August 26, 2010
The National Association of Credit Management (NACM) recently created a new issue brief that focuses exclusively on the Bankruptcy Code's preference statutes. This dovetails with the association's 2009 Issue Brief that addressed NACM's concerns with the entirety of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005.
Discussions of the preference-specific issue brief began within NACM's Government Affairs Committee, chaired by Ronnie Archer, CCE. Preference reform has been the centerpiece of NACM's legislative agenda for the last year, and this new document is consistent with the idea that debtors, rather than trade creditors, should be responsible for proving if a payment was preferential. Currently, trade creditors receive preference demands for payments received by the debtor within 90 days of the debtor's bankruptcy filing, and are then forced to go to court to fight them. NACM's suggested changes would require that the debtor prove a payment was preferential and not protected by the Code's preference defenses before even issuing the demand letter to the creditor.
Formerly, NACM suggested that changes be made to two subsections under Section 547, which is the portion of the Bankruptcy Code that addresses preferences. Now, NACM's proposed legislative change only affects one portion of the Code, adding two new subsections to 547(b), which provides the statutory requirements the trustee needs to prove in order to compel a creditor to return a payment received from the debtor. The two new subsections would force trustees to consider the defenses available to trade creditors before issuing demands. For example, if a trustee finds that a payment had been made to the creditor in the ordinary course of business, the trustee could not issue a preference demand for that payment.
The second subsection NACM has sought to add to Section 547(b) would limit the amount of a preference claim by reinstituting the "net result" rule, which existed prior to the adoption of BAPCPA. This would mean that the amount of a preference claim could only be as high as the difference between the new value given to or for the benefit of the debtor and any payments received by the creditor from the debtor within the 90-day period. This would simplify the issues surrounding new value defense and, again, force the trustee to consider these items before issuing the preference demand.
A full copy will be released shortly on NACM's Credit Real-Time Blog and on NACM's Advocacy page. If you have any questions or concerns regarding NACM's position or suggested changes, please send an email to email@example.com.
Jacob Barron, NACM staff writer
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As newspaper and other print media ventures continue to struggle amid poor advertising revenue stemming from the down economy as well as losses in readership and classified placements to often free online competitors, the specter of bankruptcy reorganizations appears an ever-present threat to the industry. And three ongoing proceedings are proving that emerging from bankruptcy is far from easy in the news world, as well.
Two media companies trying to exit bankruptcy in the last week suffered significant setbacks and another faces a tight deadline as negotiations to garner concessions from a powerful workers union were completed with only a week to spare before the sale's deadline.
"This is a symptom of fewer people reading papers," said Bruce Nathan, Esq., Lowenstein Sandler PC. "They're overleveraged, the bad economy means ad revenues have dropped and consumer demographics have changed. This is a deadly combination. I mean, I don't even get the paper anymore. I read the [New York] Times online, and I'm an old goat." Nathan added that publishing companies largely realize they have to segue into a different product model, one that will take a lot of thought, investment and time to reach. However, already overleveraged companies may simple run out of time to create a long-lasting business model change.
Tribune Co., publisher of the Los Angeles Times, Baltimore Sun and Chicago Tribune, among others, watched as its plan to exit bankruptcy evaporated in part from an organized effort from lower-level creditors to scuttle a deal that was negotiated primarily with and to the overwhelming benefit of higher-ranked lenders. Many creditors cried foul over what appeared to be a deal that would leave smaller stakeholders with little to nothing. Perhaps even more importantly, some larger creditors who formerly supported the Tribune's plan to exit bankruptcy withdrew support amid widespread allegations that the 2007 leveraged buyout of Tribune, which also owns more than 20 television stations among its diverse assets, essentially amounted to a massive fraudulent financial transfer. There are also reports circulating that a group of unsecured creditors will file their own Chapter 11 reorganization plan without the support of Tribune. Now, all of the sudden, Tribune wants to bring a new deal to the table in the coming days that's seen as more fair to various creditor groups.
Meanwhile, the buyout of a much smaller, Ohio-based newspaper chain fell apart largely because of the collateral damage tied to the lackluster economic rebound. A group of company insiders operating as Brown Media Corp. garnered a bankruptcy judge's approval for the right to purchase the struggling Brown Publishing Co. in the U.S. Bankruptcy Court for the Eastern District of New York. However, the new group's lender pulled its support at the 11th hour, leaving it unable to buy the struggling publisher for the agreed $22.4 million. Moreover, the existing publisher noted it only has court authorization to use cash collateral to remain in operation through Labor Day weekend and will have to shutter all operations without some type of continuance.
