Reno F.R. Fernandez III has a great sense of humor – for a lawyer or otherwise. His catchphrase: “When the chips are down… go to Reno!”
As an associate attorney at Macdonald & Associates, a law firm with offices in San Francisco and Modesto, Reno practices bankruptcy and related litigation in the Northern and Eastern Districts of California. He represents debtors, creditors, and trustees in bankruptcy, receiverships, assignments for the benefit of creditors, fraudulent transfer suits, preference actions, and other insolvency proceedings.
Bankruptcy sounds scary, but it can often be the only thing that keeps a small business afloat. We spoke with Reno to discover how bankruptcy can help small businesses.
ISBB: Tell us of some of the ways that you save small businesses.
Fernandez: When a business has cash flow but is being squeezed by the bank, or a trade creditor refuses to agree to a workout, we can file a chapter 11 case and confirm a plan that will restructure the business’s debt so it can return to profitability.
For example, we represented Derco, a local diamond and jewelry retail chain. We were able to confirm a plan over the objection of certain creditors. As a result, the company emerged from bankruptcy and continues to operate.
In another example, we represented the owners of a Farmers Insurance franchise. The business could not file bankruptcy separately from the owners because it was a sole proprietorship. However, we were able to use this situation to the owners’ advantage. In addition to reducing the business’s debt burden, we stripped off two home equity lines from the owners’ residence. The result was an improved balance sheet for both the business and the individuals.
We are frequently retained prior to a potential bankruptcy to assist in negotiations. We can add value by showing creditors the consequences of refusing to negotiate and providing our clients with a candid assessment of the situation.
If you can’t save a business, what do you recommend?
If necessary, we can help a small business to liquidate. A chapter 7 case is a convenient and effective way to liquidate. In chapter 7, the owners are entitled to step away from the business fairly quickly while a trustee takes possession of the assets.
It is important to retain experienced bankruptcy counsel when liquidating a business. For example, we represented the Coastside Family Medical Clinic, in which the trustee initially refused to distribute patient records to former patients as required under the Bankruptcy Code. We worked to keep costs down and minimize delays while we successfully litigated to compel the trustee to distribute the records.
A bankruptcy attorney needs to be sensitive to the complex web of interests involved in a case and willing to work to reduce conflicts. For example, we represented a local spa that had closed its doors, and we were tasked with handling the company’s relationship with hundreds of gift card holders. We were able to avoid disputes and ensure a smooth liquidation.
We also represented Restaurant Equipment and Design, which needed to liquidate a warehouse filled with restaurant supplies. Although we represented the corporation and not the owners, we worked to maximize the proceeds of the liquidation, and in the end the proceeds were sufficient to pay off the bank entirely and release the owners from their guarantees.
Are there other things that can be done for a business besides restructuring the debt?
Yes. In fact, sometimes the debt payments are manageable, but some of the facilities or operations are losing money and threatening the profitable side of the business. In this case, it is possible to reject leases, abandon property, and otherwise eliminate unprofitable parts of the business while retaining the profit centers.
Another common problem arises when a business owns valuable property, such as real estate, but cannot pay the mortgage. The lender may want to foreclose even though the owner believes there is enough value to pay off the loan if the owner could sell the property. In this case, it is possible to stop the foreclosure and sell the property in bankruptcy, under the owner’s own terms, or gain time to properly market and sell the property.
Do you have any other advice for small business owners who are experiencing rising debt?
The best advice is to ask for help before it is too late. It is generally not a good idea to spend your IRA or 401(k) (which are generally exempt in bankruptcy) or take a loan out on your house to save a failing business. Using your personal resources to cover shortfalls does not address the real problem, which is usually the debt structure or operations, and it is virtually impossible to recover these contributions if the business ultimately files for bankruptcy. Therefore, it is better to address these problems before they grow into big problems.
Some serious red flags are if a trade creditor refuses to deliver supplies, an unsecured creditor files a lawsuit, the bank freezes a line of credit, or a lienholder starts foreclosure proceedings. A reorganization is likely to be more successful if you understand the process before these things happen, and a call to a skilled bankruptcy attorney can save a lot of time and money in the long run.