Heller Bankruptcy Imminent?

And what does this mean not only for those of us capsized earlier in the year but those currently still working for Heller Ehrman?

Your cruise director has it on very good authority from sources within Heller that the banks basically emptied out Heller’s bank accounts yesterday.  This was probably done in anticipation of Heller being forced into bankruptcy by various lawsuits – most recently its San Francisco landlord.

We’ll have more information as it develops.


10 Responses to “Heller Bankruptcy Imminent?”

  1. 1 Former Associate 11 December 2008 at 12:12 pm

    Would the SF landlord have filed a complaint this week if it intended to commence a BK proceeding? Wouldn’t that be a waste of legal fees? Also, isn’t a landlord’s recovery limited in a BK?

  2. 2 Jayne Loughry 11 December 2008 at 12:44 pm

    Yes, no, yes.

    The lawsuit claims Heller owes the landlord $85 million. By filing a lawsuit with that big fat dollar number, the landlord can assert it is Heller’s largest single creditor, which would/will give it a more powerful voice in any bankruptcy proceedings, a voice which I presume they (the landlords collectively) would use to try to take control of the process, most notably by trying to get someone of their choosing elected trustee in place of someone appointed off the U.S. Trustee’s panel. In trustee elections, the amount of a claim sort of turn into votes. So think of the $85 million claimed in the lawsuit as an easy way for the landlord to amass 85 million votes in a trustee election, which should be plenty to get its guy elected.

    Landlords are rarely secured creditors, so, but for one exception, they should stand in line along with all the other unsecured creditors, which in turn means landlords’ percentage of recovery (“cents on the dollar”) should be the same and should be paid at the same time as all other unsecured creditors, including employees. Here’s the exception and it’s a big one for you folks: Among unsecured creditor claims, wage claims have priority status up to, I believe it’s now, $10,000. The priority means that, up to $10,000 of an employee’s wage claim should be paid before the landlords or any other unsecured creditor gets paid a penny. This is how it’s supposed to work, but of course there are lots of ways a trustee who is the landlord’s puppet could try to screw over the employees so that there’d be more money for the landlord(s).

    There’s a lot more you all will need to know if Heller goes into bankruptcy — voluntarily or otherwise — but now’s probably not the time for me to spin your heads with more detail. What’s most important to know is: the signs point toward the landlord(s) taking into bankruptcy and, very likely, trying to control the bankruptcy for its/their benefit. If this happens, you all will need to act quickly.

  3. 3 Former Associate 11 December 2008 at 1:40 pm

    But isn’t the size of the claim the same regardless of whether the landlord has filed suit or not? Don’t you think they would have already filed if they were going to, while there was much more AR still out there?

  4. 4 Green Ham 11 December 2008 at 2:38 pm

    Personal to Jayne Loughry: You are absolutely the best. Thank you so much for your detailed analyses of various issues. The technical information you impart — along with your clearly evident compassion for those of us dealing with the HE aftermath — are enormously appreciated.

  5. 5 Jayne Loughry 11 December 2008 at 5:56 pm

    Former Associate:

    First question: Not necessarily. I’m guessing you’re not a litigator. Pumping up alleged damages in a complaint is not an unusual plaintiff attorney tactic. Sue for a zillion, settle for a million. High damage claims: get the defendant’s attention; most lawsuits settle rather than go to trial, so most plaintiffs end up getting less than they claim; pumping up damages in the complaint raises the ceiling, thus, improving plaintiff’s chances of getting a higher settlement. Of course I haven’t seen the leases or even the SF landlord’s complaint, and the current economy is likely making it harder to rent the space, nevertheless, my gut says that $85 million is probably a very pumped up number.

    Second question: Maybe, but I don’t think so. First, though it might seem like an eternity to all of you, it really has only been a couple of months since Heller announced its closure. The Brobeck landlords took several months to file their lawsuit and a few months more before filing for involuntary bankruptcy against Brobeck (all added up, it was about 7 months from closure announcement to bankruptcy). So why did they wait? Probably for the same reasons Heller’s landlords would wait.

    Actually, there’s no reason to rush a lawsuit. If the debt to the landlords is unsecured — as it very likely is — then the landlords know they’re not going to see a dime until the secured debt (whatever’s owed to the banks) is paid off. Neither reason to nor sense in filing a lawsuit until a) you think the banks are close to being paid off, and b) you think there will or can be a lot of money/assets left over after the banks are paid, but c) you come to suspect that the Heller dissolution committee isn’t going to make much/any effort to keep collecting money/assets just to pay you off. (By the way, as I wrote in the “Through A Glass Darkly” thread, accounts receivable are by no means Heller’s only collectible assets; rather just the only ones that the Heller shareholders likely want collected, and even then I imagine they want them collected only to the extent necessary to pay off the banks and, thus they delusionally hope, eliminate their personal liability.)

    The SF landlord’s lawsuit seems to indicate the landlord now believes that the conditions described above — a), b), and c) — have all come to pass or are close at hand. It’s possible that the landlord suit was intended to scare the dissolution committee and shareholders into coming up with some bucks for the landlord, but I don’t think so because it’s kind of an empty threat, much like the employees’ class action and even wage claims filed with state labor departments are empty threats. Litigation takes too long. Before a single deposition is taken, the banks will have been paid off, the dissolution committee will have stopped collecting assets, will spend whatever money is left however they want (perhaps giving Larrabie the $12,000 he had the nerve to say he was owed) and then close up shop. Plaintiffs in any of the lawsuits won’t be able to go after the uncollected assets unless and until they prove their cases, by which time collecting the assets will be much more difficult, if not impossible. For this, and a lot of other reasons, I expect the landlords know that pursuing a lawsuit against the Heller dissolution committee and shareholders would be a lengthy, expensive, and royal pain in the ass. This is mostly why I think the landlord’s lawsuit is more likely a prelude to taking Heller into bankruptcy rather than just a scare tactic.

