San Francisco Bankruptcy Lawyer Blog

When determining whether to file bankruptcy, it helps to have background on bankruptcy terms:

AUTOMATIC STAY: injunction that automatically stops lawsuits, foreclosure, garnishments, and collection activity against the debtor the moment a bankruptcy petition is filed.

BANKRUPTCY: legal procedure for dealing with debt.

BANKRUPTCY CODE: Title 11 of the United States Code (11 U.S.C. §§ 101- 1330), the federal bankruptcy law.

BANKRUPTCY ESTATE: legal or equitable interests of the debtor in property at the time of the bankruptcy filing. The estate includes all property in which the debtor ownership even when property is used by another.

BANKRUPTCY JUDGE: judicial officer who is the court official with decision-making power over federal bankruptcy cases.

BANKRUPTCY PETITION: formal request for the protection of federal bankruptcy laws.

BANKRUPTCY TRUSTEE: private individual or corporation appointed in Chapter 7, Chapter 12, and Chapter 13 cases to represent the interests of the bankruptcy estate and the debtor's creditors.

CHAPTER 12: bankruptcy designed for family farmers or family fishermen with regular annual income to propose and carry out a plan to repay debts.

CHAPTER 7: chapter of the Bankruptcy Code providing for "liquidation," i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors.

CHAPTER 11: reorganization bankruptcy, usually involving a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time.

CHAPTER 13: chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. Chapter 13 allows a debtor to keep property and pay debts in 3-5 years.

REAFFIRMATION AGREEMENT: agreement by Chapter 7 debtor to continue paying a dischargeable debt after the bankruptcy, usually for the purpose of keeping collateral or mortgaged property subject to repossession.

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In the Delta Air Lines Chapter 11 bankruptcy case, the United States Court of Appeals for the Second Circuit decided on June 22, 2010 that equity owners under pre-petition leveraged aircraft leases were entitled to assert claims against Delta for tax losses from Delta's insolvency and foreclosures on the aircraft.

The court addressed double recovery issues involving Tax Indemnity Agreements ("TIAs") common in leveraged leases. Leveraged leases are financing structures employed by airlines to fund the aircraft acquisition. The purchase price is funded partially by an equity owner, and partially by debt (approximately 80%). The aircraft gets leased to the airline, which makes lease payments, calculated to service the debt and provide a cash return to the equity owner. The primary benefit for the equity owner is not the cash return, but being able to take accelerated depreciation deductions under the Internal Revenue Code to offset general taxable revenue.

To protect the tax benefit, the equity owner enters into a TIA with the airline, where the airline agrees to compensate the equity owner if the equity owner has to recapture tax deductions taken like in a default in rent payments and subsequent foreclosure on the aircraft.

In the Delta case, Delta's 2005 bankruptcy filing was an event of default under its aircraft leases, resulting in foreclosure on the aircraft. The equity owners filed claims under the TIAs based upon the recapture of their depreciation deductions.

The Second Circuit found that the purpose of the TIAs was to compensate the equity owners for their tax losses and relied on the enforcement on negotiated contracts even where a double recovery might result. The Second Circuit clarified that general concepts of bankruptcy equity and fairness should not overturn the carefully negotiated contractual rights of sophisticated parties.

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There are two US Bankruptcy judges in San Francisco. The US Bankruptcy court in San Francisco is located at 235 Pine Street, San Francisco, CA, in the heart of the financial district. The judges' names are Judge Dennis Montali and Judge Thomas Carlson.

According to his bio on the US Bankruptcy Court, Northern District of California web site, Judge Carlson graduated from Beloit College, B.A. in 1969, and then went on to Brandeis University, for graduate studies in American History from 1970-71. He graduated from Harvard Law School, J.D. in 1975 and received a LLM in Tax from N.Y.U. Law School, LL.M. in 1985. Judge Carlson is well respected by attorneys for seeing things in cases that sometimes the parties do not catch. He appears to want the best interests of all parties served, even continuing status conferences sometimes to give parties another chance to review their issues to make sure they are making the right decisions. In one recent status conference in June 2010, he asked the debtor to review again to see if dismissal of his Chapter 11 case rather than converting to Chapter 7 was really in his best interest, considering he had unsecured debt that could be discharged in a Chapter 7.

