TMA Central Texas: UCC Article 9 – Extracting Business Value from Distress

As a streamlined alternative to bankruptcy or ABCs, a strategic UCC Article 9 short-sale of business assets can resolve and relaunch a business operation, predictably and efficiently, requiring only the consent of the senior creditor and defaulting borrower. Through a senior lender’s Article 9 sale of ‘in-use’ assets, an uninterrupted and unencumbered business operation can be passed into a new legal entity, under new ownership.

This interactive webinar will provide attendees with an overview of how the use of an Article 9 sale can be beneficial for business preservation, giving the seller incentive by providing the opportunity to earn from the new business in a non-ownership capacity and giving creditors the chance to increase recovery value on defaulted loans.

Foreign Okay Hmm Do Okay Okay Up Okay good afternoon everyone this is Angelo de carol the president Of the central texas tma group I would like to welcome second win today To our presentation And turn this over to michael parker who Will give you a more detailed Introduction Of second wind and what they’re going to Talk about michael it’s all yours Good afternoon everyone um welcome on Behalf of the Central texas chapter of tma we’re Privileged to have Second wind consultants with us today In particular we have aaron todran Who is the president of second wind and Bob dinazi who is a business development Officer for director for second wind um Aaron Um will will tell you and i’m looking at His kind of brief bio here that um what Second wind does And and has done very well is they’ve Learned to use article 9 as a business Preservation Tool whereas it took

Typically is thought of as a kind of a Liquidation tool and so That is what aaron and bob will be Talking About today a little uh quick history About uh both aaron and bob uh Aaron is an active attorney um practiced In boston for about six years before he Started Second wind and has been uh doing that Now for the last 11 years and uh has done over 1600 article 9 we’ll call them Reorganizations During that period of time bob has a A really interesting background um mr Dinazi has Spent 18 years in hollywood as a feature Film producer Executive overseeing creative Development and structured film finance Before he came back to the east coast And started with second wind And with that i will uh turn it over to Bob Thank you everybody thank you for coming Um first of all thank you michael angelo Jenny And a nod to uh bob butler for helping Put this together Business preservation is a passion it is What led Aaron to found the company um Aaron was a practicing bankruptcy

Attorney who Essentially was looking for a better way To fill the gap left by the judicial Process Um chapter 11 filings have an abysmal Success rate for smaller businesses that Don’t have the size Or the fortitude to make it to a Successful discharge Um so he thought there must be a better Way and the process we’re going to talk About today is not Proprietary to second wind in any way we Feel it’s a tool that if the community Of advisors investors lenders understood Better Could be used not only for the benefit Of preserving businesses jobs and Economic activity but at the same time Would create opportunities for them to Transact which are otherwise Are being lost when those businesses are Liquidated rather than being preserved So i’m just going to give everyone a High level overview of ucc article 9 Asset sales um how we deploy them what They’ve been traditionally used for And talk about just some of the Technical requirements um And what opportunities they present for All of us here and then turn it over to Aaron who will Go on to highlight um the article 9 Reorganizational process with some real

World examples And we’re going to let this conversation Today be be led Organically by interaction rather than Using a slide deck So i thought i’d start with a little Story earlier this year Just as corona had been underway for a Few months In the financial press you saw articles About the impending title wave of Bankruptcies that were expected You saw articles about the expectation That we would lose 30 million Um american small businesses you saw Articles about lenders doing triage on Their portfolios and so forth um And you saw a lot of articles about how Much stimulus would it take To preserve american businesses and Could we afford it So i wrote a post on linkedin for Just my community of tma folks and Lenders And it had the audacious title of can You See article 9 save the us economy and What i meant by that Was that if in fact we could preserve Businesses rather than liquidating them Might that not have more impact on Economic recovery than any amount of Stimulus and debt we could ever print So that was the idea the reason i

Mentioned this is uh this post was read By the editor of economics and business For bloomberg businessweek his name is Peter coy he promptly called Aaron and myself and he said i need to Write about this And we said that’s fantastic what i Thought was most interesting about The first conversation with him though Is when he said i consider myself to be A student of distress and i’ve never Heard of this before Um and likewise at the tma cleveland Event In the fall before the pandemic article 9 sales were On people’s minds you’d hear Conversations in the hallway People asking questions about it and There was a panel and i think it was Called Abc’s versus ucc article 9 something to That effect And on the panel the um the gentleman Speaking about article 9 was asked a Question and he was asked Have you ever heard of a ucc article 9 Sale being conducted In the context of a going consumer Business of a business that was still Operational And his answer was no i’ve never heard Of that And as you can imagine i was thinking to

