WW&R Bankruptcy practice group of Weltman, Weinberg & Reis, the nation's largest creditor's rights law firm, is your source for bankruptcy news and information. We are committed to helping clients thrive in these ever changing times.
With the commercial real estate market in a continued pattern of free fall, coupled with the still-lagging economy overall, creditors are likely to see a continued increase in overall bankruptcy filings for the foreseeable future. For every strip mall or office park that watches as long-time, valued tenants vacate their spaces, there are landlords who cannot service the debt on their property due to an overall decrease in rental income, and there are small business owners now joining the ranks of the newly-unemployed, along with their employees.
The unfortunate trickle down sees both employees and small business owners seeking bankruptcy protection, along with a growing number of commercial property owners who are unable to find replacement tenants to make up the shortfall in rental income.
Additionally, those tenants remaining behind may see a lag in business as a result of the loss of “anchor stores” which attracted casual shoppers to the area. This point was driven home by the recent Chapter 11 filing by Movie Gallery, Inc., the operator of the Hollywood Video chain. Preliminary indications are that a “significant number” of Hollywood Video stores will be shuttered in the coming months, leaving hundreds of strip malls across the country without a valued tenant.
The Bankruptcy Department at Weltman, Weinberg & Reis will continue to monitor trends in bankruptcy filings and will update you as data becomes available.
While they became stronger in 2009 (yes they became stronger), the financial institutions were more willing to write off the bad debts of companies and were less likely to restructure debts when companies became delinquent. The result became a substantial increase in business bankruptcy filings in 2009. The number of businesses filing for bankruptcy in 2009 increased by 38% from the numbers reported in 2008(1).
The other factor that contributed to the substantial increase in business bankruptcy filings is the economy. With the high costs of gas, materials and food coupled with low consumer turnout in the marketplace, businesses’ profit margins were unable to meet the demands of the companies’ debts.
Along with the increase in business bankruptcy filings in 2009, companies’ default rates hit a record high in 2009(2). While some experts predict that the growth of business bankruptcies will taper off in 2010, the majority of experts think otherwise. Such factors as being unable to find financing, being unable to instill consumer confidence due to high unemployment and foreclosures and being unable to handle defaults in the commercial real estate industry, means that a slowdown in business bankruptcy filings is unlikely. The industries that are most suspect to seeing business bankruptcy filings are retail, media, commercial real estate and transportation.
With the increase number on business bankruptcy filings, creditors need to monitor accounts closer. The following are some general tips to make sure you are on top of the situation.
Tips for Chapter 11 Creditors with Claim:
Have a game plan on what you as a lender want from the company. What will yield the best return for you- liquidation or being patience to see if the company will become viable
If you have a first lien on all the business assets, you will need to seek attorney representation to begin negotiations with the debtor in possession(3). Many times these negotiations may take place prior to the filing. The most important items as a first lien holder are to protect your first lien position post bankruptcy filing as well as receiving adequate protection payments while waiting for the Chapter 11 Plan to be confirmed. Look out for a Motion to Use Cash Collateral, which generally is one of the first motions filed after a bankruptcy petition
All creditors holding a secured claim need to make sure that the Debtor in Possession does not attempt to modify the loan contrary to bankruptcy law. Consult an attorney if you do not agree with any treatment of your claim. Look out for Disclosure Statements, Chapter 11 Plans or any Motions that might affect your claim (Motion to Sell Property, Motion to Avoid Lien)
File your Proof of Claim
Be on the Creditor’s Committee, if applicable
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(1)Information pulled from Automated Access to Court Electronic Records (AACER)
(2)Information pulled from Standard & Poor’s
(3)Debtor in Possession is a technical term used in bankruptcy. In essence, the Debtor in Possession is the debtor
Creditors doing business with entities they suspect are on the verge of filing for bankruptcy protection need to be aware that they may be required to return the payments received from that entity within the 90 days preceding a bankruptcy filing. Whether you are a party to litigation entering into a settlement agreement, a trade creditor contemplating a compromise of a delinquent account, a lender negotiating a workout, or simply conducting business as usual, all dealings with financially troubled parties should be approached with an eye on avoiding preference risk.
Section 547 of the Bankruptcy Code permits a debtor-in-possession in a Chapter 11 (reorganization) case, or a bankruptcy trustee in a Chapter 7 (liquidation) case, to recover certain payments made to the debtor’s general creditors within 90 days (or one year if the payments went to “insiders” of the “debtors”) prior to the petition filing date for the bankruptcy. Such payments are considered “preference” payments, or just “preferences”.
