California Business Bankruptcy Lawyer & Attorney : Klein DeNatale Law Firm : Bakersfield, Kern County, Central California

Greetings from the trenches.  As the economy has slowed down, business has picked up for those of us in the insolvency world.  Just like many of you, this has kept me busy and unable to attend to the blog as I wish.  But I came out of my hole to let you know about a survey being conducted by the ABA Journal.

Effects of the Wall Street crisis have spanned the country, and the ABA Journal is surveying lawyers for their thoughts on the economy. Please take this brief 2-minute survey.

Survey results will be published in the January ABA Journal. Answers will be kept confidential and used only in combination with all other responses received.

Take the time to add your input.

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According to data released by the Administrative Office of the U.S. Courts, and discussed in the Los Angeles Times, nearly one million bankruptcy cases were filed between July 1, 2007, and June 30, 2008--a total of 967,831 cases.  That represents a 28.9% increase over the preceding 12 month period.  And, as discussed on  the ABI web site, based on that same data, bankruptcy filings have increased 29.2% in the first half of 2008 relative to the same time period in 2007.

Leading the way in bankruptcy filings is the Ninth Circuit, in particular California.  Filings in the Ninth Circuit increased by a staggering 60.9%.  This is, of course, no surprise given the catastrophic impact that the real estate downturn has had on the California economy over the last year and a half.

Nationally, Chapter 7 filings increased by 36.7%, Chapter 13 grew by 16.9%, Chapter 11 increased by 30.6%, and Chapter 12 filings actually decreased by 18.7% when compared to the prior 12 months.

As steep as the increases appear, the total number of filings still has a long way to go to match the total amount of filings of even two years ago, as revealed by the Administrative Office's data.  For example, take a look at this spread sheet.  In the period July 1, 2005 through June 30, 2006, the total number of filings was nearly 1.5 million.  Data shows that the years prior to 2006 had similar amounts of cases initiated. 

Therefore, although the new data indicates a steep incline, the aggregate filings are still below historical levels.

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Making headlines today is the release of the Standard & Poors/Case-Shiller Home Price Indices.  According to this index, there was a nationwide decline of 15.8% in home values in May when compared to the same time last year.  In Los Angeles, as noted by the Los Angeles Times, the decline is much more distressing:

The Los Angeles area saw a 24.5% May price decline from a year ago and also hit a record low annual decrease.

As many of you remember, we endured a real estate downturn in the early to mid nineties that resulted in a similar percentage decline, but with a major difference:

The Los Angeles decline from the peak now matches the 1990's real estate downturn, but has occurred in less than two years. In the previous real estate cycle, Los Angeles area prices declined more gradually, falling 27% from 1990 to 1996 before stabilizing, according to the Case-Shiller index.

What does the rapid decline mean to the bankruptcy world?  With the present decline compressed to a period of only two years, versus seven years in the nineties, it seems inevitable that the volume consumer bankruptcy filings will increase--as has already happened--as families come under increasing financial pressure.  This pressure is on all fronts as the price of consumer goods increases and families do not have the fall back reserves of equity that they would usually rely on. 

But commercial bankruptcy is also becoming more prevalent as the real estate and oil price woes are impacting sole proprietorships and closely held businesses, along with the headline-making corporate bankruptcies.  Chapter 11 filings in the first quarter of 2008 were up 61.5% over the same period in 2007 (200 in 2008 and 123 in 2007).  While not historically record breaking when compared to the 1990s,  the quantity of Chapter 11 filings indicates an upward trend that may only now be catching up with the declining economic conditions of the country.

If you would like to go deeper into the home price data, access the historical data for this index at the Standard & Poor's website.

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As the subprime crisis deepens and grows and the potential for recession increases, the effects are seeping into other industries as consumers are tightening their belts in order to afford food and gas.  Michael Barbaro of the New York Times discussed the effects on retailers in a recent article:

Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.

But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.

Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.

The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.

Our own insolvency practice here in Bakersfield has felt the impact of this upsurge in bankruptcy filings generally, and retailers in particular.  Recently the firm has filed two new Chapter 11 cases with another ready in the next week or so (an incredible rate for a relatively small market).  It appears that the window for bankruptcy attorneys to take a vacation has passed and the ramp up for coping with increased case loads must shift into high gear as more and more regional retailers enter the "zone of insolvency" and seek the help of a bankruptcy professional. 

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As if the increase in filings under all chapter of the bankruptcy code and the heavy workload we are all experiencing weren't enough evidence of the demand for competent bankruptcy counsel, a new survey conducted by a recruiting firm and discussed in the ABA Journal confirms that fact:

A new survey has found that lawyers expect bankruptcy to be the hottest growth area for law firms this year. That’s no secret to law firm managers who are already beefing up bankruptcy practices.

One out of four lawyers surveyed said the fastest area of growth would be in bankruptcy work, exceeding the number who designated corporate governance and litigation as the sectors most likely to see increases, the Wall Street Journal reports. More than 300 lawyers from large law firms responded to the survey by Robert Half Legal.

Managers at two law firms told the newspaper they are already adding more lawyers to their bankruptcy and restructuring departments.

Gregory Milmoe, the co-leader of the corporate restructuring department at Skadden, Arps, Slate Meagher & Flom in New York City, said demand for bankruptcy services at his firm has “emphatically increased.” His group has increased by 17 lawyers and he expects three more will be added over the next two months. In January and February, the department billed 45 percent more hours than the same period last year.

Marshall Huebner, who co-chairs the bankruptcy group at Davis Polk & Wardwell, said his lawyers are “extremely busy.” The firm cross-trains lawyers and has moved 15 of them from banking and litigation work over to the bankruptcy department.

