California Business Bankruptcy Blog

GM Emerges from Chapter 11, But Has Some Work To Do

tegland@kleinlaw.com (Terrence T. Egland) — Fri, 10 Jul 2009 09:49:03 -0800

It has been nearly two months since my last post and a lot has happened in the bankruptcy world. Personally, I have been up to my eyeballs in work, primarily with an unprecedented increase in Chapter 11 filings. The partners cannot remember a time when the firm has handled so many Chapter 11 cases simultaneously. The good news is that, although filings are up, a good portion of these filings are ending with a reorganized debtor rather than a conversion to Chapter 7.

Speaking of reorganization, General Motors has both entered and exited Chapter 11 during the time since my last post. According to news reports, the new entity that resulted from a 40 day turnaround in bankruptcy court will be a leaner and meaner operation:

The new company will be much smaller, with brands like Saturn, Hummer, Opel and Pontiac in the process of being sold or closed. It will also have a smaller sales network, with thousands of dealers having been cut during the reorganization.

Its management ranks also will be smaller. Mr. Henderson said the company was eliminating 35 percent of its executive positions . . . .

While it may be sad for some to see several of the brands split off or disappear altogether, this slimming down of GM is something that needed to take place decades ago. Throughout the years, rather then absorb the name plates it acquired into its existing brands, GM had a tendency to just add those name plates to its roster. This eventually lead to GM producing what were essentially the same cars under multiple brands with multiple dealerships. This left its bloated dealer network to fight with each other for sales of essentially the same car while at the same time trying to compete with the other domestic car companies and the likes of Toyota and Honda.

Add to the recipe the fact that GM, and the other domestic car companies, have been building what were generally considered, for one reason or another, substandard vehicles when compared to foreign rivals, and you have a recipe for disaster. Along with its slimming down, GM also needs to devote considerable effort in improving the quality and reputation of its vehicles if it is to succeed.

Let's hope that GM's emergence from Chapter 11 today means that it has averted disaster. Only time, and the quality of its product, will tell.

Coyotes Bankruptcy: Even the Great One Must Wait

tegland@kleinlaw.com (Terrence T. Egland) — Tue, 12 May 2009 14:08:09 -0800

Last week, the NHL's Phoenix Coyotes filed for protection under Chapter 11. Perhaps if Chrysler hadn't been stealing the headlines this item would have made more waves. What makes this case interesting, obviously, is the fact it is a professional sports franchise. As such, some big names are standing around waiting for paychecks until the Court approves the payment of pre-petition wage claims. None of those names is bigger than the Great One himself, Wayne Gretzky. In total, the Coyotes have asked to pay over half a million dollars in pre-petition wages. Along with his salary, Gretzky is also a creditor of the estate to the tune of $8 milliion in deferred compensation. Although I'm sure he isn't too worried about it.

More detail on the case can be found on the NetDockets Blog courtesy of Randall Reese.

Chrysler Bankruptcy: How do you kill a hedge fund?

tegland@kleinlaw.com (Terrence T. Egland) — Tue, 05 May 2009 15:38:56 -0800

Taking the concept of personhood for entities a little too far, the attorney for the non-TARP lenders in the Chrysler bankruptcy case said in court yesterday that his "clients" had received death threats over their refusal to reach a deal regarding a workout. How exactly do you kill a hedge fund?

Ok, some of his clients may be individuals, but it is still amusing.

Chrysler Bankruptcy May Not Be Quick Fix

tegland@kleinlaw.com (Terrence T. Egland) — Tue, 05 May 2009 15:04:43 -0800

You may recall my post from last week where I asserted that a 30 to 60 day timeframe was an optimisitic estimate for Chrysler's exit from Chapter 11. According to a Reuters story, at least one firm agrees with my assessment: Moody's Investment Services. In making his announcement at the White House last Thursday, the President indicated that the intent was for Chrysler to exit Chapter 11 after 30 to 60 days.

But Moody's said the proceeding could be hotly contested and drawn out because of the bankruptcy code that ensures procedural fairness for all creditors with an interest in the bankruptcy estate.

. . .

At this point, it is difficult to make any predictions other than that the process is likely to take considerably longer than the 30 to 60 days projected by the administration . . .