The purpose of this portion of the Code is to discourage creditors from taking extraordinary collection measures against a potential debtor in the immediate, pre-bankruptcy period. In at least some cases, if creditors do not panic, the debtor can successfully work through the financial issues that trouble it and resume ordinary payment of its bills. But if creditors push, there is a perceived rush on the debtor to collect everything possible.
For example, preferential payments to the debtor’s “favorite” creditor who holds a personal guarantee by the debtor’s principal or to the creditor who can hurt the debtor the most do not reflect the bankruptcy policy of equality of treatment for all creditors. Bankruptcy law can compel a creditor to disgorge monies received in excess of its fair share of the debtor’s assets.
If a creditor receives a letter or call from debtor’s bankruptcy counsel about a potential preference claim the creditor should not automatically refund the payment(s). There are potential defenses against repayment and, in any event, it’s a negotiation game, particularly if the demand is for a relatively small sum. If negotiation does not settle the claim, the debtor or the trustee can file suit against you in the bankruptcy court. Even if suit is filed, the claim probably still can be settled by negotiation.
The Bankruptcy Code provides several defenses to preference liability in order to encourage creditors to continue conducting business with a financially troubled debtor in the hope of avoiding a bankruptcy filing. The three most common defenses are (i) the contemporaneous exchange for new value, (ii) the subsequent new value and (iii) the ordinary course of business defenses.
The first of these three defenses prevents recovery of a payment when the transfer was intended by the debtor and creditor to be a contemporaneous exchange for new value given to the debtor and when such exchange was in fact substantially contemporaneous. New value is defined by the bankruptcy code as money or money’s worth in goods, services, or new credit, or a release by a transferee of property previously transferred, but does not include an obligation substituted for an existing obligation.
The “new value” rule requires that you demonstrate an essentially contemporaneous exchange of value between you and the creditor. After learning of a debtor’s bankruptcy filing, a creditor should account for all payments received within the 90 days preceding the filing and match those payments to goods shipped or services provided after the date of the oldest payment received within the preference period. This will allow the creditor to analyze the extent of its new value defense and potential liability to a preference attack, aiding in a cost-effective resolution of any preference demand.
The “ordinary course” defense protects recurring, customary credit transactions that are incurred and paid in the ordinary course of the debtor’s business and the creditor’s business. To successfully employ this defense it is imperative a creditor maintain detailed records of the dates that payments are received in relation to the dates invoices are generated in order to show that the pattern of payments received within the 90 day preference period is comparable to either industry statistics or the prior payment history between the parties. This defense highlights another common mistake of creditors, which is to restrict credit terms upon discovering a debtor is experiencing financial difficulty. Several courts have found that payments received after a creditor began restricting credit terms were not made within the ordinary course of business between the creditor and debtor. Rather than tighten or more strictly enforce credit terms, creditors should require prepayment in order to avail themselves of the new value defenses discussed above.
Although it may be impossible to completely eliminate all preference risk when dealing with a distressed entity, especially when drafting a settlement or workout agreement, there are strategies that can help reduce such risk. Further, given the available statutory defenses, if a payment received within the preference period is attacked as a preference, a compromise can likely be reached with the trustee that would prove more favorable to the creditor than the recovery that could be expected through the bankruptcy claims process.
Kevin C. Susman is an Associate in the Legal Action Recovery department of the Cleveland office of WWR. He can be reached at (216) 685-4298 or .
This year in the United States we have seen Bankruptcy filings increase almost 34% from 2008. However, some good news may be on the horizon in some jurisdictions. After posting a 65% increase in September of 2009, compared to case files in September of 2008, the Northern District of Ohio saw a decrease in October. In October 2009, bankruptcy filings decreased by 1% as compared to October of 2008. One month does not make a trend but we may be seeing some stabilization in this jurisdiction.
In addition, some reports have indicated that there has been a slow down in the number of commercial bankruptcies filed nationally. Some are attributing this to the slowdown in commercial lending. The number of large Chapter 11 cases has slowed as well.
The rest of the year will be a sign of what is to occur in 2010. Weltman, Weinberg and Reis will continue to monitor the latest bankruptcy trends and its potential effect on creditors.
