Supreme Court Ends Structured Dismissals in Bankruptcy Cases

Bankruptcy courts do not have the legal power to skip the priority distribution scheme of settlement proceeds in connection with a Ch. 11 dismissal, the Supreme Court held Wednesday.

The 6-2 ruling in the case of Casimir Czyzewski, et al. v. Jevic Holding Corp., et al., found that the Third Circuit and the United States Bankruptcy Court for the District of Delaware incorrectly affirmed a structured settlement that skipped the claims of dissenting mid-priority secured creditors, who were truck drivers of the trucking company Jevic.

“A distribution scheme ordered in connection with the dismissal of a Chapter 11 case cannot, without the consent of the affected parties, deviate from the basic priority rules that apply under the primary mechanisms the Code establishes for final distributions of estate value in business bankruptcies,” the Court’s opinion, delivered by Justice Stephen Breyer, stated. “Put somewhat more directly, we would expect to see some affirmative indication of intent if Congress actually meant to make structured dismissals a backdoor means to achieve the exact kind of nonconsensual priority-violating final distributions that the Code prohibits in Chapter 7 liquidations and Chapter 11 plans,” the Court said.

In essence, the days of nonconsensual structured dismissals which violate claims priority rules of paying unsecured claims before higher priority claims are over, said Bruce Nathan, Esq., of Lowenstein, Sandler LLP of New York. This ruling will therefore likely change how failed Chapter 11 cases are concluded. Nathan and Wanda Borges, Esq., of Borges & Associates, LLC, of Syosset, N.Y. will discuss the consequences of the case during their educational session in June at the 121st annual Credit Congress & Expo in Dallas.

The Court did point out that provisions in the Bankruptcy Code allow courts the flexibility to “make the appropriate orders to protect rights acquired in reliance on the bankruptcy case.” Cases such as In re Iridium Operating, LLC in the Third Circuit, and others, have addressed the interim distribution of settlement proceeds that violate ordinary priority rules, the Court noted. “But in such instances one can generally find significant Code-related objectives that the priority-violating distributions serve.” First-day wage orders that allow payment of employees’ prepetition wages and critical vendor orders that allow payment of essential suppliers’ prepetition invoices, for instance, are other examples of situations “where the distributions at issue would ‘enable a successful reorganization and make even the disfavored creditors better off.’” But that was not the case in Jevic, the court said.

Further, allowing for “rare case” exceptions to the more general rule of the Code’s priority scheme would lead to unacceptable uncertainty, and the Court said Congress did not intend such an exception.

 

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Construction Creditors May Have New Tool in Their Toolkit: Drones

Using aerial drones to aid construction workers on the job site is the goal of a new partnership between John Deere and drone firm Kespry. And though the technology is new and evolving rapidly, industry observers like James Vann, Esq., with Vann Attorneys of Raleigh, N.C., believe it’s probably a matter of if, not when the fruits of drone technology and data analysis will be seen in the credit department.

“It may not feel like a credit issue, but it will become one,” Vann said.

Materials suppliers, for instance, could already make use of such technology to monitor the leasing or renting of equipment, or to conduct timely, accurate inventory inspections, though the scope of the future use of the technology is almost impossible to predict, he said. For example, credit managers in the agriculture industry could analyze data gathered by drones to help estimate crop yield, he suggested. In fact, that vision may be close to realization as John Deere also recently partnered with drone firm Sentera to offer clients drone services in the agriculture industry.

John Deere construction equipment dealers will provide the Kespry Aerial Intelligence System to their customers at job locations around the world, starting with clients in North America. The Kespry system allows customers access to topographic data in minutes with “survey-grade accuracy,” a company press release states. “The data gathered from the Kespry system will help customers and equipment operators make decisions that reduce costs and improve productivity as they optimize the job site and spend less time on jobs,” said Andrew Kahler, product marketing manager with John Deere WorkSight.

