Category Archives: Bankruptcy News

The number of US bankruptcies passes the 500-mark as coronavirus takes toll

Corporate bankruptcies in the U.S. continue to grow amid the coronavirus pandemic as 22 new companies added their names to a growing list of bankruptcies in 2020 in the last two weeks, an S&P Global Market Intelligence analysis shows.

A total of 509 companies have gone bankrupt this year as of Oct. 4, exceeding the number of filings during any comparable period since 2010.

S&P Global Market Intelligence’s bankruptcy analysis includes public companies or private companies with public debt. Public companies included in the list of companies with public debt must have at least $2 million in either assets or liabilities at the time of the bankruptcy filing. In comparison, private companies must include at least $10 million.

Companies that entered bankruptcy proceedings between Sept. 21 and Oct. 4 include i ndependent oil and gas producer Oasis Petroleum Inc., Bouchard Transportation Co. Inc. , which operates a fleet of barges and tugs, oilfield services company FTS International Inc., film distribution company Aviron Pictures LLC, oil and gas company Lonestar Resources US Inc. and King Mountain Tobacco Company Inc., which makes cigarettes. Only three companies — Northwest Regional ASC LLC, Reata Properties LP and Continuity Logic LLC — had involuntary petitions filed against them during the period.

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Oasis, which filed a Chapter 11 petition on Sept. 30, was the only company that claimed more than $1 billion in liabilities in its bankruptcy filing during the period. The company signed a restructuring support agreement with all of the lenders in its revolving credit line and holders of 52% of its bonds on a prepackaged restructuring plan through which it aims to cut its debt by $1.8 billion.

Texas-based Lonestar on Sept. 30 filed for Chapter 11 protection, listing $560 million in total assets and $626.2 million in total liabilities.

Meanwhile, 54 companies went bankrupt in September, matching the number of filings in August.

JUST IN TIME: NEW BANKRUPTCY RELIEF FOR SMALL BUSINESSES – NEW YORK LAW JOURNAL

Just in Time: New Bankruptcy Relief for Small Businesses

A unique opportunity for Chapter 11 restructuring of small businesses with up to $7.5 million of third-party debt is set to expire early 2021.

By Jerrold L. Bregman

The clock is ticking for small businesses (with debt of less than $7.5 million) to take advantage of a new way to restructure under chapter 11 of the Bankruptcy Code. New sub-chapter V (“five”) – part of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) – is set to expire in about six months.

The CARES Act special bankruptcy relief increased the debt limit under the Small Business Reorganization Act of 2019 (SBRA) from about $2.7 million to $7.5 million in light of the unprecedented financial distress being experienced by small businesses all across the county, including especially by small retailers and manufacturers, restaurants and services providers. The increased debt limit, which became effective February 20, 2020, includes a one-year sunset.

The SBRA itself was designed to fix much of what is “broken” about chapter 11 for small businesses, including most importantly, the “absolute priority rule” that often led to owners losing their companies. High costs and indeterminable delays also made chapter 11 unworkable for many small businesses.

New Subchapter V dramatically shifts the bankruptcy process in favor of helping small businesses restructure at a time when they need it most: in the midst of a pandemic that has led to economy-wide closures, dramatic falls in income, and mass layoffs.

Creditors will also benefit from the lower costs, quicker proceedings, and increased certainty about the outcome of the process, if at the expense of some leverage. Secured lenders, whose long-term secured loans typically flow through the restructuring, will also enjoy the additional benefit of more economically viable borrowers emerging from Subchapter V.

Owners Keep Their Equity; Lower Costs and Streamlined Process

Owners now have a way to keep their equity ownership even over the objection of creditors. The baseline economic requirement for Subchapter V plan confirmation is that creditors receive at least the value of the business’s projected “disposable income” over a period of three to five years, and not less than creditors would receive in a chapter 7 liquidation.

Key to the calculation of “disposable income” is the minimum payment is after subtracting all of the business’s reasonable expenses, including the owner’s salary, and also may potentially include a contingency reserve in appropriate circumstances. In this way, Subchapter V is similar to Chapter 13 cases for individual wage earners and Chapter 12 cases for family farmers, which allow confirmation without creditor consent, subject to what may be considered a business’s “reasonable best efforts” to pay its creditors.

The costs of small-business Chapter 11 cases are dramatically reduced because Subchapter V eliminates: (i) the requirement that a separate disclosure statement be prepared and approved before voting on the Chapter 11 plan; (ii) the risk of a creditors’ committee being appointed absent cause; (iii) the risk of a competing Chapter 11 plan being filed by creditors; and (iv) the obligation to pay quarterly fees to the United States Trustee, the federal watchdog that oversees bankruptcy cases.