Myself this is Unacceptable i mean we’ve seen this done We’ve done it ourselves you know well Over 1500 times Um so what i’m not going to say what we Aren’t going to say today is that ucc Article 9 represents a panacea But there are many many situations in Which It is a fit and would be a better fit Than the options being pursued today So just a couple notes about the uniform Commercial code i’m sure Everybody here is aware that it consists Of a standard standardized set of laws That regulate business transactions Financial contracts that’s been Uniformly adopted in all 50 states The article 9 asset sale What article 9 is article 9 was written For the benefit and protection Of senior secured creditors to Allow for a post-default asset sale that Avoids the judicial process And the logic behind it is simply that In default The fair market value of assets is Considered to be Rightfully so the liquidation value of Those assets and so far as there is Going to be Almost always a deficiency balance Remaining between what’s owed to the Senior position

In the liquidation value of those assets Then it’s unreasonable to think anyone Else Should be considered to have a security Interest in them or should be able to Impede the sale of those assets so Article 9 in short was a way to expedite The ability of a senior creditor to Transact on their asset base Post default that’s the liquidation use Of ucc article 9 sales But we’re here to talk about business Preservation In a business preservation context if You take the thinking a step further A ucc article 9 sale as currently used The one thing i left out Is in the asset sale itself all Subordinate liens and liabilities are Removed From the assets in a business Preservation context If you bring to the table defaulting Borrower consent The senior creditor can sell the assets Of the business while they are still Operational meaning well the business is Still going And in so doing what happens is that the Asset sale itself Becomes a transfer of the business Operation Still running and the full value of the Assets

In use is transferred through the asset Sale into a new legal purchasing entity Under new ownership You’ve now preserved the going concern Operational value of that business via This kind of asset sale so why has this Not Been done before well it does require Defaulting Borrower consent and this is the piece That has traditionally been missing The only way to incentivize a defaulting Borrower Into essentially giving up ownership of Their business Is by pre-packaging a solution such that They can extract value from the new Business entity that’s inheriting the Assets So if you can carve out for them a means To earn and participate In that new business entity that’s Inherited the operation they now have a Path to resolving their issues And their liabilities on defaulted loans Made to old co without a bankruptcy So that’s just a high level fly overview But essentially what we’re talking about Is preserving A business removing the value of a Business operation With a streamlined single creditor asset Short sale And in doing so ultimately not only is

That Good for business preservation and for The economy and for jobs But it creates opportunity for My side of the company the folks that i Tend to work with lenders To lend into situations they would not Have been able to lend into For business intermediaries to transact On businesses they would not have been Able to transact on And for investors to invest directly Into situations they would not have been Able to Um so that’s a high level overview i’ll Stop there see if there are any Questions As we turn it over to aaron Thanks bob and um Also thank you michael and angelo and The tma community for having us for a Minute so Yeah i’m going to piggyback on um what Bob said let’s talk about a real life Story Um i’m going to use um A plastics printing company in my Example But this story can apply to Any company in any industry whether it’s Asset heavy Um in manufacturing for example or Extremely asset liked say a service Based industry

We have proven this model out regardless Of the type and also regardless of the Size Obviously when we first started doing This we did it for smaller businesses And it works extremely well for Companies running revenues between 1 and 10 million in revenue um But it also works equally well for um Lower mid market companies upwards of You know between 60 and 90 million Um so in this example we’re going to Talk about a plastics Printing press uh we’ll call it company X Company x was chugging along um on a Slow growth path over the period of ten Years They made the decision to invest in some Uh New age technology and some very Expensive machinery to expedite their Process make it more efficient and also To bolster the quantity that they can That they can produce well After they made the investment Everything is going well and Unfortunately the market turned pick Your reason Whether new technology after that came In competition Moved in uh across the street uh Covet 19 happened whatever it might be Their revenue declined and once it

Declined thereafter it plateaued and the Level at which it plateaued Rendered their debt service unsupported So far this is a story that i i imagine Many of you are familiar with Be it covet 19 or in your decades of Experience beforehand Businesses of all shapes and sizes come To Experience financial distress and they Have very few Options available so right now this Business has a senior secured loan In the amount of say a round number a Million dollars They have vendor debt below that uh they Have some equipment financing below that Perhaps to try to get them out of their Struggle they took out the dreaded Merchant cash advance And here they are in a situation their Revenue has plateaued That plateau is insufficient to cover Their debt service They have no path out they are in a Downward Cash flow spiral so what options do we Have here Well um you know the first option Generally speaking That’s available is is a a chapter 11 Bankruptcy We know chapter 7 is available but again We’re talking about business

