Law Offices of Richard S. Stolker, P.A.

Uptown Law, LLC
Richard S. Stolker, Attorney

Law Office Newsletter

Bankruptcy Reform

2005 Amendments to Title 11, United States Code (Bankruptcy)

In October 2005, new amendments to the federal Bankruptcy Code became effective. Contrary to what you may have heard, it is still possible, and often is advantageous, for individuals and businesses that have experienced financial difficulties, to resolve their financial problems through bankruptcy.

The new amendments make a number of changes to prior bankruptcy practice. Some are minor, but several are substantial.

Four major changes stand out. First, the bankruptcy amendments require prospective debtors to have their financial circumstances reviewed by one of several nonprofit debt counseling agencies, in order to gauge whether bankruptcy may be an appropriate solution. Second, “means testing” is used to determine whether an individual has the resources to pay all or a portion of his debts under a bankruptcy plan. Third, the new law establishes objective allowances for food, clothing, rent, transportation, and other “necessary” expenses, based on national or regional averages. Fourth, bankruptcy attorneys must certify that they have made a reasonable, good faith investigation into a debtor’s financial circumstances, which was not required under the former law.

Please do not hesitate to contact Uptown Law, LLC if you are experiencing financial difficulties. We will evaluate your circumstances and help you determine whether bankruptcy can help.

More on Identity Theft

It has been more than two years since an article on identity theft first appeared in this Newsletter, but we are still counseling victims because identity theft is a crime that is relatively easy to commit, while it is often difficult to identity and prosecute the offenders.

We offer the following suggestions in addition to what we have recommended in the past.

Your preprinted checks should never include your Social Security number, date of birth or driver’s license number. If these appear on your preprinted checks, shred the checks (don’t just throw them away) and have new checks imprinted without that information.

If you use a credit or debit card to withdraw cash or pay for purchases at the supermarket, you may need to enter a PIN (personal identification number). If you do, be sure to stand so that no one else can see your code as you enter it. “Over the shoulder” identity theft is rampant!

When you use a credit card to make purchases, be sure that the document that you sign, and that remains with the merchant, shows only the last four digits of your credit card, not the complete account number.

When cashing a check, the bank may write your driver’s license number and expiration date on the check. Ensure that your date of birth or Social Security number are not written on the check, since the check will pass through many hands before it clears.

Non-Compete Agreements

What is a Non-Compete Agreement?

A non-compete agreement restricts the scope of activities of a former employee. To be enforceable, the non-compete agreement must relate specifically to the business activities of the employer, soliciation of customers, or the employment activities of the employee. Restrictions as to business activities that are merely contemplated, as opposed to business activities actually being engaged in, are generally unenforceable.

Non-compete agreements are restraints on trade and free competition and as such are viewed very critically by the courts. Unless crafted narrowly, such agreements are likely to be struck down by a court as contrary to public policy. An ambiguity in a non-compete agreement is strictly construed in favor of the employee and against the employer.

Are Non-Compete Agreements Valid?

Courts that have considered noncompete agreements have generally applied three tests to determine whether they are enforceable: First, whether the restraint on the employee, is necessary to protect a legitimate interest of the employer. Second, whether the restraint on the employee's activities is unreasonably oppressive, and whether it will make it unreasonably difficult or perhaps impossible for the employee to earn a living. Third, whether the restraint on the employee's activities offends sound public policy considerations.

Using these criteria, the courts have struck down non-compete agreements that either do not reasonably limit the restriction in terms of time (duration) and space (geography). What is reasonable in one situation may not be reasonable in another. For example, a restriction prohibiting a former employee of a popular neighborhood restaurant from opening a competing restaurant within five miles for a period of one year, may be reasonable if the restaurant draws its customers from a five mile radius, and if the one year limitation will not unduly restrict the employee from earning a living. On the other hand, it may be reasonable for a business that operates statewide to restrict its former employees from competing, at least for a limited time, anywhere in the state.

What About the Future?

The law of non-compete agreements has been undergoing rapid change in recent years, in part because the economy has become more national and international, and less local in character. Therefore, we advise consulting your attorney for assistance in preparing or reviewing a proposed non-compete agreement.

Doing Business in a Troubled Economy

Can a small business remain afloat, or even profitable, in difficult economic times? With proper planning, most definitely.

Avoiding Problems

First, maintain your key contacts. Those customers who have had successful dealings with your company in the past are the ones most likely to stay with you when times get rough.

