Walking Through The AAF’s Bankruptcy Declaration

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Photo Credit: Mark J. Rebilas-USA TODAY Sports

(*Citrin Cooperman is a proud partner of Front Office Sports)

The collapse of the Alliance of American Football (“AAF”) has led to the filing of multiple lawsuits against the AAF as well as the AAF filing for Chapter 7 bankruptcy in Texas. There were early signs that the AAF was having financial difficulties when it needed cash in the middle of the season to meet its operational demands such as payroll.  

“When the AAF suspended its operations in early April, it left many, including players and vendors, wondering if and when they would get paid,” says Maryann Veytsman a director in the Valuation and Forensic Services practice at assurance, tax, and advisory firm Citrin Cooperman. “Collecting unpaid salary and/or payments will depend on how many assets the AAF has and what type of creditor each person or company is deemed to be per the Bankruptcy Code.”

There are two basic types of business bankruptcies:  Chapter 7 (liquidation) or Chapter 11 (reorganization).  

“Businesses such as the AAF typically file for Chapter 7 bankruptcy or liquidation if the business has no viable future,” Veytsman continues. “If restructuring is not an option, likely because the business’ debts are so large and the business does not have substantial assets, then liquidation is necessary. This typically leads to the business being dissolved.”

READ MORE: AAF Files for Chapter 7 Bankruptcy 

In a Chapter 7 bankruptcy, which can take many months or even years to complete, a trustee is appointed by the bankruptcy court. The trustee takes possession of the business’ assets and distributes them among the creditors. After the assets are distributed, the trustee and employees are paid.  

“If the AAF had a realistic chance to succeed, then it could have filed for Chapter 11 bankruptcy,” Veytsman believes. “In a Chapter 11 bankruptcy, a company formulates a plan of reorganization, which outlines how it will pay its creditors. The payments to creditors are typically made over a period of time and may even exceed ten-to-twenty years. The creditors have to vote on the plan, and the court will approve the plan if it is found to be fair and equitable.”

Per the Bankruptcy Code, a business’ assets are distributed in the following order:

  1. Secured creditors are paid first because their money is guaranteed or “secured” by collateral or contract.  
  2. Unsecured creditors are paid second. Unsecured claims can be priority or non-priority claims. 
    • Priority unsecured claims are administrative expenses related to the bankruptcy such as trustee fees, wages and salaries, contributions to an employment plan and taxes owed to the government.
    • Non-priority unsecured claims are all other unsecured claims that are not listed as a priority in the Bankruptcy Code and typically include bank lenders, suppliers and investors with unsecured claims.
  3. General creditors are paid last. General creditors are typically made up of stockholders and shareholders and are paid if there is any money left after paying the previous two groups of creditors.

“Secured creditors get cash first and are typically paid in full while the unsecured claims receive a pro rata share of their debt,” explains Veytsman. “However, some unsecured creditors get priority over other unsecured creditors per the Bankruptcy Code. The priority claims related to AAF would likely be any administrative expenses related to the bankruptcy such as trustee fees, wages and salaries, contributions to an employee benefit plan and taxes.

However, wages and salaries (including commissions and vacation) are only a priority claim up to a maximum of $13,650 as of April 2019 per employee for any money earned within 180 days before the date of the filing of the bankruptcy petition or the date of the cessation of the debtor’s business.”

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As result of what Veytsman outlines, the league’s former employees are not guaranteed all of the money that they earned or was promised to them. Employees may, however, be due additional monies if the AAF failed to follow The Workers Adjustment and Retraining Notification (WARN) Act. The WARN Act mandates that employers with 100 or more employees give employees 60-days advance notice of layoffs or closure. If they don’t, employees will be entitled to an additional claim for back pay and benefits for the number of days for which notice was not given.

Any expenses the players incurred during travel for the AAF, such as hotel rooms, will likely be unsecured claims. As a result, they will likely receive little to no reimbursement. The hotels themselves are also unlikely to recoup the money owed to them. However, if AAF employees paid for any expenses using a corporate card, then it is unlikely that the credit card issuers would look for payment from the employees specifically if the employees filed expense reports with the AAF and followed company procedures.

The bottom line? As the proceedings unfold, it could be a while before all parties receive their due payments.

Citrin Cooperman guides the sports world’s best companies and individuals when it comes to traditional accounting and tax support, guidance on developing business and financial plans, and much more. Visit their website to learn more.