The Scenario

Hal Nyman pulls into the parking lot behind his machining workshop in rural South Carolina, his brow furrowed with worry about the headline he read that morning: $$Awesome Sailing Goods Goes Keel$-$Up$.$ Awesome Sailing Goods $($ASG$)$ is a big customer of Hal$$s small stainless$-$steel and bronze component business, and the short article broke the news that a significant portion $($a third$)$ of his company$$s revenue was in jeopardy.

ASG designs and manufactures high$-$end accessories for yachts, and a slowdown in the luxury consumer market has led to ASG filing for protection under Chapter $11$ of the US Bankruptcy Code $(11$ U$.$S$.$C$.$ Sections $1011532)\mathrm{.}1$ Hal$$s mind spins with questions about what this means. He isn$$t from the United States, but his business partner and cousin is a US citizen; unfortunately, his cousin is out of contact on a sailing trip of his own.

Hal flips open the mailbox on his way into the office. There$$s a notice from the US Bankruptcy Court regarding ASG: an automatic stay is in effect. He knows he needs to find someone who can tell him what this means for his business. He calls his local Chamber of Commerce for help, and a volunteer consultant, Sam Costa, agrees to meet with him.

Fast Facts: ASG Contract

$$ Hal is halfway through a three$-$year contract with ASG $($the $$Contract$).$

$$ To save legal expenses, Hal used a form agreement he found on the internet for his contract with ASG that includes a provision often referred to as an ipso facto clause, which states, $$Filing for bankruptcy is a material breach of the Contract giving rise to unilateral termination of the Contract by the non$-$breaching party $[$such as Hal$].$

$$ Under the Contract, ASG has net $30(30-$day$)$ credit terms. However, ASG has not paid its invoices for $4250$ days.

$$ Two skilled machinists were hired to service the ASG contract, as well as one salesperson, who is paid commission plus an annual bonus tied to total annual sales.

$$ The official notice from the bankruptcy court states that the automatic stay went into effect on October $1,2023.$

The Conversation

Hal: I don$$t know what to do$.$ We have a large shipment due to ship to ASG next week worth USD $$20,000$and my cousin is out of town. What does this bankruptcy mean for us$?$ Can I simply give ASG a notice of termination and walk away from this contract?

Sam: I am no lawyer, Hal, but I have seen businesses that relied upon that type of termination provision sued by the US Trustee handling a bankruptcy$$something about violating the automatic stay.

Hal: What is an automatic stay? In other countries, if a company goes bankrupt, its vendors can stop fulfilling their contracts. I don$$t want to send this shipment if I$$m not going to get paid for it$.$ That$$s reflected in the contract I found online; I thought that was normal, so that$$s what both ASG and I signed.

Sam: The United States is different from many other countries in that a business can file for bankruptcy, work with the US Trustee and creditors to come up with a plan for positive cash flow, and pay a percentage of each unsecured debt. I think there are ways to help protect your business while you continue to do business with ASG, including requesting the US Trustee provide adequate assurance that ASG can pay if you continue to ship. The unpaid balance of that debt is then discharged by order of the Bankruptcy Court. The debtor business in bankruptcy $($also called a debtor in possession$)$ can also assume or reject executory contracts such as your contract with ASG. Again, an attorney familiar with US bankruptcy law can help you.

Hal: I hope so$.$ The situation at ASG impacts a lot of people. One of my machinists has a brother who works there, and he$$s afraid ASG will close. That would be terrible for this town.

The Ask

answer the following questions:

$(3$ points$)$ What is an "automatic stay"? What does it mean for Hal and the Business?

$(5$ points$)$ Is the Business's contract with ASG executory in nature? Explain. What are the ongoing responsibilities of each party under the contract?

$(5$ points$)$ The termination provision in the Contract gives the Business the right to unilaterally terminate the Contract with ASG, since ASG filed for bankruptcy protection. Is this termination provision valid? Why or why not?

$(15$ points$)$ What steps should Hal take to minimize the risk of doing business with ASG as a debtor in possession?

$(7$ points$)$ From an ethical perspective, is it "fair" for ASG to continue in business while paying only a portion of the unsecured debt and taking drastic measures such as layoffs and plant closings?

$(5$ points$)$ What do you recommend? Should Hal and his cousin rely upon the contract that ASG signed and give notice of contract termination to ASG, or should they pursue alternative protective measures?

$1.$ Should Hal and his cousin rely upon the contract that ASG signed and give notice of contract termination to ASG, or should they pursue alternative protective measures?