How does one protect themselves when a former employer goes bankrupt?

Clark1961

Clark1961

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So a friend of mine is owed a substantial sum of money by a former employer (golden parachute thing).

The former employer has stopped making payments on the money contractually owed to my friend. The contract has no provisions which allow them to just decide to stop paying. The former employer has not filed for chapter 11 protection yet but they may be forced to by their lender under the terms of their credit facility.

So, what should/can my friend do to protect his interests? Will a bankruptcy judge give any standing to a former exec with a separation agreement under which the company was paying him? Will he fall to the bottom of the creditors pile and never see another dime? Many questions and prolly only expensive answers from the lawyer types...
 
I can only imagine this debt would end up in the BK. I'm no lawyer, but I have seen a few situations similar. I'd say there is little to no protections at this point. Just wait for the BK notice at this point.
 
Proof of Claim form http://www.wiwb.uscourts.gov/fillable_forms/ProofofClaim_B10.pdf

File it with the court handling the bankruptcy.

Employees and former employees usually go the the top of the list to be paid.

A retirement plan may be different.

I saw this on a Perry Mason episode.... meaning I am no lawyer, just a victim of companies filing bankruptcy and owing me lots of money.
 
My Bro-in-law went though something similar. It's a complete minefield, and every state, and every contract is going to be different. Way too little info to make any kind of informed opinion.

So far, it's simply a debt that's back due. He can sue for payment, provided of course, there is no justification of the company stop paying(anti-compete clause is one example).

Then, there are cases where a employment contract has been written as a personal service contract for specific services. This is another can of worms. Personal service contracts are not generally discharged through corp BK. But - the individual can also declare BK and seek to protect assets from the creditor.

Lots of ugly ways this can go. File a claim right now, don't wait for BK. The order of discharge, and who and what gets paid can get seriously convoluted. Since the history of GM, BK has gotten even more messy.
 
We studied bankruptcy in business school - so this is really high level. I'm sorry to hear your friend has to deal with it. I'm also sorry to say that their priority may be rather low and it's possible they will get nothing. They could make a legal claim NOW, before bankruptcy and hope that helps, but once the company files, the chances are greatly diminished.

If you haven't been through this before, everyone that the company owes money to files their claims. All the claims are prioritized and they start assigning whatever value is left (paying out if liquidating). Generally, secured claims creditors (which your friend is not) get paid in full before any unsecured claims are paid. The good news may be that if your friend is depending on these payments as part of their living expenses, they can be prioritized higher than other unsecured claims.

Best of luck. There's a roller coaster ahead.
 
B Flynn has it as I understand it...my expertise is in insurance but my brother is a former Federal trustee and current Federal bankruptcy judge so I am a little more familiar with it than most....find a board certified bankruptcy lawyer that real familiar with the creditor side asap!
 
Unfortunately, your friend needs to consult a bankruptcy attorney. The rules about severance benefits is subject to fairly complex rules about whether the contracts are "executory" (a present obligation or a future one) or not and whether the bankruptcy is under Chapter 11 or not. Even then, there is a split among the federal circuits as to how to handle them. Even in the best case scenario, all it gives is employee claims a level of priority, not an absolute right to payment, so claims with higher priority will take precedence, so even if there are assets for distribution, they may be gone by the time they reach the employee claim priority level. And if the company chooses to pay before filing, it possible that someone paid before the Bankruptcy can be sued to take it all back, either by the company itself in a Chaper 11 or by the Trustee in a Chapter 7 case. Suing in advance is often of minimal benefit

Filing a Proof of Claim can help, and is often a necessity, but even those depend on how the claim form is filled out.

Bankruptcy is unfortunately a very complex area of the law with many traps for the uneducated and un represented creditor.
 
