December 01, 2001
Meetings & Conventions: Planner's Portfolio December 2001 Current Issue
December 2001 lawandplan.gifPLANNER'S PORTFOLIO:

The Law & the Planner

By Jonathan T. Howe, Esq.


Contracts should consider that the vendor or client might go bust before the meeting

The financial stability of the hospitality industry is in serious question. As a result, planners have to be even more diligent in examining the fiscal health of the airlines, hotels and third-parties they use. Suppliers should be equally cautious, in light of the number of organizations on the brink of financial disaster.

What happens if a supplier or client fails?

Failure is best exemplified by what, for businesses, are unlucky numbers: 7 and 11.

When a business files a Chapter 7 petition, creditors are prevented from starting or continuing any legal action against the debtor. The company’s assets are collected and sold, and the proceeds are distributed first to its secured creditors, then to unsecured creditors. Whoever purchases the assets has no obligation to take on contracts signed by the bankrupt company.

A Chapter 11 bankruptcy allows a failing business to reorganize. The company continues its day-to-day obligations and, while restructuring its debts following a plan approved by the court, pays off creditors at a reduced rate. Generally, contracts remain in place that are considered assets. Also, as a rule, deposits on future business collected by the debtor are protected.

An alternative to bankruptcy is an “assignment for the benefit of creditors.” Here, creditors and debtor reach an agreement concerning the reorganization without going to court. The debtor, if a hotel owner, generally remains in possession of his property. However, the procedure might result in new management, changes in how the property is run, etc. Again, existing contracts stay in place.

A deposit made to a company that goes into bankruptcy might be lost if it is not secured. Many times, in lieu of a cash deposit, we recommend our clients use a standby letter of credit, which provides security to the supplier while requiring performance before the money can be used to defray any costs.

Another way to protect the meeting sponsor’s deposit is to establish an escrow account. In this case, specific provisions are set up describing when and if monies will be disbursed. If there is a failure by one of the parties to meet the contractual obligations, the money in the account is returned to the depositor.

When working with a financially challenged supplier, planners should address concerns in the contract and provide a way to terminate the deal. A sample clause:

Financial Difficulties: In the event that either party shall make a voluntary or involuntary assignment for the benefit of creditors, enter into bankruptcy proceedings, become insolvent or subject to foreclosure, or take any other action for the benefit of creditors or relief of debtors, the other party shall have the right to cancel this agreement without liability upon written notice to the other. Any deposits that have been made shall be considered to be a secured deposit and returned upon cancellation.

Once a company declares bankruptcy, find out whether the other party will be able to perform. Communication is key. Since there might be an attempt to assign rights to a creditor, such as the right to collect fees in the event of a cancellation, here is another contract provision to include:

Neither party may assign any of its rights under this agreement without the written consent of the other party.

This phrase allows the planner or the facility to avoid an assignment for the benefit of creditors without obtaining assurances that the assignee will be able perform per the original contract.Of course, legal advice always should be sought when dealing with issues of financial stability.

Jonathan T. Howe, Esq., is a senior partner in the Chicago, St. Louis and Washington, D.C., law firm of Howe & Hutton Ltd., which specializes in meetings, travel and hospitality law. Legal questions can be e-mailed to him at

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