Using Chapter 11 to Reshape Unworkable Agreements
There are many reasons why a once-thriving business might end up in financial straits. One of these may be that longstanding contracts that once made good sense have become burdensome as financial conditions have changed. Above-market lease payments, expensive supplier contracts or unfavorable service agreements can drain cash flow and threaten a company’s solvency.
When a business is burdened by agreements that no longer fit its financial reality, Chapter 11 provides a structured process for evaluating, renegotiating and potentially eliminating some of those obligations. This flexibility can be one of the most valuable aspects of the Chapter 11 process, because reducing unnecessary contractual obligations can significantly improve the company’s financial outlook.
Commercial leases are among the agreements commonly scrutinized during Chapter 11. A business may be paying rent for space that is too large, no longer needed or far more expensive than its finances or market conditions justify. With the court’s approval, a business can often negotiate more favorable terms with the landlord. In many cases, the possibility of lease rejection encourages productive negotiations that benefit both parties.
Vendor and supplier agreements that have become burdensome may also be candidates for renegotiation. Long-term purchasing commitments, minimum order requirements or pricing arrangements entered years earlier may no longer reflect the business’s current realities. In Chapter 11, suppliers and vendors are encouraged to work with businesses to revise agreements on payments, pricing and deliveries. This can preserve important relationships that might otherwise suffer under the weight of unpaid debts.
Similarly, service agreements, equipment leases, licensing arrangements, franchise agreements or other ongoing business relationships are open to reexamination. Subject to trustee approval, a debtor may often reaffirm contracts that continue to provide value or reject those that have become financial liabilities. This allows the business to move forward without being tied to agreements that undermine its ability to reorganize.
During Chapter 11, every decision involving contracts and leases should be made with the company’s overall reorganization strategy in mind. Rejecting an agreement can have significant legal and financial consequences, while reaffirming a contract generally requires the debtor to cure any existing defaults and continue performance. Careful planning is essential to ensure that these decisions square with the reorganization plan. An experienced bankruptcy lawyer can help identify which agreements should be preserved, modified or rejected to best position a company for recovery.
At the Law Offices of Michael Jay Berger in Beverly Hills, we help business owners throughout California successfully navigate the Chapter 11 bankruptcy process. To schedule your free consultation, contact us online or call 310-271-6223.
