It seems that bankruptcy is not always a sign of financial weakness, if the bankruptcy filed by southern California-based Closet World is any indication.

From the OC Register online:

“Why would a profitable company seek protection from the bankruptcy court?

The filing resulted from a problem that a number of companies have had in recent years because of the recession-linked credit crunch, said Home Organizers bankruptcy attorney Chris Reeder of Reeder Lu & Green LLP in Los Angeles.

Reeder wants to make clear that none of the company’s Closet by Design franchisees is a party to the bankruptcy filing.

Home Organizers had a $21.5 million loan from Madison Capital Funding LLC that matured in 2008 with $8.1 million still owed, according to court documents.

Home Organizers was current on its payments of the loan, Reeder said. Typically, a company refinances such a loan and goes on business as usual. However, in the 2008 credit crunch, even profitable companies with good credit couldn’t get loans anywhere and their current lenders were calling in loans and lines of credit.

‘The loan did mature, and (Home Organizers) kept making payments as if it didn’t mature,’  Reeder said.  ‘We couldn’t get another lender, and this lender wouldn’t refi the loan at that time.’

‘I’ve had a lot of these types of cases recently,’ he added. ‘I’m a lender liability expert, but before two years ago I had never sued a bank’ because the cases could be resolved outside court. But lenders have become much more aggressive.

‘This case was on the way to being a very nasty fight, but we worked out a settlement,’ Reeder said.

Randy Klein, a Chicago attorney for Madison Capital, agreed that a compromise had been reached that settles the dispute between Madison Capital and Home Organizers.

Reeder said he expects this bankruptcy reorganization to be completed within 120 days. The goal is for the loan to be restructured but not discounted, he said.

‘If you don’t own a part of the company, this doesn’t affect you. The franchisees are not in bankruptcy. They are independently owned businesses,’ he said.

“What’s atypical about this bankruptcy is that the company had no problems, plenty of cash flow and plenty of business,” he said.

The company’s official statement said, ‘We are continuing to pay our vendors on time as we always have. In fact the court has approved a budget allowing us to do so. All closet, garage and other organization system installs for our clients are going forward as scheduled.’