    Because, if Heller is taken into bankruptcy, then it’s a very different scenario. Involuntary bankruptcy would yank all control away from the dissolution committee and the former shareholders. The trustee would take control of everything; the trustee could and should aggressively pursue recovery of all assets (not just the ones the shareholders don’t mind being recovered). All lawsuits would be stayed. Claims for money owed by Heller would have to be made in the bankruptcy proceeding. The trustee, presumably (hopefully) following bankruptcy law, and with the approval of the bankruptcy court, would have control over settling and paying claims. You see, the trustee has a lot of control and power. So if a landlord could get his guy elected trustee, then a landlord might well think it has a much better chance of getting paid back of big chunk of what it’s owed. I happen to think the employees would also have a better chance of getting at least some of what you’re owed in a bankruptcy than in a lawsuit, wage claim, or — most definitely — sitting around waiting for the shareholders to do the right thing. The trick, however, would be for the employees to act quickly enough to avoid or minimize the harm of getting stuck with a puppet trustee.

    I’m just reading tea leaves, but the report of the banks emptying the accounts yesterday is one hell of a leaf. I doubt BofA needed the money in the Heller accounts so that it could make its promised loan to Republic Windows. I think it more likely that the banks know/suspect a bankruptcy filing is indeed imminent, and they wanted to get all the cash on hand while it still could, i.e., before the bankruptcy filing. Yes, in a bankruptcy any remaining debt to the banks will be the first debt paid, but draining whatever was in the accounts meant the banks got that part of the debt sooner rather than later.

    Lastly, I’d guess that the landlords and their lawyers have been spending the past couple of months reading the tea leaves also. Indeed, I assume they and others have and continue to lurk here trying to pick up info. (Hi guys! Don’t expect the Heller employees to be as easily duped as I was.)

    Green Ham: Thank you. I know you all hoped that Heller would be different than Brobeck, but so far it’s been deja vu all over again. The hardest part of dealing with the Brobeck mess was that we didn’t know anything, we had to learn everything the hard way, and I made a ton of mistakes. I deeply hate that this is happening to you all, so if sharing what I learned can make it any easier for you, then I’m happy to do so. Bottom line, however, you folks need to either get organized and fight for what you’re owed or just walk away and forget about it all. If you work together (staff and associates) you can make the bastards pay.

  6. 6 Former Associate 12 December 2008 at 10:34 am

    Actually, Jayne, I am a litigator, and a very good one. I understand the concept of puffing up the amount of a claim so that the settlement is higher than it otherwise would be, but landlords’ damages are capped in BK. Heller, its lawyers, and the landlords all know that. As would the BK judge.

    Now, maybe they filed a complaint with sensationally high damages to encourage Heller to settle now. Technically, the prayer is probably correct inasmuch as the measure of damages for breach of lease is all the rent that is due for the remainder of the entire term. Of course, the landlord has a duty to mitigate its damages by renting the property out again, which reduces the amount of damages by whatever the new tenant pays.

    I’m not saying BK is or is not imminent, I just don’t see the landlord complaints as necessarily being a precursor to an involuntary petition by the landlords. Now, it may spook employees (like me) into thinking we need to do it ourselves, but I’m going to wait until after the New Year (or after I find a job) to do anything too controversial.

    And Jayne, I really appreciate your posts. Your insights are incredibly invaluable to all of us. Please keep ’em coming.

  7. 7 P-Owed 12 December 2008 at 10:41 am

    Jayne – Thanks so much for your insight and advice. Much appreciated.

    Obviously, A/R collections are coming in in drips and drabs, or not at all now. Hence the landlord actions.
    The DC informed us that they expect the banks to be paid off by the end of the year. The big issue is what happens next after they get the banks off their backs? The DC acknowledges the obligations Heller owes the employees so do you really think they’d close up shop and walk away once the banks are paid off? Hope not…

    Other than A/R, what are the other collectible assets you think Heller has? Also, are the shareholders shielded 100% from any personal liability?

    Given the lack of transparency from the DC, BK is looking more and more appealing from an employee perspective. Let’s get it all out in the open. The employees would get at least $10K each right?


    Thanks again.

  8. 8 My Guess 12 December 2008 at 1:32 pm

    Is that the 12K is a disbursement from one of his 3 day junkets! You know first class flights, $600 a night rooms, $200 bottles of wine ect ect. The creditors list was probably automatically generated via a financial system report. The million $ question though is if he had the chance would he now retract that disbursement? Hmmmm

    My opinion is that unless the DC makes a positive statement regarding their progress and the likelyhood of payments to employees by early Jan. push them into BK. As someone said, this will force some transparency.

    My entrepreneurial suggestion of the day. Someone create a database of all ex-heller partners and their current employment address, web enable it and for the price of $1/partner allow ex-employees to send a personalized (anonymous) Christmas cards describing just how f@cked their Christmas is going to be(hopefully to be read by the mail staff and their new secretary prior to its delivery.)

  9. 9 hellerclerk 12 December 2008 at 5:48 pm

    Apparently, BofA did need the money. Or will soon.


  10. 10 Another Former Associate 18 December 2008 at 1:28 am

    As noted above, the landlord’s claim would be capped in any bankruptcy. To one year’s rent of the remaining lease term.

    It is not in the landlord’s interest to push Heller into bankruptcy, and — regardless of whether that happened in Brobeck — it is very rare for a landlord to initiate an involuntary bankruptcy. There is just no reason to barge into that bk cap on the claim, when there is no such limit on the full contract damages outside bk. Landlord would still have a very large claim to work with, of course.

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