Waning Economy Means Business for Bankruptcy Firms
The holidays can be a pretty lonely time for bankruptcy attorneys.
Generally, businesses wait until after December, if they can, to declare that they are broke. High hopes hang on the September-to-December buying spree that feeds retailers, their suppliers, hotels and other service providers, and just about anybody who benefits from dollars moving quickly from one hand to another.
But this year, things are different.
“We have never been busier,” said William Lobel, a partner in the Irvine law firm of Lobel, Winthrop and Broker. “Bankruptcy people are unbelievably busy because the economy is in the toilet.”
While Chapter 11 bankruptcy filings are down slightly from last year, attorneys and federal bankruptcy court staff in Santa Ana agree that the cases filed this year in Orange County have been bigger and more complicated. National Lumber & Supply Inc., one of Southern California’s oldest retailers, dissolved its 21-store chain in bankruptcy court after trying in vain to reorganize. And FundAmerica, the controversial Irvine network marketing company, is also going through a complex, court-supervised bankruptcy reorganization.
Bankruptcy attorneys say they expect the number of filings to pick up in January and February, which are traditionally active months for such filings.
“You can anticipate after the first of the year a rash of filings in the retail and clothing industry, and in real estate-related businesses,” Lobel said.
He is advising his clients to “get small” for a while. “I tell them to retool their business in a way that allows them to break even until the economy turns,” he said. “They should get as liquid as they can and, whatever they think the economy is going to do in the next 12 months, act in a way that they can make it even if the economy is 20% worse.”
The local bankruptcy picture is a mirror of the national one, said Chris Beard, publisher of Turnarounds & Workouts, a Bethesda, Md., newsletter for people who track troubled companies. He said the large bankruptcy firms are growing by about 10% a year in terms of revenue, and 10 of the 25 largest bankruptcies of all time have been filed in the last 18 months: retailing giant Campeau Corp., Continental Airlines and Eastern Airlines among them.
With the economy in recession, many companies are finding it difficult to stay solvent, particularly those that piled on heavy debt as a result of acquisitions made during the free-spending 1980s.
“A lot of companies have undertaken more debt than they can reasonably carry,” said Ted Albert, acting managing partner of Buchalter Nemer Fields & Younger in Corona del Mar and a member of the 9th Circuit board of bankruptcy trustees in Santa Ana. “They can get away with it as long as there’s an upswing, but with the first bump in the road, they tumble.”
As one of seven bankruptcy trustees in the Orange County system, Albert handles about 100 to 150 cases of Chapter 7 and Chapter 13 filings a week. Chapter 7 filings, in which the court supervises the sale of a business’s assets, are up 21% for the first 11 months of this year compared to the same period in 1989. Filings for protection under Chapter 13, which allows individuals to reorganize their personal debt, are down 13% for the same period, although the actual number is up from two years ago.
Like businesses, Albert said, consumers are overly burdened with debt.
“A lot of individuals are too indulgent with credit cards,” he said. “The one thing that recurs most often is this vain attempt to keep up with the yuppie lifestyle. Young families who should be building a credit history are filing for bankruptcy because they had to have a motor scooter or jet skis or a stereo.
“I perceive the mood in the country’s changing, but a lot of people have overextended themselves and they can’t get out at this point.”
Albert said the heavy caseload makes it difficult to spend as much time as he would like with each case.
Arthur Marquis, assistant U.S. trustee in Santa Ana, said his office is handling as much work as it can now. He assigns cases to a member of the board of trustees and reviews their reports on the cases, which are due every 180 days.
He attributes the rise in bankruptcy activity to the weakening economy and also to the fact that more attorneys are advertising their services. “It may be just that people are having less of a stigma attaching to bankruptcy,” Marquis said.
Judge James N. Barr, one of three judges in the federal bankruptcy court in Santa Ana, said greater public familiarity with bankruptcy means that companies are filing for Chapter 11 protection before their financial problems drag them under completely, and are attempting to reorganize more often than they were in the past. Barr is presiding over the FundAmerica reorganization and the liquidation of National Lumber.
National Lumber attempted to reorganize, but failed when its financier declined to extend more credit.
Barr said that of the three districts in the 9th Circuit, which includes Orange, Los Angeles and San Bernardino counties, Orange County has more Chapter 11 filings per judge than any other. To handle the load, the three judges in Santa Ana, who handle Orange County filings, have temporary approval to hire a second law clerk.
Barr has recently hired a second clerk because he expects motions and pleadings in the FundAmerica reorganization to swamp his office soon.
If there is a benefit to the surge in bankruptcy filings, Barr said, it is that the attorneys are more familiar with the procedures. “I’m seeing better pleadings, better thought-out motions than I was four or five years ago,” he said.
Attorney Lobel said that even though he is busier, he is distressed about the cause. “Even for bankruptcy lawyers, this is not a happy time,” he said. “Generally, my advice is to cut way back on staff, and that’s real human heartache. It’s no fun telling people they have to lay off somebody who’s been loyal.”
BANKRUPTCIES IN ORANGE COUNTY
When the economy goes into a tailspin, personal and corporate bankruptcy filings typically soar. In Orange County, Chapter 7 filings for corporate liquidations were up sharply through the first 11 months of 1990. Chapter 11 filings, which provide companies with protection from creditors while they reorganize, and Chapter 13 filings, which provide similar protection for individuals, were down during the January-November period.
CHAPTER 7 FILINGS ‘85: 3,538 ‘86: 4,966 ‘87: 5,521 ‘88: 5,671 ‘89: 5,471 ‘90: 6,672 CHAPTER 11 FILINGS ‘85: 445 ‘86: 430 ‘87: 350 ‘88: 284 ‘89: 341 ‘90: 285 CHAPTER 13 FILINGS ‘85: 1,073 ‘86: 1,283 ‘87: 1,312 ‘88: 1,138 ‘89: 1,839 ‘90: 1,596 Source: U.S. Bankruptcy Court, Research and Development Department, Los Angeles.
Note: All figures are for Jan.-Nov. period in U.S. Bankruptcy Court, Santa Ana.
