[revel]

There are some really profound misunderstandings of how bankruptcy and credit work in this thread.

Creditors are ranked by seniority and get paid out in order by seniority. Equity is below every creditor and has been completely wiped out. Companies are not allowed to take cash or sell the furniture to pay out employees. That money is legally owed to creditors and attempting to stiff them is theft. I'm sorry to those affected at Convoy, but that is the reality of working at a startup that goes through a hasty liquidation. Convoy is not being "cheap" about this, as some are suggesting. Any "retention bonuses" are to keep executives around for long enough to unwind the company in an orderly fashion. Nobody is getting rich off failure; if everyone were to walk away there'd be nothing left and therefore nothing to recover and distribute. It's bad for everyone, but the alternative is worse.

As for the larger situation: Convoy were a digital freight brokerage. They acted as intermediaries between shippers and carriers and make money on the spread between the two. They got into trouble because the entire freight sector has been suffering a double whammy of cost increases due to inflation (ie. diesel costs) and a slowdown in demand. This has caused a number of carriers and brokerages to go bust. Freight brokerage has some other properties that make Convoy's situation particularly serious. In particular, carriers typically securitize their accounts receivable. In freight, this is known as "factoring." Convoy got stuck holding the bag after their partner carriers went under, having already paid them for their service, but still waiting for payment from the shipper.

Worst of all, Convoy had no exits because their only potential acquirers are in the same industry and are also getting completely crushed.

[HWR_14]

While in general what you are saying is true, employees owed wages are the highest seniority of creditor. As long as you were selling furniture for reasonable prices to make payroll, you should be fine.

[twic]

In case anyone is interested in the gory details, the priority order of creditors is here:

https://usbankruptcycode.org/chapter-5-creditors-the-debtor-...

Wages are fourth priority, but only up to $12,850 per person (one month's salary at ~150k a year).

The three priorities above wages are child support (not really applicable to corporate bankruptcy i assume), liquidator's expenses, and some mildly complex case i don't really understand. Taxes are eighth, two behind grain farmers and fishermen (lol America).

[chadash]

thanks! this is great reporting.

I think that this list might be talking about unsecured claims though. I think that secured claims might be separate. So, for example, if an individual declares bankruptcy and they owe $500k on their house, that claim would come before child support payments. I am definitely not a lawyer and bankruptcy law strikes me as particularly complex.

The third priority is tough to parse. From looking over it quickly, it seems like this might be claims from doing business between when i file bankruptcy and when i go into foreclosure. Again, not a lawyer, but my guess here is that if I'm a store and I file bankruptcy on Monday, but don't have a trustee until Wednesday, and I put in an order for a palette of water bottles on Tuesday, then the distributor of the water bottles might have a priority claim.

[JALTU]

Fisherman, here. I have a few stories...

[pradn]

Please share, I’m interested!

[noobermin]

Is the complaint that they are not paying remaining wages or that they are not paying severance?

[irjustin]

It's severance where most of the misunderstanding is.

But yes this grandparent post is mostly correct. If severance was not built in to any loan contact (it never is). Then creditors are paid first.

It would be interesting to know how much debt they have vs remaining cash and when did it dip below.

Paying severance is extremely low probably even below equity since there's no legal requirement to pay severance.

[friendzis]

Severance IS wage

[dehrmann]

Why would you pay severance when declaring bankruptcy?

[closewith]

Obviously it depends on the jurisdiction. In countries with strong employees protections, redundancy payments have a high priority during administration.

[irjustin]

Errrr how?

[Edit] Legally how is it. Not just because it's commonly measured in months of wages

[irjustin]

I realize one possible misconception is severance vs "gardening leave" [0].

They look really similar, but legally entirely different.

In "gardening leave" you're still an employee and on payroll until the last day. Whereas severance you're not an employee and typically paid lump-sum (but doesn't matter for this discussion). So in this specific situation, yes, that would be wages and would be paid out first before creditors because you are _legally_ entitled to those wages.

The problem of course you cannot hope to put a whole company on "gardening leave" in hopes that it can "act as severance" for everyone. Your creditors will sue you and easily win. They'd probably put an emergency injunction on the company and remaining funds before the first month was even completed once they learned of "creditors hate this one little trick!"

[0] https://en.wikipedia.org/wiki/Garden_leave

[thaumasiotes]

That's an unlikely misconception, since paid noncompete periods are not something that most people have ever even heard of.