Preservation there is a viable business Here in company x It does have a product it does have Revenue it does have equipments assets Employees and enterprise values so let’s Let’s forget chapter 7 and talk about Chapter 11 for just a moment Chapter 11 is the only legal tool Available to distressed business owners To try to Restructure their contracts which is the Backbone Of a capitalistic society to allow them To re-emerge From those from those unsupportable Positions Well the statistics show that 75 percent of the businesses that file For chapter 11 protections fail to make It through the plan Of the 25 percent that actually succeed The majority of those are quote unquote Big business Those are uh companies that have Disposable income so that they can Afford the bankruptcy process That’s the conundrum most of the Companies that fit this description in The country Uh don’t have the cash that is required To make it through the bankruptcy system There’s a new sub chapter five which i’m Sure many of you are aware of That that constrains the the time and

From the the sub chapter five trustees That i’ve spoken with has not created The relief That the the uh authors of that Provision hoped for Also once you’re in sub chapter five an Objection is an objection is an Objection It still must be dealt with there are Still adversary proceedings that stem From that And it still can create an extremely Time consuming Expensive process and again companies Are there They don’t have the run room they don’t Have the cash they don’t have the time To survive Even within a sub chapter 5. so again This is not to say that all bankruptcy Is bad but It’s it’s not certainly a tool that can Be used across the board for distressed Companies What other options do we have well the Company could borrow more money Uh that’s going to be a challenge Because they’re already in a financial Situation Uh a financially challenged situation They might qualify for merchant cash Advances i’m sure many of you have Experienced the challenges that come With that

And typically when a company is Exploring options to buy their way out Of their challenges that simply Expedites the past the path to failure You have a few other options an Assignment for the benefit of creditors Um that is also challenging you know Seeking to Get permission from the entire debt Schedule For a cram down uh also takes time also Takes Money uh requires uh oftentimes a Receiver Requires an asani um And it lacks finality um you know Bob and i have been talking to many People specifically in the tma Communities over the years And i i’ve i’ve met very very few that Have actually Completed abc’s there are some abc Friendly states out there where they Where they specialize them and they get Good at them um But it’s it’s it’s not a very efficient Tool Uh and not widely used for a number of Good reasons So what else is left all we’ve talked About are pretty unpleasant ineffective Options Uh the only thing that’s left is Liquidation and that’s

What we’re seeing a lot of um you know Banks Simply uh acknowledging that the Business has no path forward they they Don’t want to take their chance in a in A bankruptcy proceeding Uh perhaps it’s not even an option Because the business doesn’t have the Capital to make it through or to To uh pay for a lawyer in the first Instance so they shut the business down Um so here we come to article nine Article the of the uniform commercial Code As bob said a right afforded to secured Creditors to convey their collateral Outside of the judicial system Acknowledging the fact that quite Frankly Liquidation in the judicial system is Expensive time consuming And you know takes takes resources it’s It’s It’s not an efficient process so instead They wrote this code in the uniform Commercial code This provision in the code that allows Secured creditors With the consent of the borrower to Convey their assets that were pledged as Collateral Stripping the lien the liens off and the Encumbrances off So as they can realize the value of the

Cloud collateral that was pledged to Them Great still we’re not doing anything to Preserve the business So if you take article 9 a few steps Further and you arrange Uh the entire transaction then you have The ability to preserve that value So what do i mean there are four parties To any article nine sale there’s the Distressed business There’s the secured lender there’s a Buyer And there’s the financier that funds the Buyer Sometimes the financier can also be the Buyer But for purposes of this example let’s Assume that they’re Two separate parties so normally An article 9 sale stops at those first Two parties There’s the borrower the defaulting Borrower and there’s the secured lender The secured lender Uh communicates with the borrower and Says look you’re done why don’t we Cooperate together convey these assets At public auction through article nine Avoid the legal the legal um Mess this will give us the best Opportunity to maximize the value on These assets minimize your personally Guaranteed deficiency balance and we can

Move on Uh that is the the main way that article 9 sales are used However if you enroll Identify collaborate with And and facilitate the transaction with Those second two parties Then you have the the capabilities of Conveying the business At that same force liquidated valuation But without Shutting the business down nowhere in The uniform commercial code Is it required to close a business In order to conduct an article 9 sale Also written directly in the code Provides lenders The ability to conduct a private article 9 sale Which means that we as trusted advisors As as transaction facilitators as Intermediaries As turnaround specialists have the Ability to Capitalize on the relationships that we Have to play our part In this transaction so in this company We have a A plastics printing company they have Their assets they have a million dollar Note The force liquidated value of the assets Is say two hundred thousand dollars We identify a buyer we identify

