While Chapter 11 filings in 2019 were about half of the peak reached in 2005, there were significant filings by iconic companies. The American Bankruptcy Institute monitors the bankruptcy landscape and lobbies to pass key legislation, like the Small Business Reorganization Act of 2019. Amy Quackenboss and Ed Flynn provide an overview of significant bankruptcy actions in 2019 and look ahead to 2020.
Total Bankruptcy Filings
Total filings for 2019 were about 775,000,1 virtually unchanged from the 773,418 cases filed during 2018. Calendar year 2005 was the high-water mark for bankruptcies with 2,078,415 cases filed. This spike preceded the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), followed by a sharp drop in filings in 2006. Since 2010 filings nationwide have dropped by more than one-half.
Chapter 11 Filings
The total dollar volume of assets, liabilities and professional fees in Chapter 11 cases far exceeds all other chapters of bankruptcy combined, although they account for only about 1% of all bankruptcy cases.
About 7,000 Chapter 11 cases were filed nationwide during 2019. This was the sixth consecutive year that filings were between 7,000 and 7,500. Chapter 11 filings are now less than one-half as high as their most recent annual peak in 2009.
According to New Generation Research, there were 63 filings by publicly traded corporations in 2019, up slightly from the 58 such filings in 2018. Among the largest cases were the filings by Purdue Pharma and Insys Therapeutics (opioid manufacturers), PG&E2 (California utility), the Celadon Group (trucking), Forever 21 (retail) and EP Energy (oil and gas).
Three significant bankruptcy-related bills involving disabled veterans, family farmers and small business Chapter 11 debtors were signed into law on August 23, 2019. In an era where partisan politics are the norm, these bills all enjoyed widespread support from across the political spectrum.
The HAVEN3 Act (Public Law 116-52) provides that certain veterans’ disability benefits are not to be treated as income for purposes of the bankruptcy code’s means test. This brings these benefits into parity with the treatment of Social Security payments under the bankruptcy code’s means test.
Bankruptcy debtors are not required to disclose whether they are veterans. However, a research scholar at the Stanford Center on Poverty and Inequality found that veterans are over-represented among bankruptcy filers, comprising about 10% of the U.S. population but accounting for about 15% of bankruptcy filings. According to the National Conference of Bankruptcy Judges, the HAVEN Act “will remedy an imbalance in the bankruptcy code that disproportionately steers veterans receiving such benefits into Chapter 13 cases because they often fail the Chapter 7 means test.”
The Family Farmer Relief Act of 2019 (Public Law 116-51) increased the Chapter 12 debt ceiling for family farmers from $4.15 million to $10 million. The Chapter 12 debt limit for commercial fishermen (currently $1.92 million) was not affected by the legislation.
Chapter 12 was added to the Bankruptcy Code by the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986. Since then, more than 30,000 Chapter 12 cases have been filed. About 600 Chapter 12 cases were filed in 2019, an increase of 20% from 2018.
The Small Business Reorganization Act of 2019 (SBRA) (Public Law 116-54) created a new Subchapter V of Chapter 11 of the bankruptcy code. Key features of SBRA include:
- A trustee is appointed in every case
- No unsecured creditors committee
- No disclosure statement required
- No U.S. Trustee quarterly fees
- Shorter timelines for completion
- Bankruptcy court can confirm a plan over the objection of impaired creditors
- If a plan is consensual, the trustee is terminated, and the debtor receives discharge at confirmation.
- If the plan is not consensual, the trustee continues to serve, and discharge occurs after payments are completed (three to five years).
Certain Chapter 11 debtors would be ineligible for treatment as a small business under Subchapter V, including:
- Debtors whose total liabilities exceed $2,725,625
- Debtors whose debt was primarily consumer rather than business in nature
- Debtors whose estate consists of a single property or project (single asset real estate cases)
About 40% of Chapter 11 cases filed in recent years would have been eligible for reorganization as a small business under the new Subchapter V. The effective date of the SBRA is February 19, 2020.
Once again, in 2019 there have been a substantial number of filings by retailers. Two of the 2019 filers had also filed in 2017 (Gymboree and Payless Shoes). Retailers that filed in 2019 include Barney’s New York, Destination Maternity, Forever 21 and Avenue Stores.
Clergy Abuse Chapter 11 Cases
Bankruptcy courts have played an important role in resolving the aftermath of the clergy abuse crisis that has been plaguing the Roman Catholic Church in America. To date, there have been 23 Chapter 11 filings by dioceses or religious orders, including two that filed in 2019 (the Archdiocese of Agana, Guam in January and the Diocese of Rochester, NY in September).
To date, all but six of the cases have resulted in approved plans of reorganization or dismissal after settlement with the victims. Parties in the cases filed during 2019, and the dioceses New Ulm and Winona/Rochester (both in Minnesota), Santa Fe, NM and San Juan, Puerto Rico are still working toward resolution.
Although most of the clerical abuse occurred decades ago, the crisis is nowhere near over. Several states, including Pennsylvania, New York, California and New Jersey, have revised their statute of limitations for claims of childhood sexual abuse. As a result, many other dioceses are expected to file in future years.
Bankruptcy Cases in the Supreme Court: The Supreme Court is asked to review 7,000 to 8,000 cases each year, but generally only accepts about 80 cases for hearing. During 2019, three bankruptcy cases were decided by the court:
- Mission Product Holdings Inc. v. Tempnology, LLC (17-1657)
The court held (8-1) that rejection of an executory trademark license does not bar the licensee from continuing to use the mark.
- Taggart v. Lorenzen (18-489)
The court held (9-0) that a court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.
- Obduskey v. McCarthy & Holthus LLP, (17-1307)
The court held (9-0) that a business engaged in no more than nonjudicial foreclosure proceedings is not a “debt collector” under the Fair Debt Collection Practices Act, except for the limited purpose of enforcing security interests under 15 U. S. C. §1692f(6).
Additionally, four cases have been granted certiorari for the 2019-20 term:
- City of Chicago, Illinois v. Fulton (19-357)
Issue: Whether an entity that passively retains possession of property in which a bankruptcy estate has an interest has an affirmative obligation to return that property to the debtor or trustee immediately upon the filing of the bankruptcy petition.
- Rodriguez V. Federal Deposit Insurance Corp. (18-1269)
Issue: Whether courts should determine ownership of a tax refund paid to an affiliated group based on the federal common law or based on the law of the relevant state.
- Ritzen Group Inc. v. Jackson Masonry, LLC (18-938)
Issue: Whether an order denying a motion for relief from the automatic stay is a final order under 28 U.S.C. § 158(a)(1).
- Financial Oversight and Management Board for Puerto Rico v. Aurelius Investment, LLC (18-1334)
Issue: Whether the appointments clause governs the appointment of members of the Financial Oversight and Management Board for Puerto Rico.
Outlook for 2020:
- The U.S. economy is generally healthy, and it has been more than 10 years since the end of the last recession.
- Total business and consumer filings are expected to rise slightly during 2020 but will remain well below the levels filed during most years between 2000 and 2013.
- Experts are predicting substantial bankruptcy activity in automotive and chemical industries along with continued distress among retailers and hospitals.
- Demand for coal continues to drop, which likely will lead to additional cases involving this sector. •