In what has potential to emerge as a late 2011/early 2012 buzz topic, another state has moved to toughen the process for debt-saddled municipalities to declare for bankruptcy protection.

California Gov. Edmund “Jerry” Brown this week signed Assembly Bill 506, which will require municipalities seeking the ability to file Chapter 9 to either declare a fiscal emergency or document efforts to negotiate with creditors prior to such a filing. Though promoting it as otherwise, the move appears to be a thinly veiled effort to pump the brakes on the slowly emerging trend of municipalities considering Chapter 9 as an increasingly viable option to beat financial woes. Pennsylvania promoted somewhat similar legislation over the summer.
Brown said the legislation “puts in place reasonable steps for local governments to take before filing bankruptcy…let’s be clear, this bill does not prevent a municipality from declaring bankruptcy or even throw roadblocks in its path.” He continued the goal was to find “alternative, less drastic solutions” then filing.

The municipal bankruptcy issue has become an increasingly hot one for businesses/creditors that do significant selling on terms to municipalities, especially ones now struggling, amid the ongoing financial crisis and increasing entitlement issues. This year, about a half-dozen municipalities filed for protection under Chapter 9 with the latest of which emanating out of Central Falls, RI. Jefferson County, AL narrowly avoided it thanks to a $1 billion renegotiation approved by debt-holders tied to a sewer rehab project, and Harrisburg, PA continues to weigh what appear to be a very narrow set of options as creditors for a failed trash-incineration project haven’t been so flexible.

Bruce Nathan, Esq., of Lowenstein Sandler PC, who is presenting an NACM teleconference Wednesday on the municipal bankruptcy issue, listed skyrocketing health care and pension obligations as well as lower revenue and construction-related debts both tied to the ongoing economic downturn among top reasons for the growing trend. He noted that specifically in California, the state capital city of Sacramento alone has unfunded retiree health care liabilities of $245.6 million and that the bankruptcy filing in the city of Vallejo is among the largest in U.S. history.

For more information on or to register for Wednesday’s teleconference on this topic and how it will affect credit managers, click here.

Brian Shappell, NACM staff writer

The body count of U.S.-based solar product manufacturers rose as yet another western-based firm has filed for bankruptcy. However, perhaps illustrating how tough times have gotten for the industry, this one has moved straight to the liquidation phase.

Arizona-based Stirling Energy Systems Inc. has filed for Chapter 7 in U.S. Bankruptcy Court in Delaware. At least four of such companies have now filed some form of bankruptcy since August. Like the others, Stirling is blaming the lack of demand amid the stumbling economy and under-cutting on pricing and cost for Asia-based competitors. Also in play are massive problems with saturation and over-investment during the boom years, relative to demand, which was highlighted earlier this year in NACM’s eNews and Business Credit Magazine.

Others who filed for bankruptcy protection under Chapter 11 include California-based SpectraWatt Inc.,  Massachusetts-based Evergreen Solar, and Solyndra, also based in California. Months before, BP solar operation halted its Maryland-based solar activities in favor of relocation abroad to save costs.

Solyndra has been in the spotlight, more so than the others, because of the large federal government grants it received, its ties to the Obama administration, an FBI raid on their offices on the days following their Chapter 11 filing and a present Congressional investigation into its principals’ business practices.

Brian Shappell, NACM staff writer

Some bankruptcy and business watchers thought the three-year saga that is the Washington Mutual, on of the two largest Chapter 11 bankruptcy filings, was closing in on eyeshot of the finish line. Then, a judge in the U.S. Bankruptcy Court’s Third District (Delaware) dealt it another setback by siding with lower-level creditors.

Three years since filing for Chapter 11 bankruptcy protection, WaMu’s creditors and shareholders presented final arguments in bankruptcy court asking for the judge to reject a $7 billion reorganization plan last month. Opponents argued a settlement deal WaMu made with a group of hedge funds undermines the fairness of the bankruptcy process and alleged incidents of insider trading. U.S. Bankruptcy Judge Mary Walrath evidently found the argument compelling as she rejected the reorganization plan this week in court and ordered the sides to enter mediation. In the process, she reportedly intimated it was likely some involved in WaMu proceedings, namely a quartet of hedge funds, indeed engaged in insider trading practices to shape the bankruptcy process, as some lower-level creditors alleged.

