Daily Journal Article on Bankruptcy Venue Reform

DAILY JOURNAL
November 23, 2020
By Zev Shechtman, et al.

It’s time for Congress to address bankruptcy venue

What do the Dodgers, American Apparel, Rubio’s Fish Tacos, California Pizza Kitchen, MGM Studios, and Pacific Sunwear have in common?  Each is an iconic Southern California brand.  But that’s not all they have in common.  These companies are members of a growing list of California companies that strategically elected to file for bankruptcy outside of California.  By filing for bankruptcy in faraway states, they deprived local employees, vendors and creditors from participating in the bankruptcy process.  Read more —

 

Danning Gill Represents Chapter 11 Trustee
in California Oil and Gas Bankruptcy & Sale

LOS ANGELES – Danning, Gill, Israel & Krasnoff, LLP represented  Michael A. McConnell, the Chapter 11 trustee (the “Trustee”) for the estate of HVI Cat Canyon, Inc. (“HVI”), which owned approximately 1,000 oil wells, most of which were idle or not performing.  The $26.75 million sale of the oil and gas assets located in Santa Barbara and Kern Counties closed on October 26, 2020.  HVI is affiliated with Rincon Island Limited Partnership that went through its own bankruptcy commenced in 2016.  The Trustee also closed a second sale for oil wells located in Orange County.  The Trustee was represented throughout by Danning Gill Partner Eric P. Israel.

The HVI bankruptcy case was filed in the Southern District of New York on July 25, 2019, transferred to the Southern District of Texas, and then transferred to the Northern Division of the Central District of California.  The Bankruptcy Court directed the appointment of a Chapter 11 trustee on motion by the State of California and others.  The Trustee was able to procure post-petition financing via a series of loans from the main creditor, UBS AG, and ultimately borrowed approximately $13.5 million.  With those funds, the Trustee operated the company for approximately one year.  During that time, the global price of oil crashed due to a price war between Russia and Saudi Arabia, and the effects of the COVID pandemic on global demand for crude oil.

In order to improve marketability of the company, the Trustee converted the company into a stand-alone vehicle instead of being part of a conglomerate of affiliated entities.  As part of the process, the Trustee rejected contracts with insiders and affiliates that had provided office space, equipment rentals, back office services and even sales of its product, replacing those arrangements with insiders and affiliated entities to third party vendors at market prices.

According to Mr. Israel, “The sale was complex, requiring settlements with numerous diverse parties in interest, including over 500 mineral owners, numerous governmental regulatory agencies and several secured creditors, and the County of Santa Barbara for many millions of dollars in real property taxes owed.  Ultimately, the mineral owners agreed to waive pre-petition back royalties of about $13 million in order to procure a responsible new operator.”

UBS was represented by O’Melveny & Myers, LLP.  The Official Committee of Unsecured Creditors was represented by Pachulski, Stang, Ziehl & Jones, LLP.  CR3 Partners was the Trustee’s financial analysts.

Ravn Alaska’s Emergence from Bankruptcy

From Float Alaska to the New Ravn—Acquiring Alaska’s Largest Regional Airline through Bankruptcy During the COVID-19 Pandemic

In March of 2020, Ravn Air Group, Inc. and its seven affiliates (collectively, Ravn) comprised the largest regional air carrier in the State of Alaska.  Ravn had 1,300 employees, 72 aircraft, 21 hub airports, and 73 facilities serving 115 destinations in Alaska, with 400 daily flights.  In addition to transporting passengers throughout the state, Ravn provided logistics, mail, charter, medical and freight air services in Alaska.  Ravn operated two Part 121 FAA certificates, and one Part 135 FAA certificate.  The Ravn affiliates were assembled and owned by a group of private equity firms and other investors.

In 2015, Ravn entered into a secured credit agreement with secured lenders for a term loan of up to $95 million and revolving loans of up to $15 million.  In March 2020, Ravn owed the secured lenders approximately $91 million.  All of Ravn’s assets were pledged as collateral to secure the loans.