The financing that’s going to come up With the 200 000 To incentivize the bank to go through The article 9 process The buyer is a strategic buyer so that Through the transaction The business can remain alive up and Running To the outside world that never has to Shut down for one minute The financier uh benefits from this Situation By providing the financing as bob said This can be a business development model For businesses that would otherwise be Shut down and liquidated Article 9 can turn those unsellable Opportunities into transactional Businesses So in that situation uh This the secured party um the secured Lender Wins so to speak is it reaps the Benefits from the situation because Because the assets are being conveyed as An operational Enterprise we can get A premium on the dollars higher than What they would otherwise get in a Liquidation scenario Additionally this process removes the Burden From them to have to go through that Liquidation process themselves

Removes the burden of legal costs of of The time that goes with it And the uncertainty that comes with not Knowing If anybody is actually going to bid at a Public auction at the end of the day So to remove that entire burden give Them a some certain And that some certain in a shorter Period of time that is a higher amount Than what they would otherwise get Creates a huge value for secured lenders Who have non-performing Credits in their portfolio right now On the uh on the back end of the Transaction on the buyer side on the Financing side Be it factors abl’s anything of that Nature There’s a huge amount of creativity and Opportunity there By turning bad deals into good Opportunities rather than walking away From a business Walk them through an article 9 sale the Result is a clean Brand new unencumbered business Enterprise that you can leverage Assets and confidently in first position The original business the value Proposition is quite obvious But it goes from on death’s door to Continuing its operation You know sure the business owner must

Give up ownership But that doesn’t mean they can’t play an Operational role They can be a non-owner ceo in the new Entity Or perhaps their desire is simply to Exit uh we can We can pave the path for them for an Exit as well where they would otherwise Not have any Because their business was unsaleable And the value of their debts surpassed The enterprise value of the business That they would hope to sell the Business for So um you know that’s that’s generally The scope of the transaction Um it’s an article 9 sale which is Ostensibly A controlled private short sale of Business assets Of a distressed business that can be Conducted through article 9 to preserve The business operation For the benefit of the secured lenders For the benefit of the investors the Private equity groups Uh and and for the benefit of the Financiers Uh who are seeking to turn bad deals Into financial situations This tool can be used proactively or Reactively Uh reactively to um

To help facilitate the defaulted Non-performers already in You know your or your clients uh Portfolios And can be used proactively for business Development again To turn those deals those bad deals into Good opportunities And that’s the way article 9 works That’s the way article 9 can be used For business preservation which again is Far more than just the Sheer liquidation component that it was Initially designed for Aaron thank you i i neglected to say at The beginning but i put in the chat if Anyone’s got questions please Stick them in the chat or or feel free To try and uh Otherwise get them forward uh aaron can You give some examples of say your Most complicated article 9 sale or your Smallest article 9 Sale or you know some of those Yeah article 9 sales get complicated In a number of different ways obviously The more complex The business structure is the more Moving parts There are so if you have a company with Multiple subsidiaries Then you have to ascertain who the Creditors are what the creditor security Is

If there’s cross-collateralization Involved so as to make sure that you are Conducting the article 9 sale through The right party Another issue that makes article 9 sales More challenging are licensing And credentialing issues take for Example trucking and logistics There are a number of interstate Licensure and credentialing Components that must be transferred from The old company to the new company Um the seller to the buyer and Sometimes that can add some Complications no question Be it pharmaceuticals that require the Same type of issue Oftentimes the asset base itself can Make the transaction A little bit more complicated Assets aren’t always perfectly Identified And accounted for in a warehouse Sometimes they’re spread all over the Country On the road again if it’s some sort of Transportation or logistics company Um oftentimes Uh the the cash flow uh Of the business makes it very Challenging you know like anything This transaction does not happen Overnight and we have to implement Certain cash flow protection measures

So as to ensure the businesses viability Throughout the process Oftentimes uh the most obvious example Comes from the merchant cash advance World where they send those 406 notices To account debtors and they freeze cash Uh for these distressed businesses and That kind of Halts um the entire operation that’s Frustrating because the merchant cash Advance is trying to claim Dollars that has already that have Already been um Uh pledged as collateral to factors or Senior lenders Um or have already been purchased Purchased in some way shape or form but They don’t care you know they freeze it All the same so there’s no There’s no it’s hard for me to say um What the what the single Most complicated uh article nine sale is Those are the types of factors that Contribute To um you know the the complicated Nature Of it but what i will say is that you Know there’s there’s Uh there’s a way around everything you Know for for credentialing logistics Um we’re yet to identify uh something That cannot be transferred Um in in some process or another Um you know when it comes to assets and

