November 27, 2017

Bankruptcy filings decline, but experts at Business Law Fall Meeting predict the hits will keep coming

Despite major retail brands like Toys R Us, Sports Authority, Payless, The Limited, Gymboree, Hhgregg, Wet Seal, RadioShack and Gander Mountain all filing for bankruptcy this year, overall bankruptcy filings declined in 2017 from the previous year, according to statistics presented Friday, Nov. 17, during the ABA Business Law Section’s Fall Meeting in Washington, D.C.

“And that is a trend that has been going on since about 2009,’’ said Judge Christopher S. Sontchi of the U.S. Bankruptcy Court District of Delaware and a panelist on the CLE program “Bankruptcy for Breakfast.” “And what I think is interesting about the filings that really go back two or three years is a diversity of the Chapter 11 filings beyond just the cases in Delaware and New York, but we’re seeing big and medium cases but we’re seeing medium-size cases being filed in Indiana, Ohio, Illinois, Virginia and of course the southern district of Texas. That, I think, is an interesting trend that we’re seeing.”

According to panel moderator Katherine Good, a partner at Whiteford, Taylor & Preston LLC in Wilmington, Del., total bankruptcy filings for the past year ending September 30 were 790,830. That represented a 1.8 percent decline from 2016.  The number of Chapter 11 business filings was 23,109 and there were 767,721 non-business filings.

Regionally, however, some areas of the country were hit harder than other. Filings in the eastern district of New York were up 20.2 percent to lead the nation.

“I did not realize that we were No. 1 on the list,’’ said a surprised Judge Elizabeth Stong of the U.S. Bankruptcy Court for the Eastern District of New York in Brooklyn, N.Y. “I think it reflects the economy and reflects the profound need for the kind of relief that bankruptcy provides to business and to lenders. The need is ever greater for lenders and for business and we see across the board with the largest cases being the middle markets and small business.”

Panelist Javier Lorente, partner at Naveira, Truffat, Martinez, Anido, Lorente & Lopez in Buenos Aires, Argentina, provided a perspective on bankruptcy filings in South America. He said the pace of bankruptcies has been slow the past few years not because of the poor economy but because companies didn’t see the advantage to filing.

“Our corporations did not go into insolvency proceedings because they had no credit from the banks at all so it made no sense to file bankruptcy cases,’’ Lorente explained. “We did have certain liquidation cases, but I must also tell you there has been an increase in consumer bankruptcy during the last few years. But if I have to say some industries that have been hit hard in the last few years is oil and gas.” 

Indeed, oil and gas were among industries in the U.S. that showed trends in bankruptcy restricting and insolvency in 2017, along with retail and the shipping sector.

Since the start of 2015, 128 oil and gas producers filed for bankruptcy, according to Good. And service providers had 33 filings from January to July of this year, compared with 46 filings total in the same period of 2016. Also, depressed commodity prices continued through mid-2017, though they increased in the third quarter.

Good said one of the major factors affecting retail should come as no surprise — online shopping. “Amazon, interestingly, accounts for 53 percent of growth in e-commerce sales,’’ Good said. “But online retail overall has been growing very rapidly, which has resulted in a record number of store closings in 2017.

She predicts that the retail industry will continue to face challenges resulting from the 2005 amendments to the bankruptcy code that affects shipping dates for merchandise and debtor leases.

Shipping has undergone some significant changes going back the last few years, faced with issues of rapid decline in asset values, mobile assets in complex capital structures, lender distress and jurisdictional concerns about filing and asset locations, which are hard to centralize, according to Good.

An industry to watch, according to Good, is automotive. “There have been reports of decreasing sales due to Uber, longer lasting cars and decreased demand for new cars,” she said, also noting recent filings by seatbelt maker Takata and global upholstery supplier GST Autoleather.

So, what do the experts see ahead for bankruptcy issues and trends in 2018? Each panelist admitted it’s never good to make predictions, but they did anyway.

Good predicts there will be more complex cross-border cases “that are going to require communications between courts.”

Lorente thinks we will see more Latin American countries using Chapter 15 bankruptcy in order to gain discovery. “You take for granted discovery here in the U.S. Discovery is very broad here in the U.S., but not so much so in Latin America countries,’’ he said. “My second view regarding what’s coming next is avoidance actions coming from liquidation proceedings in South America enforced in Chapter 15 cases here in U.S.”

Sontchi points to more retail cases on the horizon. “I think we are only beginning the cycle of disruption in that industry that will last years. And I expect we’ll see more liquidations.”

Michael Rubenstein, a shareholder with Liskow & Lewis in Houston, said his initial answer to the question of what’s ahead in 2018, was more consumer filings in Houston because of the flooding caused by the hurricane. However, he expanded his thinking to include a broader problem of climate change.

“I think we’re going to see climate change drive filings,’’ he said. “Last year there were 508 Chapter 12 filings.” Chapter 12 allows family farmers and family fisherman to restructure their finances and avoid liquidation or foreclosure. “I think as climate change becomes more of a factor you are going to see a lot more of those types of cases.”

Stong predicts there will be a continued growth of bankruptcy filings in the middle-market, smaller business cases. “I think it is on us to make the process in these cases work as well as it possibly can in that sector, learning as much as we can from the practices that come of the bigger cases.”

And Sarah L. Cave, a partner in the New York City office of Hughes Hubbard & Reed LLP, sees more filings regionally outside of New York and Delaware. And she said blockchain technology is worth keeping an eye on in terms of how they affect financial transactions and what happens when those transactions fail.