Due to the seasonal nature of Alaska air travel, Ravn relied heavily on spring and summer bookings.  In March of 2020, the COVID-19 pandemic upended the business.  By March 12, 2020, the World Health Organization declared COVID-19 a pandemic, and the first case of the virus was announced in Alaska.  Travel restrictions, cancellations and decreased booking resulted.  By March 20, 2020, the State issued a travel advisory to cease all non-essential travel.  By the end of March 2020, Ravn lacked cash to fund operations, including payroll.

On April 5, 2020, the eight Ravn entities filed for chapter 11 bankruptcy protection in Delaware bankruptcy court.  The Ravn debtors obtained superpriority secured financing from their prebankruptcy lenders, with such debt being repaid ahead of other debts, and a limited budget available for the administration of the bankruptcy cases.  The debtors originally sought to reorganize in chapter 11 utilizing funds made available under the CARES Act, but the debtors’ secured debt burden proved too great.

The debtors’ agreement with their DIP lenders required an accelerated timeline to confirm a liquidating chapter 11 plan.  The plan also allowed for sales of assets under section 363 of the Bankruptcy Code outside of a liquidating trust, so long as the secured lenders consented to the sale.

The debtors started a sale process, with the initial intent of selling the entire business as a going concern.  The debtors solicited bids.  However, no bidder submitted a bid that the lenders deemed adequate to acquire all of the assets of the debtors.  Accordingly, the debtors sold the Ravn assets in over two dozen lots, comprised of aircraft, ground support equipment, real estate, parts and equipment, contractual rights and other personal property.

FLOAT Alaska, LLC is a company founded by Josh Jones, a startup incubator manager and investor, Tom Hsieh, an engineer and social entrepreneur, and Robert McKinney, a veteran regional airline executive.  The team previously founded FLOAT Shuttle, Inc., focused on the Southern California market.  The FLOAT Alaska team viewed the Ravn going concern sale as a unique opportunity to provide essential air services to the rural communities of Alaska and to return much needed jobs to the region.  The team also understood that a successful going concern acquisition would be accompanied by the CARES PSP grant of at least $15 million which would be used to rehire personnel and other startup costs.

The FLOAT team completed extensive due diligence on the company and its assets.  The team worked diligently to submit a qualified bid satisfying the numerous operational, financial, and procedural requirements to acquire a commercial airline.  FLOAT participated in a multiday auction with numerous competing parties vying for the going concern business.  It was a complex process where the debtors repeatedly divided, and re-divided, their assets in efforts to maximize the value.  The debtors went so far as to expressly instruct bidders to “bid against themselves,” by asking bidders to increase their offers for various assets, some of which had only one bidder.  The FLOAT Team worked indefatigably to adjust its bid to meet the requirements of the court, the debtors and creditors.

FLOAT’s ultimately successful bid for the key assets of Ravn’s passenger business was $8 million, with a waiver of major contingencies, and a firm commitment to an early and expedited closing process.  The core assets FLOAT sought to acquire included the corporate name, intellectual property and goodwill, Ravn’s Part 121 certificates, and a core fleet of six Dash-8 aircraft.  The debtors concluded that FLOAT’s carefully crafted bid was the best and highest bid for the going concern business.

In addition to the initial aircraft purchased, FLOAT acquired essential ground support equipment and several important real properties, including the debtors’ main hangar and training facility.  The FLOAT team utilized an interdisciplinary team of attorneys specialized in bankruptcy, corporate laws, aviation, and CARES Act financing, led by restructuring attorney Zev Shechtman of Danning Gill.  Because of the vision and perseverance of FLOAT’s outstanding leadership team, they were able to rapidly transition  from bidders to owners and now operators of Ravn Alaska.  The company has hired or rehired over 200 employees, and it plans to grow further.  The New Ravn will resume commercial passenger travel by the end of October. 

 

Wave of Bankruptcies Washes Over Los Angeles Businesses

Los Angeles Business Journal

October 12, 2020

John Tedford, partner at Danning Gill Israel & Krasnoff spoke with the Los Angeles Business Journal (LABJ) for an article about various industries hit hard financially by the COVID-19 pandemic.