The Kespry drones fly autonomously without manual piloting and use sensors to avoid obstacles like trees, cranes and buildings, the firm said. “The post-processed data are accessible from anywhere in the world via an easy-to-use web interface, allowing customers to access real-time 3D renderings, volumetric analysis and data export features with the click of a button.”

New regulations for companies to follow as they use drones was issued by the Federal Aviation Administration (FAA) in June 2016, and industry experts believe it will bring more than $82 billion to the U.S. economy and create more than 100,000 new jobs over the next decade. The requirements laid out in the FAA rule mandate pilots have to keep an unmanned aircraft within visual line of sight. Operations are allowed during daylight and twilight hours if the drone has anti-collision lights. The regulations also set out height and speed restrictions and other operational limits, such as prohibiting flights over unprotected people on the ground who aren’t directly participating in the drone operation.

Aside from helping construction workers on the job, drones can also be used to safeguard materials on a job site. The Cecil County Sheriff’s Office recently used one of its drones to find about $400,000 worth of stolen construction equipment that was hidden behind a barn in Elkton, MD.

 

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Sleuthing Out the Facts: Information Gathering, the Nontraditional Way

Though you may think you need to equip yourself with a deerstalker hat, a Calabash pipe and a magnifying glass when gathering information about a customer, a true Sherlock Holmes of the credit industry can use simple tools that are much closer to hand. Outfitted with social media, trade group connections and a discerning eye, a credit professional can sleuth out a wealth of information on clients if you just know where to look.

In her webinar presentation Private Companies, Private Credit, to be held in April, D’Ann Johnson, CCE, credit and collection manager at Roofers Supply, will cover many traditional and nontraditional methods of information gathering when a prospective customer’s company is privately held or too new to have built a business credit history.

“We’re in an age of mass information,” Johnson said. “There’s very little that you can’t find out about somebody, unless they don’t use technology at all.”

Social media searches are a great way to start. Use Google, Facebook and LinkedIn. A membership with Angie’s List can also be helpful. Clients who may not have official offices might have a rating on Angie’s List, through which you can determine the level of satisfaction of their customers. Chances are, if he is paying his vendors, he has a good rating on Angie’s List, Johnson said.

Avenues such as social media “will give you the character of the customer and the conditions that they work under,” Johnson said. “It’s not just about the numbers.” Social media can help you if it’s simply a matter of getting in touch, but can also reveal changes in the company, such as adjustments in top-level management.

Let your salespeople be your eyes and ears when you need to assess a customer. They can inform you of any problems with the company. “We rely on our sales team quite a bit,” Johnson said. “We try to be in constant contact with them so that we are in the forefront of what’s going on with that account.”

Joining a trade group also offers an invaluable resource. “I can’t stress trade groups enough,” Johnson said. “Once you get into a trade group you can share factual information and also build a network within that group.” Not only is information available, which must be kept factual, but support as well. “You can reach out to them and talk a problem through and know that the information is held confidentially.”

Among the many other topics covered by the webinar is how to look at a tax return as an interim financial statement and methods for gathering information when the customer is outside of the United States.

“We use a lot of different partnerships … to build a 360-degree view of our prospective customers and continue to do that through the lifetime of our relationship with that customer,” Johnson said. “We get a 360-degree view so that we are better able to service them and better able to service our company.”

 

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Corporate Borrowing Slows as Profits Speed Up

Nonfinancial companies in the U.S. reduced net borrowing in the fourth quarter of 2016. Moreover, corporate debt grew at a slower pace for the first time in more than two years.

Corporate earnings saw gains from a leveling of industrial commodity prices, while uncertainties connected to the U.S. presidential election and an overvalued equities market contributed to the slowdown in borrowing, according to Moody’s Investors Service. Leveraging may continue to decline until the next round of profit decreases, when companies will buoy earnings per share with equity buybacks funded by debt, the ratings agency said.