According to his bio on the US Bankruptcy Court, Northern District of California web site, Judge Montali received a Bachelor of Arts, University of Notre Dame in June 1961, and a Juris Doctor, University of California, Berkeley in June 1968. He was appointed United States Bankruptcy Judge Northern District of California, San Francisco Division in April 23, 1993, and reappointed in April 23, 2007.

A bankruptcy judge is not the same as a state court judge. The bankruptcy code is federal law and the US Bankruptcy Court has exclusive jurisdiction in all bankruptcy cases. A person cannot file bankruptcy in a state court. Bankruptcy judges are federal judges. The bankruptcy court is a court of specific jurisdiction, meaning that a person cannot file any other claim in bankruptcy court except for matters related to bankruptcy. If there is a related civil action, like a contract dispute, the person must file the action in a state court.

A debtor might need to appear in bankruptcy court for status conferences or motions when there are decisions to make on keeping personal property that the person does not own outright, disputing reliefs from automatic stays, or asking to re-assume liability for a certain debt.

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When observing a US Bankruptcy Court status conference in San Francisco, there is often an appearance made by the US Trustee and the Panel Trustee. These individuals have different roles in a bankruptcy case.

The US Trustee works for the Department of Justice responsible for overseeing the administration of bankruptcy cases and private Panel Trustees, and ensuring compliance with the Bankruptcy Code. The US Trustee ensures that the public interest is being served by the proper administration of all bankruptcy cases. The US Trustee appoints the Panel Trustees that filers meet about five weeks after filing at 341 creditors' hearings.

If the Panel trustee notices fraud or the ability for a debtor to pay a fraction of debts over a 60 month period then it's reported to the US Trustee where they will litigate and attempt to dismiss the debtor. US Trustee administration ensures debtors are paying their fees and submitting all required schedules. The US Trustee gets its fees in certain bankruptcy cases like Chapter 11 cases by calculating a percentage from the operating reports that debtors turn in each quarter. Operating reports are also important for keeping parties informed on the cash flow for secured creditors. The rents generated by properties securing debt are also security for secured creditors.
Payments made each quarter to US Trustee are based on cash flow in operating reports. Reports are filed under penalty of perjury.

The Panel Trustee works for creditors even though paid by the debtor. When a debtor files bankruptcy without a Panel Trustee appointed, the debtor is said to be a debtor-in-possession. The debtor no longer a debtor-in-possession after a Panel Trustee is appointed. The Panel Trustee might engage attorneys and accountants to find out how the funds in the estate were used, but usually would try to preserve estate assets by not conducting investigations that are not beneficial to creditors. For instance, forensic accounting, because of the expense amounting to as much as $50,000, is saved for situations where there are fraud or preference payments.

Continue reading "Panel Trustee and US Trustee at San Francisco Bankruptcy Status Conferences" »

On March 30, 2010, Electrical Components International (ECI), filed a Petition for Bankruptcy in the United States Bankruptcy Court for the District of Delaware. ECI's bankruptcy proceeding is before the Honorable Kevin J. Carey, Chief Judge of the Delaware Bankruptcy Court.

ECI has become a leading provider of wire harnesses, subassemblies and assembly services. ECI goods are sold to customers in the transportation and HVAC industries. Wire harnesses include wires and related components used in electronic components. Some of ECI's customers include Bosch, Chrysler, Delphi and GE. ECI manufactures wire harnesses in plants located in Mexico, n China and Poland.

The company filed the Declaration of ECI's CEO in Support of Chapter 11 Petitions. The ECI Declaration provides a summary of ECI's business, the events leading up to ECI's bankruptcy, and ECI's objectives in bankruptcy.

If a public company files bankruptcy, the company's securities may continue to trade even after the company has filed for bankruptcy under Chapter 11. Companies that file under Chapter 11 usually are unable to meet the listing standards to continue to trade on Nasdaq or the New York Stock Exchange. When a company is delisted from a major stock exchanges, their shares may continue to trade on either the OTCBB or the Pink Sheets.