[friendzis]

It's not the way it is calculated. All payments attached to employment contract are wages, be it regular salary, bonuses, vacation pay or severance. Say the contract defines severance of 1 month for each full year worked capped at 3 months: at the moment contract reaches 1 year anniversary, the employee should be owed 1 month worth of severance upon contract termination

[irjustin]

You're right, but only if it's in the employment contract. It's not a legal requirement to have one to hire someone [0].

Way more commonly, severance is part of a termination contract, and thus it would not be here.

[0] https://www.dol.gov/general/topic/wages/severancepay

[booi]

I've worked in the sf tech industry my entire career and my employment contracts have never included guaranteed severance. I've seen severance being paid out to fellow employees but afaik it is done as courtesy and wasn't legally required.

Are you European? Maybe it's different there.

[batmansmk]

All official information mentions “shutting doors” and “winding down” and not necessarily a bankruptcy. For instance, in the same space, Shone just returned part of the equity to the investors, paid comp to the execs for a full year, and us, employees, got jackshit.

[paulddraper]

> paid comp to the execs for a full year

IDK if Shone did things the most intelligent way, but the general story is not uncommon.

Shareholders/creditors have a mess if the CEO and CFO walk out the door for their new job; it is financially beneficial for them to liquidate assets and shut the door.

Shareholders/creditors don't have a mess when the engineer and a product manager walk out the door to their new job.

That's how the logic works.

[Retric]

This stuff doesn’t require the CEO or CFO either. Receivership doesn’t even require the active participation of the board, so yes there’s some benefit of keeping existing executives around but that’s often offset by the costs of doing so.

[paulddraper]

> Receivership doesn’t even require

Cooperation of board/executives is not required but it is immensely helpful.

"The easy way" vs "the hard way."

[pseg134]

How would it possible help in this situation? The game is over and everyone knows exactly where all the money is. It will just be distributed back to the creditors and then remaining to the shareholders. Who needs the CFO for that? Basically anyone could run that process.

[paulddraper]

> everyone knows exactly where all the money is

Bank accounts, contacts, loans, real estate, equipment, IP, etc.

For a (once) multi-billion 1500-employee logistics business, it's more involved than you give credit for.

[shiroiuma]

Maybe they need something in bankruptcy law that requires the executives to stick around, at low pay, to do their jobs and unwind the company. After all, they're the ones who made it fail. Why should they be allowed to walk away?

If a regular individual declares bankruptcy and then doesn't bother doing any of the required paperwork and legal stuff, saying the court needs to pay them top dollar for their time, things will not go well for them.

[broken-kebab]

You mixed up a lot of things here. On practical side: execs, and accounting already legally must do paperwork, however shareholders want them to go well beyond that. And you can't force people to do job properly just by legally obliging them, otherwise Soviet Union would not fail.

On moral side: business in general (and startups especially) requires navigation between things many of which are unpredictable, and plenty are beyond your control. Also I've seen startups failing because of software bugs, and technical limitations. In this particular case, do you know about any obvious wrongdoing? If not you probably shouldn't auto-assigning blame on "them".

[paulddraper]

> Why should they be allowed to walk away?

Because we decided ages ago that compelled labor is a bad idea.

[shiroiuma]

Again, try declaring bankruptcy, and then refusing to do any more paperwork or show up for the bankruptcy hearing with the judge, and see how it goes for you.

In fact, bankruptcy is a process that, if you follow the rules, is beneficial to you: you get protection from your creditors so that your loss is minimized. If you refuse to do the labor to follow this process, you won't have any protection and things will go badly for you. I don't see why it should be different for the owners and executives of a corporation. These people are not employees.

[PawgerZ]

Sorry to be pedantic, but according to the 13th ammendment, compelled labor is allowed as a punishment of crime.

To be real, if the executives at a company do commit crimes that lead to the failure of the company, I think they should be on the hook for that.

[paulddraper]

> if the executives at a company do commit crimes that lead to the failure of the company, I think they should be on the hook for that

Yes, e.g. Theranos.

But the majority of failed businesses fail for reasons that have nothing to do with crime.

[oldtownroad]

There’s no obligation to run a company into the ground. If a company reaches a point where the end of its runway is in sight, and the company decides to let employees know that the company will be out of money in 2 months, to give employees time to start looking for options… that’s allowable and not some sort of theft from creditors.

Many companies are open with employees about the state of the business.

If you have less than 3 months runway and little prospect of any fundraising, tell your employees. You don’t need to steal money from creditors (?) to pay severance, you just gotta do your best to not blindside people who have rent to pay.

[adriand]

> Convoy had no exits because their only potential acquirers are in the same industry and are also getting completely crushed.

Some great insights here and you clearly know the business. I’m curious about this last statement however. Just how badly are other players doing?

