University of California
Type of paper: Thesis/Dissertation Chapter
Bankruptcy in Circuit city
The purpose of the bankruptcy law is to help individuals or companies such as Circuit City to clear the amount that was being owned to the creditors and to be able to start the business entity of a fresh and new note. The process id achieved through the liquidation of the various assets possessed by the company to cater for the debts that had been accumulated by the company. Other than the liquidation of assets, there may exist a repayment plan that sees to it that all the debts of the creditors have been fully been paid and that the company has no debt with any entity or individual. The United States Federal Courts handle the cases of bankruptcy that have been filled under the Bankruptcy code that is dictated by chapter 7, Chapter 11 and chapter 13. The federal courts therefore have an exclusive jurisdiction pertaining cases that involve bankruptcy. Various state courts cannot be able to listen to cases pertaining bankruptcy because they fall out of the jurisdiction of the particular courts. The process of bankruptcy involves the implementation of various principles in the law perspective. The legal concepts of “automatic stay”, “assume”, “discharge” and “exemptions” are all applied. In relation to the Circuit City, Chapter 11 of the bankruptcy code had been used to guide the facts of the case (August et al, 245).
Overview of Chapter 11
Majority of the cases that have been filed under the chapter 11 such as the case of Circuit City are normally referred to as reorganizational bankruptcy. Various rules and stipulations are expected to be followed during the listening of the bankruptcy case as governed by chapter 11 of the bankruptcy code. Upon dismissal of a particular bankruptcy case, in a time span of 180 days before the listening of the particular case, the debtor is not to show up in any court seeking for a petition which had been respectively been signed by the creditor. It therefore becomes the obligation and duty of the debtor to file into the court the following documents unless stated otherwise by the court. Assets and Liabilities, Schedules, Current incomes and expenditure schedules, unexpired leases and executor contracts schedules and financial affairs statements (Bishop, 132).The bankruptcy procedures that were adopted by Circuit City became very relevant. A certain amount of fees was paid to the federal courts so as not to dismiss the case. The main purpose of the particular chapter therefore reorganizes a business. In business law, it is known, as a business is a separate entity from its stakeholders or shareholders. The business can be sued or it can sue. In our particular context, Circuit City is viewed as an independent entity as compared to the shareholders of the company. Therefore, according to any case of bankruptcy filed by the company, Circuit City, which in the particular case is the debtor, the personal assets and properties of the individual shareholders is not at any particular risk. In the particular case, the investment stock value is the only asset that may be focused on when the company states that it is at a state of bankruptcy. During the court hearing, the chapter allows the people who have sued the company to be able to do an investigative research on the company and be able to come up with evidence pertaining to the amount of investments and assets that the particular company possesses. It becomes very necessary that a company for instance Circuit City state the assets that it possesses and the current market value of the assets. Some instances involve companies that lie about what they own. It is under such circumstances that the trustees are given the mandate to conduct a research on the properties owned by the company (Schaffer, 178).
Other measures exist that are taken when determining whether a company has undergone bankruptcy or not. The various trends of trade are examined in comparison to the expected measures taking place. For instance, the various tax-paying patterns of the company are analyzed with the main aim of determining whether the company has been fulfilling its obligation to the government as a whole. It therefore becomes important for Circuit City to be analyzed in detail to make sure that upon its bankruptcy state, it had fulfilled the mandate owed to the stakeholders and that of the government, which dictated its operations. These procedures are always considered necessary since the government also belongs to the group of debtors that need to be settled. Prior to listening of the cases, there is usually the formation of a creditors committee. The particular type of committee is responsible for putting the debtor at check to ensure that he has honored the various responsibilities that he has been charged to do. The process involves many procedures that need to be monitored at a close range by a creditor who is owned the most by the debtor. It also helps in determining whether the amount would be raised or may be considered as a bad debt. However, no scenario can arise where the Circuit city can completely find it difficult to raise the amount of money that is needed for settling the various accumulated debts.
Upon declaration of a state of bankruptcy, Circuit City had faced a number of challenges of which it had thought it as being wise to liquidate all its assets and be able to resume the normal operations of the business on a clean slate. The decision is always a consolidative decision of the management where the various financial statements are reviewed repeatedly. If the company has been surviving on various loans from different blockers, then the company reaches at a state where its progress is analyzed. The most prevalent scenario that affects majority of the companies that have been faced with bankruptcy is the fact that the net income is constantly less than the amount they spend. Moreover, the firm begins experiencing instances in which it is constantly unable to keep their employees in a constant and stable salary. Scenarios arise where the company has failed to pay its employees over a long duration of time. Majority of the firms that are declared bankrupt always fail to pay their employees over a time span of 6 months. The employees of the particular organization therefore always torn between the decision to stay behind and work for the company until it remits its arrears owed to them. Other employees ought to move out of the company before it becomes too late. At the particular time, the company begins experiencing a downsizing with a reducing rate of employees who are responsible or the various operations in the particular firm (Morison, 176).