Those creditors referred to include the pensioners I mentioned last week. As I indicated, there seems little hope that the Chrysler bankruptcy case will be a quick affair. Prepare to dig in.

UPDATE: At least two other commentators agree with my assessment of the tough sledding Chrysler has ahead of it: Mark Roe at the Wall Street Journal and Steve Jakubowski at the Bankruptcy Litigation Blog. For a contrary position, see Stephen Lubben's analysis at the Credit Slips blog.

Kern County Businesses Optimistic About Economic Outlook

tegland@kleinlaw.com (Terrence T. Egland) — Tue, 05 May 2009 14:04:42 -0800

A survey conducted by the Greater Bakersfield Chamber of Commerce reveals a surprising resiliency and optimism in the Kern County business community. Given the continuing general economic woes, I would have expected responses much more negative than these:

How do you think economic conditions in Bakersfield/Kern County will change in the next six to 12 months?

Significantly better: 4.4 percent

Somewhat better: 41.7 percent

About the same: 32.9 percent

Somewhat worse: 18.3 percent

Significantly worse: 1.8 percent

No response: less than 1 percent

Which statement best describes how you are feeling about your business?

My business is thriving: 20.8 percent

My business is down but I am going to make it: 55 percent

My business is really struggling but I think we'll survive: 13.2 percent

I am concerned that my business may not survive: 5.6 percent

Other: 4.4 percent

No response: 1 percent

While those who believe that things will get "significantly better" over the next six to twelve months are justifiably few and far between, there are a surprising number (41.7%) of local business owners who believe things will get somewhat better, and a large number (32.9%) who think things will at least not get any worse. In total, 79% of those polled think the economy will remain the same if not improve. That is good news about the morale of our local community. Let's hope that morale turns into hard numbers by the end of the year.

Offshore Oil & Gas Company Files Chapter 11

tegland@kleinlaw.com (Terrence T. Egland) — Fri, 01 May 2009 09:16:50 -0800

There is a story this morning that may interest Kern County oil producers. Independent oil and natural gas exploration and production company Energy Partners, Ltd., has filed for Chapter 11 bankruptcy protection in the Southern District of Texas. Energy Partners has negotiated a pre-packaged bankruptcy with a committee of its senior noteholders. According to its Chief Restructuring Officer, Alan Bell:

During the past year, an extraordinary confluence of factors led to our need to pursue this financial restructuring, including the impact of hurricanes, the collapse of the credit markets, sharply declining commodity prices and a resulting deficiency in the company's borrowing base.

Not to mention decreased demand for gas due to consumers reducing consumption. When one considers the multitude of "bad news" that has impacted the energy industry over the last year it was probably a blessing in disguise that gas prices spiked to record levels. Without that extra cash in hand, there could have been even more energy sector bankruptcies by now. Of course, this may just be the tip of the ice berg. Time will tell.

Positively, however, the Energy Partners bankrutpcy represents the ideal for any business seeking to reorganize under the Bankruptcy Code. By thoroughly planning for the bankruptcy and bringing its senior noteholders on board in the pre-petition planning process, Energy Partners has virtually ensured a smooth trip through Chapter 11.

Chrysler Bankruptcy Plan Announced: Too Aggressive of a Timeline?

tegland@kleinlaw.com (Terrence T. Egland) — Thu, 30 Apr 2009 10:15:47 -0800

President Obama announced today that the Federal government and Chrysler have developed a Chapter 11 bankruptcy strategy that involves financing by the government and investment by Fiat. The filing was largely caused by the failure of the government and Chrysler to reach a deal with bondholders. A discussion in the New York Times, which can be found here, of how a potential Chapter 11 filing by Chrysler might shake out under the plan includes the intention that Chrysler would exit Chapter 11 in 30 to 60 days. President Obama described the bankruptcy as a "surgical" process.

