"We're in a time of economic uncertainty," said Bruce Nathan, Esq. "The recession is over, the economy is projected to grow, but there's still a lot of uncertainty as to whether or not we'll have a double dip."
Figures from the Department of Commerce have signaled the official end to what has been referred to as the "Great Recession," but, as Nathan noted, business conditions and lending have remained so stubborn that a second dip into economic trouble doesn't seem out of the question for many companies. "The commercial real estate market may fall," he added. "Bank lending has dropped 28% in the third quarter of 2009 alone and that just continues the credit crunch that started in the fall of 2008."
In addition to tightened lending, bankruptcies have also experienced meteoric increases, with Chapter 11 filings rising 68% over the last year.
This being the case, companies have had to take even greater care to protect themselves in the increasingly likely incident of a customer's bankruptcy. In his most recent NACM-sponsored teleconference, entitled "Dealing With a Troubled Company: No Need to Cry the Blues!," Nathan offered a wealth of legal defenses and practices to help creditors stay safe when their customers become risky.
One of the more important things to remember in a bankruptcy proceeding is where each type of creditor falls in the pecking order. "Your claims are segmented based on a hierarchical distribution in the Bankruptcy Code," said Nathan. "The secured creditors are on top, whether they're the lender or secured lenders of a purchase money security interest, or creditors with state law lien rights, etc."
Unsecured creditors tend to be on the bottom, a position that carries many potential risks, despite the fact that Chapter 11 debtors will often attempt to rely on these creditors to see them through the proceedings and further extend credit. "Any of you being asked to extend credit in the Chapter 11 are told ‘don't worry, you have an administrative priority claim,'" said Nathan, noting that to get the trade credit, debtors will assure their suppliers that any credit given to them will eventually be repaid. "The problem is there are other categories of administrative claims and there is a risk that after the secured creditors are paid in full there may not be enough to pay the admin claims." Citing the bankruptcy of Ames Department Stores, Inc. earlier in the decade, Nathan noted that there aren't necessarily any guarantees despite what a debtor might promise. "The Ames Case still hasn't paid their administrative claims after something like 8 years," he said.
Nathan went on to discuss how to use specific defenses and other security devices to greatly increase a company's chance of payment on its claims.
Jacob Barron, NACM staff writer