Rosenstein Law Group

Bankruptcy laws have been changing a lot recently. Sometimes the effects of these changes are very obvious, but other times, the effects aren’t as obvious, and aren’t even felt until a few years after they’re enacted. Many of the changes have been made to strengthen debtor’s and trustee’s powers, and many individuals and companies have been feeling the pressure.

For example, bankruptcy reorganizations used to be extremely common. What is happening more and more these days is that instead of reorganization, the company is liquidated. This, in addition to a company shutting down, can cause many people to lose their jobs.

Back in 1983, the Lionel case allowed companies, instead of filing a plan of reorganization, to sell off some of their assets. What exactly could be sold was outlined in a “363 sale.” This was originally designed to allow companies with spoilable product to sell it off. For example, if you ran a grocery store and filed for bankruptcy, it allowed you to sell off your assets. This was later expanded to include the ability to sell off major assets, eventually including virtually the whole company. It was a quick way to avoid having to file a plan of reorganization.

A 363 sale works by a company publishing a desire to sell their equipment, and for 30 or 40 days, people have a right to object to it, judges can say “OK, sell it,” or if there is a higher bidder, the sale switches over to them. This can be an extremely successful way to make enough money to cover debts, but it always comes at the expense of jobs, and company owners losing control. Performing a 363 sale is effectively saying to everyone involved that your company is most likely not going to survive bankruptcy.

This change can be seen in how financially troubled companies act these days. It is common for companies to delay seeking financial help, hoping that the economy is going to turn around for the better soon.

That is the exact opposite thing that companies should do, though. It is important that companies seek financial help early on, before they’re completely desperate. Chapter 11 filings should be an absolute last resort, as it is virtually unsurvivable for smaller companies.

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Hostess Brands, Inc. has named a new CEO as of Friday, to help the company successfully emerge from its Chapter 11 bankruptcy reorganization, which was filed over a month ago.

Hostess Brands is known for their Wonder Bread, Twinkies, and Ding Dongs. They brought in 53-year-old Gregory F. Rayburn as CEO, replacing Brian Driscoll, whose resignation is effectively immediately. Rayburn has been working with Hostess since February, when he was hired as chief restructuring officer. He is now responsible for managing the company’s overall strategy, as well as overseeing all negotiations with the company’s union.

A recent statement published by Hostess states that they’re proud to announce Rayburn as CEO, and goes on to say that Rayburn has had a lengthy career of helping turn around troubled businesses. Rayburn has previously worked as the chief restructuring officer for WorldCom, which was the largest bankruptcy filing the country had seen up to that point.

Based out of Irving, Texas, the privately-held Hostess Brands filed for Chapter 11 bankruptcy in January, not quite 3 years after its predecessor, Interstate Bakeries, filed for bankruptcy. Back then, the company was based in Kansas City, Missouri, and they filed for bankruptcy protection in 2004. They changed their name to Hostess Brands Inc. when they emerged from the bankruptcy proceedings.

Lately Hostess has been struggling with increasing competition, and rising labor costs. All of Hostess’ 19,000 employees are unionized, which is different from most of its competitors. That means that Hostess faces drastically higher pension and medical benefits costs. Hostess has also been facing sales pressure, as lately Americans have become more health-conscious, and buy fewer snack cakes and white bread.

A spokesman for the Teamster Union for Hostess workers released a statement on Friday saying that they are surprised by Rayburn’s appointment to the CEO position, but that they will continue to work with Hostess towards a resolution that will be to everyone’s benefit.

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American Airline’s recent bankruptcy filing will definitely have some pretty far-reaching consequences in Arizona. What may not be so easy to tell is that the effect felt by Arizona’s 2 largest airports may be completely different.

In 1927, Standard Airways set up shop in Tucson International Airport. Since then, its successor, American Airlines, has been one of the largest airlines in Tucson. At Tucson International Airport, American Airlines is the 2^nd busiest out of all airlines, where it carries 23% of all passengers. Not only that, it has also been one of the fastest growing airlines, with passenger counts rising by 6.5% for last year. American Airlines is also one of the larger employers in the area, responsible for almost 750 employees in its southwest reservations office.

The same is not true in Phoenix, though. American Airlines came to Phoenix only a few years after Tucson, in 1930, but it doesn’t have even close to the same impact in Phoenix. American carries only 3.5% of all of Sky Harbor’s passengers, which puts it far behind both US Airways, which carries 46% of passengers, and Southwest, which carries 33% of passengers.

