Creditors' Resource

Is CIT Relevant?

richard@crarecovery.com (Richard Feferman) — Sat, 18 Jul 2009 23:59:32 -0800

CIT provides financing to over 1,000,000 small and mid-sized businesses.

CIT provides more loans than any other lender under the Small Business Administrations most popular program.

CIT is the provider of capital to America's small businesses. One can argue that there are others such as GE, but no other company has the focus of CIT. Given the other bailouts, saving CIT should be a no brainer. The Wall Street Journal reports that there has not been a ground swell of public support for assistance to CIT.

Ironically hasn't the public complained that the large banks aren't lending bailout dollars quickly enough to help the economy? CIT likes to make loans, they are good at making loans, and CIT is has the best infrastructure in place for getting out financing for the small businesses that can generate jobs. Importantly they are not punch drunk push-overs that make stupid loans. Their trouble emanates from the current economic contraction.

The stimulus programs are not going to work unless money is put to work. CIT actually has the infrastructure in place to augment the recovery of small business in America. Here is a great opportunity to save a financial institution worth saving.

US Bankruptcies to Rise 45% in 2009

richard@crarecovery.com (Richard Feferman) — Fri, 05 Jun 2009 17:06:06 -0800

CNNMoney.com reports credit insurer Euler Hermes ACI forecasts a 45% increase in bankruptcy filings in 2009. Banks are in danger as US business bankruptcies may be up sharply.

The FDIC reports year over year charge-offs to commercial and industrial borrowers are up by $4.2 billion as of the end of the first quarter. Credit rating agency DBRS states "business bankruptcies surpassed the peak levels of the previous cycle last year, and there is little to suggest that business bankruptcies have reached their peak."

Commercial Bankruptcy Filings On The Rise

richard@crarecovery.com (Richard Feferman) — Wed, 03 Jun 2009 07:08:36 -0800

Chelsea Emery of Reuters covers corporate bankruptcy and restructuring. On Reuters shop-talk blog, Chelsea reports that commercial bankruptcy filings in May were up sharply from the same month a year earlier. 7,514 bankruptcy petitions were filed for businesses in 2009 compared with 5,354 for May 2008.

Improve the Odds of Getting Paid - Form a Creditors' Committee

richard@crarecovery.com (Richard Feferman) — Sun, 24 May 2009 15:05:46 -0800

    The president of a tire company called me to discuss what to do as a result of a customer going into Chapter 11. He asked what could he do that isn’t going to require him to come up with any cash, is not going to take much time, and has the potential to be very effective?

    I responded that participation on an official creditors committee might make the difference in a satisfactory resolution with the customer that filed chapter 11. While there are no guarantees as to the outcome of a case, often I have been able to use the power of a creditors committee to significantly enhance the treatment of unsecured creditors.

    An active creditors committee has a powerful voice in a Chapter 11 case and the ear of the court. Bankruptcy Judges want to hear from the creditors’ committee on the many issues in a Chapter 11 case. Federal law provides for a seat at the negotiating table for committees. A committee’s activities include oversight of the debtor, and scrutinizing debtor’s affairs, and evaluation of the fairness and feasibility of a debtor’s actions. The bottom line is a well-run pro-active committee can create value for unsecured creditors.

    An attractive aspect of official committees is that they are usually structured so that there is no direct charge to the members for the cost of professionals that advise committees. Thus a mechanism is in place to level the playing field for creditors (or sometimes shareholders) in the negotiations that take place in formulating how a debtor will be restructured or liquidated.

    And the absence of a committee can result in the creditors getting the short end of the stick! Don’t assume that someone else is going to be looking out for creditors; it is the responsibility of the creditors to lookout for themselves – make use of this powerful tool – an Official Creditors Committee.

    I’ll write more on this soon, but for now see that a committee gets formed. Call me if you need help.

Will California Go Bankrupt?

richard@crarecovery.com (Richard Feferman) — Sat, 16 May 2009 18:34:35 -0800

Wall Street Journal columnist John Fund thinks a federal bailout [with conditions] will be negotiated. The state's revenues are in free fall and a budget deal is not expected to be approved next week by voters.

In a video posted on the Wall Street Journal website, Mr. Fund opines that the Obama administration will provide the money and California will agree to not cut spending.

