When Your Client Files for Bankruptcy
     

Contract broadcast engineers have no foolproof way to protect themselves against bankrupt clients. In fact, the bankruptcy code leans the opposite way, providing protection to a bankrupt party.

The promising news for contract engineers — at least based on anecdotal evidence and opinions of industry observers — is that the economy is improving and the number of broadcast bankruptcies has slowed. (BIA and NAB said they typically don’t track radio group bankruptcies.)

Engineers may be affected when a broadcaster declares bankruptcy. Source: Chris Imlay, SBE

Yet the recent recession serves as a reminder that broadcast engineers, especially contractors, should take steps to limit risks and complications brought on by reorganization filings.

The legal layers of a bankruptcy filing in the United States are complicated. Even if your client pays you before declaring bankruptcy, the money may not be safe; a court-appointed bankruptcy trustee can seek a refund of certain payments from creditors.

Chris Imlay, general counsel of the Society of Broadcast Engineers, has delivered presentations about the effect of bankruptcy and reorganization of broadcast facilities on engineers.

He says most broadcast bankruptcies are Chapter 11, a reorganization process. The more dramatic Chapter 7 filing calls for liquidation of all assets.

“Almost nothing a contract engineer puts in a contract can protect them in a Chapter 11 filing,” Imlay said. “A contract engineer will be lumped in with all of the unsecured creditors, who are behind all of the secured creditors and the IRS.”

However, he continued, most broadcaster reorganizations are successful in the long run. “That is simply because the value of a broadcast license typically negates the need for liquidation.”

Pennies on the dollar

Unsecured debts may be paid out at only pennies on the dollar, said Raymond Quianzon, an attorney specializing in bankruptcy at communications law firm Fletcher Heald and Hildreth.

Source: Chris Imlay, SBE

“An engineering firm or contract engineer may want to secure a debt that it is owed by filing a financing statement, attachment or lien in the appropriate state or county location — although the bankruptcy court usually will still treat a secured debt with a higher priority than any unsecured debt,” he said.

Imlay noted that the FCC still holds stations responsible for complying with technical rules. Therefore, the value of a broadcast engineer may actually increase during bankruptcy.

“It’s beneficial to be as helpful as possible during the reorganization process,” he advises engineers. “The trustee is going to need the services of the engineers during the reorganization process. Then the engineer will be paid by the trustee for work done during the reorganization. The trustee has a lot of incentive to keep the engineer working and honoring the contract.”

If the bankruptcy grim reaper does strike a broadcast engineer’s client, and assuming there is an outstanding debt, Imlay suggests that the contract engineer have a claim in the bankruptcy filing.

“Contact the trustee and see if there is a chance to continue work during the reorganization. Not many trustees or receivers are going to be technically inclined. They will likely need your expertise.”

Further, the warning signs of financial doom often are visible earlier to a broadcast engineer than to other station personnel. A trail of unpaid vendors is a telltale sign of financial problems, according to observers who spoke to RW for this article.

All the more reason a contract engineer should never make advance payment for hardware or subcontracting services on behalf of a client.

“Everything should be done in the name of the licensee, and especially during the reorganization period. You really shouldn’t count on any reimbursement at that point,” Imlay advised.

Critical vendors

The best protection a contract engineer can have is a written and enforceable contract with a client station, said Jeffrey Tarkenton, a bankruptcy specialist with Womble, Carlyle, Sandridge & Rice.

Source: Chris Imlay, SBE

“That way an engineer can also avoid the risk they may have to repay any payments received within 90 days of bankruptcy which constitute preferential payments,” he said.

Once the bankruptcy case has been filed, the engineer typically will have little if any leverage on outstanding invoices unless the engineer is a “critical vendor,” Tarkenton said.

“Critical vendors are creditors who are determined to be so vital to the debtor company that the creditor’s refusal to perform could imperil the debtor company’s operations or reorganization.”

The engineer should always file a “proof of claim” with the court for unpaid sums, Tarkenton said. A proof of claim is a form issued by the bankruptcy court.

There are strict deadlines for filing the claims, and claims that are not “timely filed” will be disallowed, according to Tarkenton. Although creditors usually receive little or nothing in the way of distributions in a bankruptcy case, there are cases in which creditors who file proofs of claim receive full payment, plus interest.

A staff engineer is in a much better position than a contract engineer during a bankruptcy filing, Imlay said, since seldom is a broadcast engineer considered an excess cost in a broadcasting operation, though of course any employee is affected when a company undergoes financial turmoil.

“You’ll be paid like everyone else. Problems only could arise if the trustee believes it is cheaper to hire a contract engineer, but usually other types of staff are impacted first by layoffs. The problem for a staff engineer is if the reorganization plan should fail.”

All sources contacted for this story recommended that a broadcast engineer consult a bankruptcy lawyer in the event of a client or employer bankruptcy.

Imlay said sample contracts for engineers are available to SBE members online at www.sbe.org.

Comment on this or any story. Email radioworld@nbmedia.com, attention Letter to the Editor.


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