ECI began with Burcliff Industries in the 1950s. Francisco Partners acquired ECI for $320 million. To finance the acquisition, ECI entered into a $250 million debt facility. In 2007, ECI increased its debt facility to $340 million to acquire Noma, another wire harness manufacturer. Within a year of the Noma acquisition, ECI defaulted under its loan agreements and requested a modification of the loans.

The Declaration explains ECI's "financial difficulties [were] primarily due to the unprecedented downturn in the U.S. housing industry and global economic recession." In 2008, the company closed plants, laying off employees. ECI lost $169 million in 2008. The drop in revenue prevented ECI from meeting long term debt obligations ($321 million). In late 2008, ECI notified its lenders it was in default of the loan covenants under credit agreements.

In most instances, the company's Chapter 11 plan of reorganization cancels the existing equity shares. Secured and unsecured creditors are paid from the company's assets before common stockholders. Where shareholders participate in the plan, their shares are usually subject to substantial dilution.

Under ECI's prepackaged plan, the first lien holders apportion 50 million shares of new common stock of the reorganized ECI. Second lien holders apportion $10 million in cash. General unsecured claim holders remain unimpaired.

Rinne Legal provides counseling to individuals, families and small businesses in financial difficulties. Call for a no charge initial consultation.

Affiliated Media, owner of the San Jose Mercury News, filed a 'pre-packaged' Chapter 11 bankruptcy Friday, according to Bloomberg News. Affiliated is a holding company which owns the Bay Area paper, as well as the Denver Post and other properties, through its subsidiary MediaNews Group. The filing took place in Delaware, where Affiliated has its corporate headquarters of record.

The move was the 13th bankruptcy filing by an American newspaper publisher in as many months, according to an Associated Press report that appeared on the Huffington Post website. It came despite angry denials by Affiliated last summer that the company was in any financial trouble. Company officials said day-to-day publication of the Mercury News and other papers will not be effected by the pre-packaged Chapter 11 bankruptcy filing.

In a pre-packaged Chapter 11 filing an indebted company and its creditors reach agreement on the resolution of most or all outstanding issues before a bankruptcy petition is filed, and present their agreement to the court at the time of filing. The goal is to move the bankrupt company through the court process much more quickly.

California pre-packaged Chapter 11 bankruptcy filings are a complex option, but one some distressed companies may wish to consider if San Francisco bankruptcy becomes inevitable. If you are considering a pre-packaged California bankruptcy it is imperative that you consult a Bay Area bankruptcy attorney early in the process. An East Bay bankruptcy lawyer can offer advice on the best ways to proceed with a California bankruptcy, and help you consider whether a pre-packaged Chapter 11 bankruptcy filing is possible, and, if so, whether it would suit your situation.

Bloomberg: Affiliated Media files for bankruptcy protection to restructure

AP reprinted at Huffington Post: MediaNews Group Files for Chapter 11 Bankruptcy Protection

Spansion, the Sunnyvale-based manufacturer of flash memory, has announced its first quarterly profit since it went public in 2005 and, with that, plans to emerge from California Chapter 11 bankruptcy during the first quarter of 2010.

The Bay Area company declared bankruptcy last March, according to the electronics industry publication EE Times. "By focusing on our core businesses and exiting unprofitable applications, we have shown that our strategy is working to deliver strong financial results," EE Times quoted Spansion's CFO as saying. Third quarter 2008 net income at the firm improved by $135 million year-on-year.

Spansion's news is a reminder that bankruptcy, as traumatic as it can be, holds the potential to be a new beginning rather than merely an end. In making sure the process really is a beginning, a Bay Area bankruptcy attorney can be one of your most important guides and advisors. California chapter 11 bankruptcy is designed to allow troubled companies the time and space needed to reorganize with the goal of emerging stronger once they exit bankruptcy and return to profitability.

Making your way back to profitability after a bankruptcy filing, and exiting court protection, can be as legally tricky as declaring bankruptcy in the first place. A San Francisco bankruptcy lawyer can help you throughout the process: minimizing the pain of declaring chapter 11 bankruptcy in the first place, and helping to keep you on track as you make your way back out of the bankruptcy court system.