The company in most cases is therefore forced to close indefinitely if it does not find an investor to be able to rescue them from their bankruptcy nature and state. There are usually6 several legal factors and procedures that are considered when a company undergoes such a state. In the case of Circuit City as the document will describe, majority of the business stakeholders had to be catered for since they formed the basis upon which the company conducted its operations. Chapter 11 of the bankruptcy act takes into consideration the various factors that form the foundations and principles of bankruptcy of a company. It considers the views and investments that have been added to the company by various external entities with an aim of conducting a smooth transition. Various outcomes are always expected because of bankruptcy. A company may switch to another business field or venture or it may be sold out to a new owner who would restructure its policies. In most cases, a business entity cannot be sold out or given to a new management when it faces broad challenges of bankruptcy. The financial statements will have to be cleared and sorted out. Moreover, companies that have undergone a situation of bankruptcy are gazetted and listed. It therefore prevents the probabilities of various new investors from investing into the company that has already been declared bankrupt. It becomes impossible for the organization to pick up its normal operations. Most of the companies normally resort to venturing into a new business line under a new name and a restructured management system. AT the particular stage, majority of the reforms are normally adopted so that the company does not fail it its operations. The particular period is normally marked with caution and speculations in the industry about the various prospects. The choice of business line is also always carefully selected to ensure that the firm reps maximum profits from it. The second part of the document is going to discuss about the practical aspects of the bankruptcy law that Circuit City employed while undergoing the particular period and stage (Brown, 188).
Circuit city bankruptcy proceedings
On 10th November 2008 after years of mistakes and speculation and months of trying to set things right circuit city filed for bankruptcy. The document was filed with the US bankruptcy court in Richmond district of Virginia. The immediate and distant future plans of Circuit city were laid out. City’s legal; counsel which comprised of McGuire Woods was retained because of the proceedings of chapter 11. The document entailed a declaration by the vice president and also the chief financial manager of the organization’s stores, Bruce Besako. The declaration was issued in support of the first day pleadings and the chapter 11 petitions. Three main factors were cited by the declaration, which forced Circuit city to adopt chapter 11. The factors include; erosion of the confidence of vendors, global economic crisis and decreased liquidity. The company had immediate objective of attaining three types of relief as they had hopes of turning around in the long-term. The first relief was the approval of enough financing of post-petition that ensured smooth transition to chapter 11. The second relief was the authorization to precede the closing sales by the stores. The last type of relief was the rejection of unexpired leases of real property that was nonresidential.
First day orders and motions
The company filed a total of twenty one first day motions and other five administrative motions. The declaration described the first day motions as: Important to allow the debtors to transit to and operate in the chapter 11 with minimum disruption or interruption to their business or loss of value. Or productivity, constitutes a vital element in achieving successful reorganization of the debtors, Ensures and facilitates the company to comply with the applicable law of non-bankruptcy, in extent the law also remains applicable to the bankruptcy proceedings of chapter 11. The five administrative motions included; request the first day hearing on the date of petition in order to consider the requested relief in every motion. The second administrative motion seeks to have the joint administration of debtors’ bankruptcy cases. The third one seeks Kurtz man Carson Consultants to be retained. The fourth wanted management of case procedures approval. The fifth administrative motion requested the authority to consolidate a list of the fifty largest creditors who are unsecured. The motions formed foundation of Circuit city’s ground work and plan. The motions enabled them establish the balloting agents and they were able to prioritize the people whom they owed most money (LoPucki et al, 168).
