Hurry up and wait. That’s the only option for local businesses owed money by bankrupt Circuit City and LandAmerica.
More than 1,000 entities are owed money by Circuit City, according to a list of creditors filed with the bankruptcy court in Richmond, and the money from a liquidation sale might not yield enough money to pay them all.
“It’s highly unlikely that unsecured [creditors] will be paid 100 cents on the dollar. It’s hard to tell right now what the percentage will be, but it looks like it won’t be much,” said William Gray, a bankruptcy lawyer with Sands Anderson Marks and Miller who is representing a number of shopping centers and builders with claims against Circuit City.
Step one for creditors of all sizes is to file a proof of claim. The deadline for filing in the Circuit City case is January 30. (The form can be found here.) But businesses that were hired after Circuit City declared bankruptcy in November will likely get paid much more. That’s because they are administrative claimants, which places them higher in the pecking order of who gets the proceeds of the liquidation sale.
And although the liquidation sales are going gangbusters – see our other story – legal and advisory costs are piling up quickly. Exact dollar figures aren’t available, but it stands to reason that legal and financial advising bills are adding up fast. Many out-of-town lawyers charge more than $300 an hour.
There is a clear hierarchy to who gets paid during a bankruptcy proceeding. First are the administrative claimants, which include owed taxes and firms who start work after a company files for bankruptcy. The secured creditors get paid next. Secured creditors include banks that have collateral and some vendors that only lent their TVs or other electronics with collateral. They’ll get at least the current value of the collateral, Gray said, which might be less than what it was worth a few months ago depending on the market for the goods.
A little further down the order are the unsecured creditors, which include firms that did work expecting to get paid. And in the caboose are the stockholders, who will likely be wiped out.
So what’s a small business to do if owed money by a bankrupt entity?
Most small businesses are probably unsecured creditors. First, they should do a quick cost-benefit analysis. If a company is owed only a few thousand dollars, it’s probably best to file a proof of claim without a lawyer.
But because parties are vying for a piece of a rapidly disappearing pie, most businesses with larger claims are hiring legal representation.
“If you continue to do business with Circuit City after the bankruptcy filing, then it might make sense to get a lawyer to protect your interests for the administrative period,” said Roy Terry, a bankruptcy lawyer with Durrette Bradshaw.
LandAmerica, another Richmond company that declared bankruptcy last year, will file its bankruptcy schedule in February. That means the deadline for proof of claims won’t be for a few months after that. But businesses that deal with LandAmerica likely won’t get anything, lawyers say, because the company has huge liabilities, some of which are still being worked out in court. The lawyers’ fees must be paid first, and they are accumulating quickly as more and more cases are filed against the title insurance company.
It’s not always the case that debtors get stiffed. When Richmond-based Best Products filed bankruptcy in 1996, area lawyers recall that unsecured creditors were paid more than $.50 on the dollar.
But Movie Gallery, a chain of movie stores that declared bankruptcy last year, paid only 10 to 12 percent of claims, said Gray, who is still working on that case a year after it was filed.
The lesson in all of this, Terry said, is that businesses shouldn’t let companies run up their balance. “The first and best rule is to get paid or don’t do service or provide an item. Credit terms need to be short, and if somebody starts pushing you out, that’s the big danger sign.”
Aaron Kremer is the BizSense editor. Please send story ideas to [email protected].
Photo curtesy of Jeff Auth.