Given that the Chapter 11 of United Airlines took three years, I do not see how Chrysler emerges with a plan of reorganization in place after only 30 to 60 days no matter how well thought out the plan is. There are simply too many constituents involved--including, among others, unions, retirees, suppliers, and dealers--for the process to go this smoothly. For example, no doubt each of the stakeholders will have serious objections to the modification or rejection of their respective contracts with Chrysler, especially those dealing with pensions and health care. I do not think it is a question that all of the stakeholders will benefit from the filing and will emerge with the new company. But 30 to 60 days is just too optimistic a timeframe for finalizing all of the details that the plan will need to sort out. I would like to hear your thoughts on how quickly Chrysler will emerge from bankruptcy by commenting below.

If Chrysler is to emerge in 30 to 60 days, it will be largely due to Jones Day's Corrine Ball, whose representation of Chrysler is discussed here.

An interesting side note to the announced plan is the inclusion of GM's financing unit, GMAC, as the lender for new Chrysler purchases. GM, on the verge of collapse itself, will now have a stake in Chrysler without spending any cash.

Building Volumes on the Bankruptcy Freeway

tegland@kleinlaw.com (Terrence T. Egland) — Tue, 14 Apr 2009 16:06:55 -0800

Bankruptcy filings continue to increase despite the supposed restrictions on such activity BAPCPA was intended to impose. As summarized by Jonathan Hayes over at the Bankruptcy Prof Blog:

Total petitions filed in March were 131,000, a 28% increase over February which totaled 102,000 and a 47% increase over the 89,000 filed in January. That is 323,000 for the quarter compared to 296,000 for the fourth quarter of last year or a 9% increase. Based on the first quarter, we're looking at 1,292,000 for the year 2009.

Prepare to stay busy for a very long time. Read a more detailed analysis of the numbers here.

Turning Back Time on Some of BAPCPA's Provisions

tegland@kleinlaw.com (Terrence T. Egland) — Tue, 14 Apr 2009 15:39:52 -0800

If you are a bankruptcy practioner that represents retail Chapter 11 clients, then legislation that is now before the Judiciary Committee may interest you and your clients. The bill, titled the "Business Reorganization and Job Preservation Act of 2009," would undo some of the damage done by BAPCPA. As Bob Eisenbach of Cooley Godward's In the Red: the Business Bankruptcy Blog notes:

The bill would repeal changes made by BAPCPA relating to (1) the deadline to assume or reject non-residential real property leases, (2) utility deposits, (3) the Section 503(b)(9) administrative claim, and (4) reclamation.

Quoted at the National Association of Credit Management web site, Congressman Jerrold Nadler (D NY), the sponsor of the legislation, explained the rationale behind the bill:

In an economy as depressed as ours, we must be cognizant of the many difficulties facing American businesses and avoid placing unnecessary hurdles in their paths. . . . The Business Reorganization and Job Preservation Act of 2009 will remove some of the obstacles now hindering struggling businesses and inject a much-needed economic boost during this time of severe recession. It's essential that we give retailers, which are often the job-providers of our communities, the means to reorganize and stay in business.

As anyone who has represented a business affected by the BAPCPA changes knows, landlords and lenders have the ability to lock tenants into new leases while trying to make their way through a reorganization process, which can cause a business great difficulty. The proposed changes in the bill would reinsitute the flexibility that debtor's previoulsy had pre-BAPCPA. Of particular importance is the repeal of the maximum 210 day fixed deadline for the assumption/rejection of non-resedential real property leases. The bill reinstates the pre-BAPCPA practice of 60 days, with extenstions of time for "good cause."

Not so fast with that hourly rate hike..."only" $925/hr is ok.

tegland@kleinlaw.com (Terrence T. Egland) — Mon, 23 Feb 2009 11:22:24 -0800

A couple weeks ago I pointed you to the story of the bankruptcy partner at Kirkland & Ellis seeking approval of an $1,100/hr fee in the Tronox Chapter 11. Attorneys at Sidley Austin were seeking approval for a similar fee in the Delaware Bankruptcy Court in the Tribune Co. Chapter 11 (No. 139 in the Docket). The Court refused to approve the $1,100/hr fee, but instead approved a reduced fee of $925/hr based on the lead partners subsequent amended declaration. ABA Journal link here. Sidley's rates for the Tribune case range from $575 to $925 per hour for partners and $240 to $650 per hour for associates.

