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Michigan commercial bankruptcy case converted to Chapter 7

We've discussed a number of business bankruptcy cases in recent weeks on our Wayne County bankruptcy law blog. The latest involved a national restaurant chain emerging successfully from Chapter 11. However, one recent example of a commercial bankruptcy right here in Michigan highlights the importance of a sound reorganization plan when filing for Chapter 11, and the consequences of failing to develop one in the time allotted.

The business in question is a shopping center in a town a few hours northwest of Wayne. The developer had a successful record of strip malls and chose the site of an old apple orchard for this particular one. It failed to secure full funding, however, with the only tenant eventually suing the developer for failing to complete the rest of the mall on time.

The developer filed for Chapter 11 in order to try to solidify funding to complete the mall in spite of over $7 million owed to banks, attorneys and local government agencies. Chapter 11 can be a valuable tool for business owners in situations like this, who need protection from their creditors while they work out a plan to reorganize and return to profitability. Eventually some debts -- although usually less than the full amount owed -- are repaid in Chapter 11.

But after almost a year in Chapter 11, this developer's largest creditor asked a judge to convert the case into a Chapter 7, or liquidation, bankruptcy. In reviewing the request, the judge found that the latest business reorganization plan was too speculative and still fell almost $325,000 short of balancing the books. Therefore, he ruled that the shopping center case should indeed move into Chapter 7.

Unlike Chapter 11, a business does not emerge and continue operations after Chapter 7. Chapter 7 entails the liquidation of assets in order to pay off debts, effectively shutting down the business. For business owners who want to avoid this outcome, Chapter 11 can effectively offer them a second chance, but it is not a given, it is not an automatic do-over. Without a thorough, realistic plan to rejuvenate cash flow, Michigan businesses may have to go through Chapter 7 anyway.

Source: Mlive, "Bankruptcy judge throws Village at Knapp's Crossing into Chapter 7 liquidation proceedings," Jim Harger, June 9, 2014

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