Published by Mark

Beware! Business Lawsuits Can Lead To Business Bankruptcy

February 24, 2009 at 9:26 am

Business bankruptcies come in different shapes and sizes. An Associated Press article talked about the conditions attached to the loans our government is making to GM and Chrysler being very much like a restructuring typical of a bankruptcy, even though neither of the two companies has actually filed bankruptcy. “Moves by carmakers mimic Chapter 11”, the headline in the Indianapolis Star read.

Muzak Holdings, sellers of background music heard in stores, actually did file for Chapter 11 bankruptcy protection, hoping to remain in business while reorganizing. It’s easy to see how changes in the way music is sold and licensed for use could affect Muzak’s traditional business model. Shifts in regional demographics, innovations in technology, and changing trends can all bring even well-run businesses down.

In the case of small business owners, an expensive medical illness in the family can overwhelm the business owner’s financial capacities. And, let’s face it, sometimes the very entrepreneurial risk-taking we so admire in our country just doesn’t pay off. The bankruptcy safety net was put in place for all those reasons.

As a bankruptcy attorney in Indiana, I’ve seen many business successes and as many business failures. In my earlier bankruptcy blog, “Small Business Owners Have Lots Of Big Company In Bankruptcy”, I cited a study by the Ewing Marion Kaufman Foundation For Entrepreneurship that showed many businesses fail because of reversals in their marketplace or in their industry.

Thousands and thousands of bankruptcies are filed for a different reason altogether – lawsuits.

Filing for bankruptcy can actually stop a lawsuit, because the Automatic Stay stops most legal proceedings and collection actions against the business owner. Depending on the facts of the case (if you have a good chance of winning the lawsuit, then bankruptcy may not be the best option), the business owner and his attorney can decide on the best course of action. In fact, I’ve filed many bankruptcies for business owners who had an absolutely winning case, but who chose to file bankruptcy to avoid the onerous cost of defending a frivolous lawsuit.

Sometimes it happens that a lawsuit forces a company to file bankruptcy because that company has no good legal defense against the suing parties, and/or not enough financial resources to continue the legal defense effort.

The most glaring recent example of this is Peanut Corporation of America, which, because of the salmonella scare, has filed Chapter 7 bankruptcy and has begun liquidating assets as claims against it pile up. This is not a typical corporate bankruptcy, because questions remain about criminal neglect on the part of Peanut Company of America and about FDA neglect in its inspection process. Nevertheless, PCA’s bankruptcy serves as an example of a financially profitable company that was forced into bankruptcy because of a lawsuit.

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