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Lawyers: In bankruptcy cases like Birdsall, early decisions are critical

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The Chapter 11 bankruptcy filing last week by the Eatontown engineering firm Birdsall Services Group followed an extraordinary chain of events: The state went to court to seize the company's assets, and several people associated with Birdsall were indicted for conspiracy and money laundering in connection with alleged violations of state pay-to-play laws.

But last week, the company took a step that is quite customary in Chapter 11 cases: assuring employees that the goal of the bankruptcy filing is the continued survival of the company.

In a letter, a copy of which was obtained by NJBIZ, employees were told the Chapter 11 filing "will allow us to restructure our company, protect our employees, and most importantly provide us access to our assets again."

While declining to comment specifically on Birdsall, bankruptcy attorneys said the decisions companies make in the early days of a Chapter 11 filing are the ones that can increase the odds of a successful exit.

Attorney Jeffrey S. Posta, of Stark & Stark, said bankruptcy is expensive, and it's critical for the company to have financing lined up before filing.

"You have to be liquid to last in a bankruptcy case," he said. "So the company has to certainly be in a position where they have a cash reserve going into a case. It is not a cheap process, and usually the longer it goes, the more expensive it is."

And, he said, the company needs a strategic plan: "You really need to know where you are going in the case before you file it. You need an exit strategy — what are you going to do and what are you going to accomplish, and what is the end game going to be?"

He said these issues are ideally tackled before heading to court. In recent years, the trend has been for companies to sell their assets while in Chapter 11, rather than reorganizing and emerging as a going concern, he said. In such a case, "the company sells pieces off to the highest bidders, and (the company) doesn't survive the process."

Attorney Joseph L. Schwartz, of Riker, Danzig, Scherer, Hyland & Perretti, struck a similar tone. "You have to line up financing beforehand — you can't just file and hope that financing will find you," he said. And the company "should probably send a notice out of some type to all employees and vendors to assure them that they are going to continue operating."

Schwartz said it is not usually difficult to keep employees on board following a Chapter 11 filling, "because normally, you will assure them that their jobs are safe for the time being. You will not lie — if your plan is simply to sell your assets and get out of Dodge, and you don't know whether the employees will be retained by the purchaser, you have to be honest."

Additionally, he said, "with unemployment being as high as it is, it is not that easy for employees to just jump ship and get new jobs." To that end, it is important for the company to get court approval to pay the prepetition claims of employees, and if there is accrued vacation time, the company could seek the court's approval for those employee claims to be designed as priority claims.

"Usually, it is not very difficult to retain employees," Schwartz said "But if things are going south and you are not able to get authority on day one to pay the pre-petition claims of the employees, then yes, the employees could bolt. But normally, I would say it is not a big problem."

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Beth Fitzgerald

Beth Fitzgerald

Beth Fitzgerald reports on health care, small business and higher education. She joined NJBIZ in 2008 after a 34-year career at the Star-Ledger and has been reporting on business in New Jersey since 1978. Her email is beth@njbiz.com and she is @bethfitzgerald8 on Twitter.

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