The proposed settlement, like many proposed bankruptcy plans in recent years, would have left unsecured creditors and shareholders with little or nothing, more likely the latter. Even Walrath herself has described the case as convoluted and intimated that litigation was likely to rage on in one form or another for some time.

Brian Shappell, NACM staff writer

The bipartisan nature of H.R. 2533, the Chapter 11 Bankruptcy Venue Reform Act, was on display this morning during a hearing on the bill in the House Judiciary Committee.  Lawmakers from both sides of the aisle asked a small group of witnesses an array of questions, and regarded the arguments against the bill, proved by lone dissenting witness Professor David Skeel of the University of Pennsylvania Law School, with a great deal of skepticism.

Held in the Committee’s Subcommittee on Commercial and Administrative Law, chaired by Rep. Howard Coble (R-NC), the hearing offered the bill’s sponsors and supporters to lay out their qualms with current bankruptcy venue statutes, which allow debtors a strikingly broad array of choices of where to bring their case.  “These rules allow a large Chapter 11 debtor to choose their venue…This leads to some strange results,” said Coble in his opening statement.  “The Los Angeles Dodgers, an entity with Los Angeles in its very name, filed in Delaware.”

Coble mentioned a complaint that would arise again and again in the hearing, noting that the leeway that Chapter 11 debtors have in where they file their bankruptcy case often comes at the expense of smaller creditors.  “Small creditors must defend preference claims filed in a remote jurisdiction,” he said.  “[They’re] sometimes left in the dust.”

Judiciary Committee Chairman Lamar Smith (R-TX), one of the bill’s original sponsors, noted in his opening statement that H.R. 2533 would not only correct provisions that disenfranchise smaller creditors, but also restore the Constitution’s original intent for the nation’s Bankruptcy laws.  “The current Chapter 11 venue rules allow many corporations to forum shop for a venue with favorable judicial precedent for the business.  For example, a nationwide retailer may prefer to file in Delaware because of the Third Circuit’s well-known rulings on the treatment of unpaid rent in bankruptcy.  At the same time, a business with many unionized employees can avoid filing in Delaware to avoid Third Circuit precedent on collective bargaining rights in bankruptcy,” said Smith.  “The Constitution instructs Congress to enact uniform bankruptcy laws.  While courts of appeal are permitted to interpret Bankruptcy Code provisions differently, Chapter 11 debtors should not be able to leave their home districts and shop for a forum whose judicial precedent on bankruptcy law they happen to prefer.”

Three of the four witnesses agreed with the Chairman, and supported the bill, namely Peter Califano, partner with Cooper, White & Cooper who testified on behalf of the Commercial Law League of America (CLLA), Hon. Frank Bailey, chief judge of the Bankruptcy Court for the District of Massachusetts, and Professor Melissa Jacoby, of the University of North Carolina School of Law. 

“The consequences of corporate bankruptcy are most profound in the communities where the debtors’ principal assets are located,” said Califano.  “If bankruptcies are filed in remote districts, the parties with the most familiarity with the debtor’s operations might be cut off in the process.”  Bailey and Jacoby agreed with Califano, with Bailey noting that “the current venue statute undermines confidence in the bankruptcy system,” and Jacoby observing that “the current laws really do risk being perceived as being procedurally unfair.”

Subcommittee Ranking Member Rep. Steve Cohen (D-TN) added that the current venue rules ultimately harm “small creditors, employees and other affected stakeholders,” and that “this bill [H.R. 2533], that’s bipartisan, offers what we think are common sense changes to bankruptcy venue statutes.”

NACM has publically voiced its support for H.R. 2533, and has long advocated for sensible changes to the Code’s rules governing where a debtor may file.  To urge your member of Congress to support the Chapter 11 Bankruptcy Venue Reform Act, look up your congressperson’s contact information here (be sure to rely on your company’s address rather than your own home address), then visit NACM’s Advocacy page to download a form letter that you can personalize to increase its effect on your representative.

If you have any questions, contact Jacob Barron, NACM staff writer and government affairs liaison, at jakeb@nacm.org.