One publisher bankruptcy case that appears less bleak, but still with its share of stress, is that of Philadelphia Newspapers LLC, publisher of the Philadelphia Inquirer and Philadelphia Daily News. A creditors' group that won an April auction for the publisher's assets despite an odd ruling that barred the use of an increasingly popular credit-bidding tactic, has finally struck a deal with a strong local union. The Philadelphia Newspapers Guild agreed to concessions that include significant pay cuts for its member employees and seven pension fund managers agreed to drop an appeal against the group's purchase in order to keep the company afloat in the news business. However, the $139 million sale must be finalized by August 31st, and the new ownership group, spearheaded by investment firm Angelo Gordon & Co., has yet to hear back on a request for an expedited hearing in the next week. Failure to meet the deadline could leave news companies 0-for-3 in recent efforts to move their respective bankruptcy proceedings along.
Brian Shappell, NACM staff writer
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Business bankruptcy filings barely fell in June, interrupting what had been a robust seasonal decline in recent months. A total of 4,633 businesses filed for protection under the Code, a mere 12 fewer than filed in May 2010.
Filings peaked this year at 5,432 in March, but fell hard in April and May, to 5,174 and then to 4,645, respectively. In the 12-month period ending June 30, business filings totaled 59,608, up 8% from the 55,021 filings reported in the same period ending June 30, 2009.
Elsewhere, the figures were more troubling. Total filings, including business and non-business across all chapters of bankruptcy, rose 20% in the 12-month period ending June 30, 2010 to 1,572,597. This marked the highest number of bankruptcy filings for any period since many provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect.
Non-business filings behaved similarly to their business counterparts, also peaking in March this year at 157,126 before falling to 144,145 in April and to 131,370 in May. June, however, marked another minor increase, the first since March, as filings inched up to 132,094. On a 12-month basis, non-business filings for the period ending June 30 jumped 21%, to 1,512,989 from 1,251,294 in the 12-month period ending June 30, 2009.
Chapter 7 filings rose by 25% from the same period in 2009, hitting 1,133,320 at the 12-month period ending June 30. Chapter 11 filings increased 2%, totaling 14,272 at the end of the 12-month period ending June 30.
A full summary of June's bankruptcy numbers, as well as a regional breakdown, can be found here.
Jacob Barron, NACM staff writer
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If only the buzzing noise from vuvuzellas remained the major story, if not annoyance, emanating from South Africa.
After a hugely successful run as host for this summer's World Cup competition raised optimism of South Africa's potential to step up as a worldwide economic player, public workers in the nation have gone a long way to destroying anything in the way of gains. The nation's largest labor union, the Congress of South African Trade Unions (COSATU), spearheaded a weeklong public workers strike on August 18 after the government balked at demands for a pay raise of 8.6%, more than twice the rate of inflation.
"The reaction has been a general strike of over a million people that has essentially shut the nation down," said Chris Kuehl, Ph.D., NACM economic advisor. "The business community has long asserted that the biggest barrier to progress in the nation has been the radicalized and powerful COSATU. This is just another example."
The COSATU followed up the strike, which included an estimated 1.3 million public employees, with threats of an even larger one on September 2 should the wage increase demand continue to flounder. Union officials even stated that its goal of the follow-up strike would be to "shut down the economy" completely. What's more troubling is the violent nature of the strike, which has risen to a level far beyond what was seen in Greece following the unveiling of its unpopular economic austerity plan. Aside from expected clashes with police, the union-led labor revolt has shut down many of the nation's public schools and much of its health system. Widespread reports depicted nurses and doctors being violently denied entry to or even removed from hospitals and clinics by angry mobs. This is not to mention patients including pregnant women and HIV-infected residents being turned away from desperately needed care amid the chaos.
The strike is the very worst case scenario outlined briefly in article #6 in the July 22 eNews story on South Africa's economic potential. The union's grip on the working population, as well as weak opportunities for black South Africans and a need for educational reform, are among the overarching issues that, while temporarily muted, clearly remain in existence, as noted by Kuehl, Hans Belcsák, president of S.J. Rundt & Associates, and a summer report penned by the Organisation for Economic Co-operation and Development (OECD). Whether an overreaction on the part of the unions or a legitimate reaction to the government spending lavishly on top officials and the rich while ignoring the working class, the nature of the August uprising has almost surely done some long-term damage to South Africa's image on the international business stage—only time will tell how much.
