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Daily News, Pop Law

That’s Not What I Call A Sticky Situation

Hostess - Via CBS Dallas

The world has been shocked and dismayed to find out that Hostess Brands, Inc., the producers of those wonderful, lovable, waist expanding treats made of golden sponge cake with a creamy filling, Twinkies, has filed for bankruptcy protection. Again.

Originally, the company was known as Interstate Bakeries filed bankruptcy in 2004, emerging from a five-year long reorganization in 2009 with a new name, and seemingly a new lease on life. However, Interstate seemed to have been on the losing end of a negotiation with one of the labor unions which supplies its workers over the Bakery & Confectionary Union & Industry International Pension Fund.

Currently, Hostess owes almost a billion dollars to that fund and over ten million to another. Those particular liabilities, in addition to what would ordinarily show on its balance sheet, are putting Hostess firmly underwater. Selling all of their assets right now likely would not cover that single liability.

Thus the bankruptcy.

This news hits a legal blog like Everyday Counsel because, frankly, who doesn’t love at least one of the treats that Hostess makes? That, and it is a great way to talk about the basics of corporate bankruptcy and why it is not the end of the world most of the time.

There are two forms of bankruptcy available to corporations. Chapter 11 and Chapter 7.

Chapter 7 bankruptcy is the one you should really fear if you are a stockholder or love the confections that a particular company makes. This is when the assets of the company are sold or “liquidated” to repay what is usually just a portion of the debts that the company has taken on.

In either form of bankruptcy, the creditors bond together to form a committee and a bankruptcy trustee appointed to make sure that everyone on the committee gets their fair share.

Most unsecured creditors are wiped out because, while they are entitled to file a claim for the value of their stock, the whole reason the company is in bankruptcy in the first place is that it did not have enough or any money, so the chances of recovery are slim to none.  Secured creditors will get the value of whatever collateral they had, but if their collateral is something with decreasing value like a truck, they will lose money.

Chapter 7 is when the company ceases to exist.

Fortunately for baked treat lovers, this is not the bankruptcy option that Hostess Brands chose.

They went with Chapter 11.

How the companies come out of a Chapter 11 bankruptcy really varies, and you should know that the use of this chapter is really much more common that you would think.

Most of them are smaller, sleeker, and more manageable. Sometimes they change their corporate structure. Most times, people are laid off and factories or stores are sold, and the company changes its name to get away from the stigma of bankruptcy.

The key to a Chapter 11 bankruptcy is reorganization. There is still a trustee and a committee, but here the goal is a bit different. Instead of looking to ensure that everyone gets their piece of the Twinkie, the trustee helps to broker a deal with the creditors, stockholders, and other interested parties that would have them forgiving some or all of the debts owed so that the company can keep operating.

This is where Hostess Brands is headed again.

This time, the reorganization should have a greater focus on collective bargaining with the various unions to relieve a portion of the $955 million owed to the two pension programs.

That will certainly be an interesting negotiation because the unions likely have little interest in letting Hostess die, but will not want to give up much money. Meanwhile Hostess could threaten to close itself down as a means of gaining leverage because it’s not worth enough to pay the pension funds all of the money anyway.

For the time being, however, fear not. You will still be able to find your favorite tasty treats on store shelves and probably will long into the future.

Recently, Hostess Brands received a cash injection from a group of lenders that will allow it to maintain its currently level of operations. Just as important, is this:

“While no agreement has been reached to date, the Teamsters Union remains committed to working with all stakeholders during the bankruptcy to find a mutually agreeable solution, if possible,” said Dennis Raymond, director of the Teamsters Bakery and Laundry Conference, in a statement. [WSJ]

Any kind of hint that a union is willing to negotiate is almost always positive as collective bargaining can get nasty. Just look at the NBA, NFL, NHL, and MLB which have all had significant and contentious labor negotiations in the last few decades.

For more information on corporate bankruptcy, especially if you are an investor, check out this page on the SEC’s website, or email us at info@everydaycounsel.com.

To view a few wedding cakes or recipes for delicious deserts made of Twinkies check out the Hostess website.

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About E.C.

Corporate and regulatory attorney. Also experienced in advocacy for the mentally disabled and minor litigation matters. Not currently practicing, but maintaining the blog to keep my research and writing skills sharp. Splitting time between Connecticut and Massachusetts.

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  1. Pingback: Whence Corporate Bankruptcy - January 12, 2012

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