Bankruptcy Bits

NYC restaurants filing bankruptcy include Tavern on the Green

In another sign of times, even the wealthy and famous are feeling the effects of the declining economy. In New York City, the owners of a well-known eating institution have sought the protection of the US Bankruptcy Court in the Southern District of New York. The 75 year old Tavern on the Green filed Chapter 11 after its lease was terminated by its present landlord, the City of New York, who has granted a new 20 year at that location to another restaurant, the owners of Central Park Boathouse, commencing January 1, 2010.

Tavern on the Green continues to operate while in Chapter 11, but has said that it may auction off the restaurant’s name, which it claims has a value of $19,000,000. Even with an auction sale, it may not realize enough to pay its creditors in full.

In the misery-loves-company category, another well-known eatery has also filed bankruptcy in NYC. Opened in 1917, the Cage de Artistes closed its doors and filed Chapter 7, not even attempting to reorganize. It was reported by NDP Group, a market research company, that over 500 restaurants had closed this year in NYC.

By: Michael B. Katz, Esq.

Erin Brockovich's former firm files Chapter 11 Bankruptcy

In the “Truth is Stranger Than Fiction” category, there is no longer a happy ending for the law firm that successfully represented Erin Brockovich and made her and others multi-millionaires. The Westlake Village, CA., law firm of Masry &Vitotoe, has filed Chapter 11 bankruptcy, seeking relief from its creditors while it tries to reorganize.

After the death of founding partner Edward Masry in 2005, it was reported that many people had sued both the firm and Masry’s estate, seeking payment of large sums of money. The firm reportedly spent millions of dollars defending itself in the legal actions, eventually forcing it to seek relief under Chapter 11 of the Federal Bankruptcy laws.

In the 2000 movie, which featured Albert Finney as Masry, Brockovitch obtained a $333 Million settlement, and the film itself made over $250 Million dollars. It can be assumed that both Masry and his law firm made a substantial recovery from the plaintiffs’ counsel fees paid to them, as well as fees from the movie, but those amounts were apparently not enough to allow them to weather the storm that followed after Masry’s passing.


 by: Michael B. Katz, Esq.

The Berman Hook Theory – planning the timing of filing bankruptcy

 There are statistics that evidence that a substantial number of Chapter 11 plans fail, and that even in cases in which a plan is confirmed, the reorganized debtor fails shortly after confirmation.

An explanation for the phenomenon is contained in a theory that has become known as "The Berman Hook." Envision a hook: a line straight down, a perpendicular line at the bottom with another line headed up. Think of a fishhook.

The Berman Hook Theory incorporates the previously expressed viewpoint that timing can be everything. Like "location, location, location," the manta is, "timing, timing, timing" for debtors.

The theory is simple: during the period of declining business, the entity survives by using its capital (cash, inventory, accounts receivable) and available credit to survive. Debt is incurred and continues to be incurred during the downturn and at the leveling off phase. The cash flow and capital crisis really occurs when the business turns around and new capital and credit are required for new inventory, (or to finance the production of new product,) and to finance the accounts receivable created by new sales. The real crisis occurs when capital is depleted, debt is the highest and demands for capital, cash and credit are newly needed. A classic scenario.

The theory suggests that the filing of a petition in bankruptcy provides little long term relief when filed in the downward spiral but is best exercised when there is a realty of a fresh start, i.e. when relief from existing debts can be most beneficial. A successfully reorganized debtor is relieved of the burden of incurring additional debt and has the opportunity to engage in business when there is an opportunity to succeed. A simple, pragmatic theory.

And the concept is equally applicable to individuals. Timing is everything. You should not seek recourse in Bankruptcy Court until you have bottomed out. By means of example, you’re best advised not to file before you have the operation and will be out of work for a prolonged time or are unemployed with no early prospect of employment. Timing can be everything.