Global Economic Outlook: The Baseline Scenario

richard@crarecovery.com (Richard Feferman) — Sat, 31 Jan 2009 13:26:08 -0800

MIT Professor Simon Johnson is a thought leader on the Global Economy. His blog The Baseline Scenario is a great resource for understanding today's financial crisis. Last week he presented his Global Economic Outlook to the Senate Budget Committee.

I'm of the opinion that The Baseline Scenario is the best place on the web to stay easily updated on the crisis. Johnson and his 2 co-founders are stimulating conversation and making this difficult subject understandable.

Financial Bailouts - A Letter To Congressman Brian Bilbray

richard@crarecovery.com (Richard Feferman) — Tue, 18 Nov 2008 07:56:59 -0800

Dear Sir:

The goal of federally financed bailouts should only be to augment feasible plans of reorganization, not to prolong the life of businesses beyond hope.

Bailout recipients should be required to devise and execute a feasible "Plan of Reorganization" as in Chapter 11 of the Bankruptcy Code. The financing could be in 2 parts: 1) the first part can provide interim financing while a Plan of Reorganization is developed; and 2) the second part will be "Exit Financing" that should only be provided to companies that can prove a that they have a feasible Plan of Reorganization.

All of the laws to administer the process are present in the Bankruptcy Code, with the exception of any legislation needed to let the government step into the shoes of the provider of the money. The Bankruptcy Courts also provide the only forum where certain issues can be dealt with (renegotiation or cancelation of existing contracts, protection for warrantee holders, etc.).

To handout money without conditions is not fair to the taxpayers, however given the seriousness of the financial problems we are faced as a nation perhaps a structure that requires responsible action by the recipients (with a recovery for the government) makes sense.

Respectfully,

Richard Feferman, Certified Insolvency and Restructuring Advisor
Corporate Recovery Associates
3830 Valley Centre Drive, Suite 705-152
San Diego, CA 92130
Tel: (858) 792-7473
email: richard@crarecovery.com
blog: www.creditorsresource.com

Alternative Sources of Recovery: Lehman Brothers' Directors & Officers

richard@crarecovery.com (Richard Feferman) — Sun, 05 Oct 2008 18:44:36 -0800

A couple of articles in the Wall Street Journal here and here are the basis for my bet that we are going see claims against Lehman's directors and officers insurance coverage. Perhaps even a fight over who is entitled to make claims against any policies. See Kimberly Melvin's article for background on D&O Policy Proceeds as Bankruptcy Estate Assets.

US Home Prices Declining at Accelerated Rate

richard@crarecovery.com (Richard Feferman) — Wed, 28 May 2008 18:49:12 -0800

We all know the housing bubble was inflated by easy credit and that market has become totally unhinged.

The Credit Market's issues are far from being sorted out. Certainly this is not going to be resolved in the short term. I think it is a fairy tail to believe the same abundant levels of consumer credit will return anytime soon. Money is going be more expensive and in shorter supply, hence we will have fewer dollars chasing houses. The next paragraph (and corresponding chart) shows why I think housing may be far from a bottom.

The S&P/Case-Shiller Home Price Indices are the gold standard for measuring aggregate home price fluctuations. The below chart, illustrating monthly changes in year-to-year comparisons, shows nationwide home prices falling at a faster rate each month.

Debt buyers ignore discharge and get sued. What a surprise.

richard@crarecovery.com (Richard Feferman) — Sun, 25 May 2008 13:01:32 -0800

Loren Steffy of the Houston Chronicle wrote an article about a couple who have filed suit against several debt buyers who apparently ignored a Judge's discharge order. Although this blog is for Creditors, the whole notion implied in Steffy's well written article is that debt buyers who are so cavalier as to have complete disregard for a Federal Bankruptcy Judge's Order have thus far not been called to account. This is unconscionable.

This case could be a big deal. I'll keep you posted.

Commercial Landlords: What To Do When a Tenant Files Bankruptcy (Chapter 11)

richard@crarecovery.com (Richard Feferman) — Fri, 23 May 2008 19:17:49 -0800

As I reported earlier 2008 is turning out to be a difficult year for retailers. What do you do when one of your Tenants files Chapter 11?

Here are three important issues:

I.   Ensure Your Rights To Payment
II.   Will The Lease Be Assumed Or Rejected?
III. How To Improve Your Odds At Minimal Cost

I.   Ensure Your Rights To Payment. First things first, consult counsel and determine if there is any reason you do not want to file a Proof of Claim. Then immediately review the tenant's (“Debtor’s”) account and lease files with your bankruptcy counsel. There are three classifications of claims typically filed by landlords:

1) Pre-Petition Claim. Everything the Debtor owes you up to the filing of the Bankruptcy Petition.