The debt schedule You know it might it might look like a True crime scene connecting all the dots But there is always the answer and you Can always identify Uh by reviewing the documents um You know who the who the transaction Must go through more often than not These things Are pretty clear pretty quick Aaron we’re getting some uh questions in The chat about Um second lien liabilities and and how You deal with those or Um perhaps maybe you don’t have one Blanket the secured lender doesn’t have A blanket lien Maybe there are a couple of different Lenders that have liens over Different portions of the assets how do You deal with with things like that Yeah um so The the most often time we see that Example michael is when you see A senior secured lender but then you Also see Uh lenders that have purchased money Liens on big pieces of equipment So if you have a you know a million Dollar uh Uh debt to a bank uh You might also have purchased a million Dollar piece of equipment Um that was financed by the seller

And they’re gonna have that that um you Know they’re gonna have that super Priority on that one asset In that situation we go Through the entire debt schedule or one Goes through the entire debt schedule to Ascertain Uh you know what is a necessary Operating expense And what is a simple um debt And you know what is paper that can be Relieved In the article 9 transaction itself so If you’re talking about a machine it Again there’s no One singular answer if this is a machine That That is not pivotal to the operation Itself Then perhaps the best decision is to Surrender that equipment back to the Seller financier If it is in fact integral to the Operations Then again that is something that can be Assigned to the purchaser as A necessary operational expense and Uh um and we can either assign that Continue the payments or create a new Agreement altogether So it really depends on on the basis of The debt Michael what it’s what it is encumbering If it is necessary or not

And you go down a stoplight analysis to Determine What does the business need uh what does The business definitely not need And then fill in the gray areas in Between to ascertain What’s what through the article 9 sale Okay another question can you kind of Compare the costs So associated with this article 9 Process For an average company to A 363 bankruptcy sale process so not a Complete Organization in chapter 11 but uh Someone who’s jumped in and And just sold us under the on the 363 of the bankruptcy code yeah Absolutely and i i see a question that i Like about residual liabilities as well Which i’m going to hop into next but the Cost really depends On the smaller scale So i guess in this situation we’re Talking about second wind consultants Um and um This to be completely candid with you All this was not intended to be about Second wind consultants but about Article nine itself Um so the cost varies uh how we uh Price our our engagements is with a flat Fee And we term it out over a period of time

Um Based on the economics of of the Underlying business Um obviously we’re talking about a Financially distressed company Um so that’s why we term it out over a Period of time to make it Affordable um but you know and that’s That’s a separate matter and i’m happy To talk about that Offline but just to get to the uh the Article on mechanics itself Michael i i’d love to respond to the Question about um Residual liabilities uh post article Nine sale So this this comes up a lot uh and it’s A really important question That the big success reliability Question And um you know my answer to you is that It is not a risk So 1600 transactions later Um we have had zero Successor liability claims succeed So there are a few reasons for that one Because This is not a sale between buyer and Seller This again is a sale afforded to senior Secured lenders It is conducted by the bank it is a Liquidation tool So because the bank is the one selling

The assets that Disrupts the chain of continuity between The seller and the buyer so as to make It very challenging For any sort of successful liability Claim to exist Also article 9 bakes into it some very Clear very binary requirements One is procedural two are just black and White check boxes The two black and white check boxes are That the buyer must be a bona fide Arms length third party purchaser that Means that it can’t Be anybody with uh similar ownership as The original business And it can’t be somebody with uh of the Direct family of the original business Owner So um if you satisfy the bona fide third Party purchaser Box then you must determine whether or Not adequate consideration was exchanged Because we’re doing private sales Adequate consideration is Necessary to determine in a public sale All you have to make sure is that it’s Done commercially reasonable and whoever The highest bidder is Um um You know that is what determines um Market value so in order to overcome That we always get Um we always get professional third

Party appraisals So as to check that box so that it Cannot be questioned Third regarding um success or liability Baked into the process there’s notice Given to every single secured party Uh or party of interest so that they are Aware of the transaction prior to its Closing They have 14 days to object and one of Two things will happen They either won’t object or they will But either way that goes we’re going to Know Prior to closing whether we have Objections or not which means That we don’t close unless we are Completely comfortable with the Situation If we don’t receive any objections then Guess what we can close the transaction As planned And if any objections come up after the Fact they have lost Standing to con to provide that um to Provide That objection if we do have objections Received we have to make sure that they Are Valid objections and um and then we deal With them And in order to be valid objections they Can’t claim oh i i had a buyer that Would have

Paid more that’s not a valid objection Their objection must be based on the Merits of the Of uh this individual transaction which Is either This this is not a bona fide third-party Purchase or or Adequate consideration was not exchanged And both of these things are going to be Heavily documented and corroborated with Full transparency So it’s it’s it’s that’s why it’s never Going to happen the final reason is that Uh in order to claim successful Liability you need standing And remember that this is this is a Transaction done through the first Position in our example It was a million dollar note and the Force liquidated value of the assets was 200k So let’s say we do the article 9 sale For 250 well that’s a 750 000 Deficiency balance even if they said you Know what your appraisal was wrong and Fraudulent i could have got twice as Much The assets are worth 500k or three times As much The assets are worth 750k there’s still A shortfall for the first position Creditor And nobody else is they’re still not Going to get anything