One industry discussed is hospitality. According to the LABJ, there were 747 Commercial Chapter 11 filings recorded nationwide in September, a 78% increase over the same month in 2019, according to New York-based research firm Epiq Systems Inc. With a total of 5,529 filings during the first three quarters of 2020, Chapter 11 commercial filings are up 33% over the same period last year.

“The hotel space is really hurting,” said Tedford. “They aren’t receiving the revenues that they need from their hotels … and their lenders have decided enough is enough. I’m guessing that that case will get filed in and about in a couple weeks in Delaware.”

Tedford added that restaurants are also in a vulnerable position, but many may disappear without filing for bankruptcy.

“The restaurants generally are just leasing, and I think a lot of them, it’s better just to shut down, so we won’t necessarily see bankruptcy filings for them,” Tedford said. “I’m surprised that we haven’t seen more restaurants closed permanently. I don’t know how they can go this long without having sustained revenues at high levels. It doesn’t look like California is just going to be allowing full occupancy anytime soon.”

To read the full article, click here.

 

Big-Name Bankruptcies Flock to Two-Judge Court in Virginia

Bloomberg Law

September 15, 2020

By Zev Shechtman

 

The U.S. Bankruptcy Court for the Eastern District of Virginia has developed a reputation among corporate restructuring practitioners as a debtor-friendly venue that issues consistent rulings while running efficient operations.

So far in 2020, 9% of large, publicly traded company bankruptcies have been filed in the Eastern District of Virginia, according to the UCLA-LoPucki Bankruptcy Research Database.  That’s more than double the district’s share of major cases during the previous five years.

“Forum shopping is the story and Virginia is the flavor of the week,” said Danning Gill Partner Zev Shechtman.

Lord & Taylor, Ascena Retail Group, J. Crew, and Intelsat SA represent the large companies that filed for bankruptcy there this year following U.S. business shutdowns caused by the Covid-19 pandemic.

To read the full story, click here.

Exiting Bankruptcy

WWD

August 30, 2020

A number of retailers that filed for Chapter 11 bankruptcy in the early months of the COVID-19 crisis are now at the finish line or close. To get here, retailers sought financing while facing the risks that come with months-long store closures, then reopened stores during the ongoing pandemic and struck deals with creditors, lenders, and in some cases, buyers. 

While the proceedings so far have shown courts willing to accommodate retailers’ requests and defer to their business judgment, there are still questions of long-term survival, bankruptcy attorneys said. 

“I think there’s going to be a tendency to approve things that may be less likely to be approved in a more healthy market environment,” said Zev Shechtman, partner at Danning Gill Israel & Krasnoff LLP.

“But in order to exit from bankruptcy, companies need to have a viable business plan going forward,” he said. “The question is, where is the money coming from on a going-forward basis?” 

“Bankruptcies can be really successful for reorganizations when there is an exit, a light at the end of the tunnel,” said Shechtman of Danning Gill.  “The bankruptcy story will be mirroring the general economic story in many ways,” he said. “If there is no end in sight for the economy, bankruptcy is not a silver bullet.”

To read the full article, click here.

Thoughts for Small Businesses Considering Bankruptcy

For an operating business, the bankruptcy process can be time-consuming, invasive, difficult to maneuver, and expensive.  You need someone who can explain all of the options, and prepare you for what’s to come.

Rule #1:  Don’t wait until the last minute.  There are lots of things most operating companies need to do when they file for bankruptcy.  Attorneys need time to evaluate what needs to be done, gather evidence, prepare motions, and hit the ground running.  Waiting until the business is almost out of cash, or until some negative event is about to happen, hurts your ability to hire good counsel and successfully prosecute a Chapter 11 case.

When is filing for bankruptcy a good idea?

For a company, Chapter 7 (liquidation by a trustee) usually is worth doing only if the business already is closed, and if (a) there are assets that can be sold, or (b) a strong signal needs to be conveyed that the business really is defunct.  For operating businesses that have some going concern value, an orderly liquidation through Chapter 11 is a better option.

For operating companies that want to reorganize, Chapter 11 is a good idea if the business is (or can be) profitable, but needs to shed some bad leases, restructure secured loans, and/or stretch out payments to creditors.  Chapter 11 can also be good for real estate companies with property that has significant equity or can generate enough cash to make monthly interest payments.  Bankruptcy protects the debtor’s assets and gives it some time to negotiate terms with creditors.

