Maximizing Non-Bankruptcy Options in Financial Recovery Strategies

1. American Bankruptcy Institute Mid Atlantic Bankruptcy Workshop Anything but bankruptcy!:ABC's, Receiverships & Other Alternatives

2. Anything but bankruptcy!:ABC's, Receiverships & Other Alternatives Moderator: Howard Brod Brownstein, CTP, NachmanHaysBrownstein, Inc., Panelists: Kenneth A. Rosen, Esq., Lowenstein Sandler PC Andrew C. Kassner, Esq., Drinker Biddle & Reath LLP Joel C. Shapiro, Esq., Blank Rome LLP Robert A. Kargen, Esq., White and Williams LLP

3. Presentation Outline • Effects of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256) and increased importance of nonbankruptcy alternatives • Out-of-court restructuring • UCC Sale • Survey of state law • Assignment for Benefit of Creditors • Inclusion of avoidance actions: Sherwood Partners • State receivership • Federal receivership • Trust mortgage

4. Panel Materials • Federal and State Court Receiverships – Pros and Cons • “Do’s And Don’ts” of Negotiating A Workout from The Borrower/Debtor’s Perspective • 11 U.S.C. §§365-366, 503-505, 545-548, 1114 • Surveys of State Laws – ABC & Receivership • Arbitration Rules • Ballot, Claim And Composition Agreement • Creditor Presentation • Secured Creditor’s Bill of Sale

5. Out-of-Court Workout: Do’s & Don'ts from the Borrower’s Perspective - 1 I.Prenegotiation Do’s A. Know Your Client ‑‑ Is it the company or the principals thereof? (a) Guaranties? (b)  Any fraud or misrepresentation? B.Understand the business and the deal: (a)  Is the business to be continued or wound up and liquidated, orderly liquidation or forced sale (b) Is your function to be a workout facilitator or a damage control officer to limit personal liability. (c) Make sure you have an accurate history of the company’s relationship with lender and vendors. (i)  Any previous workouts? If so, why are you back at the table?

6. Out-of-Court Workout: Do’s & Don'ts from the Borrower’s Perspective - 2 1. Is there a viable market for the company’s product at a price that is profitable. 2. History of the business (how did it get to the point that it needs a workout). 3. Is management trustworthy? 4. Who are the principals? Do they really run the business? If not, who does? 5. What are the strengths and weaknesses of: (a) Management (b) Production (c) Product (d) Sales (e) Margins (f) Profitability

7. Out-of-Court Workout: Do’s & Don'ts from the Borrower’s Perspective - 3 6.  Is new management needed? (The “changing of the guard” requirement syndrome.) (a)  Is management credible with trade creditors, lenders, key vendors, customers? 7.   Can the existing management change and adjust? 8.   Does ownership/management want to continue the business or is it just interested in bailing out at the lowest possible personal cost? 9.   Evaluation: (a)  Loan documents ‑ must be reviewed (b)  Secured creditor relationship (c)  Vendor relationships (d)  Customer relationship. (e)  Employee or union (if applicable) relationship 10. What are management’s strengths and weaknesses?

8. Out-of-Court Workout: Do’s & Don'ts from the Borrower’s Perspective - 4 11.  What is status of financial records? (a) Does the accountant have credibility? The old accountant (if credible) or a new accountant must be part of the negotiating team if the client is an operating business. (b) Even if not an operating business, you may need the accountant relative to an evaluation and verification of the company’s and guarantor’s assets and cash flow. 12.  Are there up-to-date financial reports? 13.  Are there credible financial projections? 14.  Is a new accountant needed for real or cosmetic reasons? 15.  Are there non‑business operations issues that have to be addressed? (a) Environmental (b) Accounting irregularities (c) Illness (d) Potential criminal matters (e) Family overhang (f) Off balance sheet items

9. Out-of-Court Workout: Do’s & Don'ts from the Borrower’s Perspective - 5 16. Who are the key vendors and can they help in the negotiations with the bank, other vendors and other constituencies such as secured creditors, debenture holders, government agencies? 17. Explore possible sale of business (a) Outright sale (b) Merger (c) Strategic alliance 18. Does the lender understand the company’s business? 19. Who is the institutional lender(s)? Has the original lender sold the loan? (a)  Who are the officers representing the institution? (b)   Who are the attorneys representing the institution? (c)   What is the institution’s cultural approach to workouts? (d)   What is the credibility factor of the company with the institution? (i)  Previous negotiations (ii)  Previous workouts (iii) Status of current workout negotiations (e)  Can you present the proposal so that it is advantageous to the lender as compared to other alternatives? (f)  Consider transferring bank accounts to non‑lender bank to avoid set‑offs and levies.