Uber Freight just announced a major overhaul on a foundation apparently provided by their acquisition of Transplace [1]. There seem to be a number of synergies between Convoy and Uber Freight although I may be naive about that. In any case, I’m curious about your view on Uber Freight and whether they are viable or simply playing the long game based on deep capital reserves, and why you think they didn’t acquire Convoy (if that even makes sense as a possibility).

1: https://www.freightwaves.com/news/uber-freights-new-solution...

[macmccann]

Uberfreight is also doing very poorly. From my understanding the Transplace acquisition was somewhat of a merger/UF trying to get out of only the 3PL business and Uber is just trying to get UF's losses off their books. There are not as many synergies as you might think due to the way freight brokerages and their deals with shippers+carriers work. One reason UF didn't acquire Convoy: it only makes sense for a brokerage to acquire another brokerage if they can get more customers (shippers) from that acquisition. But most customers of UF are also customers of Convoy, and are splitting their loads amongst multiple brokers to diversify risk and commoditize brokerages. So if you're a shipper giving 20% of your business to Convoy and 20% to Uber Freight, you won't turn around and give 40% of your business to UF now that they've acquired Convoy, you'll just go find another broker to give your business to.

[chadash]

Just to clarify your point about paying out employees... in what sense do you mean that? Some quick googling says that when a company goes into Chapter 7, employees become creditors for their unpaid wages, which means that they are at least in the same boat as other creditors (although it seems like they might sometimes be prioritized).

[jefftk]

Your source is talking about unpaid wages (legally mandatory), but severance is additional (legally optional) payments the company chooses to make to support former employees.

[IG_Semmelweiss]

And equity is legally subordinate to both of the above.

[hinkley]

Creditors and vendors on the other hand, may not be.

[pc86]

* are definitely not

[hinkley]

You will rudely discover that the landlord gets paid their early termination fees and any back rent before the employees see a single cent.

Unfortunately I had to learn this the hard way (as in I was lied to and assumed they were still going to pay us, and then the payroll money went poof)

[shiroiuma]

That sounds like bullshit (i.e., it shouldn't be this way, I'm sure you're correct). Being a landlord should entail a certain amount of risk: you're betting the tenant will be able to pay the rent, so you need to be careful choosing tenants, especially if they're companies, and moreso if they're companies with risky finances.

Why should employees be prioritized below a property speculator?

[pc86]

There are plenty of people who get paid out before the landlord, especially when you're several months in arrears as you almost always are in this situation. It's why in other markets landlords will be pretty quick to evict non-paying commercial tenants, there's a lot of risk and minimal personal guarantees unless it's a brand new business.

[AaronM]

Because much like the house in the casino, the capital class always wins.

[vipbb]

"Convoy got stuck holding the bag after their partner carriers went under, having already paid them for their service, but still waiting for payment from the shipper."

This doesn't make any sense. What you're describing is normal course of business. Shipper pay terms are usually longer than when the carrier get's paid from broker. "Carrier's went under", doesn't make any difference. If the shipper doesn't pay, than that's a problem. But to say paying carriers that "went under" contributed to Convoy going out of business just isn't accurate.

[LastTrain]

Not paying employees for work already rendered is wage theft, which is actual theft.

[paulddraper]

> Not paying employees for work already rendered is wage theft, which is actual theft.

Correct.

I can only assume "companies are not allowed to pay out employees" refers to suggestions of severance, health care, etc. in this thread.

Not earned wages, which have high legal priority.

[s1artibartfast]

you cant prosecute a dead entity for theft.

[jessriedel]

Courts can pierce the corporate veil for failure to pay employees.

[s1artibartfast]

Source?

normally piercing the corporate veil requires serious executive misconduct.

[zmgsabst]

Not paying employees is the easiest way to pierce the veil, eg https://www.arnoldporter.com/en/perspectives/advisories/2022...

[thereisnospork]

IANAL, but my understanding is in agreement with the GP - failing to pay wages is de facto 'serious executive misconduct'.

a probably relevant article: https://www.severino-law.com/blog/oqz4dx2ivdnzt7aqqrvbk9et11...

[s1artibartfast]

This however is not a bankruptcy case, but a wage theft case.

Going through a perfectly legal bankruptcy procedure is very different than working your severs 72 hours a week for years without overtime then refusing to show up at court.

This comports with my understanding that piercing the veil usually requires illegal behavior.