Gosh, only $925/hr. So sorry to inform those of you out there that raised your rate to $1,100/hr based on my prior post--looks like $925 is the ceiling...for now.

Should you revisit your hourly rate?

tegland@kleinlaw.com (Terrence T. Egland) — Fri, 30 Jan 2009 11:27:42 -0800

I remember when earning $18.50 an hour seemed like a lot of money to me. My first professional job as a draftmen for a major aircraft manufacturer paid $11.58 an hour (based on my $24,100 starting salary in 1998). But I see that even now, in my relatively lucrative law firm postion, I must be woefully underpaid. This is true if the folks at Kirkland & Ellis are to be believed regarding the value they ascribe to their services. K&E has sought approval for a PER MINUTE fee of $18.50, or $1,100 an hour. The ABA Journal reports that:

The law firm is seeking the fee for its representation of titanium dioxide-maker Tronox Inc.

Two other law firms are seeking nearly as much, requesting hourly rates in excess of $1,000, according to the story. They are Sidley Austin, in the restructuring of the Tribune Co., and Skadden, Arps, Slate, Meagher & Flom, representing Circuit City.

Bankruptcy law professor Lynn LoPucki of the University of California at Los Angeles told the wire service that fees for lawyers and other professionals in bankruptcy cases are growing at four times the rate of inflation.

“As the economy gets worse, the bankruptcy lawyers are charging more,” LoPucki told Bloomberg. “It seems that each month one sets a new record for hourly billing rates. $1,110 is, to my knowledge, a record for the debtor’s bankruptcy counsel.”

Is it time to revisit your hourly rate?

Economic Slump = Bankruptcy Boom

tegland@kleinlaw.com (Terrence T. Egland) — Wed, 28 Jan 2009 09:46:36 -0800

While the United States as a whole, and top law firms in particular, may be hitting hard times under the current recession, bankruptcy practices across the current are booming. And although job losses at law firms in general are compounding, the demand for bankruptcy lawyers has increased, so says the ABA Journal:

As experts predict the biggest boom in bankruptcy matters in 20 years, the practice niche is a hot hiring area.

Among those who have suddenly jumped the law firm fence to potentially greener pastures elsewhere are O'Melveny & Myers restructuring co-chair Michael Sage, who moved to Dechert on Monday, and Cadwalader, Wickersham & Taft restructuring co-chair Bruce Zirinsky, who departed last week for Greenberg Traurig, reports the Am Law Daily.

Sage, who bills at $895 per hour, according to a bankruptcy case filing last year, came to O'Melveny in 2007 from Stroock & Stroock & Lavan. He moved to Stroock from Dewey Ballantine in 2002.

Leading to the legal business boom is a growing tsunami of troubled companies: Not only are companies in a broad array of businesses suddenly having to shift gears to deal with the new economic reality after a worldwide economic crisis hit last year, their suppliers are in the same situation, Reuters reports.

"I think what's unprecedented is the confluence of so many (companies) starting to have their issues, while at the same time, their creditors have their own significant challenges," says partner James Sprayregen of Kirkland & Ellis.

So, as the ABA Journal also notes,

Bad news for corporate America, however, is good news not only for law firms with substantial bankruptcy departments but attorneys who wish to work there. Firms expecting a wave of bankruptcy business are not only courting seasoned practitioners to add to their insolvency practice groups but putting young lawyers to work, too.

Take heart bankruptcy lawyers young and old, while you may be pushed to the limits of your capacity, you will remain employed for the foreseeable future.

Act Fast on Bankruptcy

sbelden@kleinlaw.com (T. Scott Belden) — Thu, 18 Dec 2008 15:51:48 -0800

Everyone probably remembers that in 2005 bankruptcy laws were changed to make it more difficult to file bankruptcy and wipe out consumer debt. With a rising economy and increasing home equity, it was believed it was too easy to rack up debt and then get rid of it in a bankruptcy proceeding, and that would-be debtors should resort to home equity or other means to deal with their debts.

We all know that the economy isn't what it used to be and billions (if not trillions) of dollars of home equity have vanished over the last year or so. With this vanishing real property equity, people can no longer tap into their residences to pay debts. Even individuals with performing but unused home equity lines have found those lines terminated or reduced. Banks have dramatically tightened credit standards. Thus, people and businesses can no longer borrow their way out of trouble.