In November of 2011, when American Airlines’ parent company, AMR Corp., filed for Chapter 11 bankruptcy reorganization, the executives outlined a restructuring plan that would have them emerging from bankruptcy much more efficient, and future-proof. The plan outlined showed the biggest cost cuts in getting out of current airplane leases, and reducing their labor costs.

At the time of this announcement, US Airways executives as well as Delta Air executives expressed interest in acquiring American Airlines. At the same time, Delta made the surprising move of announcing that they were looking at possibly acquiring US Airways as well. Many analysts and airline executives praised the move, saying that the consolidation of airlines would be just what the industry needs, and that it will lead to much greater financial stability.

However the potential merger plays out, the US Airways brand could become a thing of the past. American Airlines, though in bankruptcy, is still the 3^rd largest airline in the entire United States, with 4^th quarter 2011 revenue of $6 billion. US Airways is currently the 5^th largest airline in the nation, with 4^th quarter 2011 revenue of only $3.2 billion. Delta is the largest of the 3, currently 2^nd largest in the nation, with 4^th quarter 2011 revenue of $8.4 billion. If the merger were to go through as Delta proposes, then the current Tempe headquarters of US Airways would likely move to either Atlanta, Georgia, Delta’s current headquarters, or Fort Worth, Texas, current headquarters of American Airlines.

Potentially causing further problems for the valley, the merger could put Sky Harbor’s position as a hub at risk. Sky Harbor wouldn’t add much value to American Airlines current hubs, Chicago, Los Angeles, and Dallas-Fort Worth. Sky Harbor’s strongest appeal would probably be for Delta Airlines, which would be likely to choose between Salt Lake City and Phoenix. Salt Lake City is currently a hub for Delta.

Airports are usually classified as hubs and spokes, and Tucson is at the end of a spoke. If Sky Harbor’s status from hub is downgraded, it could cause loss of flight service from Tucson to Phoenix.

There are some positive signs for airlines as well, though. 2012 started out much the same as how 2011 ended, with passenger counts declining. Tucson International Airport saw a 0.8% drop in passenger counts, but beneath that bad news is a silver lining.

The airport’s busiest airline, Southwest, reported declining passenger counts to the tune of 8.5%, but that was due almost entirely to temporary service pullbacks. The airline discontinued one of their four San Diego round-trips, and one of their five Las Vegas round-trips. Out of the 226 seats average daily capacity decline, that alone counts for 200 of them.

Total seat capacity for January 2012 was reduced by 3.4% compared with January 2011, but with total passenger counts down only 0.8%, that means that the planes that left Tucson International Airport were, on average, leaving with more seats full. That is good news to airlines.

Adding to the good news, last month, both Alaska Air and American Airlines significantly increased their capacity, as well as seeing passenger growth. Delta Airlines didn’t increase their capacity, but they also saw passenger totals increasing.

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Breaking the downward streak in bankruptcies, the number of bankruptcy filings in Phoenix saw a modest increase for the month of February.

For the valley as a whole, the number of filings was at 1,621 for February 2012. That number, which is still an 11% decline from February 2011, is an increase over January 2012’s 1,321 filings. According to bankruptcy experts, the increase in filings is mostly due to people using their newly-received tax refunds to pay for attorney fees and court costs.

The trend seen over the past 2 years as a whole has been declining numbers of bankruptcy filings month-over-month, due to the unemployment rate declining slightly and slow-but-steady economic growth.

Even though the number for February is an increase over January, it is still the 3^rd lowest number of bankruptcies seen in the past 2 years. Prior to the February numbers being released, bankruptcies had declined month-over-month for eight out of the ten prior months.

February’s growth was seen for the entire state of Arizona as well, with the total number rising from 1,795 in January to 2,160 for February. For the state, the February number is a decrease of 12% over February 2011.

In previous years, it has been fairly common to see the number of bankruptcies in February increase over the month prior as well, for the same reason of tax-returns being used for filing costs.

Scott Cohen, a Phoenix attorney at Engelman Berger PC said it makes good sense to wait until after you receive your tax return to file for bankruptcy so that you can use the refund money to help pay off student loans or any other debt that wouldn’t be discharged through bankruptcy. He goes on to say that if you file before receiving your tax return, then any refund money is almost always taken to pay off debtor claims.

For that reason, many bankruptcy experts say that January is historically among the less-active months for bankruptcy filings.