So for all of these reasons combined It’s it’s I’m not going to say it’s impossible That a successful liability claim can’t Arise But that’s why we have a zero for 1600 Plus Record um How about uh sub chapter five proceeding I’m gonna Uh redirect you here just a little bit i Know you said you’d talk to some sub Chapter five Trustees and and uh they told you That it hadn’t worked out quite like They wanted it to but Um sub chapter five allows a A debtor to retain control right allows A debtor to retain control and You specifically indicated that in the Article 9 process They can’t right um if i’m advising a Debtor In those two aspects certainly i’m going To want to talk to them about Sub chapter 5’s ability to retain Control uh Article nine what’s what’s going to be Your reply or You know what what’s uh the Counterweight for article 9 To that yeah uh great question So um when you walk through an article 9 Transaction you have to give up

Ownership of your company That’s the that’s the truth Um furthermore you’re left with a Personally guaranteed deficiency balance More more likely than not most of the Time we see that happen Most of these business debts are in fact Personally guaranteed So one By virtue of our ability to preserve The business operation through article 9 We also preserve the ability for the Business owner To earn from the company again in a Non-owner role So that creates a financial incentive For the original business owner To go through this process albeit while Giving up ownership Now two things happen after that one Is uh you must you know again this is a Little bit about the second wind process Not so much article nine but we walk Everybody through what’s called an Article nine Excuse me an offer in compromise program Which is to settle those personal Guarantees um At affordable levels based on what a Liquidation analysis would provide So we conduct the offering compromise Analysis based on liquidation what would A creditor get from that personal Guarantee

We all know that filing a suit and Getting a judgment against a personal Guarantor Only has any value if there’s any assets Behind that and if that person were to File an individual seven That paper would be ripped up and there There’d be nothing left So uh that’s particularly bad when Uh lenders have to spend money to get That judgment to execute on that Judgment to perfect it Only to find out that they’re not gonna Get anything at the end of the day so by Cooperating with those lenders doing the Liquidation analysis Walking through the oic or offering Compromise process And and and moving on with um With personal guarantee settlements we Can also assure Debt reduction and also the ability to Pay for those oic settlements by virtue Of The guarantor’s ability to earn from the Company So uh the personal guarantee deficiency Balance is it plays a huge role in this Also once those personal guarantees are Resolved We also preserve the path for that Business owner to Re-earn or repurchase an equity stake or An ownership

Interest or the whole thing back If we don’t preserve the business they Can’t buy it back or earn it back in the Future If we do they can So when you when you compare that to a Sub chapter five Well the risk is high you need money uh If you can’t If you can’t demonstrate planned Viability which No cram down is guaranteed meaning Expect to pay off the entire Balance you’re getting no debt relief Whatsoever And you risk a chapter 7 conversion Which again is going to leave you with No debt But also no income and also no business So when faced with that situation when The statistics are Vastly against me and i don’t Have a viable plan and i don’t have the Cash to make it through Uh and i don’t have control over what my Creditors are going to say or do or Object to Uh and i and you know i it’s it’s and I’m not receiving Any um any debt relief whatsoever Then to me uh a sub chapter five Filing is exceptionally dangerous So is there a circumstance where it Works out well absolutely

I’m not here to hate on bankruptcy i’m Just here To make sure that everybody knows all of The options available So that when they see certain fact Patterns they understand Which is the best the best path forward Okay i got another one in the chat um How do you deal with uh Employee issues or benefit plans and Such So um The whole article 9 process Succeeds by leveraging reality What would happen in reality if we do Not Complete the article 9 process and The answer to that question defends Depends on the circumstances involved So more often than not We are able to you know preserve The business preserve the jobs and Preserve the economic value That’s why we do this But it is a real sale It is a full-blown bonafide purchaser Real adequate consideration is exchanged So to the extent that there are employee Benefits In the old company there is There is no way to guarantee Or predict as i sit here right now Whether or Not a similar type of plan can be

Started In the new company i will tell you that There is a model where We can we can create esops employ stock Option plans to be the buyer And we have done a number of um Situations where the employees were uh Were the buyers of the company and that Was a really That is a very successful model for us In the right situation But um michael that that falls in the Category of business decisions Um whether to continue employee benefit Options And um what we create Is a blank slate for the new company to Make better business decisions than what Got them in the financial distress in The first place So it’s certainly possible the door is Open for it that’s not For us to make that’s for the employees And the the business Uh owner to decide on a case-by-case Basis Okay i’ve got a couple more questions Here i’m not sure i Fully understand it but it’s the Question is what about Bulk transfer or other notices Um i’ll wait for some clarification on That let me move the other question And that is uh who do you work for in