2) Ordinary Course Administrative Claim. Bankruptcy Code Section 365 (d)(3) requires the timely payment of your rent. Is the Debtor using your property to the benefit of the Bankruptcy Estate? Yes, and you are to be paid rent on time from the date the case was filed. If the Debtor is failing in its obligation to keep current on its Post-Petition rent then consider filing a Motion For Stay Relief as a precursor to an eviction proceeding.

3) Lease Rejection Claim. If the Debtor decides to terminate your lease you will be entitled to make a claim for your “Rejection” damages.

II.    Will The Lease Be Assumed Or Rejected? The Tenant will have 120 days to decide to Reject or Assume the lease. This may be extended, for cause (its usually granted), another 90 days. If the lease is assumed all arrearages must be paid immediately or adequate assurance of performance must be provided.

III.    Improve Your Odds At Minimal Cost. One of the best methods for improving your treatment in a Chapter 11 case without coming out of pocket with cash is get appointed to the Creditors' Committee. This is not a big time commitment and you can get lots of bang for the buck. Appoint an administrative staff member to represent your company on the Committee. The Committee will hire professionals (at the expense of the Bankruptcy Estate). Committee members have conference calls as needed. Good professionals will keep the Committee informed and handle the matters on a day-to-day basis. An effective Creditors Committee often will enhance the treatment of unsecured creditors.

Be proactive. Remember get counsel early and ask questions right away. Inquire about the formation of a Creditors Committee.

Bankruptcy Preferences - An Introduction

richard@crarecovery.com (Richard Feferman) — Tue, 13 May 2008 21:04:35 -0800

Today I spoke to a credit manager with an interesting problem. He called to discuss a letter he received demanding the payment of almost $400,000 from a customer that is in bankruptcy. Adding insult to injury, the customer still owes over $75,000 on its account. What a paradox! What my credit manager friend just received is called a Preference Demand Letter. Dealing with preferences is one of the most common encounters with the bankruptcy process for today’s Credit Professional, and preference litigation is the most common type of adversarial proceeding in bankruptcy court.

Certain payments within 90 days (1 year if the payee was an insider) of the date of the filing of a bankruptcy petition may be considered preferential and are potentially recoverable by the bankruptcy estate.

The whole notion of the return of preferential payments under the Bankruptcy Code is the “fair and equal” treatment of all unsecured creditors. This is accomplished in a “Water Leveling” process in which property (money) is recovered from the recipients of preferential payments for the benefit of the estate. It does not seem very fair when you’re the one asked to pay back money from a company that still owes money.

I am going to discuss this subject on a regular basis here, so continue to check back if it is of interest. We will be discussing the elements of a preference as well as how they are prosecuted and defended.

If you’ve received a demand, don’t ignore it, be proactive and seek the advise of counsel experienced in these matters. If you like, please call my office. We are experienced in the analysis of these matters and can possibly refer you to experienced legal counsel.

Credit Markets Frozen As Mortgage Market Melts Down - Commercial Bankruptcy Filings Rise

richard@crarecovery.com (Richard Feferman) — Sat, 22 Mar 2008 01:37:36 -0800

    What started as a residential real estate crisis is causing a shortage of funds throughout the Capital Markets. The Federal Reserve is doing an effective job regulating risk free rates, but businesses don’t borrow at these rates. Today the Federal Funds Rate is 2.20%. Unfortunately this is not solving the problem of providing dollars to businesses. Capital providers are scared and sitting on the sidelines. Commercial bankruptcy filings are on the rise. In fact bankruptcy filings of all types are on the rise.

    In order to induce lenders to invest in alternatives to the Treasury’s Risk Free Securities, Businesses pay a risk premium on borrowed funds; this Risk Premium is the difference between the Risk Free Rate and the actual rate paid. The Risk Premium is the compensation for lending to you instead of buying US Treasury Securities (Risk-Free). Commercial loan rates are not going down. The fact is lenders are scared; Risk Premiums are expanding and underwriting criteria is tightening up. A year ago when a middle market company needed to restructure financially it was much easier to recapitalize whether it was bank financing or selling securities. On top of that, you had plenty of private capital investors with money burning a hole in their pockets; commercial bankruptcy filings were at a low. The world is different today and the problem is at a point that the government is going to have to step up and provide risk capital. The downside of this is who knows what the unintended consequences of government intervention will be.