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The previous two entries have gone over how bankruptcy laws have changed recently, and how companies have been feeling extra pressure as a result. In this entry, Chuck Benjamin, a bankruptcy expert who has been in business for over 20 years, responds to being asked about who stands to benefit from these recent law changes, since individual companies don’t seem to.

When asked, Benjamin responded “the LaSalle decision and the Bankruptcy Abuse Prevention and Consumer Protection Act have given unsecured creditors a huge advantage, and the result is the cost of bankruptcy has gotten so high — because of professional and other costs — that the ability to continue the company under current ownership has reached almost zero. I understand the plight of unsecured creditors, but everyone who sells on unsecured account understands the risk. Every businessman understands this when he sells and makes a credit decision.”

The market has been tough on everyone recently, but it seems like the power has shifted too strongly into the hands of the creditors. When a creditor makes the business decision to lend money to a company, they used to have an equal risk in that company’s decisions. Nowadays, if lending to that company was a mistake, the creditor has a lot more immunity from the fallout, leaving the company itself to absorb all of the financial hardship.

Benjamin goes on to say “You know that old saying, ‘Let the buyer beware’? I think it’s every businessman’s responsibility to know to whom he sells and offers credit. If I sell to you and you begin to pay very slowly — which often happens before a bankruptcy — I should stop selling to you on credit. But if I continue to sell to you to make a buck, it’s not your fault, it’s mine.”

He makes a good point in saying that creditors are business as well, and should be held as much responsible for their lending decisions as the company they lent to.

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In an interview with the New York Times, bankruptcy expert Chuck Benjamin has been talking about recent changes to bankruptcy law, and how they can adversely affect some businesses who seek to restructure through bankruptcy. In the previous entry, he mentioned how tightening bankruptcy laws can work against the premise of bankruptcy law, in that owners of companies are more likely to be forcibly removed from their companies, which leads them to fight less hard for the company’s survival.

When asked about what recent laws lead to this change, Benjamin responded: “First, the Supreme Court’s 1999 LaSalle decision basically meant that any company that entered bankruptcy was on the market and could be bought either whole or piecemeal. And then in 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, and that changed the face of Chapter 11 for privately held businesses. No. 1, B.A.P.C.P.A. changed the landlord’s position. It limits the time to just seven months for debtors to decide whether to accept or reject the lease in bankruptcy. It used to be you could get extended almost forever the time you could accept or reject a lease. Now they have seven months. That’s not a long time to decide which locations to close while you’re in trouble and you’re trying to work through all kinds of other issues.”

Large corporations require a much larger amount of time to make decisions such as how exactly to restructure, so this puts an incredibly large amount of pressure on businesses, which can lead to hasty decisions, or being unable to come to a decision in time.

Benjamin goes on to say “the second change is exclusivity, that is, the debtor’s exclusive right to file a plan of reorganization. It used to be you had all kinds of extensions. Sometimes bankruptcies used to take two, three, four, five years. I had one that was in Chapter 11 for seven years. But it survived. Now you have 18 months where the owner has the exclusive right to file plans for reorganization. Unsecured creditors know that after 18 months they can file a plan excluding the debtor. After you’re in Chapter 11 for eight or 10 months, creditors say, ‘I’m just going to hang on. I’ll file my own plan and take over the company. Or after 18 months we’ll just liquidate it.’ It’s hard to see anything positive about a bankruptcy that takes seven years. Sometimes staying in bankruptcy a longer time was better, because it gave a debtor time to catch its breath.”

When it comes to these companies, there are many jobs on the line, and entire communities can feel the hurt when a company files for bankruptcy and shuts down, so putting extra time pressure on companies is not always the best solution. Since these changes in bankruptcy law are fairly recent, it remains to be seen just how large of an impact they will have in the long run, but some companies are already experiencing difficulties.

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Bankruptcy law has changed a lot recently, which can be good for some potential filers, but some businesses are also feeling the squeeze.

Chuck Benjamin, who has been working as a turnaround consultant for privately-funded companies with annual revenues between 25 and 50 million, has been in business for over 20 years. His company, Benjamin Capital Advisors of Rye Brook, N.Y. and Boca Raton, Fla, has handled over 70 cases during that time. Benjamin says that his “endgame is to save companies, hopefully for their owners.”

Benjamin says that the recent changes to bankruptcy law, which have given far more power to unsecured creditors and have made bankruptcy more expensive, have made bankruptcy proceedings a lot more difficult in recent years. He goes on to say that these changes have pushed many financially troubled companies into liquidating all of their assets rather than restructuring the company, which ends up eliminating the owners of the company in question, as well as many of the jobs at the company.

