Articles Posted in Chapter 11

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The rapper Curtis James “50 Cent” Jackson III filed a voluntary chapter 11 bankruptcy petition in Connecticut bankruptcy court on Monday, July 13, 2015.  Jackson rose to prominence with songs like In Da Club and P.I.M.P. from his 2003 album Get Rich or Die Trying (also the name of his 2005 film biopic) and has starred in many film and television projects, including the Starz show Power and the upcoming movie Southpaw.

“This filing for personal bankruptcy protection permits Mr. Jackson to continue his involvement with various business interests and continue his work as an entertainer, while he pursues an orderly reorganization of his financial affairs,” Jackson’s attorneys said in a statement.

The chapter 11 filing was made the same day a jury was scheduled to determine whether Jackson is liable for punitive damages in a 2010 lawsuit filed by Lastonia Leviston.  Just days prior to the filing, the same jury awarded Leviston $5 million in compensatory damages, after she alleged that Jackson violated her privacy by posting a sex tape of her online without her permission.  Jackson’s attorneys are disputing the damages award.  As a result of the bankruptcy filing, the proceedings in the sex tape lawsuit are stayed, meaning that Leviston cannot try to enforce or collect her $5 million award, or obtain a finding from the state court jury on the amount of punitive damages, without first obtaining relief from the automatic stay in the bankruptcy case.

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Commercial landlords should take notice. Within the last several months, one women’s clothing retailer after another has gone out of business. On Dec. 4, 2014, Philadelphia-based Deb Shops filed Chapter 11. Next came Delia’s, based in New York, which filed bankruptcy only four days later. On Jan. 9, 2015, Body Central, based in Florida, a chain with 265 stores, announced that it was closing all of its stores by way of an assignment for the benefit of creditors, an alternative to federal bankruptcy. On Jan. 15, Wet Seal, a Southern California-based company, filed its own Chapter 11. Then on Feb. 4, Cachè, another New York-based chain filed Chapter 11. In addition to these, Jones New York andKate Spade Saturday recently announced that their retail locations would be closing.

If one is an anomaly, two a coincidence and three a trend, then we should pay attention when we see so many substantial retail women’s clothing companies file bankruptcy all within a few months. There is anecdotal evidence that as millennials get older and start to assert their spending power, traditional brick-and-mortar businesses may be in for some tough times.

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The economy is humming along and bankruptcy filings are at historic lows.  http://www.prweb.com/releases/2015/01/prweb12432257.htm.   Nevertheless, a recent trend in retail may suggest that the times, they are a changing.

Radio Shack, the 95 year old national chain that for many years was the “go to” store for consumer electronics, has been in the headlines as a result of its bankruptcy filing in February.   But getting much less national mainstream publicity was the demise of at least seven clothing retailers, all of whom went out of business or filed Chapter 11 within the past 5 months.   In December it was Deb Shops and Delia’s.   In January, it was Body Central and Wet Seal.  In February, Cache filed, and in April, it was Fresh Produce, Simply Fashion and Frederick’s of Hollywood.

In total, these retailers operated out of over 6,500 stores.   That means many employees are now out of a job.   It also means that there were over 6,500 leases that either were forfeited back to the landlords or sold.  That is a significant disruption for property owners in such a short time period.   And a lot of new business for companies such as liquidators Hilco, Gordon Brothers, and others who specialize in liquidation sales for retail companies that are going out of business, not to mention the bankruptcy lawyers involved in those Chapter 11 cases.

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The Beverly Hills Bar Association’s Bankruptcy Section recently held a program discussing the three recent bankruptcy-related Supreme Court decisions: Law v. Siegel (a case regarding surcharge, which was discussed on this blog in a previous post by Courtney Pozmantier), Executive Benefits Insurance Agency v. Arkison (In re Bellingham) (redux of Stern v. Marshall), and Clark v. Rameker (regarding inherited IRAs and exemptions).  The program was presented by Ken Klee and Dan Bussel and moderated by Greenberg Glusker’s own Brian Davidoff.

While the three cases that were discussed address different issues, the cases were linked by common themes.  All three cases were decided unanimously by the Supreme Court — no split decisions or plurality decisions here!  Also, all three opinions made use of textual analysis.  The panelists at the program speculated that perhaps unanimity came at the cost of squarely addressing key issues.  The Supreme Court’s grant of certiorari in the Wellness International case[1], in order to resolve issues left open by the Bellingham, supports this contention.  The panel also discussed the possibility that the use of textual analysis, which is advocated by some conservative Justices, may have been necessary for unanimity.  This is supported by the fact that Justice Sotomayor incorporated textual analysis into her opinion in Clark v. Rameker.

