December 15, 2011
As conflicting decisions in lower courts have started to stack up regarding the use of credit-bidding in Chapter 11 bankruptcies, the Supreme Court of the United States now has stepped in and could render a ruling by Summer 2012.
The Supreme Court announced that, in light of a ruling that conflicts with two previous ones from other bankruptcy courts, it will consider "whether a debtor may pursue a Chapter 11 plan that proposes to sell assets free of liens without allowing the secured creditor to credit bid, but instead providing it with the indubitable equivalent of its claim under Section 1129(b)(2)," potentially this spring. In essence, it will decide whether or not creditors can use what is owed to them instead of cash in the bidding process for assets at auction. A final ruling would likely follow in about three months.
The Supreme Court noted that a Seventh Circuit Court of Appeals in Chicago in RadLAX Gateway Hotel LLC v. Amalgamated Bank, allowed a secured creditor to bid its claim in lieu of a cash bid. That directly conflicts with a pair of other cases out of the Fifth and Third Circuits, respectively. The Third Circuit decision in Delaware was in the bankruptcy case of Philadelphia Newspapers LLC. In that case, a creditor group was ruled against by a three-judge Third Circuit panel after it tried to use credit bidding in the auction of the company, which as operator of the Philadelphia Inquirer and Philadelphia Daily News owed the bidders a significant amount of money.
"I think it's a great idea—we'll get a real decision," said Wanda Borges, Esq. of Borges & Associates LLC. "I think it will be very helpful. We have a split decision, and we need to put this to rest."
A 2010 Standard & Poor's (S&P) study raised significant concerns over the fairness of the practice. S&P, among others, believes the practice often leaves out some lower-level creditors and pays off some handsomely at the expense of others. Credit bids essentially allow the creditor "to seize the collateral being sold if the auction does not result in an offer above the amount of allowed claims, effectively setting a floor price to the auction" and "can present a challenge for a debtor to conduct a robust auction process," S&P argued. Hon. Robert Drain, of the U.S. Bankruptcy Court for the Southern District of New York, has also expressed concerns over the issue of fairness in using them.
However, Borges believes the use of credit bidding can be, in proper cases, extremely helpful and believes the negative stigma held by some is unfair to what is a useful tool in the bankruptcy process, even if rarely used.
"In one Chapter 11 where I was involved, we had 20-plus parties express interest in acquiring the assets of the debtor. When the day of sale came, nobody started to bid," Borges recalled. "If we didn't have one secured creditor, a taxing party, open up with their credit bid, the assets would have been sold for peanuts." Eventually, the assets sold for nearly double that creditor's opening credit bid offer—a win for creditors hoping to recoup something owed to them. "That would not have happened otherwise. We would have ended up with a disaster," Borges noted.
Brian Shappell, NACM staff writer
Share your thoughts on credit bidding by contacting Jacob Barron, CICP, NACM Government Affairs Liason, at firstname.lastname@example.org.
Do You Know Someone Worthy of Recognition?
It's time to nominate your distinguished CBA, CBF and CCE colleagues, your favorite instructor or mentor, among others, whose professional life displays unquestioned integrity, outstanding and meritorious service in the field, and ongoing dedication to the highest standards of the credit management profession.
Find out more on NACM's Honors and Awards Program web page. Deadline for nominations is January 20, 2012.
Read the profile of a 2011 award recipient in the November/December issue of Business Credit, which features the first O.D. Glaus Credit Executive of Distinction. As an NACM member, you can also login to view the online version of this article and the entire November/December issue now!
Credit professionals still consider the economy to be their biggest concern for the coming year, according to an annual survey conducted by NACM. For the third straight year, when asked "Looking forward to 2012, as a credit professional, what are your biggest concerns?" the largest percentage (26.7%) of the nearly 1,000 participants chose "lingering uncertainties about the still-sluggish economic recovery." The result was expected, as credit professionals continue to face stagnant business conditions along with lingering bankruptcies, preference actions and customer difficulties.
The top concerns garnering the majority of survey responses included:
- Lingering uncertainties about the still sluggish economic recovery (26.7%)
- Slow payment, delinquencies and general customer creditworthiness (19%)
- Job security, the future of your career, or ensuring that salary keeps pace with cost of living (11.7%)
New to this edition of NACM's annual survey of credit professionals was a deep sense of pessimism tied to the fact that 2012 will be an election year. Just over 11% of respondents listed "election-year politics, and the elections themselves, and their effect on economic growth" as one of their chief concerns for the coming year, and many participants took the opportunity to lament the current state, and future, of American politics in the survey's comment section.
"The total gridlock of the federal government has the potential to take our, and the world's, economies down. We are on the brink of that happening now and I don't think it would take much to push us over the edge," said one respondent. "Politics as usual must come to a halt. Somehow, a spirit of compromise must happen so we can fix the economy and put people back to work. It is my perception that even if people have jobs and can afford to buy, they aren't spending because of the pervasive negativity and uncertainty around the world."