10. Out-of-Court Workout: Do’s & Don'ts from the Borrower’s Perspective - 6 Alternatives to Examine:  20. Are there any “chips” you can call in on a psychological, business or political basis to encourage continuation of business. (a) Necessity of operations in the geographic or business area in which it operates. (b) Effect of termination of business on local or regional economy. 21.  Look for any immediate sources of ‑funds, other than existing lenders (a) Additional equity or collateral. (b) Public agencies -- EDA, County Improvement Authority, UDAG, SBA (c)  Minority Lender if applicable 22.  Are there any “800 pound gorillas” in the case ‑‑ competitor who controls a constituency or creditor who has guarantees with collateral? 23. Risk of operating while insolvent -- “D&O” liability to creditors and stockholders. 24. Valuation of assets and business on a liquidation versus “going concern” basis. 25. Tax problems in a workout versus Chapter 11, forgiveness of debt, use of NOL, tax attributes, tax basis of depreciable property, debt for equity.

11. Out-of-Court Workout: Do’s & Don'ts from the Borrower’s Perspective - 7 26. Are there labor problems? 27. Does anybody have any money to invest? “Good money after bad?” 28. The disappearing lender (sale of portfolios by banks). (a) Who are you dealing with? 29. Is Chapter 11 a threat or viable alternative. 30. Are there investors or predators out there looking for all or part of the business? 31. Tax considerations of out of court resolution. II.Meeting With The Adversaries A.Credibility of the negotiators is paramount. 1.  Be realistic. Don’t promise what you can’t deliver. 2.  If you are not ready to negotiate, don’t. 3.  If you need time to present a plan, get it. 4.  At the initial meeting with the vendors and/or lenders, present the new team or the old team with new religion and why.             

12. Out-of-Court Workout: Do’s & Don'ts from the Borrower’s Perspective - 8 5. If an interim plan is needed, prepare it and present it. 6. Consider use of moratorium to buy time to stabilize or for presentation of plan. 7. Try to anticipate every objection and be able to deflect every possible criticism for past sins. 8. Set a time schedule for a second meeting with agenda and production schedule of information. 9. The “three meetings” syndrome with creditors -- especially trade: Meeting #l: Everyone is mad; Meeting #2: Start talking about offer; and Meeting #3: Start negotiating deal First Meeting:  (a)  The noninvasive taking of temperature and pulse of adversaries (i)  check with others (ii)  try to see what are the other side's real objectives (b) Perception is everything. The other side must believe that you want to help the situation and are capable of doing it. (c)  The illusion of reality. Everyone wants to recoup -- they want to believe.

13. Out-of-Court Workout: Do’s & Don'ts from the Borrower’s Perspective - 9 (d) Avoid knee jerk responses to real or imagined slights. (e)  Present an initial plan to bridge the period from the initial meeting to the second meeting.   (f)  Keep creditor constituencies apart.   (g) Plan a second meeting(s) -- Don't try to rush the process. Standstill agreement, if possib1e -- Don't give up causes of action.   (h) Consider a new face with good credentials to deface anger with old management 10.  Second meetings with creditors and/or lenders: (a) Presentation of a credible plan and projection (b)  “New Faces”: Either old management has gotten religion or present new management a crisis manager or workout specialist. (c)  Present good numbers and good projections broken down monthly over the next year and quarterly or annually thereafter. Justify and quantify why the projections will work. “Why are these projections different from all other projections?” (d)  Make sure you have a fall back position to your proposal. Decide whether to present it right away or save for another day after you check viability.

14. Out-of-Court Workout: Do’s & Don'ts from the Borrower’s Perspective - 10 (e)  Do not get caught bluffing -- know your case. (f)  Stress every positive factor.   (i)   New management if applicable. Otherwise new ideas for survival. (ii)    New orders (iii)   Better terms from vendors (iv)   Market projections of outside experts, if possible (v)    Industry analyses (vi)   New equity financing (vii)  Try to present your settlement proposal as being in the lender and/or creditor's best interest by maximizing recovery  • Lender wants to get the greatest return of its loan; interest is secondary • Creditors are looking for payment of old debt, but also strong future business.   (g)  Discount versus throwing the keys on the table. Will anyone pick them up? (h) Make sure you have enough money or credit or both to do the job right. (i) Save something to give at subsequent meetings.

