Most of my clients come to me concerned about losing stuff – house, cars, one woman was terrified that the Trustee would take her hopelessly spoiled Yorkie. Generally, those fears are not well founded – especially the Yorkie. Yes, sometimes debtors file for bankruptcy with assets that are not exempt, and they do have to turn them over to the Trustee. In Oklahoma that is fairly rare, and the Debtor should know it will happen before the case is filed and his lawyer should discuss with him ways to protect those assets. Still, there are times when filing anyway is still the best option.
Of course, there are other things that debtors lose when they file for bankruptcy – privacy, some pride, the ability to easily incur debt to start a business or buy a house. Although in many cases I think the greatest loss is one of a sense of self-sufficiency. For most people it is a great loss to ask the government for help – for protection, to use a Bankruptcy Code term.
These are things my clients think about. They don’t generally think about what other people are losing when a bankruptcy is filed. Sure, they know that their creditors won’t get paid. Of course, generally those creditors aren’t getting paid anyway; but for most institutional creditors, bankruptcy is an accepted cost of doing business. For smaller creditors and other people connected with a bankruptcy that isn’t as true; and a bankruptcy filing can be a huge loss.
I have recently undertaken the representation of some preferred stock holders in GMX Resources, Inc. GMX Resources, Inc. was a small, publicly traded, oil and gas company based in Oklahoma City that filed a Chapter 11 Bankruptcy two years ago. My clients are being sued to recover dividends that they were paid as stock holders in the period leading up to the GMX bankruptcy filing. You can find a discussion of the relevant cause of action, here. In most cases, my initial contact with these former stock holders is that they lost their entire investment in the company, they shouldn’t have to lose anything else! In fact, several people have told me they almost threw the Summons and Complaint in the trash and done nothing. If they had done so, the Trustee would have taken default judgments against them. Instead, I believe that I can successfully defend these cases.
Of course, on an emotional level I completely understand my clients’ initial reactions. One of the truths of human nature is that it is harder to give up something we have received than to have not received it in the first place or not gain it in the future. Once it is ours, it is OURS!.
On the other hand, if the preferred stock dividends at issue here are actually stock dividends (and I think they were more analogous to debt payments, but that is a conversation for another day), then they should not have been paid if it left the corporation unable to pay its bills. Stock dividends are to be paid out of surplus, not necessary operating funds. The creditors should have had access to that money before the bankruptcy was filed, instead, the creditors weren’t paid, the shareholders were; and the company filed for bankruptcy.
The company filed a bankruptcy to reorganize, but it wound up liquidating. Its general, unsecured creditors (people who had provided goods, services, loans) were owed over $81 MILLION when the case was filed. Most of those creditors will never be paid. Sure, there are a lot of institutional creditors for whom it is an expected part of doing business; but among the long list of creditors is a woman in a suburb of Oklahoma City doing business as a caterer. She was owed over $7,000 – money she will never see. To her, that must have been a catastrophic loss.
Then, there are the ongoing losses. GMX’s employees lost their jobs. The attorneys and accountants and contract firms who did business with GMX all lost a client and valuable source of business. The local economy lost part of its tax base. The business community lost a significant local player.
Everybody lost. That is the price of failure. In personal bankruptcies you have an offsetting win. A personal bankruptcy takes someone who has more debt than he can pay, and converts him into a participating member of the economy again. A personal bankruptcy takes someone who can’t care for himself and his family and converts him into someone who can. A personal bankruptcy creates the freedom to try and to succeed, because without the freedom to fail, no one could ever afford to try. One of the real benefits of the American bankruptcy system is that it isn’t punitive. It allows people to fail and try again. That is the beauty of our fresh start. If Walt Disney had not been able to file for Bankruptcy and try again, central Florida would look very different today!
Corporate bankruptcies can be wonderful things when a company successfully reorganizes. Jobs are saved, assets are made more productive, a valuable member of the business community is restored. Unfortunately, that doesn’t always work; and when it doesn’t – everybody loses.