Recent Developments

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Business Bankruptcy Issues Recent Developments

Texas District Court Holds Part Of New Bankruptcy Law Unconstitutional

In a decision on Wednesday, July 26, 2006, the United States District Court in Dallas ruled that a portion of the new bankruptcy law, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (also known as BAPCPA), unconstitutionally restricts attorneys when they provide legal advice to their clients. 

These provisions were part of BAPCPA’s focus on consumers and the restrictions were aimed at preventing attorneys — who are apparently included within the term "debt relief agency" under BAPCPA — from advising individuals, among other things, to take on more debt if they are contemplating bankruptcy.  The court also held that other related provisions were constitutional, specifically one requiring disclosure of certain specific information to individuals who are considering filing for bankruptcy.

While the decision does not affect businesses directly, it’s important to know when a court holds part of the bankruptcy law unconstitutional.  For those interested in learning more about the decision and the consumer-related provisions involved, I recommend that you read David Rosendorf’s excellent post on the American Bankruptcy Institute’s BAPCPA blog and Steve Jakubowski’s equally informative post on his Bankruptcy Litigation blog.

Recent Developments

Trade Credit Insurer Predicts Increase In Corporate Insolvencies in 2007

Euler Hermes, a trade credit insurer, predicts that corporate insolvencies in the United States will increase by 8% in 2007, after a predicted decline of 5% for the full year 2006.  By contrast, 2005 saw a 14% increase, in part because companies filed bankruptcy before the new bankruptcy law took effect on October 17, 2005. 

Among the economic reasons given for the anticipated increase in insolvencies next year:

  • The cooling of the U.S. housing market
  • High energy prices, and
  • The lagging effect of the Fed’s tightening of interest rates.

The press release on the report includes an interesting graph showing the changes in the Euler Hermes Global Business Failure Index over the past dozen years.  It also provides information on changes in predicted 2006 and 2007 insolvency rates for more than 30 countries and regions worldwide. 

This new analysis is consistent with the results of last month’s Turnaround Management Association survey, discussed in a post earlier this week. 

Recent Developments

Defaults And Restructurings — Will 2007 See An Increase In Both?

The Turnaround Management Association, an organization of turnaround professionals, has announced the results of its June 2006 credit availability survey.  In short, the survey results show relatively good credit availability now but suggest that there may be increasing defaults in 2007.  

The TMA press release on the survey has a very interesting discussion of the results and a chart graphically shows a comparison of the credit availability results over the last five years.  The full poll results are available here.

While default rates may be relatively low now, 76% of those responding to the TMA survey believe there will be a significant increase in the debt default rate by the end of 2007.  If they’re right, we could be in for a bumpy ride next year.

Business Bankruptcy Issues Recent Developments

Chapter 11 Cases: Using The Internet To Keep Track Of Case Developments

A fairly recent phenomenon, especially in large Chapter 11 bankruptcy cases, is the special website designed to help creditors and others keep track of developments in a particular reorganization case.  Among active cases right now, for example, you can follow the latest activity in the Delphi Chapter 11 case, the Refco bankruptcy, and the Delta Airlines case.  These websites generally have information about the attorneys representing the company and the creditors’ committee, an electronic docket of pleadings filed in the case, access to a proof of claim form, and announcements about major events in the case.  

Many companies in Chapter 11 reserve a section of their corporate website for updates on their reorganization efforts, and they often make pleadings and other documents available there.  Adelphia is just one example.

Regardless of whether a special website has been created, you or your attorney can also obtain access to the pleadings and other documents filed in a Chapter 11 case (and any other type of bankruptcy case) through the relevant bankruptcy court’s PACER system.  Another system, called Case Management/Electronic Case Files or CM/ECF, typically is open only to attorneys and other bankruptcy professionals with a need to file pleadings in a bankruptcy case.  Both services require pre-registration and payment of downloading or other fees where applicable.

Business Bankruptcy Issues Recent Developments

Will The New Bankruptcy Law Affect Your Business?

On October 17, 2005, the most significant revision to U.S. bankruptcy law in a generation took effect.  If you followed the media’s coverage of the new law before it became effective, you could easily have assumed that the changes were aimed only at consumers filing bankruptcy to get rid of credit card debt.  There is no question that the new law, called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (bankruptcy lawyers just call it BAPCPA), was aimed at, and affects most significantly, individual consumers.  David L. Rosendorf of Kozyak Tropin & Throckmorton, P.A., in conjunction with the American Bankruptcy Institute, maintains an entire blog devoted to the new law’s changes and how it is being implemented.  His blog has a natural focus on those consumer changes.

However, the surprising news is that the new bankruptcy law changes also contained a host of provisions that will affect businesses.  Many bankruptcy lawyers (this one included) think the law will make it more difficult for some businesses to reorganize, which could end up reducing recoveries for unsecured creditors.  That said, other provisions in the new law benefit certain unsecured creditors.  For an overview of how the new law will affect businesses and their creditors, look here or here — and stayed tuned.