Study Finds 2005 Code Reform Cut Recoveries: Bankruptcy

“Creditors have done worse” since the bankruptcy law was amended in 2005 to enhance recoveries, according to a study by University of Maine School of Law Professor Lois R. Lupica.

In her study, funded by the American Bankruptcy Institute, Lupica said the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was intended to prevent “the discharge of debt consumers could afford to pay.”

“The theory that there are can-pay debtors lurking in the shadows was not confirmed by the data,” Lupica said in an interview.

The professor said the 2005 law was designed to compel individual bankrupts to pay more by restricting access to Chapter 7, where creditors typically get nothing. The theory, according to Lupica, was that more consumers would be forced into Chapter 13, where creditors are often paid a portion of their debts through payment programs spread over about five years.

Lupica found that recoveries by unsecured creditors after the 2005 law was enacted fell by “statistically significant” amounts under both Chapters 13 and 7.

“There were no winners,” Lupica said.

Creditor recoveries were lower in part because “administrative expenses increased significantly,” according to the study. Lupica said there wasn’t even the expected increase in recoveries by secured creditors.

Lupica cited a study showing that Chapter 7 costs increased for each bankrupt by an inflation-adjusted $488 after the 2005 amendments and by $667 in Chapter 13. The average fee for a Chapter 7 filing rose 38 percent after the amendments and 63 percent for Chapter 13, she said.

“Some scholars have claimed that the credit lobby knew” recoveries would decline in bankruptcy despite the changes, she said, citing Professor Ronald J. Mann of Columbia Law School.

Rather than increase recoveries, the intention was to create a “sweat box” by keeping individuals out of bankruptcy “to receive the robust recoveries that seem to elude them once a consumer files for bankruptcy relief,” she said.

Lupica said she wasn’t surprised by the findings.

“The data confirmed my intuition developed from speaking with hundreds of bankruptcy trustees and judges,” she said in an interview.

Supreme Court

Supreme Court Takes on Third Bankruptcy Case This Term

The U.S. Supreme Court will decide next year whether an inherited individual retirement account is protected from the claims of creditors in bankruptcy.

The Supreme Court yesterday said it will resolve a split between two federal courts of appeal on the question of whether an inherited IRA is an exempt asset that an individual can retain despite filing bankruptcy.

Including the new case, Clark v. Rameker, the Supreme Court will rule on three bankruptcy issues in the current term.

One of the other cases deals with whether someone can waive the right to have certain disputes decided on a final basis by a life-tenured federal district judge. The third concerns whether bankruptcy judges have equity power to take property away that an individual bankrupt otherwise would be entitled to retain as exempt. These cases will be argued on Jan. 13 and Jan. 14.

The dispute involving inherited IRAs should be argued around late March.

The split arose in April when the U.S. Court of Appeals in Chicago ruled that inherited IRAs aren’t exempt in bankruptcy and thus belong to creditors. Last year, the federal appeals court in New Orleans concluded that the “plain meaning” of the statutes made inherited IRA’s exempt.

While an IRA funded by the debtor’s own contributions is immune from creditor claims in bankruptcy, the case going to the Supreme Court involves a bankrupt woman who inherited her deceased mother’s $300,000 account. After the daughter filed for bankruptcy, the bankruptcy judge ruled that the IRA wasn’t exempt. The appeals court in Chicago concluded that the account should go to creditors because it represented money the bankrupt could spend readily.

For a discussion of the Chicago court’s opinion, click here for the April 24 Bloomberg bankruptcy report. To read about the New Orleans case, click here for the March 14, 2012, Bloomberg bankruptcy report. For a discussion of decisions by other courts finding inherited IRAs exempt, click here for the Dec. 16, 2011, Bloomberg bankruptcy report.

The case on IRAs is Clark v. Rameker, 13-299, U.S. Supreme Court, (Washington).

The case on waiver is Executive Benefits Insurance Agency v. Arkison, 12-01200, U.S. Supreme Court. The case on equity powers is Law v. Siegel, 12-5196, U.S. Supreme Court (Washington).

New Filing

Fuel Distributor Pettit Files Chapter 11 in Washington State

Pettit Oil Co., a distributor of bulk fuel and lubricants, filed a petition for Chapter 11 protection on Nov. 25 in Tacoma, Washington.

Based in Lakewood, Washington, Pettit supplies customers in the western part of the state. Assets are on the books for $18.7 million, against debt of $22.5 million.