While the theory is valid, there are, of course, unusual circumstances under which you don’t have the luxury of choosing the time.

by: Eugene B. Berman, Esq.

Timing is everything when filing bankruptcy.

We are all aware that the timing of the filing of a petition - voluntary or involuntary - determines the time frame within which preference, fraudulent conveyance, and other claims can be asserted. A debtor may well delay a filing to protect a purported preference to a "friend" or to avoid claims ascertain insider preferences. Or visa versa: a petition may be filed to preserve the 90-day preference period so that an action can be undertaken. The consequences of when to file is one of the major considerations to be addressed by any entity contemplating the filing of bankruptcy.

One of the considerations frequently overlooked by debtors and their counsel is consideration of the most auspicious time to file for them. It is suggested that all too often a debtor files prematurely...at a time that things are bad but will probably get worse. An individual should not file when he loses his job...he should wait until he gets a new job. A business should not file at the first signs of trouble, it should wait until there is the beginning of a turn around.

The lesson is to bottom out before seeking relief in bankruptcy.

By: Eugene B. Berman, Esq.

Chapter 11 filings up 49%

Under the amended bankruptcy laws (BAPCPA), Chapter 11 is far more restrictive, costly and burdensome, but those factors have not prevented growing numbers of business bankruptcy filings over the past year.

According to statistics recently released by the Administrative Office of the U.S. Court, in fiscal year 2008, (which is the 12 month period ending 9-30-08,) Chapter 11 filings rose 49% from the prior 2007 fiscal year. The actual numbers were an increase to 8,799 from 5,888 cases.

In reviewing all types of business cases that were filed, the numbers show a jump from 25,925 cases to 38,651, which is a 49% jump.

The same increased filings are found in almost every type of bankruptcy filing, except for the rarely used Chapter 12 farm filings. Nationally, Chapter 7 liquidation cases were up 40%, while consumer wage plans under Chapter 13 were up 14%, but likely to continue rising with the continued foreclosure problems facing many people trying to save their homes.

In Massachusetts, there were a total of 15,636 filings, of which 11,525 were Chapter 7, 3957 were Chapter 13, 149 were Chapter 11 and 4 were for Chapter 12 cases.

It appears that bankruptcy filings are on pace to increase over the 2008 filings, so more record filings can be expected.

By: Michael B. Katz, Esq.

Creditors’ committee – what to do if you are invited

One of the worst mistakes that a creditor can make is to ignore the letter or telephone call from the Office of the United States Trustee advising that the creditor is “one of the top twenty creditors,” and extending an invitation to attend a meeting for the creation of a Committee of Creditors pursuant to Sec. 1102 of the Bankruptcy Code.

The best decision that the creditor can make is to immediately contact one of the bankruptcy attorneys here at Bacon Wilson.

Contrary to popular misconception, a creditor does have rights in Chapter 11 proceedings under the Bankruptcy Code. Although creditors generally choose not to participate in the process of the administration of a case under Chapter 11 because of the time and expense, the greatest right befalls to those creditors whose claims are of such an amount as to be one of the twenty largest creditors, that unfortunate group of creditors from which a Committee of Creditors is selected.

The burden of serving as a member of the Creditors’ Committee is the most significant “right” of a creditor because it allows the individual creditor to act in concert with others on the Committee in the interest of all creditors, at the expense of the estate, without the need for individual representation.

The method of selection of a Creditor’s Committee is mandated by Sec. 1102 of the Bankruptcy Code. The Committee of no less than three, nor more than eleven is appointed by the United States Trustee from among the twenty largest creditors.

