April 2011

ABF Journal, NYIC Approach the Bench, Once Again … U.S. Bankruptcy Judge Accentuates the Positive

Today, as the economy inches slowly toward recovery, ABF Journal and the NYIC were given the opportunity to approach the bench once again … this time to gain Judge Rosemary Gambardella’s perspective on how things have played out since our last interview in 2009, as well as the Judge’s view on today’s realities.

A Conversation With Judge Rosemary Gambardella, U.S. Bankruptcy Court, District of New Jersey

Rosemary Gambardella, who was sworn in as a U.S. Bankruptcy Judge in May 1985, is the first woman to serve on the Bankruptcy Court in the District of New Jersey. She served as Chief Judge of the U.S. Bankruptcy Court for the District of New Jersey from August 1998 to August 2005.

In the first quarter of 2009, ABF Journal and the New York Institute of Credit (NYIC) had the opportunity to speak with Judge Rosemary Gambardella of the U.S. Bankruptcy Court, District of New Jersey. At that time, the U.S. economy was rapidly moving toward a meltdown that would accelerate dramatically as the year progressed. Today, as the economy crawls slowly toward recovery, ABF Journal and the NYIC were given the opportunity to approach the bench once again — this time to gain the Judge Gambardella’s perspective on how things played out since then, as well as her view on current realities in the bankruptcy process.

ABF Journal: Judge Gambardella, the last time we spoke, many middle-market companies were entering bankruptcy with a high degree of frequency. From your perspective, what are the major changes you’ve witnessed since that time?

Judge Gambardella: Overall, the growth in bankruptcy filings slowed down in 2010 and the majority of bankruptcy filings involve non-business debt. The business filings, according to the statistics I receive from Washington, were down about 7% from the numbers in the calendar year 2009. While the total filings remain at a five-year high — at least according to the government accounting people — business filings are down.

At the same time, we do have middle-market companies coming into the bankruptcy court every week. And generally speaking, the companies that have the best chance of surviving the Chapter 11 process are those that are coming in with cash they can use with the ability to work out cash collateral orders for the short term.

New York Institute of Credit: Judge Gambardella, with that in mind, what are you noticing about the availability of bankruptcy filing?

JG: I’m not seeing as much availability as there was 20 years ago. A lot of the companies coming into Chapter 11 are getting through with the cash collateral they have. There still is §364 financing out there, but many companies are attempting to restructure without DIP lending as soon as they can. So, there’s a mix … some cases have a combination of cash collateral and DIP lending and some are getting through with negotiating cash collateral orders with their secured lenders.

NYIC: What about §363 sales? Have you seen a lot of them lately? If so, are these sales trending more toward financing buyers versus strategic buyers?

JG: Section 363 sales are still the major exit strategy for Chapter 11 cases. It’s not the exclusive exit strategy, but it’s still is prevalent in the majority of cases we’re seeing. In terms of the buyers, that’s really a mix too. Mostly, I see competitors bidding for assets to increase their own portfolios.

NYIC: Then it seems distressed investing is not quite as prevalent as it once was. Would that be a fair assessment?

JG: That would be so in the cases I’ve seen, but there could be more instances of distressed investing in other districts and other courts.

ABFJ: Has the trend toward pre-negotiated bankruptcies, which include unsecured credit aimed at minimizing the time spent in Chapter 11, continued? If not, how would you best categorize the bankruptcies you’re now seeing?

JG: The reality of Chapter 11 today is that you have to minimize the amount of time you spend in bankruptcy court. First of all, the amendments to the Code have cut down on the amount of time that a debtor enjoys exclusivity to file a plan. There are certain statutory realities that make it clear that a company isn’t going to have the ability to stay in bankruptcy for very long. At the same time, the burn rate in these cases is so high that financially, these cases can’t stay in for long either. One has to come in with a plan and many of the cases that come in are already set to either sell the major asset or will often say, “We’re ready to file our plan within the first several months of the case. We’re not just going to rely on the fact that exclusivity is there and we can get unlimited extensions.” Besides, most companies can’t afford to stay in bankruptcy court that long.

ABFJ: In a similar vein and from your perspective, which industries appear to be more susceptible to financial stress and therefore entering into Chapter 11 these days?

