Does Filing For Bankruptcy Protect A Business From Lawsuits?

News reports say Purdue Pharma, the maker of popular painkiller OxyContin, is contemplating bankruptcy in response to the many lawsuits (including one filed by Waukesha County) that have named it as one of the parties responsible for the opioid epidemic. Bankruptcy seems to be a common among companies facing big lawsuits, but is avoiding liability really one of the benefits of filing for bankruptcy?

A Common Occurrence

Purdue Pharma is not the first company to consider filing for bankruptcy in the face of potentially crippling liability. The utility company PG&E filed for bankruptcy earlier this year after it was blamed for several devastating wildfires.

Late last year, USA Gymnastics filed bankruptcy in an effort to manage the many claims made against it by gymnasts who allege the organization’s former medical coordinator, Larry Nasser, sexually abused or assaulted them under the guise of medical treatment.

Asbestos maker Johns Manville is credited by many with starting this trend back in 1982, when that company filed for bankruptcy after it was revealed its asbestos products caused mesothelioma.

These businesses and organizations all realized they needed to do something drastic if they wanted answer all the legal claims against them, and perhaps continue to operate. Bankruptcy was their only hope.

Bankruptcy Is A Legal Pause Button

Pretty much everyone is aware that filing for bankruptcy can shield a business from its creditors, but that shield is much more powerful than many people realize.

When a business (or a person) files for bankruptcy, the court issues what is known as a stay. The stay stops all other lawsuits the filer is involved with in their tracks. Creditors cannot collect, adversaries cannot continue discovery, all legal actions are paused. They can only start up again with the permission of the bankruptcy judge.

When a pending or potential legal action might jeopardize a filer’s ability to reorganize under Chapter 11 of the bankruptcy code, and lead the business to shut down, the bankruptcy judge can pull that litigation into the bankruptcy case and work out a solution.

Often, business assets and insurance proceeds are pooled and put into a trust that potential plaintiffs can make claims against. This puts most potential plaintiffs in a better position than they would be in if the company went out of business, or they had to wait until all of the filer’s other creditors were paid off. It also encourages more plaintiffs to come forward since the claims process is typically well-publicized and much simpler than going to court. And it benefits the fieler by reducing the uncertainty of litigation.

Once the uncertainty of costly litigation is dealt with, the filer can use the Chapter 11 process to reorganize and move forward.

A Tough Choice

Businesses who chose to file for bankruptcy when costly litigation threatens to put them out of business are taking a risk. Going through bankruptcy is not easy. It puts intense scrutiny on your business or organization, and forces leadership to make tough choices. However, it may be the best option if litigation costs are mounting.

Increase in Wisconsin Dairy Farmers Filing for Bankruptcy

Wisconsin dairy farmers have been in an increasingly tense financial crisis. With milk prices being in decline over the past decades, dairy farmers in the state have been forced to make the difficult decision to file for Chapter 12 bankruptcy. Chapter 12 bankruptcy is reserved for farmers and fisherman. According to a new report published by the Wisconsin Policy Forum, the number of Wisconsin farms that have filed for bankruptcy has more than doubled since 2014, the year milk prices began to fall. In 2014, there were 22 Chapter 12 bankruptcy cases in Wisconsin. In 2017, the state saw 50 filed.

These numbers are distressing for many reasons, one of which is the detrimental effects that may impact the entire State of Wisconsin. A failing dairy industry means widespread job loss. Dairy farmers would not only find themselves out of work, but then there are the farmers who depend on them to purchase grain. There are also people employed by dairy processing plants that would suffer job losses.

Why has there been in Increase in Dairy Farmer Bankruptcy Rates?

The milk price increase seems to be the trigger point for the increase in filing for Bankruptcy among dairy farmers. There is a decrease in demand for dairy products. The reason for this could be due to the number of alternatives to cow’s milk on the market or an increase in dairy allergies and intolerances. Whatever the reason, the demand for dairy is not at the level it used to be. Demands for products increase and decrease over time, but dairy farmers feel the effects of this more poignantly than other commodity producers. Dairy farmers cannot store and save their product, like grain producers, until prices increase. They need to move the product immediately or it expires.