The survey results are good news for lawyers with three to five years of experience in bankruptcy practice who want to move to a new job, said Charles Volkert, executive director of Robert Half Legal.

"Hands-on experience really matters,” he told the Wall Street Journal. “Legal professionals who are able to demonstrate a proven track record in that area are in demand."

Now more than ever is a great time for bankruptcy practitioners.  Keep on truckin'!

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There is an interesting statistical tid-bit posted on the American Bankruptcy Institute web site today concerning the increase in consumer bankruptcy filings and their connection to the sub prime mortgage crisis: 

U.S. consumer bankruptcy filings increased more than 30 percent nationwide in January from the same period a year ago, according to the ABI relying on data from the National Bankruptcy Research Center (NBKRC). While the consumer filings for January increased from the previous year, the data showed that the overall January consumer filing totals were flat from December. Chapter 13 filings constituted 40.05 percent of all consumer cases in January, a slight increase over December. “With over one million more subprime adjustable-rate mortgages due to reset during 2008, the payment shock for many households could lead to higher bankruptcies this year,” said ABI Executive Director Samuel J. Gerdano. The overall consumer filing total for the 2007 calendar year (Jan. 1 – Dec. 31, 2007) reached 801,840, nearly a 40 percent increase from the 573,203 filings recorded during the similar period in 2006. Click here to view the updated monthly consumer filing charts.

With consumer cases building in volume, it is logical to conclude that Chapter 11 filings will increase, especially for businesses involved in residential construction and mortgage lenders.  One example of the fallout from the mortgage debacle also appears on the ABI web site just below the above story:

New Century Financial Corp. and its creditors filed a chapter 11 plan yesterday that does not say how the company plans to pay creditors who have filed $35 billion in claims against it, the Associated Press reported yesterday. Once one of the country's largest subprime lenders, New Century raised only about $235 million by selling assets in its bankruptcy liquidation, according to documents filed Saturday in the U.S. Bankruptcy Court in Wilmington, Del. New Century's chapter 11 plan said that negotiations are underway that could cut the amount of claims filed in the case. Creditors filed $23.7 billion in secured claims and $10.5 billion in unsecured claims. Read more.

Another example of sub prime mortgage related failures is the Chapter 11 filing on friday of Wickes Furniture as noted in the Chicago Tribune:

Wickes Furniture Co., hit by the downturn that has hit furniture retailers in the wake of the housing industry's big slump, filed Sunday for Chapter 11 bankruptcy protection.

Wickes, based in Wheeling, is owned by Sun Capital Partners Inc., a Boca Raton investment firm that specializes in leveraged buyouts and other transactions.

In its filing with the federal bankruptcy court in Wilmington, Del., Wickes declared that it has assets of between $10 million and $50 million, and estimated its liabilities at between $50 million and $100 million.

The trade magazine Furniture Today reported in mid-January that Wickes Furniture was asking suppliers to sign an agreement that would postpone the company's repayment of overdue debt until mid-2009.

When viewing these sub prime mortgage related bankruptcy news items, one can't help but get the feeling that this is just the tip of the iceberg.  Things could be become very busy very fast for all reorganization professionals.

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The prominent bankruptcy and reorganization law firm of Shearman & Sterling recently announced the following on its web site:

Beijing, 8 October 2007—Shearman & Sterling has advised China Minsheng Bank (“Minsheng”) on its investment in UCBH Holdings, Inc. (“UCBH”) (NASDAQ: UCBH) the holding company of United Commercial Bank. This transaction marks the first Mainland Chinese bank to successfully make a strategic investment in a U.S bank.

Under the terms of the agreement and subject to regulatory approvals, Minsheng will acquire an aggregate 9.9% ownership interest in UCBH, with a mutual option to increase the ownership to 20% by 2009 in two phases. In the first phase, which is anticipated to close in the fourth quarter of 2007, UCBH will issue approximately 5.4 million shares of its common stock to Minsheng, following which, Minsheng will own 4.9% of UCBH.

More on this story can be read here and here.

The Boston Globe noted that "[t]he deal may herald a string of strategic investments by cash-flush Chinese financial firms in the United States and the rest of the world in coming months and years . . . ."  This begs the question:  Is this a good thing or a bad thing?  The United States Treasury Secretary believes that it is a good thing: 

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson on Tuesday said that foreign investment in the United States by China or any other government was a good thing and had always been a feature of the country's open economy.

"I very much welcome investment in our country by all foreign nations, including China," Paulson told a conference on U.S.-China relations in answer to a question.

Paulson hosted a dinner for sovereign wealth funds on Friday in Washington after a meeting of Group of Seven industrialized powers in order to improve the dialogue with these government-controlled investment funds, and he found nothing sinister in their motives.

"From everything I could see, the intent and the practices of either all or the vast majority (of sovereign wealth funds)...were economically driven," he said.

With money switching directions and coming into the United States from China, rather than the other way around, Chinese investment in the U.S. has the potential of lessening the ridiculously large trade deficit between the U.S. and China.  On the other hand, pundits have warned that Chinese investment in U.S. markets could threaten U.S. security.  In fact, there is a committee within the Treasury Department specifically tasked with analyzing the national security threat of any potential Foreign Direct Investment:  The Committee on Foreign Investments in the United States.

To bring this post in line with its stated purpose, to discuss bankruptcy issues, the increase in foreign investment in U.S. industries heightens the possibility that any Chapter 11 will have an international flavor--with creditors filing claims from around the world.  Only this last month KDG represented a potentially insolvent client that was subject to commercial arbitration in Hamburg, Germany, with a European supplier of a Chinese product.  Bankruptcy professionals must be prepared to represent clients in an international marketplace.  I am proud to work for such a firm.

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