retailers including Sears, GNC, Kmart, Forever 21 and shoe chain Payless.

“One of the first things that you want to have a very good feel for is: What's your goal?” he says. “Is it a normal Chapter 11 case for reorganization, or is it filed under the Small Business Reorganization Act? Do you intend to sell the company?” 

Reinert typically works with creditors, particularly commercial real estate landlords, who want to get paid — not put someone out of business. Sometimes an ideal way to ensure payments begin to flow again as soon as possible is to push for a sale of the tenant company as part of bankruptcy negotiations. That can be much easier than finding a new tenant. 

“If it’s a sale case,” Reinert says, “you want to ensure that the party that's coming in to acquire your lease can continue to perform and has the same type of financial basis or better as the debtor had at the time that you entered into the case. Often, you end up with a long-term lease as part of that. And that's a very successful result.”

The unique, unprecedented nature of the COVID-19 crisis, however, has made ideal outcomes hard to come by in many bankruptcy cases. For example, Reinert is involved in the bankruptcy proceedings of Cinemex, a Miami firm that owns and operates the CinéBistro chain of movie theaters that offer full-service dining options for patrons. In a statement that accompanied its bankruptcy filing, Cinemex says government restrictions on public gatherings during the pandemic completely wiped out its revenues, and it was already under intense financial pressure. “Even prior to filing for bankruptcy,” the statement reads, “we were spending over 30% of our revenues on lease-related expenses while studios ended up with 60% of every ticket sold.”

But even in these strange and difficult times, mitigation is possible, Reinert says. And that starts with open and honest communication between debtor and creditor. 

“We’ve seen scenarios where the debtor, going into a bankruptcy case, is communicating, saying: ‘Hey, we're not getting the foot traffic we would expect. We might need some help,’” Reinert says. “Those cases tend to go considerably better than a case where there's no communication and the bankruptcy [filing] almost catches the client off guard. When one side goes silent, then the next thing you tend to see is a fight.”

The Small Business Reorganization Act became law in February and represents a new option for small businesses looking to reorganize via bankruptcy court — a middle way between Chapter 7 and Chapter 11 bankruptcy proceedings. The former, with its liquidation of nonexempt assets, can make it difficult for businesses to survive bankruptcy, while the latter can carry prohibitively high costs. 

As part of the coronavirus relief bill, the debt limit for companies looking to utilize the SBRA was temporarily raised from $2.7 million to $7.5 million. That makes it available to more small businesses, many of which are carrying heavier debt loads because of the crisis. “Oftentimes, leading up to these bankruptcy cases, the debtors are already running up bills and obligations,” Reinert says. “They're asking for deferments.”