The program went on to address how these three cases will impact the practice of bankruptcy, including how courts will deal with Stern v. Marshall-type claims in the future.  A DVD of the program is available from the Beverly Hills Bar Association’s website.  By purchasing and viewing the DVD, attorneys can earn 1 hour of MCLE credit.

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A new year always brings new and unexpected challenges.  Turnaround professionals make careers out of expecting the unexpected and helping their clients turn challenges into opportunities.

We asked several turnaround professionals to let us know, in a few words, what they see coming in 2014, and here are their comments:

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“For 2014, I see continued emphasis on out-of-court restructurings and refinancings when company management and ownership commit early on to obtaining appropriate professional restructuring consulting and insolvency legal advice.  I’m expecting that lenders in these instances will provide a reasonable length of time for credible turnaround or other exit strategies to play out, provided there are specific action plans and timelines in place.”

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Filings are Down

Commercial bankruptcy filings were down by 28% in 2013 over the prior period in 2012, and overall bankruptcy filings dropped 15%, putting the country on the lowest level of petitions since 2007 according to figures released by the American Bankruptcy Institute.  The data, compiled by Epiq Systems, Inc. and released by the American Bankruptcy Institute shows there were 3,055 commercial filings in November 2013 down from 4,252 filings in November 2012.

So What’s Up?

With the continued improvement in the economy, this trend undoubtedly will continue.  So what does that bode for the world of restructuring professionals?  Well, obviously, with the reduced number of filings there is a reduced case load for restructuring professionals to sink their teeth into.  However, what is also evident is that with the passing years it seems that the nature of bankruptcy filings have also changed.

While this is somewhat anecdotal, it also appears to be backed up by the data.  Over the last several years, the nature and way that chapter 11 bankruptcy filings are being handled has changed.  Gone seem to be the days of traditional restructurings where a company filed a chapter 11, worked its way through the issues that caused it to file in the first place, and ultimately filed a plan of reorganization some 9 months to 2 years later, all the while being funded either by the company’s existing lender or by a new debtor-in-possession (“DIP”) lender.  More and more cases these days are being disposed of by way of a relatively quick section 363 sale.

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Joe Francis built his Girls Gone Wild (GGW) empire (and the ego of an emperor) filming intoxicated college girls in various states of undress, putting that footage on VHS (and later DVDs and branded websites), and selling them to eager consumers across the globe.  If you were alive and watching TV in the late 1990s and early aughts, those late-night infomercials undoubtedly made their way across your TV screen at some point, or you may have even purchased such classics as Girls Gone Wild: Mardi Gras Madness or Girls Gone Wild: Ultimate Spring Break.

Photo 1 - Joe_Francis_at_AVN_Adult_Entertainment_Expo_2009

Photo by flipchip/LasVegasVegas.com [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

After more than 15 years of persuading drunken girls to take off their clothes for the camera, a legal dispute between Francis and casino mogul Steve Wynn caused the company behind GGW, along with two affiliates, to file chapter 11 bankruptcy petitions in U.S. Bankruptcy Court in Los Angeles on February 27, 2013.At the time of the filings, Francis boasted to TMZ that the bankruptcy wouldn’t impact his personal wealth.  GGW separately issued this statement:

“This Chapter 11 filing will not affect any of Girls Gone Wild’s domestic or international operations.  Just like American Airlines and General Motors, it will be business as usual for Girls Gone Wild.”

The comparison of GGW to General Motors and American Airlines is, to say the least, head-scratching.  After all, a bankruptcy filing doesn’t exactly confer titan-of-industry status—or make soft-core porn as American as apple pie.

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The biggest trend in Chapter 11 bankruptcies over the past 10 years is to sell assets through a “Section 363 sale,” named for Section 363 of the Bankruptcy Code, which describes the standards for sales in bankruptcy court.   Previously, in most Chapter 11 cases, the debtor would propose a Chapter 11 plan.   In successful cases, the Chapter 11 plan would be approved by creditors and by the court.   If a debtor was selling substantially all of its assets, the sale would be part of the Chapter 11 plan.

With greater and greater frequency, debtors and their buyers have eschewed the more laborious Chapter 11 Plan process, opting to consummate the sale transaction by way of a simple motion under Section 363 of the Bankruptcy Code.   In order to obtain court approval of a Chapter 11 Plan, a debtor must first obtain approval of a disclosure statement, must then obtain sufficient votes from creditors, and finally, must meet other stringent Bankruptcy Code requirements.   This takes time, generally at least 3 months.  It is also expensive, and the outcome is uncertain.

In contrast, a motion to sell assets free and clear of liens under Section 363 can be accomplished upon regular notice—21 days in Southern California—and sometimes on even shorter notice if the Court allows it.   In addition, the paperwork is much less onerous and thus less expensive for the bankruptcy estate.

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