15. Out-of-Court Workout: Do’s & Don'ts from the Borrower’s Perspective - 11 11.  Third meeting or more. (a) Normally if you get to this point, the chances are that you have a deal to put to bed. DON'TS • Don't get caught bluffing. Consider having a Chanter 11 petition prepared and present for inspection or emphasis. • Don't be unprepared. • If you can’t sell the deal, get someone who can. • Don’t try to make your own deal if you are old management. In almost every case the debtor/obligor is better off having someone else negotiate for it rather than existing management or equity.

16. Out-of-Court Workout Meetings-I Where should the out-of-court meeting be held? • Debtor’s place of business. • Possible disruption of debtor’s business • Don’t want creditors seeing • Level of operations • Which vendor’s goods are on the floor? • Quality of operations • Local hotel • Do not pick a hotel that is too fancy; fancy hotels give an image of too much money floating around. • Offices of debtor’s counsel • Can make the meeting appear more “legal” than “business oriented. • Might cause creditors to bring counsel too. • Should lunch be served? • Not serving lunch moves the meeting along faster.

17. Out-of-Court Workout Meetings-II Who gets invited to the out-of-court meeting? • Creditors with an ax to grind, with a vendetta, or known to be unreasonable • How to exclude them • How to dilute their effect upon other creditors • Look at the top 20 list • How many creditors are within driving distance? • Who will have to fly to the meeting? • Which claims are large enough that a creditor is likely to send a representative to the meeting? • Are there creditors who you need to attend? • They heavily rely on the debtor’s business • They are good at crowd control • They will be a good counterbalance • Long time friendships • Should any creditors be asked to send local sales representative if the creditor is headquartered far away? • Who is the largest creditor? • Will they be willing to serve as chair of a committee? • Are they strong enough to control the committee? • Is there someone else that the debtor prefers to lead the committee?

18. Out-of-Court Workout Meetings-III When to send out the invitation to the meeting • If it’s too far in advance it give people too much time to talk (gossip) beforehand. • Should the debtor’s principal call some of the creditors to let them know of the invitation letter? • Cools a lot of jets, reduces surprise element, less formal • What goes into the letter? • As little as possible • Date, time and place • To discuss company’s finances and the payment of vendors • On whose letterhead should the letter be written? • Attorney stationery can scare people • Debtor stationery is better • Reduces likelihood of attorneys showing up

19. Out-of-Court Workout Meetings-IV What to hand out at the meeting • Concern over documents falling into competitors’ hands • Nothing in print if possible • Don’t want creditors taking documents away with them • PowerPoint presentations are better • Anything provided in writing should be “DRAFT” • Anything provided in writing should be on plain white paper; no letterhead • Keep the balance sheet simple • Keep the income statement simple • Don’t overdose on providing detail What to ask for from the creditors • 30-day reprieve • Yes, you know that that won’t be sufficient. • “We may come back for more if we prove that we’ve earned it.” • “In the meantime we are going to get you a business plan, financial projections and answers to your questions.” • Creditors rarely won’t give you 30 days

20. Out-of-Court Workout Meetings-V Why should creditors forbear? • Can’t afford chapter 11 • In a chapter 11 the only ones to benefit would be the lawyers • May be unable to survive a chapter 11 • Much smaller payments to creditors if chapter 11 is necessary • Administrative costs • Delay in chapter 11 • Value of the business would go down • Bank may be the only one to get anything in liquidation. • Equity is likely to be wiped out in a chapter 11 • Bank has said that it will be more flexible and cooperative if unsecured creditors are, too. Why have an out-of-court meeting even if a chapter 11 is highly likely? • Softer landing in chapter 11 • Cools jets of vendors anxious to litigate. • Provision of information typically buys time.

21. Out-of-Court Workout Meetings-VI Who speaks at the meeting? • Debtor’s counsel • Debtor’s financial advisor • Debtor’s principals speak as little as possible How should the room be set up? • Chairs in rows • No tables • Makes taking detailed notes more difficult • One podium in the front of the room • Never a dais Who sits where? • Debtor principals sit way in the back of the room • Debtor’s professionals sit in the first row What to drive in? • Principal should not appear in a new car

22. Out-of-Court Workout Meetings-VII Emotional factors • Creditors will be upset about the potential write-off • They feel injured, cheated, ripped-off. • Creditors get upset if the debtor’s principals are not hurting, too. • Disclose any personal guarantees. • Disclose that the bulk of the principals’ assets are in the business. • Tell creditors that the principals get wiped out if the guarantees are pursued. • Tell creditors what the principals have given up: • No salary • No payment of rent to insiders What to promise at the first meeting • Drop cold water gently • Don’t provide bad news too fast. • Let creditors tell themselves that you’ll never be able to pay them in full. • Goal now is to get creditors well informed. • Not asking for a discount (today). • Let that come later. • Committee attorney can break that news later. • “Goal is to pay everyone in full” • Remember, it’s just a goal. • Need to analyze the numbers better before making promises.