The Process i mean where do your loyalties Lie in the In the process are you hired by the Debtor are you hired by the lender Um where does that where do you come Into the process Yeah good question um we always Are engaged directly by The distressed business um Which is interesting because we don’t Get a lot of repeat business So uh what we have done is we have Created You know uh relationships with trusted Advisors Lenders abls factors intermediaries Private Equity groups venture capital groups m a Specialists Um all people that are engaged in in the Distressed business world And um you know everybody From all different sides of the Transaction i mentioned the four parties Before There’s a benefit for everybody and uh For that reason And for the fact that when we go through This process we provide full Transparency And corroboration of every step of the Way So everybody’s satisfied with what we’re

Doing because they understand that it Represents the best Path out uh ultimately everything comes Down to the single fundamental that Business failure is worse for everybody Business preservation is better for Everybody But regardless of where um you know what The source is Of the business uh it’s best to engage Directly With uh the distressed business so as to Avoid any conflict of interest That is whom you’re representing that is The business that you’re preserved Therefore That is that that that is the necessary Party for engagement Have any of your uh um article 9 sales Ever Subsequently filed for bankruptcy To your knowledge absolutely Um are those typically Reorganization proceedings or just Liquidation proceedings Well look you know what what article 9 Is designed to do Is preserve the business operation and Give it a fresh start in a way that Uh in certain situations can be far more Effective than the alternatives What it does not do is fix the Underlying problems that got you there In the first place

And yes there will be a new buyer a new Ownership structure But that does not necessarily mean that That owner is going to be able to Identify the problems and fix them The management consulting space is Heavily saturated in this country in all Industries in all shapes and all sizes That is not what the article 9 is meant To do so Um that certainly is Uh so it represents a powerful tool in The back pocket of Management consultants and and again That is also an alliance that that we as A company have created But for um for you know So you know subsequent bankruptcy Filings Look that’s just the reality of the case Not all the buyers Have fixed the mistakes and um you know Despite the reorganization they still Made some decisions uh to get themselves Into more financial trouble down the Line And and you know the business turned out To be not viable or Uh trends changed technology arose Covered 19 happened again pick your Reason Businesses definitely have have filed It’s just the nature of of capitalism Um okay with you if i just open it up

For Questions for anybody else yeah Absolutely And just for the record i i’m happy to Make myself available Uh as is bob after the two o’clock Time or directly you know we will be Happy to give you our direct contact Information So that if anybody has any questions or Concerns or comments Um i’ll rap with you guys all day So i see paul osia you’ve asked this Question a couple of times and i’m not Sure how to phrase it If you want to jump on and try and ask That question Of aaron or bob i’d appreciate it also Steve bella i i don’t know what you mean About bulk transfer or other notices If you could if you could clarify i just I don’t know what you’re referencing Steve here we go Go ahead we can hear you paul okay okay Okay so so my question is i had a case Okay on which We could not even we had to really watch Article 9 because You an oil and gas if you could have a Secondary lien holder Who you are not paying right now okay That can go and trump directly to the Well and File a lien on the well and bypass the

Lender How are you guys preparing for that That’s that’s a that’s something that The banks are really Worried about because the secondary Exposure and upon filing an article nine Those guys can file a lien right away So secondary lenders subordinate lenders Cannot trump a senior lender as long as That senior lender properly perfected Their ucc one financing statement which Is presumably their blanket lien No no no let me correct you i’m talking About an unsecured Lender who is delivering goods to the Well Okay i am the oil fuel services guy Then since you’re not paying the debtor Is not paying That unsecured creditor okay the Unsecured creditor can go Exercise a secondary lien position go Directly file a lien at the well Okay same thing happens in construction And then now The ultimate customer is not paying the Bank the ultimate customer goes to Records i don’t care i’m paying I i need my lien removed i’m paying this Guy now And and there therefore he bypasses The priority at lean holder position of The secure lender Right uh so you’re saying that they get

Some sort of trade uh A trade lien in that particular Situation traveling Or statutory lien i think that’s what I’m saying Right um well yeah that You know trade liens come up uh Frequently uh also in construction Um it it What i would say is we put together a Global picture if this whole thing hits The fan Um it’s it’s a bit of a state by state Analysis as To how high the super priority Lien goes when you have A unsecured creditor filing a trade link So for example if everything is honky Dory And the first position is getting paid With no action no legal action no Recourse no default and a trade Uh lien pops up yeah you know businesses Aren’t allowed to just Stiff their trade creditors that’s why The law affords them the ability To file uh to file those trade liens and To get that That priority status however uh what my Experience has been Is that if we have a a global default Then Uh a court is not going to issue a super Priority lien if we announce to