Jacob Barron, CICP, NACM staff writer

(EDITOR'S NOTE: Solyndra LLC officially filed for Chapter 11 in U.S. Bankruptcy Court in Delaware early Tuesday. Story originally posted on 9/1/11)  As predicted in NACM’s eNews more than a month ago, “green” business has become far from gold, especially where solar is concerned. Just last Monday, NACM covered the SpectraWatt Inc. Chapter 11 bankruptcy filing. One day later, yet another company announced it was with certainty heading down the same path.

Solyndra LLC, a solar energy products firm which gained notoriety during well-publicized visit there by President Barack Obama in 2010, announced plans to file for bankruptcy protection as early as next week. It marks the third solar in a month to official file for or announce Chapter 11 in the last month, with more potential struggling firms in the pipeline. Like SpectraWatt shortly before them, the company’s high-tech solar product offerings had become “noncompetitive” as Asian manufacturers, especially those based in China, continue to deeply undercut the firm and its competitors on pricing and overhead. Even significant financial assistance in the form of federal programs could not help enough. The problems are fueling speculation about widespread, near unrecoverable problems emerging in the solar business niche. More than 1,000 Solyndra employees are expected to be out of work almost immediately as a result of the company’s proverbial white flag.

As previously noted, it’s a prediction Credit Management Association's Mike Joncich make in an interview for stories in NACM's eNews and. the new issue of Business Credit Magazine. He noted the industry's problems go deeper than just an economic downturn/slow recovery and include serious over-saturation:

"There was over-investment in those industries [during the boom], and a number of companies are going to fall out that didn't have the right ideas or right business models to survive,” said Joncich. “Credit managers have to be aware of such phenomena."

Earlier this month, Massachusetts-based Evergreen Solar filed for Chapter 11 bankruptcy protection and, months before that,  Maryland-based BP solar operation halted its activity in favor of relocation abroad to save costs.

Brian Shappell, NACM staff writer

The Credit Managers’ Index (CMI) for August hasn’t been this low in more than a year—falling from July’s 53.9 to 52.7—and is now tracking at levels last seen in 2008–2009. “The news this month is not good and comes as no shock to anyone who has been tracking the data coming from all directions,” said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). If there is any good news, it is that the combined number has not yet fallen below 50, the threshold separating contraction from expansion. But the index of unfavorable factors fell to contractionary levels. The last time the unfavorable index was this low was in the 2009 period when the recession had just started to show signs of easing. The fact that the data was not worse this month than it was is probably worth noting as most of the other indices released in the last few weeks suggested there might have been an even steeper decline.

Kuehl said the best news in this month’s data is found in the favorable index. Here the data barely changed, going from 58.9 to 58.1. This is still much lower than most of the last year, but the precipitous collapse that took place in the companion part of the overall index did not take place here. There was even some improvement in the amount of dollar collections, while declines in the sales category were slight, from 60 to 59.2. “The most interesting aspect of the data is that extension of credit actually improved in the middle of all this gloom and doom. The fact that favorable factors have improved slightly or remained stable provides some hope that conditions will improve in the coming months,” said Kuehl. “There is still demand and business progress, but the crisis in the overall economy has been putting pressure on the finances of many companies.”

Upon examining the unfavorable factors, it is striking that the problem is primarily one of sudden business stress and failure. The biggest declines were in accounts placed for collection and dollar amounts beyond terms. These are signs of real distress among customers, but it is equally significant that filings for bankruptcies did not increase dramatically and there was not an acceleration in the rejection of credit applications. The divergence in these factors is particularly interesting and informative. While speculative, one could look at this data and conclude that companies got in trouble in the last month or so because of a sudden drop in business after anticipating better times. Evidence from earlier in the year showed that companies across the board were anticipating better days in the second half of the year and many were trying to prepare for this with expansion plans. This anticipated economic growth did not come to pass and these companies swiftly got into trouble.

If there is a small silver lining to all this, it is that the level of bankruptcies has not risen at the same pace. That means one of two things. If the economy gets back in gear in the next couple of months, companies struggling now will have some time to gain control of their budgets and be able to avoid sliding further toward collapse and ultimately bankruptcy. If the economy doesn’t catch fire to some extent in the near future, the bankruptcy rate will start to climb and the index will reflect it. The other mildly encouraging piece is that the rate of rejection for credit applications was not markedly different from last month. There is still credit available to customers that are bucking the trend. This is not like the situation at the end of 2008 when the entire credit system came screeching to a halt and even the best of companies were denied access.

