Let’s faux my legislation agency signed a lease that turned out to be overpriced and burdensome. Aside from that lease, my legislation agency does rather well, however I’d wish to see my agency get out from underneath this one unhealthy lease.
A number of latest chapter circumstances counsel a superb escape hatch.
I can break my legislation agency into two corporations. A type of corporations (“Unhealthy Firm”) stays liable for the unhealthy lease and a lot of the agency’s bank card payments. The opposite firm (“Good Firm”) retains the accounts receivable, the precious consumer and worker relationships, the legislation books (sure, we now have legislation books), the bar affiliation memberships, and no matter else makes a legislation agency beneficial. Good Firm retains a lot of the financial institution accounts, however I throw sufficient financial institution accounts into Unhealthy Firm so I can say it’s a severe firm. Good Firm stops being liable for the unhealthy lease and the bank card debt.
Some states, resembling Texas, enable corporations to interrupt in two this fashion. The Delaware restricted legal responsibility firm legislation presents an analogous mechanism. To make all of it work, I’d must terminate my authentic firm and simply create two new corporations as a replacement.
As soon as I’ve sliced and diced my legislation agency’s belongings and liabilities, all I must do is put Unhealthy Firm out of business. Unhealthy Firm has some belongings. The chapter course of will take care of these belongings and Unhealthy Firm’s liabilities the identical as in every other chapter. There gained’t be a lot for the owner or any bank card firm to recuperate, however there can be one thing. My legislation agency will efficiently keep away from legal responsibility for its lease, together with some bank card legal responsibility.
It’s a terrific plan. It additionally sounds fairly counterintuitive, even foolish. You’d suppose that when my legislation agency indicators a lease or incurs bank card debt, I shouldn’t have the ability to restructure my little empire in such a approach that my collectors lose entry to the belongings that might in any other case have backed my legislation agency’s legal responsibility to them.
A number of latest massive bankruptcies counsel that my Unhealthy Firm/Good Firm plan would possibly truly work, at the very least if I have been the defendant in tens of hundreds of lawsuits claiming that I offered merchandise that made individuals sick. Within the chapter world, they name this plan the Texas Two-Step, as a result of it begins in Texas with the Texas legislation that enables an organization to slice off belongings and liabilities into a brand new firm. Only recently, Johnson & Johnson tried to try this when it confronted 40,000 lawsuits arising from its talcum child powder merchandise. Earlier than that, a number of different corporations did the identical factor.
Some members within the chapter system have argued that the Texas Two-Step is abusive and shouldn’t be allowed. I’d agree, until I can use the identical approach to eliminate that unhealthy lease and my undesirable bank card debt.