Bankruptcy Headlines

Fitch: U.S. Personal Bankruptcies Set for Fifth Straight Annual Decline

Fitch Ratings issued a report on Friday predicting that annual U.S. personal bankruptcy filings are set for a fifth straight drop, though the rate of decline figures to level off over time as lending guidelines become more lax, according to a Fitch press release. Fitch projects total bankruptcy filings to fall by another 8-10 percent in 2015 in light of current economic conditions. This development comes as aggregate personal bankruptcy filings for 2014 fell over 12 percent lower year over year, another double-digit annual decrease. However, “the continued loosening of lenders' underwriting guidelines and the increase to consumers' access to credit should begin to slow the pace of the double-digit declines observed over the past four years,” said Fitch Managing Director Michael Dean. U.S. consumer credit rose for the fifth straight year in 2014, topping over $3 trillion on a seasonally adjusted basis. Read more.

For more on bankruptcy filing trends and statistics, be sure to visit ABI's statistics page

Wells Fargo Puts a Ceiling on Subprime Auto Loans

Wells Fargo, one of the largest subprime car lenders, is pulling back from that roaring market, a move that is being felt throughout the broader auto industry, the New York Times reported today. The giant San Francisco bank has been at the center of the boom in making loans to people with tarnished credit scores. Wall Street, meanwhile, has been bundling and selling such loans as securities to investors, reaping big profits while allowing millions of financially troubled borrowers to buy cars. But now, amid signs that the market is overheating, Wells Fargo has imposed a cap for the first time on the amount of loans it will extend to subprime borrowers. The bank is limiting the dollar volume of its subprime auto originations to 10 percent of its overall auto loan originations, which last year totaled $29.9 billion, bank executives said.

Official Says Puerto Rico's Prepa to Miss Restructuring Deadline

Puerto Rico's debt-laden power authority, Prepa, said on Friday that it will hold off on presenting a restructuring plan as it tries to secure an extension of an agreement from creditors not to foreclose on its $9 billion in debt, Reuters reported. The current agreement, which expires on March 31, had called for a deadline today for Prepa to unveil a proposal to restructure about $9 billion in debt. But it will miss that deadline, Lisa Donahue, Prepa's chief restructuring officer, said in a statement. “We have made significant progress" to negotiate an extension of the forbearance agreement, "but there is more work to do and as a result, we have not yet finalized a plan to present to the forbearing creditors." Donahue said she told creditors Prepa "would not satisfy this milestone," and that creditors do not plan to call a default as a result of the delay.

Caesars Bankruptcy Risk Killed Its Bid for N.Y. Casino License

The threat of bankruptcy by Caesars Entertainment Corp.’s main operating unit was a key reason the Las Vegas-based gambling company didn’t win a license to operate a casino in New York state, Bloomberg News reported on Friday. The state panel that recommended license winners in December said in a report released Friday that bankruptcy may have been a distraction to Caesars management, damaged the reputation of gambling in New York and kept customers from visiting the company’s proposed $880 million resort-casino. Caesars proposed developing a casino about 50 miles north of New York City, which would have among the closest to the largest U.S. metropolis. The state is moving forward with three licenses, while opening up bids for a fourth in the region along the Pennsylvania border. None of the licenses will be in Orange County, where Caesars sought to build.

Houston Hospital Company Files for Chapter 11 Bankruptcy

Houston's University General Health System Inc. on Friday filed for chapter 11 protection, the victim of unprofitable acquisitions, bad managed care agreements and an alleged overestimate of its financial condition, Dow Jones Daily Bankruptcy Review reported today. In a petition filed with U.S. Bankruptcy Court in Houston, the company and eight affiliates listed assets between $1 million and $10 million and liabilities of between $10 million and $50 million. Finances at University General have quickly deteriorated in recent months. The company's top secured lender, MidCap Financial Trust, late last year forced senior management to sign personal guarantees that University General "would only pay items approved by MidCap," and temporarily not pay its restructuring advisers, the hospital company said in its declaration filed with the court. It said that top hospital officers actually had to pay for some medical supplies out of their own pockets. Read more. (Subscription required.)
For additional analysis and insights into health care insolvencies, be sure to pick up a copy of the ABI Health Care Insolvency Manual, Third Edition, from the ABI Bookstore. 

