Chapter 11 and Malpractice

I regularly see lawyers professing to be Chapter 11 lawyers filing cases on an emergency basis. Often, it is the client’s fault for arriving at the lawyer’s doorstep at the 11th hour, and only a filing will prevent the bad event that is about to transpire. So the lawyer files the case, figuring he or she will figure out the sordid details later.

Unfortunately, it is the sordid details that make or break every Chapter 11 proceeding. I have done 'blind filings’, but I tell the client they are likely to end badly, they will spend a lot of money and not get a favorable result. If they are still interested, I make them sign a disclaimer. Still, I do everything I can to know as much as I can. If I smell disaster, I typically decline. At a minimum, every Chapter 11 should be preceded by a pre-filing analysis. This is the only way to know if there is at least a modicum of hope that the case can lead to a happy ending. In my opinion, the fundamental preliminary determination that must be made before the filing of a Chapter 11 is whether a viable Chapter 11 plan can be promulgated based on the financial circumstances that exist as of the projected filing date.

I need to know:

  1. The net income that will be available to contribute to planning payments from all sources.

  2. The additional income that could be made available through the application of techniques such as “lien stripping” ( a topic for another day, but one of the most powerful tools available in Chapter 11).

  3. The ‘best guess’ value of the debtor’s assets, including hard assets, business assets, and, in the case of an individual filing Chapter, the value of non-exempt assets; and

  4. The potential sustainable unsecured claims, including unsecured claims emanating from stripped liens, and
    whether a viable plan can be promulgated that satisfies the Liquidation Test …again, a major hurdle to any Chapter 11, and a subject for another day.

If a practitioner is not undertaking these analyses, the case is probably doomed to failure. I am at this moment an expert witness in a case where a lawyer did none of this, he ruined the client’s life, and not only risked his own wallet, but his Bar ticket as well. I will write about the case down the road. If you think Chapter 11 is in your future, see your lawyer now. Not when the funeral bell is tolling.