Everybody that Um there is uh there That this business is on the brink of Liquidation and and all of the creditors Are are pursuing collection furthermore Um part of the process is doing asset Protection So if we don’t we know that when there’s Blood in the water All of the creditors try to get their Piece first because You know if it goes to the judicial Arena Whoever’s first is going to get all of It so everybody tries to swipe at what Available cash there is as soon as Possible So as to ensure that they get something So if there’s no Viable business then then there’s then There’s nothing to preserve We protect the business and its cash Flow make sure all accounts are properly Insulated Um so that they can’t be swiped from This sort of Uh sudden um or non-judicial lean Swiping procedure through A through a uh a judgment lien or a Vendor lien or something like Like as you described but without Without diving a little bit deeper into The facts of that particular case i i i I can’t really get too uh any more

Detail than that Yeah i can jump in real quick aaron uh To save you maybe Paul i think what you’re talking about With respect to the oil and gas Case that that you referenced that is uh Unsettled law right now and it’s a lean Priority fight In fact i have that lean priority fight Up at the fifth circuit right now we’re Waiting for them to rule on that And that’s a problem whether you’re in Bankruptcy or in article 9 or anywhere Else It’s just a lean priority fight between The oil and gas producers And the senior secured lender and i saw Steve uh beulah jump on for a minute There and then jump back Off uh to maybe ask his question Bella steve bella if you’re there steve I’m here Let’s see hang on can you hear me on This yep i can now Okay my question was my last article 9 Foreclosure sale was In california and I’m in in state law if you’re going to Have All or substantially all the assets Transfer We had to do a bulk transfer Notification To all the trade creditors and we

Started out the process thinking we only Had to notify the senior lender who Obviously we were already working with But it turned out that we had to notify Not only the trade creditors but an Employee who had filed a lawsuit So what are their different notification Requirements um leading up to and what’s The notice period and it does it Does it vary by state i mean who all Needs to get noticed The general rule is that uh perfected Secured lenders of interest or parties Of interest So we run a ucc uh debt schedule we Identify Who has perfected their liens with a ucc One financing statement Filed with the secretary of state which Is public notice And those are the people that we file if There are other people that we know of Unsecureds or you know any other parties Of interest We tend to over notice The goal is to give everybody notice That’s really what you want to do And if they have objections you want to Deal with them right up front we’re not Afraid of that because we know that They’re not they’re going to be without Merit and we’re going to be able to Reject them so Uh more often than not our our rule of

Thumb is run The ucc one dead schedule notice Everybody on there And then thereafter ascertain if there Are any other parties that should Or could uh raise some noise and notice Them as well So so clearly if they have By this time they probably have pretty Large trade predator balances that are Past due Um as a general rule do you notice them Or not General rule yes we do uh there’s no There’s no surprise that the company is Feeling Uh financial distress so uh yeah uh you Know In that situation chances are more Likely than not um that that we are That we are going to notice them um Right Only requires those who have perfected Their interests Uh to to receive notice so we certainly Cover our behinds that way But just as a matter of prudence and Responsibility we do try to notice Everybody Is that like a 30-day notice 60-day Notice or technically they know It’s a 10-day notice with uh two days on Each side For um for mailing so it’s a

Day notice got it all right that’s clear Thank you Okay we just got a minute left uh rob Colorina had a question if You can jump on rob and ask your Question Yes thanks michael uh aaron can you hear Me okay yes sir Okay great just a quick question in These processes Have you picked up any um observations Of new investors Um you know coming into from either Different regions or A mix of either pe or or uh corporate or Family office investors Any observations there no We’ve seen trends for uh people Investors trying to acquire portfolios Of paper Uh default business loans of all shapes And sizes But in terms of trends of specific Uh private equity groups seeking to Enter certain industries or make certain Investments We really have not seen any sort of Trend like that Okay thanks All right i think we are at time um I want to uh thank very much aaron And bob for their uh presentation today And uh jenny put in the chat their Contact information

If you have further questions or want to Get a hold of them to talk about an Article nine sale Not appreciate it but thank you everyone For coming We’re uh tma of uh central texas Or ange i’d like to reinforce what Michael just said Um to both of the robert and aaron thank You very very much for your time today Was very enlightening And michael thank you also very very Much for coordinating this And managing the session today very well I hope everyone enjoyed it thank you Thanks everyone thank you everybody You

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