The data this month is mixed but with a decidedly downward slope. The CMI remains in expansion territory, but is holding on to that status by a thread. There may be another month of essentially flat growth in store, but after that the economy will begin to tilt in one direction or another. If there is no real improvement in some of the fundamentals, the index will reflect continued deterioration. There is some resilience evident in the index numbers as the favorable categories are holding their own. The sectors that will drag the whole index further under include those that are most dependent on the decisions that companies made when they were expecting some solid economic growth by now. The credit requested made sense at the time, but now there is some serious concern as far as what happens next if the growth rate remains mired in the predicted 1% to 1.5% region.

The online CMI report for August 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed online.

The realities of a tough market for sustainability based products and services, which were all the rage during the late boom years last decade, continue to dampen the once rose-colored view on green  business. Yet another blow to the so-called green products and services niche segment came last week as New York-based SpectraWatt Inc., a spin-off of Intel Corp. that had been based in Oregon until 2009, filed for Chapter 11 bankruptcy protection.

SpectraWatt officials said the company’s products, primarily high-tech solar cells, had become “noncompetitive” as Asian manufacturers continue to deeply undercut the firm and its competitors on pricing and overhead. Hurting matters for the company earlier this year was its unknowing receipt of defective components that were used in the production of its own products, which caused their value to plummet.

In the filing, SpectraWatt foreshadowed a slew of solar business failures by pushing for an auction to be held quickly, in less than one month, on its prediction that the market will be flooded with such solar product sales very soon. It's a prediction Credit Management Association's Mike Joncich make in an interview for stories in NACM's eNews ann the new issue of Business Credit Magazine. He noted the industry's problems go deeper than just a downturn/slow recovery:

"A lot of companies started up to participate in that sector—there was a substantial investment in green companies that are making the best of products that are energy- or resource-saving," said Joncich. "But there was over-investment in those industries, and a number of companies are going to fall out that didn't have the right ideas or right business models to survive. Credit managers have to be aware of such phenomena."

Also this month, Massachusetts-based Evergreen Solar filed for Chapter 11 bankruptcy protection. Despite receiving millions in federal and state grant dollars and tax incentives, the solar business has struggled mightily in the last two to three years. Earlier this year, it shut down a U.S. plant that employed more than 800 people and, like a Maryland-based BP solar operation before it, relocated abroad to save costs.

Brian Shappell, NACM staff writer

(Updated) A U.S. Bankruptcy Court judge has approved a plan for Borders to liquidate its assets following failed attempts to find a buyer.

Stung as a deal fell through at the last minute, struggling book-retailer Borders announced early this week that a potential bankruptcy auction would not go forward earlier and that the end of former giant through liquidation essentially was unavoidable.

Borders, whose Chapter 11 bankruptcy filings were made in February, had submitted to bankruptcy court a previously-announced proposal from Hilco and Gordon Brothers to purchase the store assets of the business and administer the liquidation process. Borders presently operates 399 stores, which employ more than 10,000 people. As many as three dozen stores and 1,500 Borders jobs could be saved as negotiations still are ongoing for retailer Books-A-Million to those locations over, which was predicted by Wanda Borges, Esq., of Borges & Associates LLC, in an interview with NACM earlier this week. 

"A notice has been filed that says 'the debtors received a bid from a non-insider to purchase the inventory, furniture, fixtures, equipment and leases for approximately 30 stores for which the debtors reserve the right...to seek approval in connection with the sale hearing...to be held on or about July 21, 2011...if the bid becomes a qualified bid.' This week could still prove interesting in the Borders case -- we may yet see a continued business operation," Borges told NACM.

Products such as the Kindle and other growingly popular electronic book-reader products hit significantly at Borders’ business model, and both they and top competitor Barnes & Noble have been trying to break into the more techno-friendly niche. However, both have been playing from behind, so to speak.

