May 2008 Business Newsletter

This installment of the Business Newsletter focuses on using bankruptcy courts as a positive tool to improve business and rectify uncertainties.  The central theme of this bulletin explores when a business should consider some sort of bankruptcy protection if it is nearing a distressed situation. The sale of a company through bankruptcy offers many benefits which are explored herein. 

For more information on how a businesses can use bankruptcy courts to protect themselves and rectify uncertainties, please do not hesitate to contact the undersigned.

BENEFITS OF BANKRUPTCY FOR BUSINESSES IN DISTRESSED SITUATIONS

Many people view bankruptcies as situations where people are down on their luck, have lost everything, and are looking for a way to be forgiven their debts.  Similarly, many people are misinformed about corporate bankruptcies and believe that such companies are going out of business and leaving no assets for their creditors.  While this may be true in some situations, businesses can also use bankruptcy as a positive tool.

The Bankruptcy Code is located in Chapter 11 of the United States Code.  The Bankruptcy Code is separated by chapters.  The most popular chapters include Chapter 7, providing liquidation for businesses and individuals, Chapter 11, governing business reorganizations, and Chapter 13, providing for reorganization of individual debts.  When a business enters a distressed situation, it should consider bankruptcy protection as a way to preserve assets for the benefit of the company’s shareholders and creditors.  Chapter 11 bankruptcy allows a business to continue in a different form.  The sale of a business through the bankruptcy process can offer many benefits.  A Chapter 11 bankruptcy may be required by a successor purchaser because there are benefits associated with successor liability under this type of bankruptcy.  Under Chapter 11, a buyer can take assets free and clear of all liens and encumbrances, with all such claims funneling back and attaching to the proceeds of the sale by the debtor/seller.  Other benefits of Chapter 11 include: rejection of underperforming contracts, time and leverage to deal with creditors, actions to bring back money for distribution to creditors, and orderly liquidation and distribution mechanisms.

Bankruptcy courts can help failing businesses close their doors, but they can also help businesses liquidate or reorganize in an efficient manner.  Therefore, if your business is falling on hard times, Chapter 11 bankruptcy may be a worthwhile consideration which will help achieve benefits for all parties involved.

 INTERNAL REVENUE SERVICE AND ECONOMIC STIMULUS PAYMENTS

Starting in May of 2008, the Treasury will begin sending economic stimulus payments to households.  To receive a payment, taxpayers must have a valid social security number, have at least $3,000 of income, and file a 2007 federal tax return.  Eligible individuals will receive up to $600.  Married couples will receive up to $1,200 and parents will receive an additional $300 for each eligible child younger than 17 years old.  To receive the economic stimulus payment, you must file your 2007 federal tax returns.  The actual amount of the payment received will depend on the income claimed on your tax return.

 INTERNAL REVENUE SERVICE AND POLITICAL ACTIVITY COMPLIANCE

 Federal law requires that organizations exempt from tax under the Internal Revenue Code Section 501(c)(3) (such as charities and churches) shall not intervene in or participate in any political campaign on behalf of or in opposition to any candidate for political office.  The Political Activity Compliance Initiative educates such tax exempt organizations about the federal law concerning political campaigning and donations and enforces the law in this area.  The Political Activity Compliance Initiative is in effect for the 2008 election season.

 THE LIBEL TERRORISM PROTECTION ACT

The Libel Terrorism Protection Act was recently passed by the Senate in Albany, New York.  The bill was introduced after the New York Court of Appeals ruled in December that New York’s laws did not protect an American author from a possible bid by a Saudi Arabian businesswoman to enforce a summary judgment issued by the High Court in London, England.  The bill passed by the Senate is intended to amend New York’s long arm jurisdiction in order to give the state’s courts jurisdiction over foreign libel claimants who win judgments against authors with substantial ties to the state.  Many legislators argue that this act will give New York’s journalists and authors the protection they need to expose truths in our society and to maintain free speech.

Prepared Kristen B. Degnan