When someone stops paying, I generally send a letter demanding payment as a first step. Your friend should talk to a lawyer about getting paid now. And maybe he's got options to accelerate remaining payments based on untimely payment. It's five to consider what happens if the company files bankruptcy, but I wouldn't get too worked up about it until it happens. Many defendants are one big loss away from bankruptcy anyway. So he should talk to a lawyer.
 
midlifeflyer said:
Unfortunately, your friend needs to consult a bankruptcy attorney. The rules about severance benefits is subject to fairly complex rules about whether the contracts are "executory" (a present obligation or a future one) or not and whether the bankruptcy is under Chapter 11 or not. Even then, there is a split among the federal circuits as to how to handle them. Even in the best case scenario, all it gives is employee claims a level of priority, not an absolute right to payment, so claims with higher priority will take precedence, so even if there are assets for distribution, they may be gone by the time they reach the employee claim priority level. And if the company chooses to pay before filing, it possible that someone paid before the Bankruptcy can be sued to take it all back, either by the company itself in a Chaper 11 or by the Trustee in a Chapter 7 case. Suing in advance is often of minimal benefit

Filing a Proof of Claim can help, and is often a necessity, but even those depend on how the claim form is filled out.

Bankruptcy is unfortunately a very complex area of the law with many traps for the uneducated and un represented creditor.
Click to expand...
I used to work for an Insurance Liquidation Office at the behest of the State Dept of Insurance. IIRC, if you don't file a POC before the bar date, you will be forever "barred" from filing said claim. It won't only help, it may well be your only salvation.

When I worked there, the priority was to conserve the assets of whatever firm in receivership in hopes of making as big a payout to employees and policy-holders as possible. Then a Dem was voted into office and that changed to "drag these out forever so we can continue to collect our paychecks."

I don't know about corporate bankruptcy, but insurance liquidations could take decades before all the litigation was settled, the assets recovered and sold, and the POCs collected and verified.
 
How much of a drain is the debt owed to him relative to the size of the operation ? If it is an ongoing drain on their profitability, they may be interested to settle with him on a lump-sump payment. The two risks to that are that A. the company recovers and he would have been better off with the structured settlement. B. the company goes bankrupt and the trustee does a clawback.

Maybe he needs to go to JG Wentworth :rolleyes:
 
In this day and age...


Rule #1......

Get a Golden Parachute in a lump sum payout.......:yes:.....
 
Looks like you have the opinion of all the smart folks. I'd add to the pile that says "Don't wait... Claim early..." The sooner you're a squeaky wheel, the higher you might be on the pile. Or not. But there's certainly creditors who haven't figured out they are getting the shaft yet. And it'll only be a matter of days before they have their lawyers filing stuff.
 
N801BH said:
In this day and age...


Rule #1......

Get a Golden Parachute in a lump sum payout.......:yes:.....
Click to expand...

Standard practice, even if the total $$ is less. Taking it over time only exposes one to risk such as bankruptcy.
 
General things to consider -

Severance Pay plans are protected as priority claims only - but you must qualify under the terms of the plan. A golden parachute is not a severance pay plan.

Any former executive with a contractual severance arrangement sits as a general unsecured creditor of the corporation [this is a corporation, right?].

That said, if it is a corporation with issued stock subject to SEC rules - publicly traded or not - then you are probably screwed.

If it was a small corporation / Sub S or a small C - there are often things you can do to get at owners assets - I've done it with great success because we represent small businesses and know how they screw up . ..

He needs to find a BK lawyer who represents creditors . . . they are usually larger firms and tend to be expensive - so it depends on the size of the claim.
 
N801BH said:
In this day and age...


Rule #1......

Get a Golden Parachute in a lump sum payout.......:yes:.....
Click to expand...

or funded in a separate trust or using some sort of financial instrument like an annuity or some other funded vehicle that pays out at the specified time and term.
 
bflynn said:
The good news may be that if your friend is depending on these payments as part of their living expenses, they can be prioritized higher than other unsecured claims.

Best of luck. There's a roller coaster ahead.
Click to expand...

WHy you need the money is simply not relevant.

Characterization is.

There are ways to get paid however. .. .
 
comanchepilot said:
or funded in a separate trust or using some sort of financial instrument like an annuity or some other funded vehicle that pays out at the specified time and term.
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Agreed....

An Annuity is a separate vehicle to administer the fund distribution....

Going that route is wise and safe....