Subchapter V speeds up the restructuring process through a regimen of three important deadlines: (i) the debtor is required to file a status report by 14 days before the initial status conference, detailing its efforts to “attain a consensual” Chapter 11 plan; (ii) by day-60 after the bankruptcy filing, the Bankruptcy Court is to hold an initial status conference to consider the substance of the debtor’s status report, the purposes of the bankruptcy filing, and the path forward for the restructuring; and (iii) by day-90 after the filing, the debtor is required to file its Chapter 11 plan, which may be consensual or nonconsensual. The Bankruptcy Court retains discretion to extend these deadlines for “circumstances for which the debtor should not justly be held accountable.”

Companies are nevertheless still required to file first day motions, including, for example, motions to use cash collateral, to make “adequate protection” payments to secured creditors after the petition date and before the plan is confirmed (via the Subchapter V trustee), and to file applications to employ professionals. Similarly, debtors must file financial reports required by Section 1116(1) on the petition date, periodic performance reports required by Section 308, and their schedules and statements. (All statutory references are to the Bankruptcy Code at 11 U.S.C. §§ 101 et seq.) Companies must also maintain insurance and pay taxes that become due during the case.

Up to $7.5 Million of Third-Party Debt; No Single-Asset Real Estate Cases

Subchapter V is strictly voluntary and must be affirmatively elected. A company makes its election when the case is filed, or within 14 days after an involuntary case is filed.

To qualify, businesses must meet two criteria. First, the total amount of secured plus unsecured debt may not exceed $7.5 million, counting only noncontingent, liquidated, and non-insider debt. Second, at least half of the debt that is counted must have arisen from the debtor’s “commercial or business activities.”

Importantly, the debt limit does not count any debts owing to the owners or other insiders, such as family members, nor does the debt cap count any contingent debts, such as potential environmental claims, or debts that have not been liquidated and remains unfixed in amount, such as commercial tort claims.

Regrettably perhaps, Subchapter V is not available to businesses whose only business is the operation of its owned real property, so-called “single asset real estate” cases. Those cases have their own special rules and requirements under chapter 11.

New Player in Chapter 11: The Subchapter V Trustee

As in traditional Chapter 11 cases, the company’s owner/management remains in control of the company (absent cause for removal), and a new player is added: the Subchapter V trustee. Some describe this trustee as a “facilitating neutral” or a “consulting trustee,” because the trustee’s mandate is to “facilitate the development of a consensual plan of reorganization.” This trustee may even interface with creditors in negotiations. This is a novel and unique role for a bankruptcy trustee, and the extent to which the promise of this role is actualized remains to be seen.

Unlike a Chapter 7 trustee, who has a duty to investigate the debtor’s affairs, or a Chapter 13 trustee, who scrutinizes the debtor’s expenses and is the disbursing agent in every case, the Subchapter V trustee serves a unique role as a facilitator whose primary purpose is to assist the debtor in making its restructuring successful.

Other Significant and Novel Features

Only the company’s owner may file a plan in a Subchapter V case; there are no creditor plans permitted. The plan must be filed within 90 days of the petition date, unless the Bankruptcy Court in its discretion grants more time, and the company is free to amend its plan any time before the plan is confirmed. There is no deadline by when the company’s plan must be confirmed. While the company’s plan must be filed in good faith, ownership’s control over the plan deprives creditors of the strategic leverage of potentially offering a “competing plan” or otherwise seeking to end the company’s exclusive right to file a plan.

Subchapter V plans may provide for a lump-sum payment to be funded on the plan’s effective date, from exit financing or other means, which further speeds the company’s reorganization.

Subchapter V also allows home mortgages to be restructured – which is unique under bankruptcy law – so long as the proceeds were used for the company’s “commercial or business activities.” This presents a pre-filing planning opportunity to refinance a purchase-money mortgage.

Subchapter V plans are also to include fallback provisions to take effect if the plan payments are not made. Companies have considerable flexibility in this regard, including, for example, to provide for the liquidation or a going-concern sale of the debtor’s nonexempt assets, the terms of which may be specified in the plan.

Cooperation toward a consensual Chapter 11 plan is encouraged by two unique features of Subchapter V as compared to traditional Chapter 11 cases. First, the facilitating trustee is available to assist in laying the groundwork for negotiations with creditors. Second, while the company is not required to obtain creditor consent so long as the disposable income test is satisfied, the company stands to benefit from confirming a consensual plan—and thus has an incentive to negotiate with creditors—including the company’s ability to obtain its discharge upon plan confirmation rather than after the required payments have been made under a nonconsensual plan.

