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How a Business Bankruptcy in Los Angeles Can Affect Individual Owners, Shareholders

By American_Apparel [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsBankruptcy offers a variety of ways to deal with debts that have outpaced one’s ability to make required payments. Certain tools are available for individuals and families, while others are better suited to corporations and other business organizations. Part of the purpose of creating a fictitious business entity, such as a corporation, is to protect business owners from personal liability for business losses. If a business files for bankruptcy protection, the owners may have to have some involvement in the proceeding, but the case will not necessarily have a direct impact on their personal finances—in the absence of any evidence of fraud or other misconduct, of course. A business bankruptcy can still have a significant impact on an individual owner, however, simply due to the process of reorganizing the business or liquidating its assets. In some cases, it can lead to financial trouble for business owners as well.

A Los Angeles-based clothing retailer, American Apparel, filed for Chapter 11 bankruptcy in early October 2015. The company has gained notoriety in recent years for, as Reuters put it, “its sexually charged advertising and controversial founder.” It operates 227 store locations in the U.S. and 18 other countries, but it has not turned a profit since 2010.

The company’s founder, who is also its former CEO, ostensibly owns 42 percent of the company’s stock. A New York hedge fund reportedly holds the stock as collateral, however, and claims to be owed $15 million by the company. The founder has been the subject of multiple controversies and complaints, including several lawsuits by former employees accusing him of sexual harassment. The company has reportedly hinted that this played a part in the decision to file for bankruptcy. He stands to incur substantial losses due to the bankruptcy. This offers an example—albeit a rather extreme one—of how a business bankruptcy can affect people close to the business’ operations.

Businesses have two main options with regard to bankruptcy, which are similar to the bankruptcy options for individual debtors. A Chapter 11 bankruptcy involves reorganizing the business while paying down and otherwise eliminating debts, with the ultimate goal of keeping the business running. This bears some similarities to a Chapter 13 bankruptcy, although they are mostly superficial. Both businesses and individuals can file for Chapter 7 bankruptcy, which focuses on liquidating assets in order to pay down debts. A business that files for Chapter 7 typically ceases all operations, and the business is likely to be dissolved at the end of the case.

Either type of bankruptcy case will affect the rights and interests of the business’ owners, known as shareholders in the case of a corporation. In small and closely held corporations, shareholders are often founders, people closely associated with the business, and investors. Shareholders in publicly traded corporations are more likely to be investors who purchased stock in a financial market like the New York Stock Exchange.

Regardless of how a shareholder acquired equity in a company, bankruptcy can potentially wipe out their interest. A Chapter 11 case freezes trading, which can cause the value of stock to plummet. In a Chapter 7 case, shareholders become creditors with very low priority, below both secured and unsecured creditors.

Since 1997, Los Angeles bankruptcy attorney Devin Sawdayi has represented individuals and families who are dealing with financial distress, guiding them through the Chapter 7 and Chapter 13 bankruptcy processes. Contact us online or at (310) 475-939 today to schedule a free and confidential consultation with a knowledgeable, experienced, and compassionate financial advocate.

More Blog Posts:

City of San Bernardino, California’s Bankruptcy Case Results in Multitude of Legal Disputes, Los Angeles Bankruptcy Lawyer Blawg, August 29, 2015

Chapter 7 Bankruptcy Case Reopened for Creditors Left Out of Debtor’s Schedules, Los Angeles Bankruptcy Lawyer Blawg, August 7, 2015

Chapter 13 Case Dismissed Due to Failure to Disclose Prior Bankruptcy Filings, Other Acts Deemed in Bad Faith, Los Angeles Bankruptcy Lawyer Blawg, July 30, 2015

Photo credit: By American_Apparel [CC BY 2.0], via Wikimedia Commons.