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Bankruptcy can put new capital and life into an insolvent company

In some business bankruptcies in Pennsylvania and other jurisdictions, the bankrupt entity will end up being sold at an auction to the highest bidder. That recently happened to a well-known military school in a nearby state that counts Donald Trump and other notable people in its list of graduates. A drastic decline in enrollment was mentioned as the reason for the school's closing and filing of bankruptcy this year.

The school is 126 years old and is a historically important institution. It filed for bankruptcy protection this year, listing $15,000 in the bank and $10.9 million in debt. The school was sold at a Sept. 30 auction for $15.8 million to a nonprofit company that is controlled by a group of Chinese investors.

It appears that the new owners will be keeping most of the current leadership and staff. The school officials helped steer the company through the bankruptcy maze, and there are no reports of a change of administration. One of the benefits of a bankruptcy filing can be that a cash-poor company can file and sometimes find fresh investors and owners to forge a Phoenix-like re-emergence of the entity. That appears to be an apt analogy for the transfer of ownership of the school through the bankruptcy vehicle in this case.

The infusion of outside capital serves to pay off the existing creditors, provide for capital improvements and reopen the institution with new financial vigor. This is one way in which a business may get a boost from pursuing a bankruptcy alternative. In an auction sale, the Bankruptcy Court must approve the sale. This usually involves a detailed review of all of the terms of the sale and the general impact on the entity.

The court is particularly interested in determining whether the school was sold for fair value. In this case, the outlook for the school is dramatically improved under the transformation that was facilitated by the bankruptcy filing. A business entity in Pennsylvania that has the potential for a similar reformulation through bankruptcy will be able to obtain all of the necessary information, options, benefits and detriments by consulting with a business bankruptcy attorney.

Source: The Wall Street Journal, "Military Prep School in New York to Reopen After Bankruptcy Sale", Katy Stech, Oct. 21, 2015

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