Business Case: Bankruptcy

Caine is a small business owner of a single member LLC (Caine's Clocks, LLC). Caine's company has had a decline in sales and Caine is struggling to pay his creditors. The business has four creditors with nearly $250,000 in outstanding debt. The company also has inventory totaling approximately $25,000 and an outstanding accounts receivable of $13,000. Caine has recently received a notice that one of his bigger customers, who owes him $7,000, is filing for Chapter 7 bankruptcy. The business accounts are as follows:

• Creditor 1: National Bank
  • The bank gave Caine's Clocks a small business loan for $100,000 at 8% interest. National Bank currently has $75,000 remaining in principal. When the bank gave the business the loan, it also secured an interest in the business inventory as collateral for the loan.
• Creditor 2: Franklin Land Management
  • This is the landlord of Caine's commercial business space. Caine has five months remaining on his lease for which he owes a total of $15,000.
• Creditor 3: Capital Card
  • Caine's Clocks obtained a business credit card which holds an outstanding balance of $60,000. Caine, individually, is also a personal guarantor for this account.
• Creditor 4: Seaport Shipping, Co
  • Seaport Shipping provided shipping services to Caine's Clocks on credit. There is an outstanding balance of $100,000 for services rendered.

For the past three months, Caine has been unable to pay any of the creditors, and several days ago, Caine received a notice that the Seaport Shipping had filed an involuntary Chapter 11 petition for Caine's Clocks. This is the only creditor to sign the petition, however.

Because Caine invested all of his personal savings into the company, Caine is also struggling to pay his own bills. Caine's personal debts are as follows:

• Apartment
  • Four months remaining on the lease with $4,000 owed.
• Car
  • A car payment of $330 a month with a remaining balance on the loan of $14,000. The car, however, only has a market value of $11,000.
• Student Loans
  • $125,000 in student loans.
• Credit Card
  • $20,000 remaining balance.
• Medical Bills
  • Medical debts of $11,000.

Caine's assets are as follows:

• Tax Refund
  • Caine is expecting a $400 tax refund. Caine filed his tax return for the previous year but has not received the refund yet.
• Personal Effects
  • A ring from his grandmother which she made him promise to use if he ever got engaged; worth approximately $2,500.
• Checking Account
  • $800 in a checking account, and no other cash on hand.
• Salary
  • Caine's only income is from his business, but he has not been able to pay himself a salary in four months. Caine's income for the past three years has been around $25,000 a year; below the median income for his state.

When Caine speaks with his attorney, the attorney recommends that Caine file a Chapter 7 petition for his personal debts.

1. Upon review of his accounts, Caine wishes to convert the involuntary petition for his business from a Chapter 11 into a Chapter 7. Are the courts likely to allow the conversion?

Yes, if it is in the best interest of the debtor.

No, because he is not a debtor in possession.

No, because the case was commenced as an involuntary Chapter 11.

Yes, if it is in the best interest of the creditors.

2. Assume that Caine has filed a plan for reorganization for the debts of the business. The shipping company, however, does not like the terms of the plan because the payout for the debt will be over five years. Does the shipping company have any standing to reject its terms?

Yes, they may reject the plan.

No, unless Capital Card and the Landlord also disagrees with the plan.

Yes, but they may forfeit their priority right if the court still confirms the plan.

No, unless all the creditors disagree with the plan.

3. Are the ring that Caine inherited and the tax refund part of the bankruptcy estate?

Yes, the ring is non-exempt property, but the refund is not.

No, both the ring and the refund are exempt property.

Yes, both are non-exempt property.

No, the ring is exempt property, but the refund is not.

4. When Caine's attorney filed Caine's petition for Chapter 7, the attorney failed to include a notice to the creditor holding Caine's medical debt. Caine was unaware of the omission because he did not get the opportunity to review the filing before the attorney submitted it with the court. After the judicial discharge of his debts, Caine receives a notice from the creditor demanding payment. Is Caine obligated to still pay this bill?

Yes, but only if the creditor first obtains court approval.

Yes, because the failure to provide proper notice to the creditor means the debt was not discharged.

No, because the omission was a mistake.

No, because Caine may retroactively provide notice.

5. If Caine files a bankruptcy petition for his personal debts, may the personal guaranty for the business credit card be discharged?

Yes, this will relieve Caine from paying the debt out of his personal funds on behalf of his defaulting business.

No, personal guarantees cannot be discharged in bankruptcy.

Yes, but only if the business has already filed for bankruptcy prior to the individual filing.

No, for Caine personally, but yes for the business.