Tag Archives: chapter 11 bankruptcy

Enron

Enron: 10 Years Later

Enron.

Similar to “Black Tuesday,” “Watergate” or “9/11,” the term has encapsulated a series of events into a single word or phrase. It is arguably the most well-known, and most scrutinized, financial collapse in U.S. history. This is evidenced by the multitude of books and movies that have rehashed and referenced the collapse.

December 2, 2011, marks the 10 year anniversary of the company filing for Chapter 11 bankruptcy protection. Ten years later, the term is still synonymous with fraud and is, perhaps, more relevant than ever before.

The scandal that was brought to light triggered a domino effect that can still be seen today. Most notably, Enron ignited the Sarbanes-Oxley (SOX) Act. This act resulted in the largest overhaul of the financial markets since the Exchange Act of 1934. This overhaul intended to prevent, discourage and/or identify future collapses.

One of the many significant SOX requirements was believed to be strict whistle-blower protections and protocols for public companies. These protections and protocols were included to safeguard and encourage whistleblowers who found themselves in the midst of Enron-like situations.

Ironically, these future whistleblowers started to use Enron as a reference point in their own claims.  Having worked as a forensic accountant in a post-Enron environment, I have seen multiple instances where the whistleblower actually cited Enron in their anonymous letter or hotline report. This practice has led to the inclusion of Enron as a keyword for investigations alongside terms like “illegal,” “cheat” and “hide.” Many of the vulnerabilities that led to the company’s collapse are now “red flags” for fraud.

Enron has become the ultimate example for whistleblowers to point to and for forensic accountants to measure against.

In response to events in more recent years and even larger corporate failures, including the fall of Wall Street heavyweights and the surfacing of multiple Ponzi schemes, many of the SOX whistleblower protocols have been amended or replaced by the Dodd-Frank Act.

The most recent changes, which went into effect earlier this year, encourage direct reporting to the appropriate government entity, extend the anti-retaliation periods and also provide greater incentives in the form of cash rewards. Theoretically, the current environment will result in more whistleblower reports and presumably more references to Enron allowing the term’s relevance to live on.

[stextbox id=”grey”]For more information about the Sarbanes-Oxley (SOX) Act ignited by Enron, visit soxlaw.com.[/stextbox]

Arizona Biltmore Bankruptcy

Arizona Biltmore, 4 U.S. Resorts File For Bankruptcy

Arizona Biltmore among 5 U.S. resort hotels to file for Chapter 11 bankruptcy

The Arizona Biltmore Resort & Spa was one of five luxury resort hotels in the U.S. that filed for Chapter 11 bankruptcy on Tuesday, days after being acquired by a group that includes affiliates of hedge fund Paulson & Co Inc., Reuters reported.

Tuesday’s filing will not affect business at the Biltmore, located at 2400 E. Missouri Ave. in Phoenix.

A $1 billion mortgage on the hotels was maturing Tuesday, according to a statement by CNL-AB LLC. Besides the Biltmore, the other properties are La Quinta Resort & Club in California, Grand Wailea Resorts Hotel & Spa in Hawaii; Doral Golf Resort & Spa in Miami; and the Claremont Resort & Spa in Berkeley, Calif.

According to Reuters, 30 affiliates of CNL-AB sought protection from creditors in Manhattan’s bankruptcy court. The affiliates listed a combined $2.2 billion in assets and $1.9 billion in liabilities. CNL-AB acquired the five hotels, plus three other luxury resorts – including the JW Marriott Desert Ridge Resort and Spa – at a foreclosure auction last week, according to Bloomberg News. Desert Ridge Resort and Spa was not included in the bankruptcy filing.

The eight resorts were purchased by Morgan Stanley Real Estate in 2007 for $3.13 billion.

The "B" Word 2008

The “B” Word-Bankruptcy isn’t always a bad thing

The word “bankruptcy” sends chills down the spines of many business owners and executives as they envision certain financial demise.