Conclusion: Carpe Diem!

In light of some analyses showing that as many as half of all Chapter 11 cases filed last year would have been eligible to use this new Subchapter V had it existed, and the economic wreckage of COVID-19, this new subchapter is likely to have a substantial positive impact on Chapter 11 proceedings in the near term. But companies better act quickly: the debt cap is scheduled fall back to under $3 million in early 2021 unless Congress acts to extend this opportunity for small businesses.

The opinions and statements made herein are for scholarship purposes only and do not necessarily reflect the opinions of the author or his law firm.

Jerrold L. Bregman, of Brutzkus Gubner’s offices in Denver and Los Angeles, is a bankruptcy and financial transactions lawyer. Jerry received his JD/MBA from UCLA and is licensed to practice law in California, Colorado and New York. Jerry is AV Preeminent-rated, a certified Specialist in Bankruptcy Law (California Board of Legal Specialization, 1995), among U.S. News & World Report’s “Best Lawyers in America” 2019/2020, and a Super Lawyer in California, New York and Colorado. See Jerry’s profile.

 

Article By Jerrold L. Bregman

Debt Collection In The Face Of A Covid-19-Fueled Recession

The Covid-19 pandemic has brought widespread uncertainty, confusion and hardship for many industries. Shelter-in-place orders and fear of contracting the virus have shifted both corporate and consumer behaviors, and business closures and job losses have generated significant financial insecurity.

As the uncertainty continues into the second half of the year, businesses and consumers are bracing for an economic recession. Though no one can predict with any precision the severity or duration of the recession, financial institutions and collections organizations should take steps now to review the completeness and accuracy of their consumer data to better understand how prepared the firm would be for what may come.

Conventional Collections In Unprecedented Times

As the economic situation worsens and consumers’ financial hardship deepens, more individuals will miss payments on their credit cards, mortgages and other lending products. Some banks have begun to recognize this danger and are preparing for a surge in defaults. While some defaults will be inevitable, institutions can help mitigate the situation by reaching out promptly to financially troubled customers and adjusting their payment terms.

Organizations that are slow to make contact as a customer’s debt lapses into delinquency are at the greatest risk of receiving partial payment or none at all. However, the effectiveness of debt recovery efforts is hampered by the fact that collection teams (both first- and third-party) rely on out-of-date customer databases and traditional skip tracing tactics to support customer outreach. As a result, the contact information (phone numbers, email, physical addresses) on file for customers may no longer be valid or is rarely used. A one-size-fits-all approach to contacting customers means that individuals are often contacted at nonideal times or using channels they are unlikely to respond to.

Article By Rich Greene

Attorney General James Renews Suspension of State Debt Collection for Fifth Time as Coronavirus Continues to Impact New Yorkers’ Wallets

New Yorkers with Student and Medical Debt Referred to AG’s Office
Will Have Payments Automatically Frozen Through September 4, 2020

New York – New York Attorney General Letitia James today announced that the state will, on Sunday renew for the fifth time, an order to halt the collection of medical and student debt owed to the state of New York that has been specifically referred to the Office of the Attorney General (OAG) for collection. In response to continuing financial impairments resulting from the spread of the coronavirus disease 2019 (COVID-19), the OAG will renew orders again from this coming Sunday, August 16, 2020, through Friday, September 4, 2020 — a date which coincides with Governor Cuomo’s most recent executive order tolling statutes of limitation and other legal time periods. After this period, the OAG will reassess the needs of state residents for another possible extension. Additionally, the OAG will accept applications for suspension of all other types of debt owed to the state of New York and referred to the OAG for collection.

“Although New York has had remarkable success in containing the coronavirus, too many New Yorkers are still enduring the financial hardships of this pandemic,” said Attorney General James. We have the power to help tens of thousands of New Yorkers who are struggling to make ends meet, which is why we are again suspending the collection of state student and medical debt referred to my office. As we continue our work to stop the spread of this virus, we must also work to rebuild our economy and help New Yorkers get back on their feet, and that starts with ensuring our state’s residents are not unnecessarily burdened with additional debt payments at this time.”

