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As the complexity and cost of federal bankruptcy grows, more financially distressed businesses look to state law remedies to address creditors, reorganize, or liquidate. State law insolvency proceedings, such as receiverships, asset sales and assignments for benefit of creditors present substantial opportunities for and risks to the parties involved. Therefore, an analysis and comparison of the risks and benefits of each situation is always appropriate for both creditors and debtors.

Federal bankruptcy law provides a method for financially strapped businesses to liquidate or reorganize. While bankruptcy offers predictability, it is public and costly, as the law provides substantial protection for the rights of creditors, owners, debtors and other third parties. In the right circumstances, state law insolvency proceedings can be the better route.

State insolvency proceedings vary greatly from state to state. Florida, Michigan and New York have highly structured proceedings that mimic the bankruptcy law, while Illinois relies primarily on nineteenth century common law, affording greater flexibility but fewer protections. Often, state insolvency proceedings are quicker, cheaper, less public, and more flexible than bankruptcy. Size alone does not drive the decision to use a state law insolvency remedy, as other factors, such as the ability to work with secured creditors, the immediacy of relief needed, the number and location of unsecured creditors, and the complexity of the financial transaction must be considered.

State remedies generally include: (1) receivership, the appointment of a receiver to take over the assets of the business to preserve, reorganize or liquidate the business; (2) asset sales, the seizure or surrender of all or specific assets to a secured creditor for sale or other disposition; (3) recapitalization, the conversion of debt to equity; and (4) assignment for the benefit of creditors, the transfer of all business assets to a trustee for all creditors to liquidate the business in an orderly fashion. The receiver, secured creditor or assignee for benefit of the creditors often works with existing management to preserve assets and maximize value. These, combinations thereof, and other insolvency proceedings can often be better than bankruptcy for both the debtor and its creditors, and each creates risks and benefits that often need to be assessed in a very short time frame.

At Brooks, Tarulis & Tibble, LLC, we have experience in working with both troubled businesses and creditors of troubled businesses to evaluate the risks and benefits of federal bankruptcy law versus state law insolvency proceedings, and to assist in addressing those situations. If we can assist you in this matter, please contact me.

Douglas C Tibble

This Brief is designed to provide our friends and clients with information regarding the various subject matters covered. It is not designed to take the place of legal, accounting or other professional advice. If expert assistance is required, the services of a competent professional should be sought. This memorandum may constitute advertising under the rules regulating Illinois attorneys.

Brooks, Tarulis & Tibble, LLC
1733 Park Street, Suite 100
Naperville, Illinois 60563

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