When asked about how he thought the bankruptcy process was broken, he responded with: “When bankruptcy evolved, it was to protect debtors, the owners. The whole concept was forgiving debts or restructuring so the business would survive in the hands of the owners. But the rules have changed over the years. Today, if they have to go into Chapter 11, the odds of the owners keeping the business are much lower. So there’s no incentive for the owners to enter Chapter 11 and reorganize. Why save a company for somebody else?”

He raises a good point, in that it’s always a good idea to have someone who is a part of the company fighting for its survival, rather than someone who isn’t invested in that company’s future.

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When it comes to bankruptcy, the number of people who file isn’t the only statistic that is increasing. In fact, it’s not even the fastest growing statistic. The number of people who file for bankruptcy without any legal help is outpacing many other statistics, which outlines an important issue.

A report from the Administrative Office of the U.S. Courts states that total bankruptcy filings for the United States as a whole have increased by almost 100% over the past 5 years. For the exact same time period, pro se bankruptcy filings, which means individuals representing themselves, have increased by almost twice as much, 187%.

A Tucson-based bankruptcy attorney, Eric S Sparks, says “I think a lot of it has to do with costs,” and that the average Chapter 7 Bankruptcy can cost upwards of $2,500. That may not seem like an exorbitant amount of money to pay, but that fee can make a huge difference to someone who is already experiencing financial hardship.

Chapter 13 filings are even more expensive, often costing upwards of $4,500. They are the more attractive of the 2 bankruptcy plans though, since if the filer has a steady source of income, they are allowed to set up a debt repayment plan with their creditors.

While pro se filings increased by 187% from 1998 to 2005, they have increased by even more since then. Over the 3 year period from 2007 to 2010, the number of pro se filings increased by over 300%, rising from 2,700 in 2007 to 8,700 in 2010.

Fitting in with the most recent trend of decreasing number of bankruptcies, however, pro se figures from 2011 decreased slightly, with only 8,010 filings.

When it comes to the country as a whole, Arizona Federal Bankruptcy Court recorded one of the highest percentages of pro se filings, making up over 20% of all bankruptcy filings in 2011. The only districts that had more pro se filings than Arizona were the central and eastern districts of California.

Please stay tuned to the next entry, in which some of the dangers of pro se filings will be outlined.

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There is a pivotal scene in the hit movie Jerry Maguire, where Tom Cruise’s character, which was modeled after one of the most famous sports agents of all time, Leigh Steinberg, gets drunk as a result of losing his biggest clients, his job, and his girlfriend all in one fell swoop.

Not known for being realistic, Hollywood then shows him sobering up the very next day, getting back to work, and as a poster-child for “it’s never too late,” he eventually finds the real meaning in his life, getting a new girlfriend, and a contract for the only loyal client he has left.

While the movie may be based on the real life of Leigh Steinberg, it differs in two key aspects: Steinberg didn’t sober up after only one night of drinking, and eventually he found himself with no NFL clients at all.

At one point the most prolific NFL agent of all, representing half of all the starting quarterbacks, and representing the first pick in the draft 6 of 7 years, Steinberg hasn’t represented a single NFL player in 5 years. He also doesn’t live in a lavish house on the Orange County coast as Tom Cruise’s character did, or work in a Newport Beach office with a view of the ocean.

The much harsher reality is that nowadays, Steinberg lives in a leased townhouse, and works in a small building in the industrial park area of Irvine, California. True to the movie, although a few years delayed, he is trying to find the true meaning in his life, working through a recent bankruptcy, hoping to one day represent athletes again.

If the ending of Jerry Maguire had been true to life, it would have shown a much bleaker picture, of Steinberg suffering a string of business setbacks, arrests due to alcohol, and a divorce, leaving him broke and drunk.

According to Steinberg, he used drinking as a means to escape his problems. As is usually the case, however, he found that it only served to make his problems worse. He went on to say “I found out a very dangerous thing. It is legally permissible to consume alcohol in the light of day. At the end, I got to the blackout point, where I just couldn’t remember things. I was unreliable. I could never tell what was going to happen.”

The worst for Steinberg came in March of 2010. It was at that point that he agreed to start attending a 12-step recovery program that he had previously tried and failed at prior points in his life. Although he won’t release details due to the anonymous nature of the program, he currently attends regularly, has a sponsor, and works all the 12 steps. He goes on to say that he has been sober for over 700 days, and that his 2-year birthday will be on March 21.