JG: We’re still seeing a number of middle-market companies in the service areas coming into the bankruptcy court there days … fewer in the manufacturing sector. When we last spoke, we had a flurry of hospital cases, but those have slowed down. As you can imagine, we’re seeing a good many real estate holding companies as well as some construction cases involving projects that were in midstream when they ran out of money. More or less, you see the same mix of companies that we’ve always seen in the bankruptcy court. Those cases are still here … peppered with a few Ponzi schemes along the way.

ABFJ: On that topic, to what degree are you seeing cases brought about by fraudulent activity?

JG: When I started on the bench in 1985, I was sitting in Camden, NJ during a time when there were many Ponzi schemes involving real estate sales in Atlantic City. Those cases were ripe for bankruptcy filings down the line. So, it keeps our trustees and professionals busy as well. But bankruptcy court provides a forum for recovering money for defrauded creditors … it’s one of the positive functions the court serves.

NYIC: There’s been much said about municipalities filing bankruptcy of late … that’s an emotionally charged issue. What have you seen or heard about municipal filings in other districts on the topic?

JG: Well, Chapter 9 and municipal bankruptcies have been available under the Bankruptcy Code for many years and there have been instances of municipalities or municipal entities filing bankruptcy. And I know we’re reading about threats of filings a lot in the papers. I think the rule of thumb is to avoid these filings, although they are trumpeted in the press. They make for good headlines and newspaper articles, but when it comes to filing … bankruptcy is really the last resort.

ABFJ: In 2009, you shared that keeping the public interest in mind while determining and pursuing the best course of a bankruptcy in financial terms are the kinds of issues that keep bankruptcy judges up at night. Are there other issues that have arisen that cause bankruptcy judges similar concern?

RG: As a bankruptcy judge — and this cuts across both the consumer area and the business area — you are dealing with peoples’ lives and their livelihoods. Sometimes a case involves a sale of a business where you have a principal and a family that’s been involved in that business their entire lives, and you know that they are going to have to suffer some of consequences. Or, while it might be off topic, you have consumers that are struggling every day and trying to keep their homes.

Those are the tough issues we deal with as bankruptcy judges. It’s not the tremendous legal issues that come up in the context of a bankruptcy case … it’s how your decisions are impacting people in their day-to-day lives. On the flip side, the process is also assisting these people every day, because it is giving them breathing room they need — whether they are a large or small business owner or a consumer — to get their lives back in place.

ABFJ: So it appears to boil down to the human side of it…

JG: It has to, and that’s what’s great about being a bankruptcy judge because everything comes into your court. You have some of the largest cases in the country and in the world, as well as consumers like you and me that need assistance through the court.

NYIC: When one considers the last couple of years and everything that has transpired, it seems as though it is prudent for borrowers and lenders alike to seek advice from their professionals sooner rather than later. Judge Gambardella, can you comment on that?

JG: You know, it’s entirely true. Quite simply as a business, you have to come into a bankruptcy proceeding with cash … you can’t come in after everything has gone out of the door because at that point, your options are extremely limited. Your leverage and negotiating power with your creditors may well be gone. But to come into bankruptcy court is always a difficult decision to make and, in the end, timing is everything. That’s been the case since I first came on the bench and that’s always been the mantra: you have to be able to get into court in time to be able to do something.

NYIC: From where you sit, are you seeing more Chapter 11 cases converting to Chapter 7 or are these cases emerging successfully?

JG: Again, it’s really a mixed bag and I can’t give you percentages. It’s always been the case that getting through a successful Chapter 11 requires clearing a lot of hurdles and the percentage rates have never been that high. But there are different ways to exit a bankruptcy with a positive outcome, even if it is an orderly liquidation to get more than scrap value for the years a company has been in business. That’s still a positive result even if the business is no longer in place and you have a displacement of employees. That’s the unfortunate part of it. But bankruptcy judges are always optimists … they are positive people for the most part, and they believe in the system and what it can do to help individuals and businesses overall, as well as the communities in which they sit.

ABFJ: Are there any issues we haven’t raised here that from your perspective are important to discuss?

JG: Well, to sum it up, I guess there was some sense that bankruptcy was no longer a viable option for businesses or consumers. There was a great deal of misinformation about that. But if you think about it, the bankruptcy courts remain the business courts of the country, and they do important work every day in both the business and non-business arenas. I still believe it’s a good alternative to get a fresh start and some of the issues we discussed with regard to timing and having competent professionals to represent your interests make the journey through the court a more positive experience.

ABFJ: Once again, Judge Gambardella, thank you for spending time with us.

JG: You’re welcome.