Incentive - July 2008 - (Page 38)

PRIMER I n ce n ti ve Aw a rd s a n d B a n k r u p tc y By Dan Beederman hen The Sharper Image went bankrupt and refused to honor its gift cards, incentive winners were left with now-useless awards, and the planners were left with angry winners. With the economy in bad shape, this won’t be an isolated case, so Incentive asked manufacturer’s rep attorney Dan Beederman for a summary of some things to consider and, if appropriate, to discuss with your company’s legal counsel. All too often, bankrupt companies are more than just headlines in the financial news. Rather, they happen to be your customers, your suppliers and, if you are an independent sales representative, your principals (the company whose products you sell). What impact will such a bankruptcy have upon your business? Will you be paid and, if so, how much and when? More importantly, is there anything you can do now to prepare for this contingency? There are no simple answers to these questions, for bankruptcy cases involve many variables and technical legal issues that are controlled by the United States Bankruptcy Code (referred to in this article as the “Code”), which, in turn, is subject to varying judicial interpretation and enforcement by the United States Bankruptcy Courts. Also, the answers to these questions often are dependent on whether the “Debtor” (the person or company that has filed for bankruptcy) has filed a Chapter 7 or Chapter 11 bankruptcy action. W uted to the Debtor’s unsecured creditors in order of their “priority” as set forth in the Code. Typically, the majority of a Debtor’s creditors are unsecured, meaning they do not have liens on or security interests in any of the Debtor’s property. For the most part, unsecured creditors have the lowest priority rights and usually will only receive a proportionate share of what is left after secured creditors and priority claims (such as administrative costs incurred by the Trustee and others) have been paid. Regrettably, that amount often is only a small fraction of what is due, if anything. Chapter 11 Proceedings Dan Beederman is an attorney in Chicago and a member of Schoenberg, Finkel, Newman & Rosenberg, LLC. For over 25 years, he has specialized in legal issues involving manufacturers’ independent sales representatives and has served as legal counsel to numerous sales rep associations in various industries. Contact him at daniel.beederman@sfnr.com Chapter 7 Proceedings Generally, under a Chapter 7 proceeding, which is often referred to as a “straight bankruptcy” or “liquidation bankruptcy,” the Debtor has ceased its business operation and its assets will be liquidated in an orderly manner under court supervision for the benefit of its creditors. A courtappointed “Trustee” will collect the Debtor’s accounts receivable (by filing lawsuits, if necessary) and will sell the Debtor’s assets, such as its inventory, equipment and real estate, to the extent that such property is not pledged as security to the Debtor’s bank or other “secured” or “lien” creditor. Only after all of the Debtor’s assets have been liquidated (and after secured creditors have recovered their property or been paid), will any remaining funds be distrib- Another type of bankruptcy that companies may file is under Chapter 11 of the Bankruptcy Code, and is referred to as a “reorganization bankruptcy.” In a Chapter 11 bankruptcy proceeding, the Debtor (often referred to as the “Debtor in Possession”) continues to operate its business in an effort to work out its financial difficulties, with the ultimate goal of proposing a “Plan of Reorganization” under which its creditors will receive more than they would have received under a Chapter 7 liquidation. In this scenario, many of the Debtor’s creditors may very well be asked to continue to sell products or provide services to the Debtor in Possession. Depending on your bargaining position (such as whether your products or services are vital to the success of the Debtor’s reorganization), you may have the ability to negotiate payment of amounts that were due and owing prior to the commencement of the bankruptcy proceeding. However, you will need to be careful, because many Chapter 11 proceedings are not successful Illustration: Katharine Sandalls 38 | Incentive | July 2008 | incentivemag.com http://incentivemag.com

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Incentive - July 2008 Contents Editor’s Note: Accentuate the Positive In The News Cover Story: Three Profiles in Good Corporate Citizenship Case Study Incentive Interview Senior Secrets To Thine Own Self be True Incentive Primer Motivation@Work Travel News: Where To Go and What To Do Take the Spa Home Not the Only Game in Town Here and Now Writing and Desktop Gifts Watches and Clocks Gift Cards: Health and Wellness Incentives Good Health Is Not Its Own Incentive Advertiser Index Last Word

Incentive - July 2008

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