Generally, what is the first thing a company should do if it plans to file for bankruptcy?

Especially if the company is operating, get its records (and record-keeping) in order.  From the first day to the last, the debtor’s success depends on its ability to properly identify and disclose its assets, liabilities and financial history, generate reliable financial statements during the case, and prepare realistic financial projections.  No matter how profitable a company may be, cases can go south quickly if the debtor’s financial reporting is inadequate or untrustworthy.

What should a small business expect during the first few months after filing for bankruptcy?

Petitions often are filed on the eve of a foreclosure, judgment, or other adverse event the debtor wants to delay.  But there is no rest for the weary.

Existing bank accounts must be closed and new ones opened right away.  A “7-day package” must be submitted within a week.  Detailed schedules of assets and liabilities must be filed within 15 days.  Soon after the case is filed, someone will need to attend an “initial debtor interview” and later a “meeting of creditors.”  Detailed operating reports must be filed each month.  In a Subchapter V “small business” case, the debtor must file financial statements and tax return with its petition, and generally must file a plan within 90 days.

While doing all of this (and more), the debtor must keep its business going.  For a truly small businesses, this is a monumental task.

What are some bankruptcy pitfalls that businesses should avoid?

It’s a long list.  Mostly, don’t do things that may turn the judge against you.  Don’t transfer away assets before filing.  Don’t provide false or misleading information in court filings.  Choose your battles (if you litigate about everything, the judge may see you as the problem, not the solution).

Also, don’t make everyone your enemy.  Litigating against creditors – especially secured creditors who can add their legal fees to the loan balance – drives up costs.  Often, by the time you finish fighting with a hostile creditor you will have spent more on legal fees than you would have spent if you had just agreed to pay the creditor more under a chapter 11 plan.

 

How the CARES Act Has Impacted Bankruptcy Cases

Earlier this year, we wrote about the Small Business Reorganization Act of 2019 (the “SBRA”), which went into effect on February 22, 2020.  For a quick recap on the SBRA, click here for our prior post.  In this post, we’ll discuss a few ways the CARES Act has affected bankruptcy cases.

More businesses can seek relief under the new Subchapter V of Chapter 11

One of the things the SBRA did not do was change the definition of “small business debtor” to let more businesses qualify as small business debtors under the Bankruptcy Code.  The SBRA’s proponents wanted the term “small business debtor” to include businesses with up to $10 million of debt.  But Congress rejected their request.  When the SBRA went into effect a “small business debtor” needed to have no more than $2,725,625 of “noncontingent liquidated secured and unsecured debts.”

About a month after the SBRA went into effect, Congress passed the CARES Act in response to the economic fallout of the COVID-19 pandemic.  In the CARES Act, Congress temporarily increased the debt ceiling to $7.5 million for businesses seeking relief under the new Subchapter V of Chapter 11.  As a result, we can expect to see more businesses (and individuals) qualify as “small business debtors.”

Debtors might be eligible to borrow money under the Paycheck Protection Program (PPP)

One interesting issue we’ve seen come up over the past few months is whether small businesses are eligible for PPP loans while they’re in bankruptcy. The SBA says debtors are ineligible. In fact, the official application actually told potential borrowers that their loan requests would be denied if they were in bankruptcy:

Despite the SBA’s position, some courts have held that it is illegal for the SBA to discriminate against bankrupt entities.

The last day for businesses to apply for PPP loans was August 8, 2020.  If Congress extends the application deadline, or authorizes a new round of loans, eligible businesses should consider getting PPP loans before filing for bankruptcy.

 

Wait, What? Bankruptcy Filings Have Gone Down in 2020

The CARES Act, unemployment benefits, and hope that things will reopen soon seem to have buoyed many businesses for the last four-plus months.  Landlords also have been flexible, though county and city moratoria on evictions leave them little choice.