    Remember during the last banking crisis during the first half of the 1990s things were not resolved until the government formed the Resolution Trust Corporation which took over (and subsequently liquidated) the portfolios of bankrupt lenders. If the holders of today’s pools of loans cannot efficiently liquidate problem assets the country is in for a painful digestion period that this analyst believes will last through 2010 perhaps through 2012.

    We may have just seen the tip of an iceberg. News reports today included the revelation that credit default swaps (insurance against a bad receivable) on the debt of CIT Group (the largest independent commercial finance company in the U.S.) are more expensively priced than the Bear Stearns' swaps were just before the government arranged rescue of Bear Stearns.

How Is Bankruptcy Under Chapter 11 Different From A Case Filed Under Chapter 7 Or Chapter 13?

richard@crarecovery.com (Richard Feferman) — Tue, 11 Mar 2008 00:58:44 -0800

    Chapter 11 is the known at the Reorganization Chapter; Chapter 7 is called the Liquidation     Chapter; and Chapter 13’s title is Adjustment of Debts Of An Individual With Regular Income.

   As I wrote earlier the goal of a Chapter 11 Case is more often than not the rehabilitation of a troubled business entity, although individual filers are not uncommon.

    Chapter 7. In a chapter 7 case a trustee is appointed, who gathers and sells the debtor’s nonexempt assets for the benefit of the creditors. The notion of chapter 7 is that creditors of the same class will be treated equally; and the debtor, who will retain limited exempt assets, will get a fresh start.

    Chapter 13. Chapter 13 is similar to chapter 11, as the goal is for an individual debtor to confirm a plan that repays all or a portion of the debtor’s obligations. Chapter 13 is available only to individuals (no corporations, LLCs, or partnerships). An individual that operates a business as a sole proprietor (a dba is OK) may be eligible to file for bankruptcy under chapter 13.
    To be eligible to file under chapter 13 the individuals unsecured debts must not exceed $307,675 and the debtor’s secured debts may not exceed $922,975. These thresholds are periodically adjusted for inflation.

    Chapter 11. The goal of a chapter 11 cases is for a rehabilitated debtor to emerge from bankruptcy through the confirmation and implementation of a plan of reorganization. The plan is basically a contract between the various interested parties (creditors, debtor, secured lenders) that controls how the debtor’s affairs are to be conducted.

   An advantage of chapter 11 is that by allowing an enterprise to continue in business, value will be maximized for the benefit of the debtor’s unsecured creditors. Generally a going concern is worth more than a business that is in a state of forced liquidation. Often chapter 11 will be used as a platform to sell an operating business. The proceeds are then used to repay creditors according to priority.

UPI Reports: 6,000 U.S. Retail Stores Predicted To Close In 2008

richard@crarecovery.com (Richard Feferman) — Sun, 09 Mar 2008 23:42:57 -0800

This may be the understatement of a lifetime. The bankruptcy filings of Movie Gallery (aka Hollywood Video); Lillian Vernon; and The Sharper Image have started us off on what may be a robust year of retail failures. With consumers tapped out, what will fall next? Or can the slack be picked up by offshore money taking advantage of a cheap dollar?

What is Chapter 11 Bankruptcy?

richard@crarecovery.com (Richard Feferman) — Sun, 17 Feb 2008 11:49:15 -0800

    Chapter 11 of the United States Bankruptcy Code is titled “REORGANIZATION”.

   The goal of a Chapter 11 case is to have the Court enter an order confirming a Chapter 11 Plan. It can be a plan of liquidation or a plan of reorganization. In either case it is a contract between the various parties in a chapter 11 case setting forth how the bankruptcy pie is going to be split up.

   A unique aspect of Chapter 11 is that usually there is not an appointed Bankruptcy Trustee. In most cases filed under Chapter 11 the Debtor plays the roll of Trustee. Many creditors that I get calls from are surprised. “Richard, the same management that got the Debtor into trouble in the first place is acting as the Trustee!” I’ll often hear.

   The notion of Chapter 11 is the rehabilitation of the Debtor. To provide balance to the fact that the Debtor is acting as Trustee, the Bankruptcy Code provides for the appointment of an Official Committee of Creditors (“Creditors Committee”). I’ll write more about Creditors Committees latter, but suffice it to say that a Creditors Committee can play the roll of a very powerful watchdog.

