The South Bay Law Firm Law Blog highlights developing trends in bankruptcy law and practice. Our aim is to provide general commentary on this evolving practice specialty.
 





 
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    Posts Tagged ‘services’

    The Year in Bankruptcy: 2010

    Saturday, February 12th, 2011

     

    Jones Day’s Charles Oellerman and Mark Douglas have just issued The Year in Bankruptcy: 2010.  It is a (relatively) concise, thorough (81 pages), and useful compendium of bankruptcy statistics, trend analyses, case law highlights, and legislative updates for the year.

    What to expect for 2011?  According to the authors:

    [M]ost industry experts predict that the volume of big-business bankruptcy filings will not increase in 2011.  Also expected is a continuation of the business bankruptcy paradigm exemplified by the proliferation of prepackaged or prenegotiated chapter 11 cases and quick-fix section 363(b) sales. Companies that do enter bankruptcy waters in 2011 are more likely to wade in rather than freefall, as was often the case in 2008 and 2009. More frequently, struggling businesses are identifying trouble sooner and negotiating prepacks before taking the plunge, in an effort to minimize restructuring costs and satisfy lender demands to short-circuit the restructuring process.  Prominent examples of this in 2010 were video-rental chain Blockbuster Inc.; Hollywood studio Metro-Goldwyn-Mayer, Inc.; and newspaper publisher Affiliated Media Inc. Industries pegged as including companies “most likely to fail” (or continue foundering) in 2011 include health care, publishing, restaurants, entertainment and hospitality, home building and construction, and related sectors that rely heavily on consumers.  Finally, judging by trends established in 2010, companies that do find themselves in bankruptcy are more likely to rely on rights offerings than new financing as part of their exit strategies.

    Happy reading.

    Metro-Goldwyn-Mayer

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    Now Coming to a Bankruptcy Court Near You: The Section 363 Discharge(?!)

    Tuesday, January 18th, 2011

    Norton’s recently-published 2010 Annual Survey of Bankruptcy Law offers an intriguing article focusing on an often-overlooked difference between “Section 363 sales” and Chapter 11 Plans – and suggesting that, for certain liabilities, Section 363 may actually afford broader relief than a Chapter 11 discharge.

    In Classic Chapter 11 Reorganizations Versus Section 363 Sales And The Effects On Environmental Cleanup Obligations: The Choice After Apex Oil Co. And General Motors, authors Joel Gross and Christopher Anderson contend:

    “[U]nless the law [surrounding Section 363 sales] changes, any debtor seeking to provide maximum protection to its surviving business from broad cleanup liabilities for divested properties would be best advised to utilize a Section 363 sale.  The protection from successor liability that can be achieved through such a sale will very likely exceed the more narrow discharge from monetary claims that can be obtained if the property is transferred under a plan of reorganization.”

    In support of their argument, Gross and Anderson compare the results of two recent decisions – In re Apex Oil and the 2009 In re General Motors Corp. decision.

    In Apex Oil, the 7th Circuit held that, despite its prior discharge in Chapter 11, the reorganized debtor remained liable for environmental liabilities incurred years earlier on the grounds that such liabilities were not “claims” subject to discharge under Chapter 11’s provisions.  A prior post regarding Apex is available here.

    In General Motors – by contrast – the the US Government supported, and the Bankruptcy Court accepted, the transfer of GM’s business assets to a newly-formed entity (“New GM”) under a sale “free and clear of all . . . interests,” including successor liability claims.  In reaching this decision, the Bankruptcy Court relied on the reasoning set forth in In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir.2003) – i.e., that Section 363 provides a basis for selling assets free and clear of successor liability claims.

    The recognizable TWA logotype
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    Not every circuit permits an extension of Section 363’s “free and clear” language to successor liability claims.  See Michael H. Reed, Successor Liability and Bankruptcy Sales Revisited—A New Paradigm, 61 Bus. Law. 179, 208–211 (2005) (surveying the lower courts’ application of TWA).  Though at least one District Court and the Ninth Circuit Bankruptcy Appellate Panel have followed the TWA decision, the Ninth Circuit has not explicitly ruled.

    Consequently, “[i]n light of the split in circuit authority, it remains to be seen whether the view that successor liability claims can ultimately be cut off via a Section 363 sale will prevail.  For the time being, however, the majority of appellate courts (including the Second and Third Circuits where so many major Chapter 11 cases are fled) have held that they can, and there seems to be a similar trend in the lower courts.”

    That said, the use of Section 363 to avoid environmental liabilities isn’t without its problems: “One potentially important limitation, which appears not to have been addressed by any court to date, is Section 363(e)’s requirement that all sales approved under Section 363 provide adequate protection for the interest of any entity in the property sold.”

