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Purple East President Drew Phillippy says a new federal law making Chapter 11 bankruptcy easier “saved a small business that’s been in the Grand Rapids area for 45 years.” Purple East President Drew Phillippy says a new federal law making Chapter 11 bankruptcy easier “saved a small business that’s been in the Grand Rapids area for 45 years.” MIBIZ PHOTO: KATY BATDORFF

New Chapter 11 laws offer small businesses a timely, cost-effective lifeline

BY Sunday, October 25, 2020 06:00pm

For more than 45 years, Purple East has been a stalwart alternative lifestyle retailer in Grand Rapids, gaining a reputation for selling an assortment of clothing, glass pipes and smoking accessories.

More recently, though, the future of the company was unclear. Purple East expanded from one to four locations in the greater Grand Rapids area over the past two years, overextending itself ahead of the COVID-19 pandemic that’s wreaked havoc on small businesses — including retailers. 

In mid April, Purple East Plus Inc. filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Western District of Michigan. The company at the time reported more than $270,000 in unsecured debts owed for property leases, utility payments, receivables, state and federal taxes and business loans.

However, it wasn’t a typical Chapter 11 bankruptcy, but one that attorneys expect to see an increasing number of in the coming months. Purple East filed under Subchapter V of the U.S. Bankruptcy Code, which was created by the Small Business Reorganization Act passed by Congress last year and which took effect in February. The law — nearly a decade in the making — was meant to help save small businesses through bankruptcy by reducing the cost and time of a typical Chapter 11 filing while allowing owners to retain a stake in the company. 

By late September, Purple East became the first entity in the Western District of Michigan to have a bankruptcy plan confirmed under the Small Business Reorganization Act. 

Purple East President Drew Phillippy said the process and the ability to emerge from three leases made it relatively easy to shift from four stores to one, which is in operation on Plainfield Avenue in Grand Rapids. 

“I think a lot of people would have been sad if this company died because of COVID and over-expansion,” Phillippy said.

The company plans to pay off creditors over the next three years.

“It’s a powerful tool for small businesses to reorganize similar to what large corporations can do,” Steve Bylenga, partner at Chase Bylenga Hulst PLLC who represented Purple East, said of the new law. “We’re going to see more companies similar to Purple East be able to reorganize instead of liquidating and come out in a pretty good position.”

Less costly, more efficient

Bankruptcy experts expect to see more cases like Purple East in the coming months. In Michigan’s Western District — which spans 34 counties in the Lower Peninsula and the entire Upper Peninsula — six other entities had filed Chapter 11 bankruptcy plans under the Small Business Reorganization Act (SBRA) as of Oct. 20. In the Eastern District covering the rest of the state, 10 plans had been filed under the Act. 

Debtors are a mix of small businesses — retailers, medical practices, investment groups, to name a few — as well as individuals, who can file under the act if a majority of their debt is from their business. 

Mark Sellers III — chairman and founder of Grand Rapids-based BarFly Ventures LLC, the parent company of the HopCat beer bar chain that filed for Chapter 11 bankruptcy in early June — filed for bankruptcy under the SBRA as an individual in late August. Sellers did not respond to a request for comment.

The SBRA was designed to keep small businesses afloat while owners retain control of the company as a sort of mix between Chapter 7 and Chapter 11. The SBRA includes fewer costly requirements under a typical Chapter 11 — for example, it doesn’t generally require debtors to file a disclosure statement. It also seeks to eliminate the potential for competing reorganization plans from creditors. Meanwhile, the law includes a 90-day deadline for a debtor to file a plan after a relief order.

The debt for entities seeking reorganization under the SBRA is capped at $7.5 million. As in Chapter 7 cases, a trustee is appointed to oversee an SBRA reorganization plan.

Richardo Kilpatrick, president of Troy-based Kilpatrick & Associates PC, is among the designated trustees in Michigan’s Eastern District. Kilpatrick was involved with early drafts of SBRA-like bills around 2010 through the National Bankruptcy Conference. He continued working with Congress through the American Bankruptcy Institute on a new bill, which all stemmed from the small business losses incurred during the Great Recession. 

Kilpatrick’s role as a trustee mostly involves mediation, he said. He also represents creditors in bankruptcy cases.

“It’s been amazing,” Kilpatrick said of the new law. “The expedited process and the return have reduced costs and I think ended up with a better result for the creditors I’ve represented. The opinion generally is very, very good about the statute. It’s really interesting when you can do good while doing well.”

Todd Almassian, partner at Grand Rapids-based Keller & Almassian PLC, said requiring only debtors to file a reorganization plan while allowing them to retain a stake in the company are two key features of the SBRA. Almassian is representing Krieger Craftsmen Inc., a Walker-based manufacturer that filed for Chapter 11 under the SBRA in October. Like Purple East, Krieger Craftsmen officials cited business overextension compounded by the pandemic that led to insolvency.

“We’re starting to see an uptick in (SBRA cases) and I think we’re going to see a lot of successful reorganizations now,” Almassian said. “In the past, the administrative expense burden and the procedural hurdles prevented some small companies from reorganizing.”

He echoed Kilpatrick in noting that creditors still are repaid under SBRA plans.

“They might not get 100 cents on the dollar, but over three to five years, they’ll get something back,” Almassian said. “It’s a heck of a lot better than these companies liquidating for pennies on the dollar.”

‘Bankruptcy tsunami’

Kilpatrick said some clarity is still needed as the law matures — for instance, when debtors are required to file three- or five-year plans to emerge from debt. Also, he wants to see the debt limit raised from $7.5 million to $10 million.

It’s also difficult for consultants and trustees to predict a distressed business’ future income in the middle of a pandemic.

“For lack of a better term, it’s all new to all of us,” said Scott Chernich, an attorney and shareholder with Foster, Swift, Collins & Smith PC who’s one of three appointed trustees in the Western District. Chernich served as the trustee in the Purple East case. He suspects additional filings may come from small manufacturers, retailers and hospitality businesses affected by the pandemic.

Despite the needed clarifications that will likely come in time, Chernich and the other attorneys who spoke with MiBiz for this story all agreed that the SBRA appears to be working as intended — and that it couldn’t have come at a better time.

Pandemic-related bankruptcy filings are expected to rise in the coming months and through next year. Commercial Chapter 11 filings nationwide totaled 747 in September, a 78-percent increase over the same period last year, according to the American Bankruptcy Institute. The ABI noted this month that expiring government relief programs, high unemployment and a “precarious financial outlook for many sectors will likely lead to a dramatic climb in filings in early 2021.”

“There’s going to be a bankruptcy tsunami at some point,” Kilpatrick said.

But if Purple East is any indication, the SBRA may be a lifeline for at least some small businesses facing dire pandemic-induced circumstances.

“From the company’s perspective, we’re just really grateful this law exists,” Purple East’s Phillippy said. “With the combination of expansion and COVID-19, if we didn’t have this Chapter 11 option, there’s no way we could have dealt with both. That really was the move that saved a small business that’s been in the Grand Rapids area for 45 years.”

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