[jessriedel]

This seems to establish precedent that unpaid wages by a bankrupt company, even in the absence of serious misconduct, are sufficient justification for veil piercing:

> The case therefore would up presenting a clear question of law: Where the workers are employed by a corporation, can an individual be held liable for penalties associated with statutory violations in the payment of wages where there was no allegation or finding that the corporate laws had been misused or abused for a wrongful or inequitable purpose? In other words, do sections 558 and 1197.1 allow workers to recover civil penalties for nonpayment of wages from individuals even when there are no other grounds for piercing the corporate veil under the doctrine of alter ego?

> The court of appeal concluded that under the clear language of sections 558 and 1197.1, the State of California, through the Labor and Workforce Development Agency (“LWDA”), can recover penalties associated with unpaid wages from individuals. Furthermore, PAGA allows employees to stand in the shoes of the LWDA and recover those penalties. Accordingly, employees are also permitted to recover those penalties from individuals.

https://hunterpylelaw.com/2021/02/individual-liability-for-w...

See also the actual decision:

https://law.justia.com/cases/california/court-of-appeal/2018...

The only ambiguity to me in reading this is whether the court considered it different because the wages went unpaid for a while before bankruptcy.

[s1artibartfast]

>The only ambiguity to me in reading this is whether the court considered it different because the wages went unpaid for a while before bankruptcy.

This is my entire point.

If you go into chapter 7 bankruptcy, and a judge prioritizes senior creditors above unpaid wadges, you are clearly in different territory than if the corporation was neglecting wages before bankruptcy.

Everyone keeps linking cases for pre-bankruptcy cases, or ones without bankruptcy at all.

Meanwhile, There laws on the books about the prioritization or creditors, and where labors stands, and how much labor gets paid out before, and how much after other creditors.

[bsder]

In California, I believe that wages are one of the very few things that executives can be held personally liable for.

[reaperman]

*prosecute

[s1artibartfast]

Thanks

[hef19898]

They paid their carriers before being paid by their clients? That is pretty bad cash flow management, and risk management. And it is decidedely not what forwarders I know do. Forwarders, e.g. DHL freight, rarely own their trucks and subcontract that out, much like a broker does. And those subcontracted carriers are usually the last to get paid in that line.

Unless, of course, Convoy had to because all their carriers insisted on upfront payments for reasons. In which case Convoy was propably already screwed any way.

[dalbasal]

What you are saying is true, but that doesn't mean a lot of underhanded "games" aren't played.

"Nobody is getting rich off failure; if everyone were to walk away there'd be nothing left and therefore nothing to recover and distribute. It's bad for everyone, but the alternative is worse."

Here's one such game. Executives, who enjoy information asymetry, and leverage can parlay this into one final earning event. Threaten to leave the company in disarray, unless they're paid. Coordinated, it's hard to say no to.

Imagine if the top 5-10 execs at an otherwise ok startup coordinated a demand to double their pay/stock or everyone walks tomorrow. They time the move using inside knowledge of cash flow, making the demand irresistible.

I'm not suggesting an alternative, but that doesn't mean a corpse isnt a feast for some.

[User23]

Unless the law has changed, in California back pay is senior to everything except tax debt. And the company officers are personally liable for it.

It should work that way everywhere. Executives need to be incentivized to do layoffs while there’s still cash for it. Defrauding employees is a terrible evil.

[jefftk]

Have you seen anything suggesting the employees are not getting their final paychecks? All I've seen is them not getting severance.

[hinkley]

We didn’t get our final check. The class action suit went on for several years and the lawyers got all the money. I believe I was entitled to something less that $100 in the end and I declined.

[jefftk]

Are we still talking about Convoy?

[hinkley]

Nope, different school of hard knocks.

[cwilkes]

Slight twist on that here: most employees are in Seattle and WA state law doesn’t mandate paying out unused vacation time.

Most (good) employers do that when employees quit but they don’t have to.

[User23]

WA state law is really quite employer and landlord friendly.

[ttymck]

> Companies are not allowed to take cash or sell the furniture to pay out employees...Any "retention bonuses" are to keep executives around for long enough to unwind the company in an orderly fashion.

Could you help me understand where the line is drawn?

[prasadjoglekar]

This line is drawn by the bankruptcy court, where creditors have a voice and agree to key management being in place for a wind down.

[ttymck]

Understood. What about before bankruptcy begins? Who decides whether to pay severance, and how is that decision informed?

[stuaxo]

I've worked in the UK for Glu Mobile, who were taken over by EA and all the UK and US staff let go.

The US staff had to just go. I got my last month's pay + about 6 to 8 weeks.

[paulddraper]

> who were taken over by EA

Yes, what happens in an acquisition vs a insolvency are different.