a) First Fidelity has an option to recover the debt by making Gena liable to pay
ID: 372759 • Letter: A
Question
a) First Fidelity has an option to recover the debt by making Gena liable to pay from her business assets. Assuming that Gena’s business was a sole proprietorship with unlimited liability, the creditor can recover by attaching Gena’s personal property. First Fidelity can offer debt restructuring by the editing the interest rates or delayed repayments. Since Marvin is a third party guarantor, First Fidelity can make Marvin liable for the dues.
b) If Gena files for bankruptcy, then her assets will be disposed off and the proceeds will be used to pay the debt, either partially or fully. Gena has an option of selling some of her expanded branches to pay her immediate dues and keep her smaller successful business profitable. Alternatively, she can explore the option of either merging or getting acquired with Larry’s business. The combined entity would enjoy cost and market synergies, which can be used to reduce the debt.
c) As a guarantor, Marvin will be liable to repay the debt in case Gena defaults. It may be advisable for Marvin to get updated about Gena’s finances and discuss the root causes of the business failure. Marvin can become a partner in Gena’s business, have ownership and management control. This would give Marvin the authority to negotiate with the lender and also to make decisions on potential partial sale of the business or merging with a competitor.
Explanation / Answer
Gena owns Gena’s Gourmet Pasta. She sold her pasta only in New Jersey. It was a success and the company expanded throughout the Northeast. During expansion Gena borrowed $350,000 from First Fidelity Bank. Because Gena was a new company, First Fidelity required that a third party also guarantee the loan. Gena’s friend, Marvin, guaranteed her loan. Everything looked good at Gena’s Gourmet Pasta until Larry’s Linguine opened. Larry was a hard competitor and soon Gena was losing business. The sales reduction meant Gena had a hard time making her payments to First Fidelity. After six months, Gena defaulted on her loan. Unable to meet her bills, Gena called it quits in September 2008 failing to make additional payments to First Fidelity. a.) Fully discuss First Fidelity’s options for collecting the debt. b.) Gena is considering filing for bankruptcy. Discuss her options. c.) How would you advise Marvin?
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