EE Times: Spansion plans to emerge from bankruptcy in Q1

San Diego-based Fairfield Residential LLC has filed for California Chapter 11 bankruptcy, according to a recent Associated Press article. The news agency reports that the company, which owns apartment buildings throughout California and the nation, approached the California bankruptcy court with a "pre-negotiated" settlement.

Pre-negotiated California Chapter 11 bankruptcy settlements are ones in which a company only goes to court and formally declares bankruptcy after meeting with creditors and devising a reorganization plan (the General Motors bankruptcy earlier this year followed a similar format, albeit with significant government involvement). The goal is to move the company through the bankruptcy process as quickly as possible in the hope of speeding its return to profitability.

According to the AP, Fairfield says it has $958 million in assets against $835 million in debt. It hopes to emerge from bankruptcy early in the New Year.

This California pre-packaged bankruptcy is an example of one of the options about which a Northern California bankruptcy law firm can offer advice. When considering bankruptcy in San Francisco, Alameda County, Contra Costa County or elsewhere in the Bay Area it is important to have a complete picture of your options. Pre-negotiated California bankruptcies are easier to arrange when one consults with a Bay Area bankruptcy lawyer before a company's financial situation reaches critical condition.

AP: Fairfield Residential files Chapter 11 Bankruptcy

Canopy Financial, a San Francisco-based company making software for the medical and medical insurance industries, filed for California Chapter 11 bankruptcy last week, leaving many questions about its business activities unanswered, according to media reports.

According to a recent article in the San Francisco Business Times, the company discovered early last month that fraudulent reports had been sent to its lenders and investors. As the business-news website Venture Beat asked in the wake of Canopy's San Francisco Chapter 11 Bankruptcy filing, the real question this raises - one that remains unanswered - is how the company's backers failed to notice its troubles until management itself revealed them in November.

The difficulties at Canopy highlight the important role a San Francisco bankruptcy attorney can play in helping both to prevent a California Chapter 11 filing, and in managing the fallout from bankruptcy if it becomes inevitable.

An experienced Bay Area bankruptcy law firm can work with clients: assisting with California mediation services and helping to negotiate loan modification agreements in an effort to stave off bankruptcy.

Obviously, cases of outright fraud, as appears to have been the situation at Canopy, are a different matter entirely. For companies genuinely seeking to dig themselves out of a hole, however, consulting with a San Francisco bankruptcy lawyer can be a key step in rescuing one's business.

San Francisco Business Times: Canopy Financial Files Chapter 11

Venture Beat: Canopy Financial files for bankruptcy. Still no answers on how this happened

Sausalito's historic Casa Madrona continued its maneuvering last week in an effort to stave off a California foreclosure sale. According to a recent report in the Marin Independent Journal a bankruptcy court has given the owners of the troubled property until next March to stabilize and reorganize their finances. The twists and turns of what is becoming a lengthy saga highlight the complexities of Bay Area Chapter 11 bankruptcy proceedings.

The historic Marin County hotel is struggling to deal with $24 million in debt, plus an unpaid tax bill of $763,000 and an additional debt of $122,000 to the Federal Deposit Insurance Corporation. It was scheduled to be sold at auction on the Marin County courthouse steps in San Rafael last August. The owners, however, bought some extra time with a last minute California Chapter 11 bankruptcy filing that initially caused the sale to be postponed until October, when it was again rescheduled. The property is currently owned by a Miami-based investment group.

Casa Madrona's troubles highlight both the flexibility and the complexity of the bankruptcy code. A skilled California bankruptcy lawyer can help clients navigate this complex legal process, searching for every possible avenue to keep your property out of foreclosure. For example, a full-service San Francisco bankruptcy law firm can assist with mediation services and loan modifications. If bankruptcy proves to be the best way forward, an experienced bankruptcy attorney can walk you through the different sections of the US bankruptcy code and help determine type of bankruptcy proceeding for particular circumstances.