Uncertainty Remains as to How a Rejected Trademark License Agreement will be Treated in the Eighth Circuit

By: Crystal Lawson

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Interstate Bakeries Corp.,[i] the United States Court of Appeals for the Eighth Circuit recently held that a trademark license agreement was not an executory contract because it was part of a larger, integrated sale agreement that had been substantially performed by both parties.[ii] Accordingly, since the debtor could not reject the agreement, the Eighth Circuit did not determine whether the rejection of a trademark-licensing agreement necessarily terminates the licensee’s rights in the trademark.[iii] In 1996, Interstate Brands Corp (“IBC”), a subsidiary of Interstate Bakeries Corporation (“Interstate Bakeries”), transferred two of its brands and certain related assets to Lewis Brothers Bakeries (“LBB”) pursuant to an antitrust judgment.[iv] In connection with the sale, the parties entered into an asset purchase agreement and a trademark license agreement.[v] In 2004, Interstate Bakeries and eight of its subsidiaries, including IBC, filed for bankruptcy under chapter 11 of the Bankruptcy Code.[vi] After Interstate Bakeries disclosed that it intended to assume the trademark license agreement, LBB commenced an adversary proceeding seeking a declaration that the agreement was not an executory contract under section 365(a) of the Bankruptcy Code and therefore, was not subject to assumption or rejection.[vii] Finding that both parties owed material obligations under the trademark license agreement, the bankruptcy court held that the agreement was executory.[viii] The district court affirmed that decision.[ix] The Eighth Circuit, however, reversed, holding that the trademark license agreement was not executory because it was part of a larger, integrated contract that had been substantially performed.[x]

A High-Income Debtor May File for Bankruptcy Under Chapter 7 of the Bankruptcy Code

By: Pamela Frederick

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Notwithstanding a debtor’s high income and ability to pay creditors, in In re Snyder,[i] a bankruptcy court in New Mexico recently refused to dismiss the debtor’s chapter 7 bankruptcy case because the court found that the debtor did not act in bad faith when filing the case.[ii] The debtor, a 63-year-old doctor with an annual salary of $290,000, filed for bankruptcy under chapter 7 of the Bankruptcy Code in order to discharge a $170,000 debt.[iii] In response, the debtor’s sole creditor moved to dismiss the case, or alternatively, to convert the case to one under chapter 11, arguing that the debtor filed the case in bad faith.[iv] In support of its motion under section 707(a), the creditor argued that the debtor’s high income, ability to repay, failure to try to repay, failure to schedule his wife’s jewelry, use of his historical average expenses on his Schedule J, and the fact that the movant was the debtor’s only unsecured creditor were all indicia of the debtor’s bad faith.[v] The debtor responded that he did not file his chapter 7 case in bad faith, arguing that his age, lack of retirement savings, lack of a lavish lifestyle, and compliance with the Bankruptcy Code all indicated that he filed his petition in good faith.[vi] The court ultimately denied the creditor’s motion, concluding that despite the existence of unfavorable factors and the debtor’s high income, the debtor’s desire to save for retirement was “consistent with good faith.”[vii] Likewise, the court denied the creditor’s motion to convert because the evidence relied upon to support a conversion under section 706(b) was “identical” to the evidence in support of the motion to dismiss under section 707(a).[viii]

Abatements Enforceable as Forfeiture Provisions

By: Shantel M. Castro

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re The Great Atlantic & Pacific Tea Company, Inc.,[i] the District Court for the Southern District of New York upheld a bankruptcy-court order enforcing an abatement provision in a lease.[ii] The case involved a twenty-year lease between a commercial landlord and a grocery store.[iii] Under the terms of the lease, the grocery store was to construct its own building on the leased premises, and the landlord would pay the grocery store a $1.9 million construction allowance within ninety days of the grocery store opening to the public.[iv] A provision in the lease stated that if the landlord failed to pay the construction allowance, the grocery store’s obligation to pay fixed rent and other charges would abate until the allowance was paid with interest.[v] The lease further provided that the grocery store would have title to the building until such time. [vi] A subsequent section of the lease entitled “Landlord default” detailed the remedies available to the grocery store in the event of a default by the landlord.[vii] After the grocery store opened, but just prior to the deadline for payment of the construction allowance, the grocery store filed for bankruptcy under chapter 11 of the Bankruptcy Code.[viii] The landlord’s financing for the construction allowance was conditioned on the grocery store assuming the lease.[ix] The lease was not assumed prior to the payment deadline for the construction allowance, therefore the landlord could not close on its financing.[x] Consequently, the landlord did not pay the construction allowance on time.[xi] Therefore, the grocery store withheld rent payments and property taxes due under the lease until the construction allowance was paid nine months later.[xii] The landlord commenced an adversary proceeding to collect the rent and filed a cure claim after the grocery store assumed the lease.[xiii] The bankruptcy court dismissed the adversary proceeding and denied the cure claim.[xiv] On appeal, the district court affirmed.[xv]