Family Run Business and Bankruptcy

Please Note:

The information in this web site is not intended to constitute legal advice or to create an attorney-client relationship. It is also important to note that the information contained in this article may be outdated.
It is very important that you obtain legal advice from an experienced bankruptcy attorney regarding your particular situation. Consultation before you take action will certainly cost you less than what it will cost to fix your unintentional errors.

Filing bankruptcy for one company may bring the assets of another company owned by the same family or group into the bankruptcy of the first.  In a recent decision, In re Cameron Construction & Roofing Co., Adv. P. No. 15-1121, 2016 WL 7241337 (Bankr. D. Mass. December 14, 2016), the Bankruptcy Court made the assets of an entity not in bankruptcy available to creditors in the bankruptcy proceeding (applying substantive consolidation).
In Cameron, there were two companies controlled by one person; one a roofing company and the other a real estate company.  Each entity filed separate tax returns, issued separate W-2 forms to employees, and filed annual reports. To the outside world they appeared to be two separate entities, so why did the bankruptcy court find it appropriate to combine the assets?

• The founder of the companies exercised control over both entities
• Employees performed services for both companies, with no delineation between the two entities
• One entity paid above market rent to the other, with no written lease arrangement
• Neither company had any corporate records such as meeting minutes, votes or resolutions approving any transactions between the two entities

What should family business enterprises do to avoid this result?  It is simple: use good business practices.  Operate as though there are two wholly unrelated companies by following all rules, laws or regulations related to the operation of a business.  :

• separate and distinct board of directors for each entity
• have regularly scheduled board of directors meetings, and minutes should be taken at each meeting.
• Make sure all related party transactions are formally reviewed, documented, and approved, either in meetings or by written consent.
• All arrangements between related entities be at at market rates (rent, services, etc) and the payments are clearly identified.
• If an employee is working for multiple entities – track their time and payments.

This might be expensive, but it certainly is a wise business practice, even if bankruptcy is in the cards for any of the entities.

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