As bad as things currently appear on Capitol Hill, many survey participants noted that they only expected things to deteriorate further as the 2012 campaign season ramps up. "I think there will be way too much concern and feelings of uncertainty over the presidential race next November," they said. "Instead of political parties working together on solutions for economic recovery, I'm afraid too much [attention] will be paid to whose party will win."
"Our leaders aren't focusing on fixing the problems," one respondent summarized.
While some participants suggested that political gridlock is causing the nation's economic turmoil, others noted that it's merely exacerbating what's already a bad situation. "I'm concerned that the customers who have struggled to hold on won't be able to last much longer," said one respondent. "This, coupled with the nonsense we deal with from the feds and the pending election...is making things that much more unpredictable."
Ultimately, this translates to what credit professionals believe will be a protracted economic slump. "I don't see things improving until possibly the beginning of 2013, if at all," said one participant. "This could be a long downturn."
Find out more about credit professionals' concerns for the coming year in the forthcoming January 2012 edition of Business Credit magazine.
Jacob Barron, CICP, NACM staff writer
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To say Detroit is suffering from financial problems typically would not be breaking news given its struggling reputation. But it seems as though the Motor City could possibly be careening toward a Chapter 9 bankruptcy filing, like Central Falls, RI, Harrisburg, PA, and Jefferson County, AL before it.
Local and national news outlets are confirming that, as Detroit appears on track to run out of cash by spring, city officials have voted against measures designed to cut the budget significantly and have delayed payments to creditors/vendors, as one councilman confirmed to the Detroit Free Press this week. What's troubling about the latter, aside from the fact that the city is already known for late payments as a rule, is that the councilman claims it was necessary in order to make employee payroll. In addition, Mayor David Bing is floating a potential proposal publicly that would ask its vendors to take a 10% cut on what they are owed. There are also rumors the state is considering trying to take over some or all financial decisions for the city by appointing a receiver.
In other municipal bankruptcy news:
In Harrisburg, U.S. Bankruptcy Judge Mary France rejected an appeal by the city council's attorney, over her previous decision to disallow a municipal/Chapter 9 bankruptcy filing coming from the state's capital city. The council's attorney, in a sort of "Keystone Cops" moment, missed the deadline to file said appeal because of confusion regarding its due date.
France struck down the infamous Harrisburg Chapter 9 filing last month on grounds that the city council, which did not have the support of the mayor or the state, was not authorized to file it. France said a state law banning such a bankruptcy filing before July 2012 was indeed constitutional, effectively cutting off the council's legs. Harrisburg's city council had defied recommendations by voting 4-3 to file for Chapter 9 bankruptcy. Supporters of doing so said it would give the city leverage to renegotiate debt largely tied to a massively unsuccessful trash incinerator project and be fairer to taxpayers.
In Jefferson County, creditors tied to its Chapter 9 filing have moved to have the case dismissed, similarly to Harrisburg, on the argument that its county commissioners were not authorized to do so. U.S. Bankruptcy Judge Thomas Bennett is charged with considering the motion to dismiss on what amounts to technicalities in the filing's legitimacy.
Jefferson County Commissioners, which at one point looked to have a deal worked out with creditors, surprisingly voted 4-1 last month to declare bankruptcy. Alabama Gov. Robert Bentley confirmed publicly that a deal with creditors that could have renegotiated upwards of $1 billion of the $3 billion in debt tied to a sewer renovation had fallen through before the decision.
In Central Falls, however, a deal seems to have been reached outside of the bankruptcy courts between the municipality and pensioners who rejected proposals to make money-saving concessions in their benefits prior to the small community's summer Chapter 9 filing. The voluntary cuts in retiree benefits will help the city save more than $1 million this year, which has been characterized as critical for Central Falls to resume any semblance of operational normalcy.
Brian Shappell, NACM staff writer
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Economists seem to agree that global growth in 2012 hangs on the fate of one particular continent.
What happens in Europe will determine much of the world's economic health, according to economists from the Wells Fargo Economics Group and NACM Economist Chris Kuehl, PhD. Both Wells Fargo and Kuehl presented their predictions in separate teleconferences last week, and while issues with Asia, inflation and elections were also hot topics, the biggest threat to growth was the euro zone.
"It's not a 2009 unless Europe blows up," said Wells Fargo Global Economist Jay Bryson, PhD. "Everything is predicated on Europe not blowing up."
Wells Fargo Chief Economist John Silvia, PhD agreed with his colleague, noting that "the primary risk to forecast will be the question on European sovereign debt, and what it entails for borrowing around the world." Kuehl, in his FCIB teleconference, noted that the crisis has already caused a second round of tightening among European banks and businesses. "The credit crisis has begun again in Europe," said Kuehl. "It's not as nasty as it was in 2008, but you're seeing a slowdown. It's gone back to a period where no one really has a good sense of where this conversation is going to go, and probably won't have until the middle of next year."
