Chapter 11 Bankruptcy Explained
With a recent high-profile Colorado Ski Country business filing for Chapter 11, there are misconceptions about how dire the situation really is. Below, I will explain the process and offer a personal story for context.
First, a Chapter 11 is commonly referred to as a “reorganization.” That right there should ease concerns that it’s the end of the world for a business. Many US businesses seek this remedy every year.
Also, in other bankruptcy proceedings, there is a state-assigned trustee in charge of the assets, whereas the debtor(s) themselves often act as the trustee in a Chapter 11 bankruptcy proceedings. A receiver may still be appointed by the Judge to steward the secured assets.
This offers the debtor the chance to continue to operate the business during the plan, and even take on new funding with the approval of the Court. The new creditors are offered favorable terms.
Why, you might ask, would anyone want to lend to the debtor involved in a Chapter 11. Well, there certainly are risks involved, hence the juicier terms. But there’s even more incentive.
In the case of the Pad Hostel, in Silverthorne, Colorado, I have a personal story: I purchased a small condo years ago in Silverthorne near the Pad. When we went under contract, the town was an afterthought on the side of I-70.
People like the owners of the Pad were pioneers. They created a vibrant neighborhood where there was a broken-down Dairy distribution center. Now, they have proven a concept that should be profitable.
New funding should be sought on the basis that all the hard work is done! Silverthorne continues to be a thriving ski town, and if the Town Council doesn’t screw it up by strangling short-term rentals (STRs), thereby annihilating tourist revenue and home values, the Pad is a solid bet.
Of course a business facing Chapter 11 proceedings is not in good shape overall. The specifics of each case determine how an 11 sets up.
For instance, I’ve reviewed the pleadings of the Pad case in particular (I am an attorney after all), and there is a major issue brewing over a Rule 4001 Motion filed by a major secured creditor. That will be heard in November and I may report on it.
Running any business is inherently risky. From a personal standpoint, I hope the Pad can make it through this process and continue to operate. These concepts take time. As a small business owner, I applaud the efforts of the Pad’s owners in being pioneers.
As always, nothing in this article shall be construed as legal advice. Neither the words contained herein or their thoughts and perspectives shall form an attorney-client relationship. Bankruptcy cases are complex and if you need legal advice in this area please seek legal counsel forthwith. James Olsen Law gives no legal or business/investing advice by virtue of these articles.