    Other issues present themselves as well.  For example:

    – Is it possible to provide for liens against the sale proceeds for successor interests?  Gross and Anderson don’t think so – as they see it, doing so would provide otherwise-unsecured creditors with preferential treatment.

    – How much are contingent successor claims truly worth?  Even if it were possible to provide “adequate protection” for successor claims, doing so raises the question of what such claims are truly worth.

    – Finally, the ability to shield assets from successor liability claims frequently implicates the Court’s equitable power under Section 105, and the extent of its scope.

    Problematic or not, these considerations likely won’t stop debtors from taking a shot at a sale: “[G]iven the certainty following Apex Oil that at least some injunctive claims will survive a traditional chapter 11 reorganization, it can be expected that debtors with significant environmental exposure will prefer to follow the roadmap laid out in GM.”

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    Federal Bankruptcy Rules Revisions – Analysis and Comment

    Sunday, January 2nd, 2011

     

    State Bar of California
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    The Insolvency Law Committee for the California State Bar’s Business Law Section has produced a very helpful analysis of recent changes to the Federal Bankruptcy Rules – which (as most readers are aware) became effective as of December 1, 2010.

    A copy is available here.

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    The Dodd-Frank Financial Reform Act: A Reader’s Digest Version

    Monday, July 26th, 2010

    A couple of prior posts on this blog (here and here) have explored the economic and regulatory reasons behind 2008’s financial meltdown, while others (here and here) have explored proposed means of handling distressed financial institutions deeemed systemically important to the nation’s financial markets.

    Economic Fears Reignite Market Slump
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    History and propositions are now overtaken by reform.  Last Wednesday, the Financial Reform Act (aka the Dodd Frank Act) became law.

    Over at Credit Slips, Seton Hall Law Professor Stephen Lubben has offered a very succinct, immediately accessible summary of the Act’s intersection with the US Bankruptcy Code – as well as some helpful links to other, useful material.

    Very important reading for those who want the “bullet points” without wading through the nearly 2,300 pages of legislation.

    Happy reading.

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    Taking Derivative Risk Out of the Code

    Sunday, March 14th, 2010

    In light of the tumultuous economic events of 2008 and 2009, a number of proposals for significant bankruptcy reform have surfaced – many of which have been summarized on this blog.

    One of last year’s posts focused on the ongoing debate over the impact of credit derivatives on failing companies, and on the continued usefulness of Bankruptcy Code provisions designed to insulate the financial markets from the bankruptcy process.

    Last week, Harvard’s Mark Roe added to that discussion with a paper entitled “Bankruptcy’s Financial Crisis Accelerator: The Derivatives Players’ Priorities in Chapter 11

    The essence of Professor Roe’s proposal is set forth at p. 3:

    Although several of [the Bankruptcy Code’s safe-harbor super-priorities for derivatives and repurchase agreements] are functional and ought to be kept, the full range is far too broad. Most are more likely to destabilize financial markets than to stabilize them and most need to be repealed.

    Professor Roe’s thoughtful analysis is a worthwhile read.

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    Small Business Chapter 11’s – Swift and Silent

    Monday, October 26th, 2009

    A recent study conducted by risk management solutions provider PayNet, Inc. highlights an interesting trend amongst small businesses: Of 750 small business bankruptcy filers owing an aggrate of $58 million, 50 percent were current with one or more of their lenders when they filed.

    The study, released at last week’s Equipment Leasing and Finance Association meeting in Southern California and summarized in a recent Bloomberg piece, indicates that borrowers are refusing to telegraph their distress before they throw in the towel. According to PayNet President Bill Phelan, such borrowers “pay and pay and pay, . . . and then they file for bankruptcy.”

    The article highlights the increased risk this type of borrower behavior creates for lenders who typically monitor their borrowers’ accounts for any sign of delinquency.  According to Bloomberg, the PayNet study also indicates that most borrowers who sought bankruptcy protection had at least one account in delinquency.  The upshot, according to Phelan (as quoted in Bloomberg), is that lenders who can see how borrowers are performing on obligations other than their own enjoy a better chance of identifying at-risk borrowers:

    “Just because you’re getting paid doesn’t mean everything’s OK . . . . It’s not the full picture.”

    The loans analyzed by PayNet are typical of those held by very small businesses – the study is based on an an average loan size of just over $77,000.  Taken at face value, Bloomberg’s assessment of the PayNet study suggests many small business owners have grown far more savvy about “strategic defaults.”

    As noted, lenders should beware.  And so should vendors and equipment lessors.

    Creditors and equipment lessors should pay close attention to trends in accounts payable aging, the recordation of a UCC-1 (if applicable), the presence (or availability) of personal guaranties from principals or other third parties, and the “mix” of goods and services provided (an analysis which may impact the priority of a claim in the debtor’s bankruptcy) . . . among other things.