Second, keep your banker apprised of the situation. The worst thing a company can do is to wait until cash reaches a critical low point before seeking new borrowing authority.

Third, seek new investment capital. Nonborrowing solutions such as infusion of a new business partner’s capital may be preferable to increasing the company’s debt burden.

Finally, and perhaps most importantly, reevaluate your company’s management strategies. If your practice is to review the firm’s budget and cash flow annually, conduct more frequent reviews, perhaps quarterly. This will help identify problem areas in time to isolate the problem. Consider working more closely with the firm’s financial and legal advisors.

Organizing the business to avoid or minimize liability

The first rule is to keep different business operations separate. If your business performs two distinct tasks (e.g. product fabrication and sales), it is generally advisable to organize into two separate companies. That way, if one part of the business encounters problems, it will not take the “good” part of the business with it. Or, a part of the business operation can be “spun off” or sold.

Create a separate account to deposit tax payments until it is time to transmit the funds to Internal Revenue, or to the state sales tax division. That way, the company will not run short of funds at tax paying time and there will not be a temptation to “borrow” from trust tax funds.

Create agreements among the shareholders or owners that address issues such as transfer of ownership interests, adding new owners in the future, what happens upon the retirement, disability or death of an owner, and so forth. This is best accomplished when the business is initially organized, but can be done at any time. Consult your financial and legal advisors for assistance in these areas.

Recognizing the early warning signs of danger

Businesses that have operated successfully for a number of years tend to dismiss downward trends as a mere aberration. Even when the handwriting on the wall is unmistakable, there is a tendency to try to “ride out” the “temporary” downswing. A better practice is to get a handle on early on as to what has caused the downturn, and try to address it at the first opportunity. Is the problem attributable to increased competition? Product obsolescence? Change in market situation?

The sooner the problems are identified and addressed, the better. Remember, “Failing to plan is planning to fail.”

Another early warning sign is that your bank has become less genial. Perhaps the bank has been swallowed up by a larger institution. The new owners may impose stricter new standards and the friendly loan officer with whom you have dealt for many years may no longer have the flexibility to provide the same level of care and help when needed. A similar early warning sign is when a vendor that rarely has enforced payment deadlines, now (for reasons unrelated to your firm) may insist on prompt payment. This can effectively transfer someone else’s cash flow woes to your firm.

Should you negotiate?

In a word, YES! You are your vendors’ customer. You need them, but they need you, too. Even if you have been strictly on a COD or net-10 basis with a vendor, they may be willing to extend terms in recognition of your loyalty as a customer. You should enter into a discussion with them about terms before you find your firm in a financial crisis.

What if the business continues to sink?

As bankruptcy counsel, we frequently see firms that have remained in business long after it should have been obvious that the business model can no longer survive in today’s marketplace. While we are not suggesting that the business be shuttered at the first sign of trouble, you should engage in serious introspection if the business repeatedly does not achieve its projections. Often, it is productive to have such discussions with a trusted third party, such as your accountant or attorney.

Perhaps the business can survive, but only after ridding itself of the unprofitable portion that is dragging down the rest of the business. In our practice we sometimes encounter businesses that have financial bottlenecks. As an example, the business model may consist of processes A, B, and C (say, manufacturing, marketing and distribution). Processes A and B are doing well but process C (distribution) has gotten so expensive and labor-intensive that the rest of the operation is being dragged down. Outsourcing, or even outright abandonment of that portion of the business may be appropriate.

What about receivables? If economic times are tough, your customers also may be slowing down payment. Perhaps some of them are headed in bankruptcy. Unless you are in the collection business, it usually pays to engage a third party to facilitate collection of receivables. Perhaps obtaining personal guarantees or a security interest in the assets of chronically slow or high-risk customers will help ensure prompt payment.

Reducing overhead is a classic solution to a temporary cash flow problem. Analyze fixed costs such as rent and salaries – Can they be reduced to improve the company’s profitability? Does the business need to tie up capital in purchasing equipment? Or could the equipment be leased at a lower monthly cost?

Can We Help?

Workouts and bankruptcies, while they should not be attempted if less stringent measures can be successful, are sometimes the best solution to allow a business to rid itself of paralyzing debt while reorganizing itself into a leaner, more profitable company. If you have questions about bankruptcy or workouts outside of bankruptcy, we may be able to help.

This Newsletter is designed to provide information of general interest but is not intended as a substitute for legal advice. If you would like to discuss any of the matters in this brochure, or any other legal issue, please call our office at 301-294-9500, or send e-mail to rstolker@stolker.com.