"The big box retailers have suffered from internet sales -- books are now becoming really an alternative to electronic media," said Credit Management Association's Mike Joncich about the shifting industry paradign. "Borders took a wrong turn while people like Amazon and Barns & Noble took a right turn to embrace the electronic delivery method." Joncich added that he believes "the age of the big box retailers may be coming to an end." 

Foreshadowing of Borders' demise into bankruptcy gained steam through late 2010 and, increasingly, throughout January. The big-box book retailer intimated twice in as many months that it would have to delay payments to creditors and/or vendors in an attempt to bolster its capital position. In additions, it was widely reported that Borders was trying desperately to renegotiate terms with financiers at Bank of America and General Electric, among others. These developments all helped tank a stock that was already trading below $0.50. A late 2010 poll conducted by The Street found that more than two-thirds of respondents believed a Borders Chapter 11 filing was likely. At least one major publishing company reportedly stopped all shipment of books to Borders for a time, fearing this week's announcement was an inevitability that would arrive sooner than later.

Brian Shappell, NACM staff writer

This year’s NACM Credit Congress had a lock on bankruptcy-focused sessions, offering both practical and academic looks at how creditors can stay ahead of their struggling debtors.

Veteran bankruptcy expert Hal Schaefer, CCE, CEW started the day off with “A Best Practice Guide to Managing Bankruptcies – Before and After the Filing.” His relaxed, conversational presentation stressed the importance of consistency in successfully navigating any debtor’s bankruptcy filing. “A policies and procedures manual is so important because it will come back to that,” said Schaefer.

“You will find that you may be in the position where you have opened yourself wide open for a preference action,” he said, adding that the timing of certain security measures that creditors take to protect themselves from a debtor default and subsequent preference action could raise some eyebrows. “Timing is a major factor. If you get a standby letter of credit and you get it nine months prior to the filing, it’s fine,” said Schaefer. “If you get it during the 90-day preference period, some red flags are going to go up.” Securitizing certain sales during that 90-day period will make it harder for creditors to eventually use the ordinary course of business defense, should a preference action come up.

Schaefer also noted that he greatly encourages credit professionals to serve on creditors’ committees, but he added that they should be prepared for some upper management pushback. “Always remember you have a fiduciary responsibility to all trade creditors, not just your company,
 he cautioned. “The strangest thing can happen when you’re sitting on the creditors’ committee and someone asks if we should go after preferences,” he noted, saying that often times some companies will want to avoid chasing these items if possible. “It does not make you a hero of the company and it’s a tough call but it’s well worth it.”

The two-part “Bulletproofing Your Credit Department” session was led by Val Venable, CCE, Bruce Nathan, Esq. and Wanda Borges, Esq., and made a solid case for why “Be prepared” should be the motto for credit professionals in addition to the Boy Scouts.

Venable and her attorney panelists offered a look at what signals a creditor can look for in a potential bankruptcy; not signals that predict bankruptcy in a month or two, but years in advance. “If you suddenly start getting trade references from your customers, it could mean that they’ve been cut off and could be looking for other suppliers,” said Venable. Another tip for spotting a potential filing down the road relates back to the advent of companies holding secured debt. “Multiple tranches of secured debt is now becoming the norm,” said Nathan. “You look at the bond debt or their bank debt and a warning signal could be an upcoming bond maturity date.”

“These warning signals are not warning signals of a bankruptcy two months from now, but a bankruptcy two years from now,” he added.

Credit Congress continues in Nashville, TN, at the Gaylord Opryland Hotel and Resort. Check NACM’s Blog for other prior updates.

Jacob Barron, NACM staff writer

Though total and personal bankruptcies continue to hover at record levels, business bankruptcy filings dropped noticeably in 2010.

The Administrative Office for the United States Courts unveiled bankruptcy statistics for the last calendar year and found the total of business filing at 56,292. That is a 7% decline from CY2009. In fact, 2010 marks the first year Chapter 11 filings decreased since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ushered in sweeping changes, which became effective in 2006.

On the flip side, the rate of total bankruptcies, fueled by personal filings, surged by 8% in CY2010. U.S. Courts said filings in 2010 totaled 1.59 million. However, it was noted that the rate of bankruptcy growth was significantly smaller from 2009 to 2010 than between 2008 and 2009.

Brian Shappell, NACM staff writer