The Wisconsin Policy Forum Report believes that a major contributing factor to the increase in bankruptcies filed is the decrease in producers’ income. According to the report, the net farm income in Wisconsin plummeted 56 percent between 2011 and 2017. With milk prices low and income levels falling, the farmers would likely be forced to take on more debt and seek bankruptcy. Unfortunately, it does not look like things will be getting better in the near future. The U.S. Department of Agriculture’s 2019 Farm Income Forecast predicts farm debt increasing by 4 percent this year. This means farm debt would be at its highest level since 1982, reaching $426.7 billion.

What is Being Done to Address this Problem?

In the midst of this dairy farm financial crisis, the State and its dairy farmers are looking for ways to help alleviate the problem. The fact that 700 dairy farmers left the business in 2018 is cause for concern. This is the time for some innovative solutions. Farmers are looking into different ways of cutting costs. This includes improvement in management of each cow’s stall. Better management means cleaner stalls. Cleaner stalls mean less bacteria and this means a decrease in the risk of infection which can be costly to treat. Additionally, better stall management means less use of expensive cow sanitizer used in the milking process.

Former Wisconsin Scott Walker also created the Dairy Task Force 2.0 comprised of farmers, processors, and other leaders of the industry. The Task Force is in place to brainstorm ways to help save the dairy industry. More recently the Task Force proposed increasing farmer access to capital although this proposal is a bit controversial. Some believe allowing farmers to borrow more money during times of financial stress could inevitably lead to even higher bankruptcy rates.

Trusted Bankruptcy Attorneys Serving Milwaukee

The State of Wisconsin, a state known for its cheese and dairy products, is proud of its dairy farmer heritage. It is difficult to see the financial issues that face dairy farmers these days. Bankruptcy is a difficult choice to make and comes with seemingly endless legal issues. The experienced bankruptcy attorneys at Hanson & Payne, LLC are here to answer your questions and help you through the entire bankruptcy process. Contact us today.

Small Businesses Hurt By Bon-Ton Bankruptcy

When one business files for bankruptcy it can cause a domino effect that hurts every single company in its supply chain. A recent article on the bankruptcy of Milwaukee-based Bon-Ton highlights the impact the retail giant’s collapse has had on Wisconsin’s small businesses and artisans whose products were sold in local stores through the company’s “Close to Home” program.

The article reveals a lot about the informal relationships and good will that underlie many business transactions. At Hanson & Payne, we know these things are just as important as the contracts between two businesses, especially when trying to negotiate a business workout or otherwise navigate a tricky financial situation, so to see it getting some media attention was quite exciting.

A Hidden Hurt

When Bon-Ton filed for bankruptcy there was a lot of talk about the demise of big box stores and the “end” of brick and mortar. Lost in all the big picture prognostication were stories about the bankruptcy’s impact on small businesses.

According to an article in the Green Bay Press Gazette, “Delaware bankruptcy court records indicate more than 60 Wisconsin-based contractors, vendors, suppliers, consultants and former employees filed claims totaling $2.6 million against the Milwaukee-based retail chain as it sought protection from creditors. Twenty of those claims, totaling $717,269, were filed by smaller companies that make products such as maple syrup, clothing, religious children’s books, jewelry, home art, drinkware, soap and candles.”

Many of these smaller companies who are now creditors in the Bon-Ton bankruptcy were participating in a unique program called “Close to Home” which encouraged Bon-Ton stores to set aside shelf space for locally made products. This is not something many big box stores do, so the artisans and small business owners that participated in the program, and are still owed money by Bon-Ton that they will likely never see, are not bitter about their losses.

Wisconsin Nice To The Extreme? Or Just Good Business?

One seller remarked, “[The Close to Home program] was a fine arrangement. It worked out well for us… Bon-Ton’s executives were more than nice to me, more than kind to me.” It seems shocking that a creditor would say something like that knowing that they will probably never get paid what they are owed, but is it really that unusual?

Yes and no. Creditors are upset when they don’t get paid money they are owed, but they are often also understanding. Nobody wants to see a business partner fail because the financial stress of that failure trickles down the entire supply chain. When being flexible is possible, it is the preferred course of action for many business owners.

Over the years, our firm has helped countless Milwaukee area businesses be flexible in order to avoid pushing a struggling business partner into bankruptcy. We know what works and what doesn’t, and we have developed strong relationships with the lenders and attorneys whose cooperation and patience are a necessary component of any successful business workout. Our tenure in the field has also led to our credibility with the commercial lenders, whose yes or no vote on a workout proposal typically means the difference between an opportunity to recover and a bankruptcy filing. If you need help working out a flexible but fair deal with someone in your supply chain, we are ready to lend a hand.