"So much for all that good feeling stemming from the World Cup," said Kuehl.
Brian Shappell, NACM staff writer
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After nearly three years of losses, at least one study found the average price per commercial property in the nation on the rise. At the same time, a housing market in need of some good news to compel a more robust economic rebound received its worst news on existing home sales in some 15 years.
Commercial property prices increased 2.2% in the last quarter according to the Investment Property Databank's (IPD) U.S. Quarterly Property Index. British-based IPD said the news of U.S. price appreciation after 10 consecutive quarters of losses was a positive development, though not necessarily an indicator that the commercial storm has passed. In fact, IPD North America Managing Director Simon Fairchild warned investors and developers to prepare for a worst-case scenario of "setbacks" and "increased volatility" through year's end because of the hard-to-predict nature of the ongoing rebound, or perceived lack thereof, in the United States and throughout the world.
Still, news of the respite from losses and write-downs, whether brief or long term, is far more positive than statistics tracked in the Moody's/Real Estate Analytics LLD Commercial Property Price Index for June. Unveiled just two weeks ago, the index saw a 4% decline in June with a low number of transactions. Moreover, statistics have become increasingly difficult to analyze in recent months because of the large amount of distressed sales distorting true property values, as such transactions did on an even larger scale in the residential real estate market.
And while there could be cautious optimism tied to the IPD, those counting on any sort of good news from the housing market this week were left disappointed by epically poor statistics unveiled Tuesday by the National Association of Realtors (NAR). Reeling even worse than expected from the end of the federal government's sales-inducing homebuyer tax credit program in April, NAR-tracked existing home sales in June plummeted 27.2% in July to a seasonally adjusted rate of 3.83 million units. While a decline was expected, July's anemic showing—the lowest since May 1995—was far worse than most experts predicted. Many top housing economists believed rock-bottom home prices and interest rates would have done a better job in stopping the bleeding. One day later, the Commerce Department confirmed monthly new home sales plunged by a surprising 12.4% to a seasonally adjusted 276,000 units. It's the lowest tally since Commerce began tracking new home statistics in 1983. Meanwhile, home price improvements, along with employment data, are seen as a key driver needed to spark the lackluster economic recovery.
Brian Shappell, NACM staff writer
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Despite the recent passage of a $26 billion stimulus bill designed to aid state payrolls, many states have enacted various targeted tax increases to shore up their budgets. Some have also turned to the more politically convenient option of using one-time funds and accounting tricks to fill their budget gaps.
According to a new report by the Tax Foundation, everything from cigarettes and soda to, in one instance, out-of-state business transactions has been subject to tax increases in 2010 amid widespread state budget shortfalls. The new stimulus bill, which passed earlier this month after overcoming a standard Republican protest, will barely make a dent in the problem, according to the Tax Foundation.
"Much like the 2009 federal stimulus funds, which run out next year, the recently passed $26 billion stimulus will do little more than paper over states' budget woes," said Tax Foundation Tax Counsel and Director of State Projects Joseph Henchman, who co-authored the new report. "Aside from the politically easy options of one-time aid, borrowing and other accounting gimmicks, states have two choices: raise taxes or cut spending."
Many states passed increases on cigarette excise taxes this year (HI, NM, NY, SC, UT), and some either raised taxes on soda or at least made it no longer exempt from the state sales tax (CO, District of Columbia). Only Washington enacted a new soda tax of two cents on every 12 oz. can, while simultaneously extending the state's general sales tax to candy. Eleven states also began selling PowerBall tickets in 2010, bringing the total of states participating in the jackpot game to 42. In tax terms, selling PowerBall tickets qualifies as a selective sales tax increase.
Among the most notable tax changes is a new law in Colorado that requires out-of-state online retailers to identify their in-state customers, with the hopes of compelling these out-of-state businesses to collect the state's use tax from consumers. Failing to comply with the law has severe penalties, and many states have terminated affiliate relationships within Colorado in response to the law's enactment.
While all these increases and changes are designed to help stabilize budgets, the Tax Foundation believes that these gestures will only complicate the process of exiting the recession. "When the recession ends, states need to have the right policies in place that will promote economic growth and maintain revenue stability," said Henchman. "Relatively high taxes on high-income individuals, smokers and out-of-state business transactions can make a state less attractive and create more volatility in an already uncertain economic climate."
Jacob Barron, NACM staff writer
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