ABI CHAPTER 11 UPDATE: TOTAL FILINGS HOLD STEADY WHILE RETAIL FILINGS CONTINUE TO CLIMB
BY SAMUEL J. GERDANO & ED FLYNN
SAMUEL J. GERDANO
Executive Director, American
SAMUEL J. GERDANO IS EXECUTIVE DIRECTOR AND ED FLYNN IS A CONSULTANT OF THE AMERICAN BANKRUPTCY INSTITUTE.
Retail filings may have dominated headlines again this year, but Chapter 11 filings have continued to hold steady. Samuel Gerdano and Ed Flynn from the American Bankruptcy Institute examine the Chapter 11 trends of 2018 and provide an outlook for the year ahead.
Total Chapter 11 filings have been steady at between 7,000 and 7,500 cases for each of the last five years. However, filings are now less than one-half as high as their most recent annual peak in 2009 (see Exhibit 1).
Although most Chapter 11 filings involve relatively small entities, a number of very large cases are filed each year. In the first 11 months of 2018, there were 12 Chapter 11 filings by publicly held companies with more than $1 billion in pre-petition assets. This was below the levels from 2015 to 2017 but was in line with annual volume of very large cases filed from 2011 through 2014.
Once again, in 2018 there have been an unusually large number of filings by retailers. The most prominent filing of the year was by Sears, a once dominant retailer that has been in business for well over 100 years. Sears currently operates about 700 stores and has nearly 90,000 employees.
The Small Business Reorganization Act of 2018 (S. 3689) was introduced on November 29 with the aim of reducing the costs and burdens on struggling small and medium businesses. The legislation is based on some of the recommendations of ABI’s Commission to Study the Reform of Chapter 11 to reinstate reorganization under the Bankruptcy Code as a viable option for small and medium enterprises. S. 3689 is sponsored by Senate Judiciary Chairman Charles Grassley (R-Iowa) and co-sponsored by Senator Sheldon Whitehouse (D-R.I.). Its companion bill in the House of Representatives is H.R. 7190, sponsored by Rep. Doug Collins (R-Ga.) and co-sponsored by Reps. David Cicilline (D-R.I.) and Tom Marino (R-Pa.).
Robert J. Keach of Bernstein, Shur, Sawyer & Nelson, P. A. (Portland, ME) and co-chair of ABI’s Commission to Study the Reform of Chapter 11 praised the introduction of the legislation. “The introduction of this bill is a key first step on the path to helping financially troubled SMEs who may simply avoid Chapter 11 altogether,” Keach said.
CLERGY ABUSE CHAPTER 11 CASES
Bankruptcy courts have played an important role in resolving the aftermath of the clergy abuse crisis that has been plaguing the Roman
Catholic Church in America. To date, there have been 21 Chapter 11 filings by dioceses or religious orders, including three that filed in 2018 (Archdiocese of San Juan, Puerto Rico in August, Diocese of Winona- Rochester, Minnesota in November, and Archdiocese of Santa Fe, New Mexico in December).
All but five of the cases have resulted in approved plans of reorganization or dismissal. Parties in the cases filed during 2018, and the dioceses of Duluth and New Ulm (both in Minnesota), are still working toward resolution.
Although the vast majority of clerical abuse occurred decades ago, the crisis is nowhere near over. Several other dioceses have announced they intend to file in the near future. Additionally, church and law enforcement authorities in a number of states are still conducting investigations.
The Supreme Court is asked to review 7,000 to 8,000 cases each year, but generally only accepts about 80 cases for hearing. Three bankruptcy cases were decided by the court in 2018:
•In U.S. Bank NA v. The Village at Lakeridge LLC, 15-1509 (Sup. Ct.), the court held (9-0) that the 9th Circuit was right to review the Bankruptcy Court’s determination for clear error (rather than de novo).
Merit Management Group LP v. FTI Consulting, Inc. (16-784), the court considered whether the “safe harbor” for securities transactions applies under §546(e) when a financial institution acts only as a “mere conduit” with no beneficial interest in the stock being sold in a leveraged buyout made by or to a financial institution, without regard to whether the institution has a beneficial interest in the property transferred. The court held (9-0) that the only relevant transfer for purposes of the §546(e) safe harbor is the transfer that the trustee seeks to avoid.
• In Lamar, Archer & Cofrin, LLP v. Appling (16-1215), the court held that a false statement about one asset must be in writing to provide grounds for rendering a debt nondischargeable.
Additionally, the following case has been granted certiorari for the 2018-19 term:
• In Mission Product Holdings Inc. v. Tempnology, LLC (17-1657), the court will determine whether a debtor-licensor’s “rejection” of a license agreement terminates the rights of the licensee that would survive the licensor’s breach under applicable non-bankruptcy law.
The ABI website features a detailed breakdown of new business and consumer cases each morning from bankruptcy, district/ circuit courts and the Supreme Court prepared by ABI Editor-at-Large Bill Rochelle.
OUTLOOK FOR 2018:
• Most analysts are predicting continued growth, but at a slower rate than in 2018.
• Expected higher interest rates could lead to increased Chapter 11 activity.
• Filings are likely to remain high in the retail, energy, and health care sectors. •
1The American Bankruptcy Institute is a nonpartisan organization devoted to the advancement of jurisprudence related to the problems of insolvency. Its more than 11,000 members include attorneys, bankers, professors, judges, turnaround specialists and other professionals. The purpose of the American Bankruptcy Institute is to support the analysis of insolvency issues, both in the U.S. and internationally; to provide a source of education regarding these issues; and to serve as a forum for the exchange of ideas among participants in the insolvency process.
2This list was compiled from the daily headlines on the ABI website. Many of these companies are privately held or have asset levels below the threshold used for prior charts on large filings. See www.abi.org/ newsroom/headlines.