The company continued with the motions in order to continue banking and business practices and continue with the intercompany transactions. The motion requests aimed at helping company get some level of normalcy during the chapter proceedings of chapter 11. The company had to ensure that no changes were made to the cash structure and system to prevent the well-established disbursements and collections from being compromised. If the court would have denied the company permission to continue its cash management traditional operations, the company would have been forced and burdened to use another system. The company also declared its plans on how it was going to pay the employees. The motions wee formulated and designed to mitigate personal hardship that the company’s employees would encounter if they were not paid as usual. The main obligation and motives of Circuit city were; prepetition obligation towards the existing employees in the company as the company wanted to continue the non-working day program and schemes and the employee benefit plans. The company also had intention of reimbursing the employees for the expenses such as prepetition which the employees experienced on the company’s behalf. It also had intension to pay all related with holdings and taxes that were payroll related. The company was able to maintain its compensation of all the employees despite the challenges and the hardships that leads to the filing of chapter 11. This was a major achievement as all the employees from the employees from executives to the lowly sales associates were compensated. The other first day motions were based on urge and need to retain the company’s normal procedures used ion paying utilities, insurance and taxes. The company also filed a motion to request for rejection of non-residential real property leases.
An important motion on the first day was the request to maintain the customers’ programs. The customer programs consist of returns, rebates, guarantees, reward points, warranties, gift cards and refunds. This was their most important part of their plan as they planned on long-term recovery. If they would not have assured the customers that the gift cards were valuable they would turn away many customers if not all. The high priced items such as computers and television need to be supported by high confidence level from the company that sells them. The timing of the chapter 11 proceeding was very unfortunate. It exposed the company to continue gloom and doom at circuit city. In order to survive the proceedings the company sought DIP financing.
The most vital and significant aspect of maintaining a company surviving during bankruptcy is acquiring DIP (Debtor in Possession) financing. This is a loan given to the debtors in order to maintain business operations. Under the American code 364, Credit can be obtained by the debtors through four various ways: Debtors can borrow in the ordinary business course hence they are allowed to get the unsecured credit through administrative expense. The other debtors don’t borrow money in the typical line of business but they use an approval from the court order so that they can be awarded the unsecured credit. This option does not offer the lender substantial protection. The third kind of debtors who fail to obtain unsecured credit, in such cases the court of law can allow debtors to receive credit claiming it’s a super priority claim. The forth type of financing is for the ones who can’t receive any kind of credit. Such debtors can acquire credit through a senior or equal lien on the estate’s property subject to lien
Circuit City Company laid out their plans for obtaining DIP finance in the initial declaration. 6he Company requested and borrowed a credit facility of 1.1 billion dollars. The amount would then be reduced to nine hundred million dollars after the holiday period. Bank of America was one of the major lenders for the company’s financing. The company also acquired prepetition credit facility worth 1.3 billion dollars. From this Circuit city drew 898 million dollars for prepetition. This meant that the company had already owed over a billion dollars in loans before it requested for the other 1’1 billion dollars. The debt amount that was taken before filing the bankruptcy chapter 11 would be rolled to the company’s DIP. They hoped this would give them the required liquidity to take them through the sensitive holiday season. The most vital reasons that made the company to need the DIP financing is because the company had undergone various challenges for a very long period of time. The time it was filing for bankruptcy, it never had adequate funding in the revolving credit facility. The court approved an order enabling the company to acquire DIP financing as a lien. The company could now receive funding being a super priority claim. The properties in the lien were general intangibles, accounts, commercial tort claims, fixture s real property, equipment, inventory, deposit accounts, investment property, all of the books belonging to the debtors and goods among the other assets that belonged to the company. The liens are superior than mortgage security or the collateral interest or claim or lien to debtor in possession collateral. The lien was a subject to pre-petition and curve liens which were unavoidable, valid and properly perfected. Circuit city was granted permission by the court on an interim basis to utilize the collateral and also to use The DIP agreement on credit during the time after entry of the interim order. There are various reasons that would lead to default in the DIP credit agreement such as failing to pay the principle to any loan, failing to pay any interest, changes in the control, occurrence of uninsured loss, it the loan parties does not observe any of the terms and agreements in the covenant. The lenders under the DIP credit Agreement are allowed to have access to debtors’ assets, which are to be collected upon any debt. When getting the DIP financing, the significant part is the carve portion that allows the attorneys and other associated professional s with the bankruptcy to get compensation (Schneider, 159).
One way used by companies to generate income and save money during the proceedings (chapter 11) is the selling of the unnecessary assets. After notice and hearing the trustee may lease or sale property of the estate except if the debtor in connection with offering the service or a product discloses a policy prohibiting transfer of personal identifiable details and information about people to individuals that aren’t affiliated with the debtors. Circuit city had vast amount of property that they could sell, they were also staffed with employees, and the company did not need them. On 4th November 2008 the company drafted an agreement stating the plans and procedures on how to handle the closing of the stores (Cranston, 254)
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