Staffing company interests and obligations are all too easily orphaned in the days just preceding, and immediately after, a Chapter 11 bankruptcy petition. The general pressures of the filing can push the Chapter 11 debtor’s relationship with its staffing companies to the bottom of the pile. And because of the effects of the automatic stay, intended to give the Chapter 11 debtor breathing room, staffing issues can molder at the bottom of that pile — very much to the detriment of the staffing companies that may, in many cases, be the real drivers behind the success or failure of a debtor’s reorganization or sale. And without quick and active intervention, those same staffing companies may bear the brunt of the cost and risk of a debtor’s sale or reorganization plans.
That staffing companies bear that cost and risk is their own mistake. Active, early intervention by experienced bankruptcy counsel can make the difference between a bankruptcy that destroys a debtor — and that hobbles or destroys its staffing companies — or one which allows both to move forward, reduce risk and loss, and grow a stronger relationship.
The great weight of bankruptcy court authority holds that a debtor’s pre-petition obligations to a staffing company are general unsecured claims. That’s bad. Pennies on the dollar bad. And that is what the staffing companies will be stuck with, at best, if they take no immediate action in bankruptcy on pre-petition claims.
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At least one case suggests that a staffing company, having negotiated with the debtor, may be able to receive what is called critical vendor” treatment — and payment — for amounts that would have been priority claims during a fixed period preceding the petition date. Obtaining critical vendor status is subject to a post-petition debtor motion, court and creditor review and objection, and court order. Critical vendor status is essentially an admission by the debtor that it cannot survive without the staffing company, and it is likely also an admission by the staffing company that it cannot continue to service the debtor without that status. A staffing company will not always be able to obtain critical vendor status, even if a debtor would like to provide it.
For instance, a staffing company that provides services that are commonly available, such as cleaning or basic temp work, may not truly be a critical vendor. However, it is absolutely worth the initial try even if criticality is dubious. And it sparks a conversation with the debtor, raising questions that should be answered.
For instance, to the extent that a staffing agreement is executory (i.e., obligations remain to be performed by both parties), has the debtor provided adequate assurance to the staffing company of future performance? Notwithstanding a pre-petition default, has the debtor defaulted post-petition, or will it do so shortly? Is the contract close to termination, and does the staffing company have the right — and can or should it be sending — notice of termination? What are the debtor’s intentions with regard to the contract if it is executor; i.e., does the debtor intend to assume it by order of the bankruptcy court (which is usually the gold standard), or is it the debtor’s intent to reject the contract, and if so, when? Does the debtor provide a line item for staffing expenses in any budget with its lender, and in any cash collateral finance order approved by the bankruptcy court? Will the debtor consent to administrative treatment for the staffing company as to all post-petition amounts due, and because of the risks attendant upon the staffing company, will the debtor consent to expedited relief form stay or termination if debtor defaults post-petition, or if debtor’s financials, receivables or reorganization steps fall below certain agreed thresholds? Is the money due the staffing company, some or all of it, even property of the bankruptcy estate?
That is a lot of questions. Questions that most staffing companies may not be asking, and if at all, maybe too late. Our experience has shown that one of the key characteristics common to creditors on executory contracts in Chapter 11 is that early legal action in the bankruptcy court is rewarded.
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