There had been a lot of whispers and rumor of his health, be it physical or financial, and he addressed them all last month when he released a statement explaining how alcoholism had caused many of his problems. At the same time, he filed for bankruptcy.

According to Steinberg, going public was extremely liberating. He went on to say “I am an alcoholic today and will be for the rest of my life. I don’t want anyone else to go through the pain and denial that I did. You only live this life once. I still think I can be of service.”

Steinberg openly admitted that his alcoholism has caused a lot of emotional and financial harm to people he cares about, but also that he has friends who have stuck by him through this entire process.

One of those friends is June Jones, longtime client and friend, and SMU football coach. When asked about Steinberg, he says “Leigh always had the athletes’ best interests in mind. He was so different from everybody else. He’s a special guy. He’s got a big heart.”

According to Steinberg, he avoided filing for bankruptcy as long as possible out of a moral obligation he felt in regards to paying his debts. He also said that ultimately it was necessary, and that while the proceedings have been embarrassing at times, the most important thing is his sobriety, and his ability to be of service to others.

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Do you owe money to your bank and have a savings or checking account with the same institution? If your answer was “Yes,” then you need to know that the bank may apply the money in your savings or checking accounts to pay down or pay off the loan you took from it. As your Arizona bankruptcy attorney will tell you, this is a common occurrence as many individuals borrow money from their banks for car loans, RV and boat loans, personal loans, and mortgage loans.

Although it may be a comforting concept, your cash isn’t really sitting in the bank vault. When you give the bank your money, you become a creditor of the bank and it has to pay you back. When you owe the bank money, you become a debtor of the bank. So when an account holder’s loan goes into default, the bank will take action on its behalf to remedy the situation.

Understanding the Bank’s Right of Setoff

As explained by our Arizona bankruptcy attorney, this right of setoff allows the bank to take the money it is holding and pay down the debt owed to it without further notice or consent from the account holder. An account holder usually finds out about the bank’s set-off after the money is simply missing from the accounts.

What action can you take? When you owe money to the bank where you do business, an Arizona bankruptcy attorney will advise you to consider opening a separate bank account at a different institution and deposit your funds there – a bank where you have not done business before and where you do not owe money.

Do not close the accounts at the bank where you are a debtor without first discussing the loan status with your Arizona bankruptcy attorney. You could make matters worse and violate the covenants in your loan agreement by closing your accounts there. Instead, maintain the minimum balance required on those accounts. But start depositing your paychecks and other checks into the new bank account that is free from setoff. Remember, as soon as you borrow money from any bank, any accounts you hold with that bank may be subject to setoff by that financial institution.

Arizona Bankruptcy Attorney Prepares Debtor for the Trustee’s Role

Filing for debt relief under the U.S. Bankruptcy Code necessarily requires that the debtor surrender control over his or her debts to the court and give the reins to the trustee assigned to administer the case. This doesn’t mean that the petitioner is prohibited from paying for necessaries such as food, utilities, and rent without the court’s permission. Filing for bankruptcy does mean that the debtor must disclose all payments to creditors made in the 90 days preceding the bankruptcy. And if the payment was made to an insider, such as a family member, then the debtor must disclose all of those payments made in the previous year. What we are referring to now is the debtor’s preferential treatment of one creditor over another.

Those payments made to creditors and insiders in the period preceding the bankruptcy are scrutinized by the case trustee. The case trustee is looking for extraordinary payments that could be preferential. An Arizona bankruptcy attorney would describe a payment to a creditor as potentially preferential if it put that creditor in a better financial position than it would have been in the bankruptcy case absent that payment.

Bankruptcy is about fairness to equally situated creditors, so the debtor is not permitted to pick and choose one creditor over another without evidence of an extraordinary circumstance. The petitioner’s $5,000 payment to Uncle Harry six months before the case is filed, for example, will certainly involve further investigation into the circumstances surrounding that payment by the case trustee.

At the Rosenstein Law Group, we know that every individual debtor’s circumstances are unique. When representing a Chapter 7 or Chapter 13 client, our Arizona bankruptcy attorney will analyze the nature of every debt and creditor, determine any potential bank setoff, and examine every insider payment so that the client is fully prepared for the case trustee’s administrative course. When you need experienced bankruptcy representation and advocacy, contact our offices any day of the week 24/7, and arrange for your free initial consultation.

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