23. Out-of-Court Workout Meetings-VIII Attorneys for the unofficial creditors committee • Do you know who represents whom already? • Any friendly attorneys? • Any creditors that might accept a recommendation for committee counsel? • Is there an attorney who should be “educated” prior to the meeting? • What are the insightful questions that the debtor would like to see asked? • What are the insightful questions that will make an attorney look smart? Consider: • How organized is the debtor’s industry? • Is there a trade association? • Is there an attorney who is prominent in the industry? • Will competitors know of the meeting the moment that it is called? • Are the creditors likely to share confidential information with other customers? • Would the creditors balk at signing a confidentiality agreement? • Will they have to discuss it with their counsel? • Does that do more harm than good?

24. Out-of-Court Workout Meetings-IX Speak beforehand to: • Secured creditors • Key employees • Critical vendors. Play up: • Debtor is being proactive. • Goal is to avoid chapter 11. • Debtor hired good counsel and good financial advisors. • Dissecting the business from the ground up. • Debtor is prepared to accept pain also. • Principals know that they also will have to incur pain. • Think we’ve caught the problem early enough to fix it. Ventilation and tempers • Allow creditors to “get if off their chest.” • Don’t fight back • Feel a little guilty • Never raise the level of the meeting. • Promise an answer to the question, but not now. • You need to do some research. • “You’re right. We’ve made some mistakes.”

25. Out-of-Court Workout Meetings-X What’s next? • Conference call in a couple of weeks • Will get you all the information that you’ve requested. • Need to meet with the bank and report to the bank on today’s meeting. • Going to refine business plan. After the meeting: • Principal to call each creditor • “How’d you think the meeting went?” • “I really appreciate your support.” • “We’re going to work our way through this.” • “Were any creditors in the room hostile?” • “Let’s stay in frequent contact.” • “Any suggestions?”

26. Out-of-Court Workout Meetings-XI Importance of frequent communications • Well-informed creditors are more likely to stand still. • Reduces need to go to an attorney for help. • Send out frequent updates. • Share the good news and the not so good news. • Commiserate with creditors, but be moderately upbeat. • Let them know what you’re doing and what’s going on, e.g.: • Met with the bank today, bank is being supportive. • Met with our biggest customer today, customer is being supportive. • Got a big new order today. • Sales were good last week. • We’re ahead of last year/ behind last year.

27. Top Ten Questions to Ask a Prospective Client Who Wants to Accomplish An Out-of-Court Workout 1. Will your customers care that you are having financial problems? (Length of lead-time between order for goods and delivery of goods. Impact on customers if you cannot deliver goods on time.) 2. What is your relationship with your largest vendors (Love or hate? Will they be supportive)? 3. Are any vendors irreplaceable as supply sources? 4. How important are you as a customer to your vendors (major or minor customer)? 5. How competitive is the debtor’s business? (Will competitors pounce when word gets out that the debtor is in trouble? Will they succeed?) 6. How many of your top 20 creditors have claims that are large enough to justify attending an out-of-court meeting of creditors? 7. Are there any of your vendors that you can talk to “privately?” (Listen to your suggestions about committee counsel, about the direction in which the creditors should go or about reigning in an out of control creditor.) 8. Which creditor’s claims will not be settleable (environmental, taxes, utilities, bank guarantees)? 9. What’s gone on before now (Have prior period projections been missed? Have promises been broken?) 10. Where does the bank stand on an out-of-court workout? (Will the bank forbear or restructure if relief is obtained from the unsecured creditors? Is there a personal guarantee? Does the guarantee have value?)

28. Assignment for the Benefit of Creditors (ABC)1 • “…a transfer of legal and equitable title to all debtor’s property to a[n assignee] with authority to liquidate the debtor’s affairs and distribute equitably to creditors.” (Black’s Law Dictionary, 4th ed.) • Created by state law: statutory authority plus common law • Assignment is fundamentally a contract, although some states require judicial oversight and/or public filing • Designed for liquidation, not turnaround or reorganization 1Based on Berman, Geoffrey L., General Assignments for the Benefit of Creditors: A Practical Guide, Am.Bankr.Inst., 2000

29. Assignment for the Benefit of Creditors (ABC) [See charts in Appendix on ABC in various Mid Atlantic states]

30. Receivership [See charts in Appendix on Federal and State Law Receivership in various Mid Atlantic states]