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Analysis: The High Cost of Saving a Failing Small Business

 

 

 
 

March 26, 2015

 
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  NEWS AND ANALYSIS

ANALYSIS: THE HIGH COST OF SAVING A FAILING SMALL BUSINESS

Lawyers say that a bankruptcy filing to save a small business often costs at least $100,000 to $300,000 -- and sometimes twice as much in cases where creditors are contentious, according to a Wall Street Journal analysis today. "It's a little bit of a sticker shock when you figure out how much you actually owe, especially when the odds are not great of coming out of bankruptcy," said John Lavin, chief financial officer of M. Slavin & Sons Ltd., a Bronx fish wholesaler. Three years ago, Lavin's company ran up $1.68 million in professional fees in its chapter 11 case, according to court documents. But a group of lawyers, judges and others, organized by ABI, wants Congress to change the existing chapter 11 protections for small businesses. One of their suggestions would help the owners of small bankrupt companies avoid having to sell their businesses when the owners can promise to use future profits to pay companies' past debts. Currently, creditors must be fully repaid for a business's ownership to remain the same. Another suggestion put forward by ABI's Commission to Study the Reform of Chapter 11 to make the process cheaper would be to eliminate the automatic appointment of creditor committees for private firms with less than $10 million in assets or debts. Read more. (Subscription required.)

SURVEY: RESTRUCTURING EXPERTS FORESEE INCREASE IN CHAPTER 11 FILINGS

After a prolonged period of economic tailwinds, during which bankruptcy restructurings declined steadily, the future could see an increase in filings, according to AlixPartners' annual survey of turnaround and restructuring professionals. The past six years have seen a steady and steep drop in the number of chapter 11 filings -- a more than 50 percent decrease since 2009. However, the experts in our survey indicate that the cycle may be starting to turn. Nearly 47 percent of respondents predict that filings will increase in 2015, and another 31 percent say that filings will remain at current levels. When asked about chapter 7 liquidations, 42 percent of respondents say that chapter 7 filings will stay the same in 2015, and 33 percent say that they will increase. A trend that is here to stay, according to the survey, is the move toward pre-negotiated and pre-packaged bankruptcies. Such deals have increased steadily since 2008, and Alix's experts predict that the trend will continue. Among survey respondents, more than half (53 percent) say pre-negotiated and pre-packaged bankruptcies will increase in 2015 over 2014, and another 40 percent say such bankruptcies will stay the same. Click here to download the survey.

CFPB UNVEILS PLANS TO REIN IN PAYDAY LENDERS

After releasing successive studies on the payday industry over the past two years, the Consumer Financial Protection Bureau (CFPB) today unveiled sweeping proposals that could fundamentally change the business of short-term loans and other products, CollectionsCreditRisk.com reported today. The CFPB said that the rules under consideration must still be examined by a Small Business Review Panel before being formally proposed. "After much study and analysis, we are taking an important step toward ending the debt traps that are so pervasive in both the short-term and longer-term credit markets," said CFPB Director Richard Cordray. Overall, the proposals would include everything from income-verification requirements to limits on how many loans a consumer can borrow in a given time period. But lenders could choose from among various sets of requirements which ones to follow. The rules would generally be divided into three sections: short-term loans, long-term loans and restrictions on collection practices. For both short-term and long-term products, lenders could choose from two different sets of requirements to follow. One approach, which is intended to "prevent" debt traps, would require the lender to follow a list of rules to determine borrowers' ability to repay when making a loan, including verifying their income. The alternative approach -- to "protect" consumers from debt traps -- would involve a different set of restrictions to foster affordability, such as limits on loan amounts or maximum numbers of rollovers, for example. Click here to read the CFPB's proposed rules.