How much this lingering uncertainty and possible collapse will affect the United States, however, remains unclear. "We don't have a lot of exposure to Greek debt," said Kuehl, referring to the euro zone country closest to the brink of collapse. "France is probably the most exposed when it comes to the private sector. Germany is the most exposed when it comes to the government. Once you get past Germany and France the exposure begins to deteriorate quickly and as far as the U.S. is concerned, it's relatively small," he noted, while also cautioning that, "we are exposed indirectly because U.S. institutions are tightly connected to those in France and Germany."
This being the case, growth in the U.S. is expected to be positive but still on the small side. "We do expect the U.S. economy to expand by 2%," said Silvia. "With this subpar economic level, we have modest inflation levels, and I think the Fed funds rate will stay the same until 2013." (See story #6.) Bryson agreed, noting that "It's an average sort of year. Then, in 2013, we come back."
Still, the European Union has to find its way out of their sovereign debt crisis, and determining how to do that is a process fraught with dangers and uncertainties. Regarding the most recent austerity plan, Kuehl noted that the reception from countries other than Germany and France has been more than a little lukewarm. "A lot of concern within European states is how much control this is giving Germany and, to a lesser extent, France," he said, citing that the new EU treaty binds all the countries in the euro zone, even those whose fiscal houses are in order. "The countries that are most opposed to this treaty are the ones who are not really in that much trouble right now, who kind of looked at the whole situation going 'why are we losing control when we have done the things we needed to manage our budget?'"
Other issues come down to enforceability. The EU previously had a set of standards for how member countries had to keep their finances in order, but Greece and other countries broke those rules without consequence, and now the entire union has to pay for it. "The conversation today is not so much the new treaty, the issue is now can you enforce it," said Kuehl.
"There aren't a lot of options as far as Europe is concerned," he added, grimly. "It's really going to come down to whether or not the ECB (European Central Bank) and the IMF (International Monetary Fund) are willing to throw that kind of money in there."
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Jacob Barron, CICP, NACM staff writer
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China celebrated the tenth anniversary of its accession to the World Trade Organization (WTO) this week. But a report from the U.S. Trade Representative (USTR) finds that even after a decade, the booming Asian giant is still falling short on its compliance goals.
While China has taken many impressive steps to implement trade reforms since 2001, the USTR described the overall picture currently presented by the country's WTO membership as "complex," given a troubling trend in China toward intensified state intervention in the economy over the last five years.
"Increasingly, trade frictions with China can be traced to China's pursuit of industrial policies that rely on trade-distorting government actions to promote or protect China's state-owned enterprises and domestic industries," said the report. "In fact, in recent years, China seems to be embracing state capitalism more strongly, rather than continuing to move toward the economic reform goals that originally drove its pursuit of WTO membership."
Progress toward market liberalization began to slow in 2006, according to the USTR, and certain Chinese policies have raised concerns that the country still has yet to fully embrace some key WTO principles, such as market access, non-discrimination and transparency. China's recalcitrance continued to create problems for U.S. stakeholders in 2011, most notably due to China's indigenous innovation policies, lax intellectual property rights enforcement and discrimination against foreign enterprises.
Looking ahead to 2012, stakeholders can expect to see continued enforcement efforts from the USTR and the rest of the Obama Administration, with a special focus on reducing Chinese government intervention.
"Breaking down Chinese market barriers and maximizing our stakeholders' opportunities to compete in the global marketplace could not be more important in today's world," said the report. "Going forward, the administration will continue its dedicated efforts to achieve these goals."
Jacob Barron, CICP, NACM staff writer
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Some in the mainstream media tripped over themselves early Tuesday to predict the Federal Reserve would emerge from its latest policy meeting with dampened talk of an extended period of low rates and Treasury purchases as the U.S. economy appears to be back on track for somewhat improved, though less than impressive, growth levels. While the improving economy was noted, the Fed did not take anything that resembled a step back from its rates or Treasury policies.
The Fed's Federal Open Market Committee unsurprisingly opted to hold the federal funds rate at a range between 0% and 1/4%. More significantly, the committee reiterated that conditions are "likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013." The announcement indicated the Fed expects moderate growth through 2012 despite problems in global markets, notably the high-debt "PIIGS" nations and those in the European Union affected by their struggles. The Fed admitted such global strains remain the largest threat to an improved 2012. Meanwhile, once again, it downplayed the threat of inflation on the U.S. economy:
"The committee anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate [to foster maximum employment and price stability]."
It is also said that fighting off inflation as well as continuing a "stronger economic recovery" than found over the last couple of years is behind the reasoning to continue its policy of reinvesting principal payments from its Treasury holdings (debt and mortgage-backed securities) back into more securities holdings.
Brian Shappell, NACM staff writer
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