Marin Independent Journal: Owners of Casa Madrona in Sausalito given more time to stabilize finances

MarinScope Sausalito: Casa Madrona Auction Delayed Again

Not the nicest news to receive on Thanksgiving Weekend, perhaps, but new data released this week indicates that bankruptcies nationwide spiked 33 percent in the third quarter of this year. California bankruptcies remain a significant part of the problem, as the state remains one of the nation's leaders in this area, an unhappy reality for anyone facing a Bay Area foreclosure.

According to media reports, the American Bankruptcy Institute released data yesterday indicating that 388,485 there were bankruptcy filings between July 1 and September 30, up from 292,291 in the same period last year. "The spike in bankruptcy filings for both consumers and businesses reflect the continuing effects of today's weak economy," said ABI executive director Samuel Gerdano, according to CNN.

According to an analysis by the Reuter News Agency, approximately 71 percent of the third-quarter filings were made under Chapter 7 of the US bankruptcy code and 28 percent under chapter 13. Most of the remainder of the filings used chapter 11. Nevada led the nation in filings per capita with California ranked 13th.

In troubled and unsettled times such as these it is more important than ever to develop a relationship with a full-service Oakland, Walnut Creek and San Francisco bankruptcy law firm. Early consultation with a Bay Area bankruptcy attorney can help avoid worse problems in the future. If the attorney can help arrange a California loan modification it may be possible to avoid bankruptcy entirely.

Reuters: U.S. bankruptcies rise 33 percent in third quarter

CNNMoney: Bankruptcies spike 33%

Last week's San Francisco chapter 11 bankruptcy of high-end clothing retailer Wilkes Bashford is emerging as an example of how the bankruptcy code can help to save a small business. According to a report in the San Francisco Chronicle, the 43-year old business is to be sold and reorganized as part of its San Francisco bankruptcy and intends to remain open to its customers throughout the process.

Wilkes Bashford is a boutique operation, catering to the sort of people who are willing to spend thousands of dollars on a single dress or pair of pants. It has been built on personal relationships between the owner and his staff on one hand, and their small but loyal clientele on the other. The city's famously well-dressed former mayor, Willie Brown, told the Chronicle the news that Wilkes Bashford's will remain open despite its San Francisco bankruptcy is "a relief for all of us who will have no other place in town to buy clothes."

According to media reports, Wilkes Bashford is to be purchased by an East Coast company that deals in the same sort of high end clothing. The new owners reportedly believe that more modern record-keeping and inventory management can make Wilkes Bashford profitable again.

As this story indicates, San Francisco bankruptcy can mean more than a simple choice between reorganization and liquidation. In distressed economic times the assistance of an experienced San Francisco bankruptcy lawyer can mean the difference between saving and losing a business. A full-service Bay Area bankruptcy law firm can walk you through the different sections of the bankruptcy code, and can help to determine the best way forward given your particular circumstances.

San Francisco Chronicle: S.F. clothier Wilkes Bashford sold, to stay open

KGO-TV: Wilkes Bashford files for bankruptcy

A follow-up to my Bay Area Chapter 11 bankruptcy post earlier this week about the pre-packaged Chapter 11 bankruptcy of CIT, a huge, century-old commercial lender: The Sacramento Bee reports that CIT's Chapter 11 bankruptcy may have an impact in Northern California. The paper reports that CIT has two offices in the Sacramento area, where it "is a leading lender to the retail sector and to women- minority- and veteran-owned small businesses."

It is exactly this 'ripple effect' that can make a bankruptcy filing by a large company like CIT so problematic. Even if CIT does manage to keep its day-to-day operations running normally, the effect on small businesses in the region could be significant, forcing some companies to consider their own California bankruptcy moves. The assistance of a Bay Area bankruptcy lawyer who knows that every situation is unique and requires personal attention is crucial for any company that may fear the emergence of this sort of situation.

CIT is the nation's largest "factor" - a specialized type of lender focusing on the retail sector. Factors lend retailers the cash they need to manage their inventories. A spokesman for the National Retail Federation told Bloomberg News that many businesses "dodged a bullet" in the case of CIT, noting that the company's Chapter 11 bankruptcy filing came late enough in the year that most retailers already have their holiday merchandise in stock.