MORTGAGE SERVICERS IN DOJ'S CROSSHAIRS FOLLOWING JPMORGAN ROBO-SIGNING SETTLEMENT

While only JPMorgan Chase has been cited for recent robo-signing infractions, Clifford J. White III, the director of the Executive Office for U.S. Trustees, said that he is seeing evidence of other servicers not following proper protocols when it comes to dealing with homeowners who have filed for bankruptcy, American Banker reported today. That could include not just robo-signing documents, but also failing to inform homeowners of mortgage payment increases or charging excessive loan-default fees. Such abuses violate a 2012 settlement between law enforcement officials and the nation's largest servicers, and White is putting other servicers on notice that they too will be punished if they flout bankruptcy rules. "Compared to where we were a few years ago, the banks are doing a better job," said White, but he added that "it is disappointing that, after all the years, [the problems]…are not completely rectified." The $25 billion national mortgage settlement was supposed to put an end to the widespread practice of low-level employees at mortgage servicers rubber-stamping foreclosure documents without reviewing their accuracy. Earlier this month, JPMorgan Chase agreed to a $50.4 million settlement with the U.S. Trustee Program for robo-signing notices of payment changes in 2013 to borrowers in bankruptcy. Almost all of the restitution will be in refunds and credits to borrowers. Read more.

COMMENTARY: WARREN HAS RIGHT DIAGNOSIS FOR CORPORATE INFLUENCE, BUT WRONG PRESCRIPTION

While Sen. Elizabeth Warren (D-Mass.) contends that some large companies influence legislation and regulation so that they can benefit at the expense of competitors, her prescription -- more government -- is like the old practice of bloodletting to cure patients of almost all illnesses, according to a commentary in The Hill yesterday. The only reason that large companies can game the system as much as they do is because the regulatory state has been advancing at an increasing pace, according to the commentary. In the 41 years since 1974, the Code of Federal Regulations has grown from 69,000 to 174,545. Click here to read the commentary.

Sen. Warren will be providing remarks at the opening reception of ABI's Annual Spring Meeting on April 16 in Washington, D.C. Register today for ASM to save $100 before rates go up tomorrow!

BUYOUT FIRMS FEEL PINCH FROM LENDING CRACKDOWN

An effort by regulators to deter banks from financing takeovers with high levels of debt has dealt a blow to the private-equity industry, the Wall Street Journal reported today. After resisting at first, banks have lately been falling in line with guidance that regulators set in 2013, which sought to limit how much debt banks could extend for corporate takeovers. U.S. buyouts this year have fallen as firms spent $17.14 billion buying U.S. companies as of yesterday, the lowest dollar volume at this point in the year since 2012 and representing the fewest deals since 2010, according to data provider Dealogic. Loan volume, another measure of buyout activity, has also declined. About $26.5 billion in leveraged loans for U.S. private-equity buyouts and refinancings has been issued so far this year, an 82 percent decline over the same period in 2014 and the lowest level since 2009, according to Dealogic. Bankers and private-equity executives said that the lending pullback is creating pressure on buyout firms to do smaller deals funded with less debt and more cash. Read more. (Subscription required.)

SEC FINALIZES KEY JOBS ACT RULES FOR SMALL BUSINESSES

Nearly three years after the law was signed, the Securities and Exchange Commission has taken an important step toward implementing the JOBS Act, making it easier for small and mid-sized businesses to raise capital through small public offerings, the Washington Post reported today. Commissioners yesterday approved rule changes that allow companies to raise up to $50 million a year, up from a longstanding cap of $5 million, through what’s known as Regulation A offerings. Under Reg A offerings, as they’re commonly called, companies looking to raise relatively small amounts of money through a public offering are subject to a much simpler SEC registration process, putting fewer bureaucratic hoops between them and investors. Until now, the Reg A path, which is nearly as old as the SEC itself, has been sparingly used. Congress voted to lift the cap as part of the Jumpstart Our Business Startups (JOBS) Act, which was signed into law in April 2012, largely to encourage more small and mid-sized companies to consider that option. However, it’s another more subtle change the SEC has made to the rules – one that the agency was not specifically required to adopt – that some experts believe will make the Reg A option now much more appealing to companies in need of capital. In keeping with the initial regulations proposed about a year ago, the commissioners finalized new rules that exempt Reg A offerers from registering with state financial regulators in every state in which their prospective shareholders reside. Read more.

DISCOUNTED SUBSCRIPTIONS TO AUDIO ABI JOURNAL AVAILABLE FROM MODIOLEGAL!

Subscribe now to our new streaming audio Journal, offered by ModioLegal. Narrated articles from each issue of the ABI Journal can now be accessed through your web browser -- on your computer, smartphone, or tablet -- for a low monthly fee. For a limited time, subscribe to this new service now for just $9.95 a month (regularly $12.95) with coupon code abi-early. Sign up for any audio Journal plan, and your first month is free! Go to http://www.modiolegal.com/subscribe to learn more, or send an email to accounts@modiolegal.com for a free demo.