Danning Gill partner John Tedford spoke to the Daily Journal for a July 28 article about the stats coming from the Central District of California.  Based on that information, although a number of big-name companies have been filing for bankruptcy – particularly on the east coast – locally we have not seen an upswing in bankruptcy filings.  As of mid-July, we were on pace to have about the same number of Chapter 11 business cases filed in the Central District this year as in each of the last five years. There were actually fewer filings in March, April and May than in January and February.

As of August 7, 2020, 161 Chapter 11 business cases had been filed this year.  That equates to 269 filings per year (only 4 more than last year).  In 2010-2011 there were more than 720 such cases each year.

When we look at cases filed by all debtors under all chapters, the pace of filings is way down.  As of August 7, a total of 17,828 cases had been filed in the Central District.  That equates to about 29,800 filings for the year.  Since at least 1992, the Central District has had fewer than 30,000 filings only once (in 2006), and since 2007 it has never had fewer than 37,000 filings.

As the CARES Act programs lapse, unemployment benefits decline, and threats of evictions escalate, it seems certain that bankruptcy filings will increase substantially.  Whether filings return to their 2010-2011 levels remains to be seen.

If you have access to the Daily Journal online, click here to read the full article.

Brace for Impact: Cal Supreme Court holds that the “Community Property Presumption” trumps the “Form of Title Presumption”

In November 2018 we wrote about In re Brace, in which the Ninth Circuit Court of Appeals asked the California Supreme Court to decide whether the “form of title presumption” trumps the “community property presumption” when spouses take title to real property as joint tenants.  To read our prior post, please click HERE.

On July 23, 2020, in a very thorough decision that will have a big impact on family, bankruptcy, and debtor-creditor law, the California Supreme Court answered the Ninth Circuit’s questions.  The decision can be read HERE.

In sum:  Property acquired by spouses with community funds on or after January 1, 1975, is presumed to be community property even if title to the property is taken in joint tenancy.  The grant deed, in itself, is not sufficient to overcome the community property presumption.  What is required to overcome the community presumption depends on whether the property was acquired before or after January 1, 1985.

Why does it matter when the property was acquired?  In the 1970s, the California legislature enacted landmark reforms to the community property system.  Those reforms, which went into effect on January 1, 1975, eroded prior rules that emphasized the manner in which title was held.  Still, spouses could “transmute” property from community property to separate property (and vice versa) by an oral or written agreement or a common understanding between the spouses.  However, effective January 1, 1985, new legislation provided that a transmutation is not valid unless it is made in writing and satisfies certain requirements.

This decision will have a huge impact in bankruptcy cases, especially chapter 7 cases, in which only one spouse files for bankruptcy.

Consider the following example:  John and Jane own a house that they bought after they were married.  The grant deed says that they took title as “John and Jane, husband and wife, as joint tenants.”  The house is worth $500,000.  Their mortgage is $300,000.  John files a chapter 7 petition, but Jane does not join in.  As is his right, John claims a $75,000 homestead exemption in the property.

Under a 2003 Ninth Circuit case called Summers, the chapter 7 trustee would not sell the house because it would not generate any funds for unsecured creditors.  If she were to sell the house, about $35,000 would go to pay brokerage fees and closing costs, and $300,000 would go to the mortgage company.  That leaves $165,000.  Half of that would be paid to Jane for her one-half joint tenancy interest.  That leaves $82,500.  From that the trustee would pay John his $75,000 homestead exemption.  That leaves $7,500.  The trustee’s statutory fee for selling the property would exceed $7,500.  Since a sale would generate nothing for unsecured creditors, the trustee would “abandon” it back to the debtor.  John and Jane would keep the house, and creditors would receive nothing.

Now, under Brace, the trustee will sell the house because John’s bankruptcy estate includes all community property in which John had an interest when he filed for bankruptcy.  See 11 U.S.C. § 541(a)(2).  After paying costs of sale and the mortgage, the trustee will pay John his homestead exemption and the remaining $90,000 will be used to pay costs of administration (such as the trustee’s fee) and unsecured creditors.  John and Jane will lose the house, and creditors will receive something on account of their claims.

As we predicted in our prior post, the California Supreme Court’s answer will have a significant impact on cases in which only one spouse files for bankruptcy.  In many such cases, the answer makes it more likely that debtors’ houses will be sold and creditors will be paid.