Two bank creditors are owed a total of about $20.2 million. The lenders are KeyBank NA and U.S. Bank NA.

Last year, Pettit generated revenue of $319.1 million, with $1.3 million in cash flow. So far this year, revenue is $172.2 million, with $6.1 million in cash flow.

Pettit asked the bankruptcy court for authority to pay pre-bankruptcy debt to four main suppliers. Otherwise, Pettit said, supplies will be cut off, resulting in the immediate loss of customers.

The case is In re Pettit Oil Co. Inc., 13-bk-47285, U.S. Bankruptcy Court, Western District of Washington (Tacoma).

Updates

Cengage Disclosure Approval Sets Stage for Feb. 24 Confirmation

Cengage Learning Inc. scheduled a confirmation hearing for Feb. 24 after a bankruptcy judge in Brooklyn, New York, approved disclosure materials allowing creditors to vote on the revised Chapter 11 reorganization plan.

Cengage, a college textbook publisher, and the creditors’ committee said lenders don’t have liens on $273.9 million held in a money-market account. Consequently, the revised plan creates an escrow fund to be distributed once the court determines whether first-lien lenders’ liens are valid against the cash and 15,500 copyrights.

The lenders will nonetheless receive an initial distribution of almost $40 million on account of their unsecured claims, based on the company’s assumptions about the invalidity of secured claims.

Even if the liens are invalid, first-lien lenders said they are still entitled to benefit from subordination agreements and participate alongside unsecured creditors by virtue of their deficiency claims.

The revised plan is designed to reduce debt for borrowed money by $4.3 billion. Assuming their liens are all valid, senior secured creditors will take the new equity and a $1.5 billion term loan.

The revised disclosure statement shows the senior secured lenders with a recovery of 72.8 percent on $3.38 billion in claims, while second-lien debt holders see 5.5 percent on $41.5 million in claims.

Senior noteholders are told in the disclosure statement to expect a 9 percent recovery on claims of $27.6 million. General unsecured creditors could see 4.1 percent on claims of $3.1 million. Holders of subordinated notes receive nothing.

After bankruptcy, the company will be financed with a revolving credit ranging from $250 million to $400 million provided by third parties.

Cengage commenced a Chapter 11 reorganization in July after negotiating an agreement with holders of $2 billion in first-lien debt to eliminate more than $4 billion of $5.8 billion in debt. Second-lien creditors and holders of unsecured notes were not part of the agreement.

The company first submitted a plan in August, with amendments later. For details on the original plan where first-lien lenders would receive the new stock plus a $1.5 billion term loan, click here for the July 3 Bloomberg bankruptcy report.

Cengage’s debt includes $3.87 billion on five first-lien term loans and revolving credits plus $725 million outstanding on first-lien notes and $710 million on second-lien notes. Cengage owes some $490 million on three issues of unsecured senior and subordinated notes.

Financial statements for the quarter ended March 31 showed assets of $4.68 billion against liabilities of $6.47 billion, following a $2.76 billion goodwill impairment charge.

Apax Partners LLP bought Cengage in 2007 from Thomson Reuters Corp. in a $7.75 billion transaction. The acquisition was funded in part with $5.6 billion in new debt financing.

First-lien lenders who signed the so-called plan-support agreement include funds affiliated with BlackRock Inc. (BLK), Franklin Mutual Advisers LLC., KKR & Co. (KKR) and Oaktree Capital Management LP.

The case is In re Cengage Learning Inc., 13-bk-44106, U.S. Bankruptcy Court, Eastern District of New York (Brooklyn).

Vertis Gets Plan-Filing Exclusivity Extended to Feb. 3

Although Vertis Inc. sold its assets in January and has yet to propose a Chapter 11 plan, the Baltimore-based advertising and marketing services provider drew no objection from creditors for a fourth enlargement of exclusive plan-filing rights.

The bankruptcy court in Delaware extended exclusivity until Feb. 3, some two months short of the maximum permitted by the Bankruptcy Code.

Quad/Graphics Inc. (QUAD) said it bought the business for a net price of about $170 million. The sale created a $20 million fund to wind down the remainder of the bankruptcy. About $10 million was left earlier this month.

The current bankruptcy is Vertis’s third. The prior case, in late 2010, required less than a month to complete, eliminating $700 million in debt.

