Total commercial bankruptcy filings for the first three months of 2012 hit 15,833, a 19% drop from the 19,638 filings during the same period in 2011.

According to data provided to the American Bankruptcy Institute (ABI) by Epiq Systems, Inc., the fall in commercial filings mirrored the overall decline in bankruptcies across the board. Total and noncommercial filings both decreased by 12% in the first quarter compared to the same period in 2011.

For trade creditors, the decline in bankruptcy filings has also been accompanied by a drop in collection issues, according to Lynnette Warman, Esq., a partner with Hunton & Williams, LLP. “The trade creditors I speak with confirm that they are experiencing fewer bankruptcy filings, and that for many, there are fewer collection issues,” she noted. “In fact, the number and amount of trade debts outsourced to collection agencies have also dropped over the past year.”

Much of the decline can be traced back to tightened credit conditions, both secured and unsecured, that gripped the trade during the recession. “As this occurred, some businesses failed fairly quickly after their bank lines were cut or unsecured credit reduced, ” said Warman. “Some of these closures were done through bankruptcy; other businesses just quietly closed their doors and their owners simply stopped doing business.”

While banks and sellers tightened credit across the board, the buyers simultaneously experienced a significant drop in their own income. “Many companies experienced a serious reduction in sales, which obviously led to fewer purchases on their part, thus less outstanding unsecured debt,” said Warman. “Businesses that have survived the past few years have had to cut expenses to survive, and should have less debt, both secured and unsecured, on their books.”

Warman will participate in four sessions at this year’s NACM Credit Congress in June, co-hosting the CCE Exam Review, serving as a panelist in the Legal Issues Executive Exchange session, and presenting two separate educational sessions. To find out more about this year’s program, or to register, click here.

Jacob Barron, CICP, NACM staff writer
 

Many have argued that the Chapter 11 process, at least as it works for unsecured creditors, is broken. Among those advocating for changes to the Bankruptcy Code to better provide for trade creditors are not merely the scorned trade creditors themselves, but also a burgeoning class of legal professionals.

"Increasingly, Chapter 11 is a tool for a failing company to shed its assets and distribute its unencumbered cash proceeds, if any, to creditors," said Brett Weisenberg of Cooley LLP. "The exit strategies clearly provided for Chapter 11 debtors—confirmation of a liquidation plan or conversion of the case to Chapter 7, with their attendant delay, expense and risk—no longer adequately address the goals of the various constituencies within a liquidating Chapter 11."

Weisenberg is the author of an article titled "Expediting Chapter 11 Debtor's Distribution to Creditors," which will appear in this month's edition of the ABI Journal, published by the American Bankruptcy Institute (ABI). In it, he outlines a two-part proposal for changes to the Bankruptcy Code that would enhance Chapter 11 process effectiveness, specifically by providing for a "structured" dismissal of the Chapter 11 case in certain instances and a combined disclosure statement and plan hearing. "While many bankruptcy courts have authorized these alternative exit strategies as being permitted by the Code, the time is ripe to make crystal clear that these procedures are in fact authorized by the Code," said Weisenberg.

Such a structured dismissal would prevent debtors from languishing in bankruptcy when there's little reason to believe it will be successful. Weisenberg noted in his article that the criteria to use such a structured dismissal "should include (1) the debtor holding less cash to be distributed than some maximum amount, and (2) establishing, by a preponderance of the evidence, that (a) proceeding in the requested fashion is in the best interests of all creditors and (b) confirming that a Chapter 11 plan of liquidation would be overly burdensome or impractical under the specific facts of the case."

In theory, this would provide creditors with a better chance at greater recovery, since, rather than a lengthy, expensive and ultimately futile Chapter 11 process, the case would be dismissed, and authority granted to the debtor estate fiduciaries to make a distribution to creditors. Furthermore, the speed of the process would be increased by the combination of the disclosure statement and plan hearing, which Weisenberg noted was similar to the procedure used by small business debtors under Section 1125(f) of the Code.

Until these changes are made, however, Weisenberg said that creditors and bankruptcy professionals "will be forced to expend funds on an overly complicated and cumbersome plan-confirmation process, or be compelled to fight over whether utilizing these alternative exit strategies is permitted under the Code."

Learn more about NACM's positions on the Bankruptcy Code and other statutes in the 2012 NACM Issue Brief.

Jacob Barron, CICP, NACM staff writer

American Airlines filed for bankruptcy protection this morning, taking the road that many of the company’s competitors have taken in years prior.

AMR Corp., the holding company of American Airlines, and AMR Eagle Holding Corp., the holding company of American Airlines’ regional carrier, American Eagle, filed their Chapter 11 petitions this morning in the U.S. Bankruptcy Court for the Southern District of New York, despite the fact that both are headquartered in Fort Worth, TX. In a release, AMR’s Board of Directors noted that the filing would hopefully allow the company to achieve a cost and debt structure that is industry competitive, thereby assuring its long-term survival.

According to AMR’s most recent quarterly balance sheet, the company has $24.72 billion in assets and $29.55 billion in liabilities. It also has $4.1 billion in unrestricted cash and short-term investments, which the company said should be enough to ensure that vendors, suppliers and other business partners will be paid timely and in full for goods and services provided during the reorganization according to terms. AMR’s cash position also suggests that debtor-in-possession financing is neither considered necessary nor anticipated.

In an FAQ for suppliers and trading partners, AMR was mum on what sort of payment unsecured creditors could expect to see on their pre-petition claims. “It is impossible to predict before approval of the plan of reorganization how much holders of general unsecured claims will receive,” said the company. However, AMR also filed a separate motion with the court asking permission to pay certain foreign suppliers and vendors certain pre-petition obligations, meaning that these non-U.S. based companies may see payment sooner than later. The company said that it expects the court to approve the motion.

"Our very substantial cost disadvantage compared to our larger competitors, all of which restructured their costs and debt through Chapter 11, has become increasingly untenable given the accelerating impact of global economic uncertainty and resulting revenue instability, volatile and rising fuel prices, and intensifying competitive challenges, " said AMR Chairman, CEO and President Thomas Horton. "Our Board decided that it was necessary to take this step now to restore the Company's profitability, operating flexibility, and financial strength."

Jacob Barron, CICP, 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

Three years after the two largest Chapter 11 bankruptcy filings in U.S. history, one case appears close to the finish line, while another could very well be stalled for some time.
U.S. Bankruptcy Court for the Southern District of New York Judge James M. Peck approved the Lehman Brothers' payment plan to creditors Tuesday. Specifics of the plan will be available to the nearly 50 creditors who combined for claims exceeding $130 within weeks, with a Nov. 4 voting deadline.

A confirmation hearing is tentatively scheduled for Dec. 6. Bryan Marsal, LBHI's Chief Executive Officer called the judge’s approval of the plan a “major milestone” in the complicated bankruptcy case. Coincidentally, there was also significant news in the last week coming out of the second largest bankruptcy case in U.S. history, though it may not be all that close to completion.

Also nearly at the three year point since it filed for Chapter 11 bankruptcy protection, Washington Mutuals creditors and shareholders presented final arguments in bankruptcy court asking for the judge to reject a $7 billion reorganization plan. 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.

The proposed settlement, like many proposed bankruptcy plans in recent years, would leave unsecured creditors and shareholders with little or nothing, more likely the latter. Even U.S. Bankruptcy Judge Mary Walrath intimated the case continues to be convoluted by those involved and that a decision on her part isn’t necessarily imminent.

Brian Shappell, NACM staff writer