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Revisiting the 2005 Amendments When Times Get Hard

posted by Elizabeth Warren

As a follow up to my earlier post about the forces that have made bankruptcy less workable for reorganizations, I note a new Businessweek article.  Retailers are feeling the pain of reduced consumer spending and tough credit terms, and now they are discovering that the 2005 bankruptcy amendments will make it harder--or impossible--for some of them to reorganize.

In an article entitled, When Chapter 11 is the End of the Story, reporters have started interviewing failing retailers who are facing new hurdles because of the changes in the law. The conclusion?  Companies that might have reorganized before 2005 may now be pushed into liquidation.

Bobby's comment on the earlier piece is right on point: bankruptcy laws will determine who bears the losses.  But that's the problem with many of the amendments.  Special interest lobbying means that one group gets favored over another, with no real policy justification.  Worse yet, in some cases, companies that could reorganize if all the creditors shared the hit will be forced to liquidate. 

Creditors want their money, of course.  But giving creditors so much power that businesses that could have been reorganized will end up liquidating makes no business sense for anyone.

Congress was enthusiastic about dismantling some key Chapter 11 protections in boom times.  When those amendments are tested in hard times, they seem much less attractive.


One of our local malls was sold yesterday at auction to IBC for 6 million and the other changed ownership just in the last 6 months. We had a proposal to build a new outdoor mall with the county and city offering tax incentives but the company is now "revaluating" economic conditions. Now the retailers are in limbo, one said on the news that he had been paying is lease payments directly to the IRS. So this mall was in Bankruptcy in the Northern District of Texas and IBC did lift the stay in the first Chapter 11 Bankruptcy and the stay was subsequently lifted. One of the Co-Owners has a ton of retail property here in Texas and filed bankruptcy for several of his corporations. The recent involuntary Bankruptcy 08-43909 Northern District of Texas had the stay lifted on an expedited basis. Apparently the Co. owed a lot of County taxes and took out loans using the property as security in violation of the loan terms with IBC. IBC paid the county taxes and obtained the tax certificates. What was interesting to me was that in their Relief from Stay IBC pointed to schedules indicating 45% vacancy. The “Breakpoint” on monthly income need to be $163k per month and the property was only bringing in $90k per month (approx). What I thought was curious was that the stay was lifted on the same day it was sold at auction probably after or at the same time as the auction. Didn’t get to read the order so I guess it was retroactive? I didn’t see a response from the debtor but then again the attorney for IBC got a hearing on the same date she filed the Relief from Stay. Conclusion…. Sold.

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