Recent Rulings May Make Attorney's Fees Recoverable on Unsecured Claims

richard@crarecovery.com (Richard Feferman) — Wed, 30 Jan 2008 20:44:07 -0800

    My friend Bob Eisenbach over at Cooley Goodward has been writing about the potential for unsecured creditors to recover attorney’s fees in connection with claims in which the recovery of the fees is allowed by contract or statute outside of bankruptcy (see here).

   This is a complicated issue with conflicting court decisions, but Bob speculates that we may see more and more unsecured creditors including these fees in their proofs of claim.

   Bankruptcy attorney Scott Riddle states in his blog, “The bottom line in these cases is that unsecured creditors will (and probably should) include attorneys fees as part of their claim, at least until the other Circuit Courts rule on the issue.” See Scott’s article here.

Do I Need To File A Proof Of Claim? (Chapter 11 Cases Only)

richard@crarecovery.com (Richard Feferman) — Mon, 28 Jan 2008 05:28:58 -0800

A a creditor from New York called and asked me if he needed to file a Proof of Claim.

First some background. The debtor in a Chapter 11 Bankruptcy case is required to file a list of its unsecured creditors on an official form called “Schedule F”. In addition to the amount owed the debtor may further classify a claim as disputed, contingent, or unliquidated.

According to the Bankruptcy Code, in a Chapter 11 bankruptcy case creditor whose claim is not scheduled; scheduled in the wrong amount; or scheduled as disputed, contingent, or unliquidated shall file a proof of claim before the deadline that will be set by the Court. Please note that requirements for the allowance of a claim under the Bankruptcy Code is not the same for cases under the other Bankruptcy Chapters.

In other words, if a creditor’s claim is listed in the correct amount and not classified as disputed, contingent, or unliquidated then the listing in the schedules by itself is evidence enough for the claim to be allowed. Also your lawyer may have a reason for you to file or not file a Proof of Claim.

Now please don’t throw out your vendor files, as at a latter date a party in the case may object to the claim and evidence of the validity of the claim may need to be provided. Also see me post How To File A Proof Of Claim.

Checking The Status Of A Bankruptcy Case or Are We Going To Collect This Debt?

richard@crarecovery.com (Richard Feferman) — Mon, 28 Jan 2008 05:08:10 -0800

A credit manager in Tulsa, Oklahoma called me today and said a customer who is in chapter 11 owes her employer a bunch of money. She asked, “how do I find out what is really going on and how much is my company going to collect on that account?”

   I told her that in 2005 our friends in Congress added a new provision to the Bankruptcy Code to make things more transparent for creditors. The Bankruptcy Code now says that official creditors committees formed under the Code shall provide access to information for unsecured creditors that are not appointed to the committee.

   The provision is a little ambiguous, but I suggested that the caller send a couple of friendly letters to the committee chair and lawyer. She’ll probably have to follow-up with a couple more phone calls and letters; and she’ll want to let them know that she is writing pursuant to Section 1102 (b) (3) of the Bankruptcy Code. As the attorney is working by the hour, he should be happy to take her calls (at the expense of the Debtor most likely).

   Most of these professionals are actually very nice people. I suggested she ask what information can the committee provide to help her evaluate the prospects for recovery by unsecured creditors and can the committee provide an estimate of the timing of distributions?

   She can also ask what are the prospects for the rehabilitation of the Debtor, or will the customer’s business be sold as a “Going Concern” (bankruptcy lingo for an operating business as opposed to a closed business).

   In the future I’ll write more about this. And if you get notified that one of your customers has filed for chapter 11, please feel free to call or email my office right away.

How To File A Proof Of Claim (Chapter 11 Cases Only)

richard@crarecovery.com (Richard Feferman) — Thu, 24 Jan 2008 16:53:36 -0800

I frequently get calls from creditors asking how to file a Proof of Claim in a Chapter 11 Case. Beware; the rules and requirements are different in the other types of cases (cases filed under Bankruptcy Chapters 7, 9, and 13).

Your attorney may or may not recommend the filing of a Proof of Claim.

A Proof of Claim form will usually be sent out, but a copy of the form can be downloaded here.

Attach any necessary copies (not originals) of documents to support the validity and amount of the claim to the Clerk of the Court where the case is being heard.