Sec. 1103 of the Code provides that a Committee may:

1. Consult with the trustee or debtor in possession concerning the administration of the case;
   
   
2. Investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business and the desirability of the continuance of such  business, and any other matter relevant to the case or to the formulation of a plan;
   
   
3. Participate in the formulation of a plan, advise those represented by such committee of such committee’s determination as to any plan formulated, and collect and file with the court acceptances or rejections of a plan;
   
   
4. Request the appointment of a trustee or examiner under Sec. 1104 of the Code; and
   
   
5. Perform such other services as are in the interest of those represented. The single, most  important decision to be made by the Committee is made on day one, immediately upon the appointment of the Committee: the selection of its counsel. The selection is made by a vote of the Committee on nominations made by the members of the Committee.
   

The attorneys in the bankruptcy and insolvency department of Bacon Wilson are experienced in the representation of Creditors’ Committee and have a distinguished record of the successful advocacy of the interests of unsecured creditors. Information concerning those cases in which the firm and its attorneys have served is available on request, as is a list of references.

We urge our clients and friends to participate in the formation of a Creditors’ Committee when invited to do so and suggest that they promptly contact the firm before attending such Committee formation meetings. Bacon Wilson and its attorneys are available to serve as counsel to any Committee. We have experienced attorneys well qualified to do so.

Receipt of notification that you are one of the top twenty creditors is an opportunity for you to participate in the reorganization process and to assure that the Committee is represented by the counsel of your choice



by: Eugene B. Berman, Esq.

Tribune Co. filed for Chapter 11 protection on December 8, 2008

The publishing empire of the Tribune Co. was forced to seek protection under Chapter 11 on 12-8-08. The Delaware filing listed assets of over $7.6 Billion, and debts of $12.9 Billion. The largest creditors include JP Morgan Chase, Deutsche Bank, AG, Angelo Gordon & Co and KKR Financial Corp. The company is a huge media giant, led by Samuel Zell, which has eight major newspapers and a large number of regional television stations. It also owns the Chicago Cubs baseball team. The well-known papers include the Chicago Tribune, Los Angeles Times, Hartford Courant, Baltimore Sun, Orlando Sentinel and the Sun Sentinel of Ft. Laudedale, FL.

Zell attributed the filing to the approach of some major debt payments that were going to hurt the company’s cash flow, but other media reports indicate that notwithstanding Zell’s investments of over $300 Million last year, the Tribune Company’s debts ballooned and advertising revenue had been shrinking due to the weak economy and the shift of media ads to less-traditional outlets. This Chapter 11 filing is likely the first of many in the newspaper industry.

by: Michael B. Katz, Esq.

What are the big 3 auto makers hiding from the public in their quest for a bailout?

The efforts by the big three automakers to obtain a bailout – a loan – from the federal government, have an agenda that is not openly discussed: the social-economic significance and/or consequences of bankruptcy. Unfortunately the real issues involved in the efforts by General Motors, Ford and Chrysler are a hidden agenda to the public face, with efforts to obtain federal funds.

It is no accident that both management and labor have joined together to seek a bailout rather than to file for protection under the provisions of Chapter 11 of the Bankruptcy Code, which exists for resolving the very situations now facing the automobile industry. Why? One may ask.

The answer is rather simple once one looks past the rhetoric of “too big to fail,” etc. In a proceeding under Chapter 11, management is subject to review, stock ownership is subject to being superseded, and union pension funds and contracts are subject to rejection.

None of these sacred cows are subject to scrutiny in the type of bailout that has been requested. Indeed, even the demands for assurances of viability by the Democrats will put management, stock ownership and union contracts on the table.

There are pros and cons to pursuing either of the alternatives. A federally funded bailout would preserve the vested self-interests of management, shareholders and the unions. For GM or any of the big three to file would undoubtedly result in a rejection of the union contracts and result in a dramatic realignment of the wage scale in American industry. If it is true that the automobile industry would be more competitive if it did not have to pay taxes, how much more competitive would it be if it did not have to pay American standard wages to its employee?

It is no surprise that the Mitt Romneys of the world advocate for a filing. There are those who profit at the dismemberment of American businesses. There are Bain Capitals ready, willing, and presumably able to take over even giants like GM, and do what they do so well to the detriment to the target, and to their own profit.