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But bankruptcy is no longer the frightening phenomenon it once may have been, particularly in the business realm. Chapter 11 bankruptcy has become an extremely useful business tool for a company to reorganize its operations, accomplish a sale of assets, obtain new financing or achieve a capital restructure.

The following are examples of challenges a business often faces:

  • A new business has not quite met revenue expectations.
  • The equity structure is outdated or unworkable.
  • The business owns excess real property it wants to sell or the business wants to acquire additional property.
  • The business has been threatened with litigation.
  • The business wants to refinance, but the lender has expressed concern about financial or other issues.
  • The owners of the business want to merge with another entity.

The most common use of the Chapter 11 bankruptcy process is one designed to restructure the company’s balance sheet. A company that wants to extend or refinance onerous debt, eliminate burdensome contracts or leases, and/or bring in new capital can generally accomplish these goals by a Chapter 11 filing that provides these opportunities and a temporary safe haven.

But Chapter 11 isn’t just for severely financially distressed entities. There are myriad other business reasons for filing a bankruptcy. For example, bankruptcy may be a good alternative for a client who owns some troubled properties and other healthy ones. Structuring a “roll up” and then using the bankruptcy process to propose a long-term solution can provide the necessary and ultimate protection for the distressed properties. Other common business transactions such as sales, mergers and acquisitions may be accomplished in a more beneficial fashion for all parties under the protective umbrella of Chapter 11.

A general knowledge of bankruptcy and the benefits it can provide will arm business owners, management and their advisors with a repertoire of creative solutions to meet business challenges and attain the companies’ ultimate goals.

An overview
The purpose of a Chapter 11 bankruptcy is to reorganize. It may include restructuring debt, altering operations, eliminating equity, selling assets or any combination of these things. The reorganization is accomplished through a document called a “plan of reorganization” in which the debtor describes how it intends to pay creditors or treat equity interests. Creditors and equity interests have the opportunity to vote in favor of or against the plan. The aim is to have the plan confirmed by the bankruptcy court, at which time it becomes a binding contract on all affected parties.

A Chapter 11 proceeding is commenced quite easily by filing a simple two-page “petition” with the bankruptcy court. At the time of the filing, an “estate” is created and all assets owned by the debtor prior to the filing are considered to be property of that estate. The debtor is referred to as the “debtor in possession” (DIP). Filing of the case triggers an immediate imposition of an injunction called an “automatic stay.” The stay prevents creditors from proceeding with any action against the DIP, and entitles the DIP some “breathing room” while assets are marshaled or while a reorganization is being developed.

In many respects, the general operations of a business continue in Chapter 11 as they did prior to the filing. The DIP can continue to buy inventory, produce products and sell merchandise as long as the transactions are in the ordinary course and scope of business. Nevertheless, certain actions such as the payment of pre-petition debt, the use of cash proceeds that may be subject to a lien, and the sale of major assets are prohibited unless the bankruptcy court approves them.

The plan of reorganization sets forth the means for payments to the company’s creditors. The general rule is that all claimants on the same level must be treated equally and must be paid in full before the next level can receive payment. Other provisions include financing arrangements or capital contributions and the composition of the company’s management.

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The final step is plan “confirmation” by the bankruptcy court. In order for the DIP to confirm a plan, it must obtainthe affirmative vote of all the classes of creditors it has proposed. However, the bankruptcy code permits the DIP to confirm a plan even if it doesn’t have all the needed votes, as long as the plan complies with certain specific sections of the code. Once the plan is confirmed, a bindingcontractbetween the debtor and its creditors is created and the debtor emerges from bankruptcy. All previous obligations to and claims by creditors are discharged and are replaced by therepayment orother obligations created by the plan. The “reorganized” debtor can have a fresh start.

Of course, there are many specifics and nuances to each bankruptcy case. For a comprehensive read on bankruptcy, you can download this guide at www.jsslaw.com/publications.aspx.

Carolyn Johnsen is a member of Jennings Strouss & Salmon. She can be reached at 602-262-5906 or cjohnsen@jsslaw.com