Business-related bankruptcy cases are increasing in Wisconsin and around the country.
Through April, 3,412 Chapter 7 bankruptcy filings were recorded in the U.S. Bankruptcy Court, Eastern District of Wisconsin, a 43-percent increase over the number of filings in the same period in 2007. There were nine Chapter 11 filings in the court through April, compared with two during the same period in 2007.
Chapter 7 bankruptcy liquidates all of a business’ assets. Generally, businesses no longer exist after a Chapter 7 procedure.
Chapter 11 bankruptcy is intended to reorganize a business so that it might continue after the process, either with its previous owner or after a sale.
Most of the increase in Chapter 11 filings is related to the commercial real estate market, said Peter Blain, an attorney with Reinhart Boerner Van Deuren S.C., who specializes in business bankruptcy and reorganization, specifically the condominium development market.
“A lot of projects went up when the money was easy,” Blain said. “(Many of the) parties investing in commercial real estate found themselves in a market that appeared as if it would go on forever. A lot of investors were overextended. Now that we’re coming to a slowdown or halt in the market, there is an inability to move units, even those committed to close.”
While the impact of the real estate slowdown has not spread to other industries yet, increased filings in manufacturing, shipping and other industries are likely, said Patrick Howell, an attorney with Whyte, Hirschboeck Dudeck S.C. who also specializes in bankruptcy and business reorganization.
According to the American Bankruptcy Institute, about 28,322 businesses filed for bankruptcy in the United States in 2007, a 43.8-percent increase over 2006.
“When I think about where is the heart and soul of the Rust Belt — in operations like manufacturing concerns — I don’t see them here yet,” Howell said. “Because the impact is so severe on the real estate market, I am just wondering when we will see if this will make it into the service and manufacturing industries.”
Blain has already started to see some spillover in bankruptcy filings, although largely in markets outside of Wisconsin.
The credit woes caused by the slowdown and collapse of the housing and commercial real estate market has started to spill over into other marketplaces, Blain said.
“It is more difficult for any business with distress to refinance,” he said. “The credit crunch has spilled over in a more general sense.”
Other factors such as high gasoline and diesel fuel costs and increased utility bills will also put more pressure on other businesses, which will lead to more Chapter 11 filings, the attorneys said.
“If you consider that virtually every business has products delivered by trucks, and as costs increase and ripple through the economy, a lot of marginal businesses will feel the pressure,” Blain said. “It’s already hitting the airlines.”
Bankruptcy filings will further increase, Blain said, because of rapidly rising costs for commodities such as metal.
“Increased competition like that puts pressure on U.S. manufacturers,” he said. “Naturally, the numbers will go up. Filings will increase. If we are not in a recession now, we will be in one (soon), so through 2009, there will be a continuing increase in filings naturally.”
Most of the Chapter 11 cases that Blain and Howell work on are filed in Delaware and southern New York state, because the federal bankruptcy courts there are known for being favorable to debtors and have experience in large cases.
In Wisconsin, businesses and individuals can file for a state reorganization called Chapter 128, which can be faster, less expensive and more flexible than federal Chapter 11 filings, said Michael Polsky and Marie Nienhuis, attorneys with Beck, Chaet, Bamberger & Polsky S.C.
Polsky’s firm is one of the best-known practitioners of Chapter 128 in Wisconsin, and Polsky has been named receiver for several high-profile commercial Chapter 128 cases, including the First Place on the River condominium development in Milwaukee, the Metropolitan Place Phase II condo development in Madison, a large vacation project north of Wisconsin Dells and for Leisure Investments, an owner of several office buildings in Milwaukee and Washington County.
A receiver in a Chapter 128 filing acts as an independent third party, responsible for maximizing the value of the business or assets that are being reorganized, Nienhuis said.
Polsky’s practice is working on 45 open Chapter 128 filings around the state, the firm’s busiest level ever, he said. Almost all of that work is related to the commercial real estate market, specifically condominium developments.
“This is the busiest we’ve ever been,” Polsky said. “(We’re dealing with) more developments than people in business itself. This is a project problem rather than a professional problem. This is buildings and land, not the companies involved in the development process.”
The Chapter 128 process almost always involves the sale of a company, both Polsky and Neinhuis said. Although former owners occasionally end up purchasing their companies in the auction process, it does not happen often.
“The receivership process is designed to maximize the value of assets to creditors,” Polsky said. “There are numerous cases in which the dividend to unsecured creditors has been in excess of 50 percent of the amount due.”
Although most Chapter 128 filings result in a sale of the company, the business often continues with new owners and with most jobs preserved, Polsky said.
“In many cases, because we’re able to obtain a going concern value for the company, not only does the bank get paid in full, there is a substantial dividend to unsecured creditors as well,” he said. “The additional benefit of on ongoing concern sale is that jobs are preserved, vendors still have a client and customers still have a supplier.”
Although Chapter 11 is intended to allow a business to continue to operate once it has been reorganized, most companies that file for bankruptcy under that chapter end up being sold, both Howell and Blain said.
“Fifteen years ago, a decent percentage of the companies (filing) would conform to a reorganization plan (after Chapter 11 proceedings),” Blain said. “In the last 15 years, most Chapter 11s are filed for the purposes of selling a business as a going concern in a short time frame. It’s common to see a lender require (a business) to file Chapter 11 and for a sale memorandum to be prepared by a set date, and to have a sale be by a given date. Even many of the large cases wind up as sales.”
If a business owner wants to continue owning and operating a company after a reorganization process that happens in court, Chapter 11 remains one of their best options to hold onto the company, Howell said. However, it is a difficult, expensive process, he said.
“It takes a strong core business and people to run it, with a strong entrepreneur owner who can rally the troops and the market behind it,” he said.
Resources for troubled businesses
- Turnaround Management Association-Chicago/Midwest chapter. 815-469-2935
www.turnaround.org. - American Bankruptcy Institute
www.abiworld.org. - International Insolvency Institute
}www.iiiglobal.org. - American College of Bankruptcy
www.amercol.org. - U.S. Bankruptcy Court-Eastern District Wisconsin
www.wieb.uscourts.gov. - Wisconsin State Bar – Bankruptcy, Insolvency and Creditor’s Rights section
www.wislawyer.org/sections/bankruptcy. - Milwaukee Bar Association
www.milwbar.org.