ABI'S NEWEST TITLE, CHAPTER 15 FOR FOREIGN DEBTORS, IS AVAILABLE FOR PRE-ORDER!

Every month brings several new cases filed under chapter 15, making this a rare growth spot in corporate bankruptcy. ABI's newest title, Chapter 15 for Foreign Debtors, covers all aspects of the UNCITRAL Model Law on Cross-Border Insolvency, as well as chapter 15 of the Bankruptcy Code. The book also provides details about the foreign representatives, avoidance actions, creditor protections, concurrent proceedings, comity and much more. An extensive appendix filled with sample case documents and forms related to chapter 15 proceedings is included. To pre-order your copy at the ABI member price (log-in required) of $75, please click here. (Printed copies will be delivered in April 2015.)

NEW CASE SUMMARY ON VOLO: METROU V. M.A. MORTENSON CO. AND SCHUFF STEEL CO. (7TH CIR.)

Summarized by Bonnie Clair of Summers Compton Wells LLC

In a matter of first impression at the appellate level and reversing the decision below, the Seventh Circuit declined to utilize judicial estoppel to cap a chapter 7 trustee's potential recovery in an action at an amount equal to that due the debtor's creditors. The court reasoned that capping recovery could impact a trustee's ability to retain counsel to pursue an action or create any meaningful recovery for creditors and, thus, declined to create a barrier to payment of creditors that had no part in the nondisclosure.

There are nearly 1,700 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.

NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: ATTORNEYS GENERAL VOW TO DEFEND RADIOSHACK'S 117 MILLION CONSUMERS

A recent blog post details how attorneys general around the country are vowing to protect the personal data of 117 million consumers as RadioShack goes up for sale at a bankruptcy auction.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

INSOL INTERNATIONAL

INSOL International is a worldwide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 43 member associations worldwide with more than 9,000 professionals participating as members of INSOL International. As a member association of INSOL, ABI's members receive a discounted subscription rate. See ABI's enrollment page for details.

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UPCOMING EVENTS:

9th Annual Credit and Bankruptcy Symposium
May 7-8, 2015
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17th Annual New York City Bankruptcy Conference
May 14, 2015
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ABI/St. John's Forty-Hour Bankruptcy Mediation Training
May 17-21, 2015
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14th Annual Litigation Skills Symposium
May 19-22, 2015
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5th Annual Memphis Consumer Bankruptcy Conference
June 5, 2015
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22nd Annual Central States Bankruptcy Workshop
June 11-14, 2015
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Cross-Border Insolvency Symposium
June 18, 2015
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22nd Annual Northeast Bankruptcy Conference
July 9-12, 2015
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10th Annual Northeast Consumer Forum
July 9-11, 2015
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Beijing Insolvency & Restructuring Symposium
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20th Annual Southeast Bankruptcy Workshop
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11th Annual Mid-Atlantic Bankruptcy Workshop
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  CALENDAR OF EVENTS
 

2015

April
- Annual Spring Meeting
April 16-19, 2015 | Washington, D.C.

May
- Credit and Bankruptcy Symposium
May 7-8, 2015 | Uncasville, Conn.
- New York City Bankruptcy Conference
May 14, 2015 | New York, N.Y.
- Forty-Hour Bankruptcy Mediation Training
May 17-21, 2015 | New York, N.Y.
- Litigation Skills Symposium
May 19-22, 2015 | Chicago, Ill.

June
- Memphis Consumer Bankruptcy Conference
June 5, 2015 | Memphis, Tenn.

 

 

- Central States Bankruptcy Workshop
June 11-14, 2015 | Traverse City, Mich.
- Cross-Border Insolvency Program
June 18, 2015 | New York

July
- Northeast Bankruptcy Conference
July 9-12, 2015 | North Falmouth, Mass.
- Northeast Consumer Bankruptcy Forum
July 9-11, 2015 | North Falmouth, Mass.
- Beijing Insolvency & Restructuring Symposium
July 13-14, 2015 | Beijing, China
- Southeast Bankruptcy Workshop
July 23-26, 2015 | Amelia Island, Fla.

August
- Mid-Atlantic Bankruptcy Workshop
Aug. 6-8, 2015 | Hershey, Pa.

 

 
 
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