Compounded by rising gas and commodity prices, the "perfect storm" of factors has converged to squeeze individuals and businesses throughout the country. Many are now being forced to turn to relief under the bankruptcy code.

When a bankruptcy case is filed and the trustee or debtor has determined there are assets with which to pay creditors, a notice is sent out to all creditors listed by the debtor. If you receive a notice that someone who owes you money has filed bankruptcy, your initial inclination may be to write-off the chance of collection. But do not be so quick to give up. If you are diligent, you may get paid some or all of the debt owed to you.

When you receive the notice, usually called a "Notice of Commencement of Case," read it carefully. You received it because the debtor believes it owes you money. The notice will tell you what type of bankruptcy was filed and when the meeting of creditors will take place. You may want to appear at that meeting to ask the debtor questions about the debt and the debtor's plans to repay you.

The notice will usually include a proof of claim form. Complete that form, or have your attorney complete it for you, and file it with the court. If your claim is properly filed and not disputed by the debtor, you should get a distribution from the bankruptcy. I have seen many cases where creditors were paid 100 percent on the dollar. Keep in mind that the proof of claim deadline is critical. The courts are very unforgiving. If you fail to file timely, your debt might be wiped out.

The laws also provide for exceptions to wiping out debts. For example, if the debt was incurred through fraud or some other intentional misconduct, the debt may not be wiped out and you may be able to collect the debt notwithstanding the bankruptcy case. Also, if you have a lien, the debt may not be wiped out. But you still must move quickly in the bankruptcy court to assert your rights. In short, there may be many opportunities for you to get paid even if the party that owes the money files bankruptcy. I have seen cases where money has to be returned to the bankrupt debtor because creditors did not file claims or otherwise assert their rights. If you get a notice, don't delay. Call a qualified attorney with expertise in bankruptcy law who can offer advice to maximize your ability to recover. Otherwise, your rights could be lost forever.

Economic Downturn (Recession?) Subject of ABA Journal Survey

tegland@kleinlaw.com (Terrence T. Egland) — Tue, 18 Nov 2008 10:59:12 -0800

Greetings from the trenches. As the economy has slowed down, business has picked up for those of us in the insolvency world. Just like many of you, this has kept me busy and unable to attend to the blog as I wish. But I came out of my hole to let you know about a survey being conducted by the ABA Journal.

Effects of the Wall Street crisis have spanned the country, and the ABA Journal is surveying lawyers for their thoughts on the economy. Please take this brief 2-minute survey.

Survey results will be published in the January ABA Journal. Answers will be kept confidential and used only in combination with all other responses received.

Take the time to add your input.

Nearly One Million Bankruptcy Cases Filed in Last 12 Months

tegland@kleinlaw.com (Terrence T. Egland) — Thu, 28 Aug 2008 11:44:27 -0800

According to data released by the Administrative Office of the U.S. Courts, and discussed in the Los Angeles Times, nearly one million bankruptcy cases were filed between July 1, 2007, and June 30, 2008--a total of 967,831 cases. That represents a 28.9% increase over the preceding 12 month period. And, as discussed on the ABI web site, based on that same data, bankruptcy filings have increased 29.2% in the first half of 2008 relative to the same time period in 2007.

Leading the way in bankruptcy filings is the Ninth Circuit, in particular California. Filings in the Ninth Circuit increased by a staggering 60.9%. This is, of course, no surprise given the catastrophic impact that the real estate downturn has had on the California economy over the last year and a half.

Nationally, Chapter 7 filings increased by 36.7%, Chapter 13 grew by 16.9%, Chapter 11 increased by 30.6%, and Chapter 12 filings actually decreased by 18.7% when compared to the prior 12 months.

As steep as the increases appear, the total number of filings still has a long way to go to match the total amount of filings of even two years ago, as revealed by the Administrative Office's data. For example, take a look at this spread sheet. In the period July 1, 2005 through June 30, 2006, the total number of filings was nearly 1.5 million. Data shows that the years prior to 2006 had similar amounts of cases initiated.

