Meetings & Conventions: Planner's Portfolio December
2001
December 2001
PLANNER'S PORTFOLIO:
The Law & the Planner
By Jonathan T. Howe,
Esq.
WHEN A SUPPLIER GOES BANKRUPT
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?
THE NUMBERS GAME
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.
SMART MOVES
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 [email protected].
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