Millions of New Yorkers, like Americans across the nation, have been impacted — directly or indirectly — by the spread of COVID-19, forcing them to forgo income and business. Since COVID-19 began to spread rapidly across the country in mid-March, tens of millions of residents across the nation have filed for unemployment, including more than 3.4 million in New York state alone. In an effort to support many New Yorkers economically impacted during this difficult time, Attorney General James will this weekend renew an order — first made in March and renewed in April, in May, in June, and in July — to ease the financial burdens for many workers and families by halting the collection of medical and student debt owed to the state of New York and referred to the OAG for collection through September 4, 2020.The OAG collects certain debts owed to the state of New York via settlements and lawsuits brought on behalf of the state of New York and state agencies. A total of more than 165,000 matters currently fit the criteria for a suspension of state debt collection, including, but not limited to:

  • Patients that owe medical debt due to the five state hospitals and the five state veterans’ homes;
  • Students that owe student debt due to State University of New York (SUNY) campuses; and
  • Individual debtors, sole-proprietors, small business owners, and certain homeowners that owe debt relating to oil spill cleanup and removal costs, property damage, and breach of contract, as well as other fees owed to state agencies.

NYS Attorney General Latitia James

Temporary Deferral of Payments Act 2020 introduced to protect companies from bankruptcy

Introduction

Despite the impact of the COVID-19 outbreak on legal matters and company wellbeing, creditors still have the same remedies at their disposal to recover unpaid debts (for further details please see “Debt collection during COVID-19“). Moreover, the Dutch courts are generally handling bankruptcy petitions and requests for pre-judgment attachment in the same way as they did before COVID-19.

However, this will likely change soon, as in June 2020 the minister for legal protection published a preliminary draft of the Temporary Deferral of Payments Act 2020 for online consultation.

Essence of act

The temporary act’s purpose is to protect Dutch companies from avoidable bankruptcies and limit the damage caused by the COVID-19 crisis as much as possible. The temporary act enables the courts, when ruling on a bankruptcy petition, to defer the bankruptcy proceedings for an initial period of up to two months, which can – on request – be extended once or twice, each time by no more than two months. Therefore, the deferral period cannot exceed six months in total.

In addition, the courts can be requested to suspend any other recovery actions instituted by the relevant creditor, with the purpose of enabling the indebted company to restart its activities after the government has (partly) lifted the restrictive COVID-19 measures.

Act in more detail

An indebted company facing a petition for its bankruptcy must file a request for the abovementioned deferral of the bankruptcy proceedings. To substantiate the request, the company must summarily prove that:

  • its financial distress is exclusively or mainly due to the restrictive measures relating to the COVID-19 outbreak which were announced in the Netherlands on 16 March 2020; and
  • it cannot continue its business as usual, which has resulted in a temporary inability to continue to pay its debts.

This is deemed to be the case when the company provides information about its financial position showing that:

  • before the restrictive measures were announced, it had sufficient income to cover its due and payable debts; and
  • since the measures were announced, it has suffered a loss in turnover of at least 20%.

If the company successfully proves the above, the court will grant the request for deferral if the following conditions are met:

  • the company is expected to be able to pay its debts after the deferral period set by the court; and
  • the legitimate interests of the bankruptcy petitioner are – in the court’s opinion – neither undesirably nor disproportionately prejudiced.

If the court grants the request for deferral, the following will apply during the deferral period:

  • the indebted company cannot be compelled to pay debts to the creditor that requested the bankruptcy; and
  • a failure by the company to fulfil a payment obligation towards the aforementioned creditor before commencement of the deferral period cannot by itself constitute a ground for the creditor to:
    • change in any way its obligations or commitments towards the debtor;
    • suspend the performance of any obligation towards the debtor; or
    • dissolve an agreement with the debtor.

Further, on the debtor’s request, the court granting the deferral may also provide that during the deferral period:

  • the creditor that requested the bankruptcy cannot exercise its right to recover assets belonging to or controlled by the debtor; and
  • (pre-judgment) attachments are lifted.

If the request for deferral is granted but it subsequently appears that the criteria for granting the deferral are no longer met or the debtor has prejudiced the rights of one or more creditors, or it can reasonably be feared that the debtor will do so, the court will annul the deferral on its own initiative or on the request of the relevant creditor (such request will be handled with the utmost urgency).

Comment

The online consultation on the legislative proposal resulted in 16 comments, which were mostly positive. On 11 June 2020 the consultation closed and on 13 July 2020 the government submitted the legislative proposal to the House of Representatives. With Parliament in recess until the end of August 2020, some delay is probable. However, the temporary act is still expected to come into force in the near future and remain in force until at least 1 October 2020. After this, the act can be extended in two-month increments.

Recent practice shows that the courts seem to anticipate the entry into force of this temporary act as bankruptcy petitions are increasingly being deferred, usually for four weeks. This is apparently to give the relevant debtor some temporary breathing room, which is also one of the purposes of the Temporary Deferral of Payments Act.

Article by Ben Reinders