Therefore, although the new data indicates a steep incline, the aggregate filings are still below historical levels.

May decline in home prices worst ever

tegland@kleinlaw.com (Terrence T. Egland) — Tue, 29 Jul 2008 13:51:29 -0800

Making headlines today is the release of the Standard & Poors/Case-Shiller Home Price Indices. According to this index, there was a nationwide decline of 15.8% in home values in May when compared to the same time last year. In Los Angeles, as noted by the Los Angeles Times, the decline is much more distressing:

The Los Angeles area saw a 24.5% May price decline from a year ago and also hit a record low annual decrease.

As many of you remember, we endured a real estate downturn in the early to mid nineties that resulted in a similar percentage decline, but with a major difference:

The Los Angeles decline from the peak now matches the 1990's real estate downturn, but has occurred in less than two years. In the previous real estate cycle, Los Angeles area prices declined more gradually, falling 27% from 1990 to 1996 before stabilizing, according to the Case-Shiller index.

What does the rapid decline mean to the bankruptcy world? With the present decline compressed to a period of only two years, versus seven years in the nineties, it seems inevitable that the volume consumer bankruptcy filings will increase--as has already happened--as families come under increasing financial pressure. This pressure is on all fronts as the price of consumer goods increases and families do not have the fall back reserves of equity that they would usually rely on.

But commercial bankruptcy is also becoming more prevalent as the real estate and oil price woes are impacting sole proprietorships and closely held businesses, along with the headline-making corporate bankruptcies. Chapter 11 filings in the first quarter of 2008 were up 61.5% over the same period in 2007 (200 in 2008 and 123 in 2007). While not historically record breaking when compared to the 1990s, the quantity of Chapter 11 filings indicates an upward trend that may only now be catching up with the declining economic conditions of the country.

If you would like to go deeper into the home price data, access the historical data for this index at the Standard & Poor's website.

Bits, Bytes, and Potential Pitfalls: E-Discovery Continued

tegland@kleinlaw.com (Terrence T. Egland) — Mon, 07 Jul 2008 14:47:29 -0800

I am back! As most bankruptcy practitioners already know, the volume of work has increased. This has lead to an ever increasing scarcity of free-time to devote to the blog. Important topics, however, need to be discussed so I soldier on.

In that vein, today is part two of my discussion regarding electronic discovery and its impact on the bankruptcy practitioner. Part one covered what electronically stored information (“ESI”) is generally, and why a bankruptcy practitioner should care. Part two covers some of the nuts and bolts needed in order to manage the handling of ESI.

Know how your client’s ESI is handled

In order to serve your client properly, a bankruptcy practitioner faced with discovery of ESI must know how the ESI is created, stored, and preserved. In essence, you must know who to talk to: the Information Technology (“IT”) professionals.

The first item of information that you will need to request from your client’s IT professionals is a detailed “map” of the client’s computer network. Click here for an example of a simple computer network. As you can see from the example, such a map provides information on all of the end users and the equipment used by everyone in the organization. This information is vital when it comes time to physically search the network for relevant information.

When looking at your particular client’s network map, it is also important to take note of the physical layout of the network, i.e., is it in one location (a local area network or "LAN," or maintained in multiple geographic locations in a city, state, or U.S., a wide area network or ("WAN"). The scope, and as a result, the cost, of the information gathering process will be impacted by the geographic location of the network, and could be a factor in filing for a protective order based on the burden of the search.

Under Federal Rules of Civil Procedure Rule 34(a), the constituent parts of an organization’s overall computer network include not only its LAN or WAN, off-site storage and back-up, and individual computers, it also includes all peripheral devices such as printers, scanners, flash drives, cell phones, and personal digital assistants ("PDAs"), etc.

Apart from the network map, it is also important to get a copy of the organization chart of the IT department so that you can speak directly to the people who will know where the information you need is hiding. Here is an example of an IT department organizational chart from Seton Hall University. As you can see from the example, an IT department could be quite vast and speaking to only one person in IT may not cut it.

Ideally, the people in the IT organization chart should have a firm grasp on the organization’s document retention policy (discussed in part one). This means that they will know in detail the dates of deletion and back-up for all of the organizations data.