But most people bailing out or getting the axe will see a "golden parachute" as a cash cow and never look at the long term implications they bring...:sad::sad:
 
Clark1961 said:
So a friend of mine is owed a substantial sum of money by a former employer (golden parachute thing).

The former employer has stopped making payments on the money contractually owed to my friend. The contract has no provisions which allow them to just decide to stop paying. The former employer has not filed for chapter 11 protection yet but they may be forced to by their lender under the terms of their credit facility.

So, what should/can my friend do to protect his interests? Will a bankruptcy judge give any standing to a former exec with a separation agreement under which the company was paying him? Will he fall to the bottom of the creditors pile and never see another dime? Many questions and prolly only expensive answers from the lawyer types...
Click to expand...

If the company is still open, tell your friend to pack a lunch and go sit in the lobby all day, every day and tell his story to every person, employee, customer and vendor, who walks into the lobby. If he is forcibly removed, then stand in the driveway with a sign, speak to all who will listen. Payments should start again, or better yet, a lump payoff would be better. If the company is closed consult a lawyer.
 
Bankruptcy is a very quirky and technical area of the law, and many lawyers don't even really understand it. The best advice in this thread is to talk to a creditor-side bankruptcy attorney. Most of the other "advice," save for that given by Mark and Comanche Pilot, is pretty misguided. Part of my practice is creditor-side bankruptcy work, and there's not nearly enough info provided here to offer any real "advice." Suffice it to say that if his former employer files for bankruptcy, he's probably in for a painful, and long, process that may end with him getting little to no money from the estate. And as Comanche Pilot noted, good creditor-side bankruptcy attorneys generally aren't cheap, so the size of the claim becomes pretty important.
 
bradg33 said:
Bankruptcy is a very quirky and technical area of the law, and many lawyers don't even really understand it. The best advice in this thread is to talk to a creditor-side bankruptcy attorney. Most of the other "advice," save for that given by Mark and Comanche Pilot, is pretty misguided. Part of my practice is creditor-side bankruptcy work, and there's not nearly enough info provided here to offer any real "advice." Suffice it to say that if his former employer files for bankruptcy, he's probably in for a painful, and long, process that may end with him getting little to no money from the estate. And as Comanche Pilot noted, good creditor-side bankruptcy attorneys generally aren't cheap, so the size of the claim becomes pretty important.
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Would you mind a pm?
 
comanchepilot said:
or funded in a separate trust or using some sort of financial instrument like an annuity or some other funded vehicle that pays out at the specified time and term.
Click to expand...

The likely reason the severance is structured to pay over time is because the company didn't have enough money to pay a lump sum*. Unlikely that they would they have had the money to buy an annuity.







* unless it was done to enforce the terms of a non-compete agreement
 
weilke said:
The likely reason the severance is structured to pay over time is because the company didn't have enough money to pay a lump sum*. Unlikely that they would they have had the money to buy an annuity.
Click to expand...

Lots of speculation here. Nearly all the speculation is inaccurate.

I've kept things vague to protect my friend. Thanks for the input from those who know something. For the speculators, well, it's POA so have fun with your imaginings...
 
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weilke said:
The likely reason the severance is structured to pay over time is because the company didn't have enough money to pay a lump sum*. Unlikely that they would they have had the money to buy an annuity.







* unless it was done to enforce the terms of a non-compete agreement
Click to expand...


Usually that is the case. . . you have continuing non-disparagement and non-compete obligations on the part of the exiting executive.

In a closely held, family type business - it is very common for the corporate obligations not to be followed in a sufficiently detailed manner in order to breach the corporate veil and get at the shareholders assets since the place is technically being operated as a partnership instead of following the corporate obligations required by the law of the state at issue. . . .

If you can breach the corporate veil other creditors can as well - but - if you don't tell anyone except the corporate lawyers and show them the proof - you can often get a settlement outside the bankruptcy case.
 
comanchepilot said:
If you can breach the corporate veil other creditors can as well - but - if you don't tell anyone except the corporate lawyers and show them the proof - you can often get a settlement outside the bankruptcy case.
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How would that not be a preference payment?
 
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