Who says that determining if and when to file Chapter 11 is easy?  Sometimes the choices have consequences greater than those involving one company or even one industry. There are economic, political and societal consequences that must be considered.



by: Eugene B. Berman, Esq.

Bankruptcy filing statistics for the 12 months ending 6-30-08

In the District of Massachusetts, a total of 15,047 bankruptcy cases were filed in the 1-year period commencing on 6-30-07 and ending on 6-30-08.  In breaking down those numbers, a total of 10,643 cases were filed under Chapter 7; 154 cases were under Chapter 11;  3 cases were filed under Chapter 12;  and 4246 were Chapter 13 cases. 

In examining the breakdown of those cases between consumer and business cases, only 334 cases of the total were for businesses, and of those cases, they were distinguished into 184 Chapter 7, 134 Chapter 11,  3 Chapter 12 and  12 Chapter 13 cases.

Filings in every category but Chapter 12 and Chapter 11 remain strong, and it is expected that this quarter, ending 12-31-08, will show a growing number of cases being filed. The increase in filings is expected to continue to increase through 2009.


by: Michael B. Katz, Esq

Beware - creditors who join together to seek an involuntary bankruptcy petition may be jointly liable for both actual and punitive damages

Most creditors are aware that under Section 303 of the Bankruptcy Code they can commence an involuntary bankruptcy petition under either Chapter 7 or 11. To do so, three or more creditors who hold non-disputed bona fide claims of at least $12,300 in excess of any liens on the debtor’s assets can join together to file the involuntary petition.

If there are less than twelve creditors in total, only one or more creditors holding undisputed claims of the same aggregate amount can also file the involuntary petition. Creditors other than the original petitioning creditors are allowed to join in the petition.

The trap for creditors now is that in the event that the debtor contests the validity of the involuntary filing, and prevails, the Court may grant judgment against the petitioners for costs, reasonable attorneys fees for the debtor’s defense, plus if “bad faith” is found, also award an amount to pay any damages proximately caused by the filing, as well as punitive damages.

In a recent case decided by the Circuit Court of Appeals, Sofris vs Maple-Whitworth, Inc, et al, 48 BCD 245 (Bankr 9th Cir, 2007), the Court addressed the issue not of liability, but of the right of the losing party to seek contribution from other creditors who were not specifically named in the action seeking damages for the wrongful involuntary petition. In that case, the debtor recovered $42,257 from one creditor, and the creditor thereafter sought the right to apportion the liability among other petitioning creditors, who were not sued by the debtor. In this case there were five initial petitioning creditors, but subsequently, eleven other petitioning creditors were added.

The Bankruptcy Appellate Panel upheld the ruling of the Bankruptcy Judge that the debtor is not required to seek damages against all of the petitioning creditors, and turned down the defendant’s position that they should only be liable for their pro rata share of the judgment, and went into a lengthy discussion of the rights of those named to thereafter seek contribution amounts from the other creditors, but in separate legal actions.

What is the lesson to be learned here?

1. First, it is often not a wise decision to be a petitioning creditor in an involuntary bankruptcy, unless you are certain of the facts and the existence of insolvency, and that the reward greatly exceeds the risk.
   
2. Secondly, if you are going to join an involuntary, you should insist on either written indemnification from the lead player, or at least an agreement to share pro rata if there is a bad faith filing determination later on in the case.
3. Finally, it rarely makes sound business sense to join an involuntary petition, where there is already a sufficient number of petitioning creditors. Too often it is done as a show of “force” against the debtor, seeking to make it surrender the fight, and to seek to impress the Court with the depth of insolvency of the debtor, thinking that if three petitioners are adequate, ten must be better.

It is suggested that you as a creditor are far better off to stay out of the legal battle and sit on the sidelines, rather than to risk punitive damages for an ill-advised involuntary petition.

By: Michael B. Katz, Esq.