Once you have a handle on your own organization’s ESI (something that should occur long before any actual litigation is initiated), you should turn your attention to the opposing parties’ ESI and the discovery necessary to obtain it. The same basic information discussed above is required to do a thorough job, i.e., network map and IT organization chart. A copy of the document retention policy and use policy of the opposing organization is also essential. All of these documents should be identified in the litigation hold letter that you will immediately send to opposing counsel (see part one).

Next time I will discuss the format of the ESI you should request and the 500 lb. gorilla in this conversation: cost.

Vallejo Becomes Largest City in California to File Chapter 9

tegland@kleinlaw.com (Terrence T. Egland) — Tue, 27 May 2008 13:25:57 -0800

It's now official: Vallejo is now the largest city in California to file for Chapter 9 protection. Long believed to be in the works, the bay area city filed in the U.S. Bankruptcy Court for the Eastern District of Californiat in Sacramento last Friday [update: Case No. 08-26813; petition and schedules available through PACER]. As described in the San Francisco Chronicle,

This Bay Area suburb of about 120,000 people faces a $16 million deficit in its fiscal year starting July 1. Bankruptcy will keep services running and prevent creditors from suing the city while officials devise a plan to get back on solid financial footing.

Like Vallejo, many U.S. cities are saddled with labor contracts that offer salaries, overtime pay, pensions and health benefits they say they can't afford. Those expenses are expected to balloon as health care costs soar and employees retire earlier and live longer.

Vallejo officials hope the bankruptcy judge will allow the city to rewrite its labor contracts and bring compensation down. If they're successful, other cities may follow their lead, experts say.

As one city official put it, "Vallejo has been spending beyond its means for more than 15 years," said J.D. Miller, a financial planner and longtime Vallejo resident who served on the budget committee. "We've acted like someone who lives their life and spends their money as if their job will always be there."

As the budget crisis takes further hold of California, can other cities be far behind Vallejo?

The Subprime Spread

tegland@kleinlaw.com (Terrence T. Egland) — Tue, 22 Apr 2008 09:51:09 -0800

As the subprime crisis deepens and grows and the potential for recession increases, the effects are seeping into other industries as consumers are tightening their belts in order to afford food and gas. Michael Barbaro of the New York Times discussed the effects on retailers in a recent article:

Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.

But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.

Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.

The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.

Our own insolvency practice here in Bakersfield has felt the impact of this upsurge in bankruptcy filings generally, and retailers in particular. Recently the firm has filed two new Chapter 11 cases with another ready in the next week or so (an incredible rate for a relatively small market). It appears that the window for bankruptcy attorneys to take a vacation has passed and the ramp up for coping with increased case loads must shift into high gear as more and more regional retailers enter the "zone of insolvency" and seek the help of a bankruptcy professional.

E-Filing is Serious Business

tegland@kleinlaw.com (Terrence T. Egland) — Mon, 21 Apr 2008 08:56:18 -0800

Failure, or in this case refusal, to file bankruptcy cases electronically can jeopardize your bar card. The Kansas Supreme Court has suspended an attorney for, in part, refusing to e-file bankruptcy cases for three clients:

The Kansas Supreme Court held that the lawyer, Stephen D. Harris, violated his duty to represent his clients with competence, diligence and promptness. The court ordered a suspension because of the e-filing problem as well as a second complaint that he mishandled a civil case, Legal Blog Watch reports.

New rules took effect in September 2004 requiring all bankruptcy pleadings to be filed electronically. But the lawyer didn’t comply and tried to file a case the old-fashioned way four months later, Legal Blog Watch reports, citing a report on the Legal Profession Blog.

The bankruptcy court ordered the lawyer to obtain training and a login for electronic filing in the next 30 days, but he didn’t comply, the Kansas Supreme Court said in its March 28 opinion. Instead he tried to file a second case by paper pleadings and received yet another warning. A third client who was unhappy with the lawyer’s failure to e-file for him filed a disciplinary complaint. Harris did not return the complaining client's $800 advance fee, the court said.

The full opinion of the Kansas Supreme Court can be found by clicking here.