    The small loans addressed by PayNet are indication of a larger trend: PayNet reports that an estimated 100,000 small businesses have sought bankruptcy protection in the last year alone.  This data corresponds with earlier predictions about the anticipated “ripple effect” of larger Chapter 11 filings, reported here.

    Amidst the “green shoots” of a claimed economic recovery, “swift and silent” small business Chapter 11’s are something to think about.

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    The Law of Unintended Consequences

    Monday, September 14th, 2009

    Unintended consequences.

    Unfortunately, life is full of them . . . and so is the 2005 Bankruptcy Code.  Today’s post will discuss just one: The expanded protection afforded trade creditors under Section 503(b)(9).

    What does this section do?  And just how much protection does it provide?  As amended, Section 503(b)(9) was intended by Congress to protect vendors who supplied goods to a debtor within 20 days of a debtor’s bankruptcy filing by extending “administrative” (i.e., 100% payment) status to their claims.  Along with amendments to Section 546(c), the idea was to protect vendors who extended credit to a debtor immediately before the debtor filed a case.  But in fact, Section 503(b)(9)’s application may now be leaving many such vendors at greater risk.

    How so?  A recent Daily Deal piece by Natixis’ Christophe Razaire briefly outlines three general problem areas. 

    Goods?  Or services?  Section 503(b)(9) protects suppliers of goods well enough, and understandably so: Along with Section 546(c), it is designed to preserve and augment the protections extended to the same vendors under the Uniform Commercial Code.  But what about suppliers of services?  Unfortunately, as a number of creative service providers have discovered, the Code offers no such similar protection.  Moreover, where a company relies primarily on services for its activity, it appears doubtful that the Code’s amendment does anything to alleviate the risk of a debtor’s default and eventual bankruptcy.

    Payment?  Or post-petition payables?  Though Section 503(b)(9) provides administrative priority for “20-day” vendor claims and Section 546(c) likewise permits vendors to assert reclamation demands for goods supplied immediately prior to the debtor’s filing, in practice, vendors rarely see any early compensation in the case. 

    Instead, a bankruptcy court is far more likely to simply afford such claims their entitled administrative status, then require the vendors holding them to wait until the conclusion of the case for payment.  Economically, this means that vendors who should be enjoying administrative protection and receiving cash are, in fact, merely exchanging one “IOU” for another – and, in the meantime, suffering as much liquidity distress as any other general unsecured creditor.

    Needless to say, this liquidity distress has to be dealt with in some fashion.  And it is often addressed through a refusal to further supply the debtor-in-possession except on “COD” or similarly restrictive terms.  Alternatively, other customers of a cash-strapped vendor may feel the squeeze through tightened terms as the vendor struggles to compensate for large – but unsatisfied – administrative obligations owed by the debtor.

    Administrative protection?  Or administrative insolvency?  Perhaps the most unintended consequence of Section 503(b)(9)’s amendment is that business reorganizations involving large numbers of “20-day” claims may, in fact, be threatened by its application.

    “20-day vendors” can, if they so choose, accept payments on their administrative claims at a discount – and, in fact, it is not uncommon for debtors to attempt to cut such deals.  But where there are numerous “20-day” claimants, the debtor often faces very slow, arduous negotiations.  Many vendors are reluctant to negotiate with the debtor for fear of “selling out” too low; others may try their hand at brinksmanship, betting that the debtor’s need to satisfy such claims prior to emerging from bankruptcy will reward their willingness to “hold out.”

    Often, the “reward” for such bargaining is something less than creditors may have hoped for.  The debtor concludes it cannot negotiate and must instead incur the [additional] administrative expense of contesting such claims directly in an effort to reduce their aggregate amount.  If these claims disputes do not go the debtor’s way, or if the debtor is already struggling to emerge with sufficient cash, the debtor may be forced to liquidate – thereby leaving all creditors, from secured debt to general unsecured claims, with far less than might otherwise be the case.

    How big can these problems get?  A recent “Dealscape” blog post by Ben Fidler illustrates how the section is playing out in the troubled retail and auto parts sectors, where vendors of goods often play a significant role in a company’s operations.  Fidler points to larger Chapter 11 filings, such as Empire Beef Co., Blackhawk Automotive Plastics, Inc., and Plastech Engineered Products, Inc., which have been left administratively insolvent or have been threatened with such insolvency, as a result of section 503(b)(9)’s amendments.

    Though not every case is as large as the ones cited by Fidler – and not every case results in administrative insolvency – similar dynamics with similar results can just as easily arise in smaller Chapter 11’s.

    In sum, this anecdotal data suggests that Congress’ well-intended efforts to afford some creditors with more options in a debtor’s reorganization may, in fact, have left all creditors with far less options.

    Surely, this cannot have been Congress’ intended consequence.

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