In the latest case, Vertis listed assets of $837.8 million and debt of $814 million. Liabilities included $68.6 million on a revolving credit and $427.7 million on a secured term loan.

Through the first bankruptcy in 2008, Vertis merged with American Color Graphics Inc., also in Chapter 11 at the same time. The first reorganizations reduced combined debt by almost $1 billion.

The new Chapter 11 case is In re Vertis Holdings Inc., 12-bk-12821, U.S. Bankruptcy Court, District of Delaware (Wilmington). The 2010 bankruptcy was In re Vertis Holdings Inc., 10-bk-16170, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The first bankruptcies were In re ACG Holdings Inc., 08-bk-11467, and In re Vertis Holdings Inc., 08-bk-11460, both in U.S. Bankruptcy Court, District of Delaware (Wilmington).

GMX Resources Tallies $4.7 Million Net Loss in October

GMX Resources Inc. (GMXRQ), an oil and gas exploration and production company, reported a $4.7 million net loss in October on revenue of $2 million.

The month’s operating loss was $823,000, according to a report filed with the U.S. Bankruptcy Court in Oklahoma City, where the company is based. Interest expense for the month was $3.7 million.

GMX has a Dec. 3 hearing in bankruptcy court for approval of disclosure materials explaining a revised reorganization plan based on a settlement between senior secured noteholders and unsecured creditors.

The lenders are to assume ownership in exchange for $338 million of the $402.4 million they are owed. For details, click here for the Oct. 25 Bloomberg bankruptcy report.

GMX filed for Chapter 11 protection in April after negotiating a debt-swap agreement with secured lenders. The company has 160 wells in North Dakota, Montana, Wyoming, Texas and Louisiana. It listed assets of $281.1 million and liabilities totaling $458.5 million.

The $51 million in 9 percent second-lien notes last traded on Nov. 21 for less than 1 cent on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The $48.3 million in senior unsecured notes due 2015 traded on Nov. 20 for less than 1 cent, according to Trace.

For the nine months ended Sept. 30, 2012, GMX reported sales of $48.3 million and a net loss of $206.7 million, including $166.2 million in asset-impairment charges.

The case is In re GMX Resources Inc., 13-bk-11456, U.S. Bankruptcy Court, Western District of Oklahoma (Oklahoma City).

Statistics

Foreign Companies Push Defaults Higher This Year

Defaults worldwide through October by 31 issuers reached $17.4 billion, more than at the same time last year, as a result of more defaults outside the U.S., according to a report this week from Fitch Ratings.

In the same period last year, there were 25 defaults on $13.4 billion in debt. The increase is attributable to $4.8 billion more in defaults abroad, Fitch reported.

Except for senior secured debt, where the recovery rate this year is up fractionally to 65.5 percent, recoveries on lower-ranking debt are lower this year compared with 2012.

For senior unsecured debt, this year’s 28.3 percent recovery is down 34 percent from 2012. The 29.4 percent recovery on subordinated debt this year is off 23 percent from last year.

Advance Sheets

Filing Lis Pendens Isn’t Voidable as Preference, Court Says

The filing of a lis pendens isn’t a transfer of property and therefore can’t be voided as a preference, the U.S. Court of Appeals in Denver ruled.

A bank listed the wrong name in recording a mortgage, making the mortgage possibly invalid as lien on the property. Before bankruptcy, the bank initiated a lawsuit to reform the mortgage and filed a lis pendens, the technical name for a filing in land records asserting an interest in the property.

The owner filed for bankruptcy and failed to persuade the bankruptcy judge that the lis pendens should be voided as a preferential transfer occurring within 90 days of bankruptcy. The district court agreed, and the case went up to the U.S. Court of Appeals for the 10th Circuit.

Citing Colorado law, Circuit Judge Paul J. Kelly Jr. agreed with the lower courts. A lis pendens, he said, doesn’t transfer property even though it may render the property unmarketable.

Kelly rejected the argument that there must have been a transfer because the owner’s rights in the property were diminished by the lis pends.

“We do not see how clouding title constitutes ‘disposing of or parting with’ an interest in property,” he said. He didn’t address whether the mortgage itself was invalid or what the bank’s interest in the property should be.

The case is Ute Mesa Lot 1 LLC v. First-Citizens Bank & Trust Co. (In re Ute Mesa Lot 1 LLC), 12-1134, U.S. Court of Appeals for the 10th Circuit (Denver.)

To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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