CIT arranged what is known as a "pre-packaged" bankruptcy, in which a company presents the court with a full reorganization plan at the same time that it files for bankruptcy. These are not the most common types of bankruptcy filings, but may be worth considering for some businesses. An experienced San Francisco bankruptcy lawyer can offer more insight on when a "pre-packaged" bankruptcy may be appropriate. CIT says its business operations will continue uninterrupted, but the Bee expressed some doubts, calling the situation for smaller Northern California retailers "worrisome" in the wake of the CIT filing.

There are a number of reasons why a Bay Area company may consider Chapter 11 bankruptcy, which allows for corporate reorganization. Extreme cases may require exploring liquidation as part of a Northern California Chapter 7 bankruptcy filing. A Northern California bankruptcy lawyer is your best source of information and advice concerning the different chapters of the bankruptcy code.

Sacramento Bee: CIT filing may tighten credit for Sacramento-area small firms

Bloomberg: Retailers 'dodge bullet' with CIT's November filing

New data released this week by Equifax shows that Northern California remains particularly vulnerable to small business bankruptcies. Three Northern California areas made the top 15 among the country's hardest hit small business bankruptcy regions during September: Sacramento, Oakland-Fremont-Hayward and the San Jose-Sunnyvale area of Silicon Valley.

Overall, California cities or regions occupy seven of those top 15 slots, spotlighting the degree to which California small business bankruptcy remains a difficult problem. Sacramento small business bankruptcy activity earned the state capital the number three spot on the list. Oakland was 10th and San Jose-Sunnyvale 14th.

A press release from Atlanta-based Equifax, which compiled the data, noted that, nationwide, the September 2009 numbers represent a 27% increase in small business bankruptcy filings from the same month a year ago: 9361 filings, versus 7386 in September 2008. Equifax analyzed Chapter 7 bankruptcy filings, Chapter 13 bankruptcy filings and Chapter 11 bankruptcy filings.

These unpleasant economic numbers are a reminder of the important role a Northern California bankruptcy attorney should have in your financial planning. Consulting an experienced Oakland bankruptcy lawyer, Contra Costa County bankruptcy lawyer or San Francisco bankruptcy lawyer is a key step not only in initiating the bankruptcy process, but in managing it with the goal of making the process run as smoothly as possible.

Equifax Press Release

Sunday's Chapter 11 filing by CIT Group offers a lesson in the role psychology plays when a company files for bankruptcy. CIT filed its bankruptcy petition in Manhattan, but its example is applicable to companies considering a California bankruptcy in Contra Costa County, San Francisco, Alameda County or elsewhere in the Bay Area.

According to an item posted on the New York Times' website Sunday afternoon, century-old lender CIT hopes to reemerge as a viable company via a so-called "pre-packaged" chapter 11 bankruptcy. The paper noted that this will make CIT the first large financial company to default on federal bail-out funds received last year. CIT, the Times reports, was the nation's largest "factor", a specialized type of lender supplying the cash flows on which retailers depend.

Companies of all types regularly use Chapter 11 bankruptcy to create a 'breathing space' in which they can reorganize and return to profitability. Conventional wisdom has long held, however, that lenders are different. A lender's viability is closely tied to confidence in the company, since few people are willing to borrow money from a bankrupt company.

For Bay Area businesses considering bankruptcy the lesson is clear: psychology - confidence - plays an important role in the path a company in San Francisco bankruptcy must follow to get back to profitability. An experienced Northern California bankruptcy attorney will not only guide you through the legal complexities of the California bankruptcy process, but can advise on the best ways to demonstrate the confidence your clients need to see as they decide whether to continue doing business with a firm in Chapter 11.

In CIT's case, for example, the Times reports that the company hopes to inspire confidence by entering a so-called "pre-packaged" bankruptcy, in which a court is asked to approve a reorganization plan at the same time that the company files Chapter 11. If this works it should allow CIT to emerge from bankruptcy much faster than might otherwise be the case. A San Francisco bankruptcy lawyer can advise whether a similar solution might work for you.

New York Times: CIT Files for Bankruptcy