According to the Federal Reserve's recently released Financial Accounts of the United States for the fourth quarter of 2016, nonfinancial business debt rose at an annual rate of 2.6% in the fourth quarter, down from an annual rate of 6.3% the previous quarter. The final quarter of 2016 saw the end of a series of quarters in which corporate debt grew more rapidly than pretax profits and internal funds, Moody’s reported. The quarter’s yearly increase of 13% and 7.5% for pretax profits and internal funds, respectively, outpaced the 5.2% rise of corporate debt. By comparison, from the fourth quarter of 2014 to the third of 2016, corporate debt averaged an annual increase of 6.6% and pretax profits (-4.4%) and internal funds (-2.2%) saw declines.

With the Federal Reserve beginning to increase interest rates, companies are showing more caution with their debt, which grew by the slowest percentage in six years last quarter, as reported by MarketWatch. According to Moody’s, the fourth quarter deleveraging is unusual because it occurred in the seventh year of a business cycle upturn. When this happened before, with corporate debt growth overtaking the growth rates of profits and cash flow more than five years into the previous two upturns, leveraging continued until recession hit.

The ratio of internal funds to corporate debt is a predictor of the high-yield expected default frequency (EDF) metric, Moody’s explained. A rising ratio of corporate debt to internal funds is expected to be the precursor of the next extended upturn by the high-yield EDF metric.

The overvaluation of equities, along with a decline in mergers, acquisitions and divestitures, sparked a decline in the annualized value of net equity buybacks by nonfinancial companies, with 2016’s final quarter being the lowest in three years. Net equity buybacks are correlated with corporate net borrowing, Moody’s said. A drop in net equity buybacks helps to pare down net borrowing.

 

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South American Economies Will Improve, but Multiple Factors Likely to Subdue Growth

Economic growth is in the forecast this year for some of South America’s major economies, but factors from low commodity prices and volatile currencies to ongoing corruption scandals and potential trade protectionism in the U.S. will likely hamper more favorable outcomes.

After Brazil saw significant economic contraction in 2015 and 2016, the administration has adopted constitutional amendments to lower public spending growth and improve the credibility of the Central Bank, and has begun to address pension and social security reforms, according to a recent series of reports on South American nations from credit insurer Atradius. In 2017, better business confidence, infrastructure plans and monetary easing will likely lead to a modest recovery. However, gains will be hampered by weak bank lending, a volatile currency, high unemployment, a weak manufacturing sector and a 10% increase in business insolvencies.

Foreign currency corporate debt in Brazil had been rising in recent years, but in 2016, levels stabilized a bit. “Most externally indebted businesses have either hedged their currency risk or have access to large foreign currency reserves,” Atradius analysts said.

In Chile, low copper prices in 2016 led to subdued economic growth—copper accounts for 45% of Chile’s export earnings and 10% of GDP. Lower demand from China, which buys about 25% of Chile’s total exports, also hurt Chile last year, the credit insurer said. This year, demand for copper is not expected to grow much, and the economy will probably see modest gains. The country is also sensitive to global trade flows—it has trade agreements with more than 60 countries—so protectionist trade measures elsewhere could negatively impact Chile’s exporters. “Chile´s very open economy could be adversely affected by protectionist trade policies directly (in its trade with the U.S.) and indirectly (via a potential slowdown in trading with Asian countries as well as with Brazil and Mexico).”

In Argentina, a new administration has addressed sovereign debt default, cut energy subsidies, abolished export taxes and lifted capital and currency controls, but the government’s support is shaky leading into mid-term 2017 elections. In 2016, GDP shrank 2% following the reform policies, a recession in the nation’s largest trading partner, Brazil and low commodity prices. After the peso devaluation dropped the currency’s value by a third in 2016, inflation skyrocketed by 35%, analysts said. This year and next, however, the country should see inflation fall and economic growth return, boosted by access to international capital markets. “However, while peso appreciation should sustain export growth, this upswing could be severely dampened by any additional U.S. import tariffs and any disruptions in global trade flows.”

Atradius predicts Argentine businesses will still face liquidity risks due to volatile credit markets and an uncertain political and economic environment. Trade creditors should particularly watch out for companies that hold significant debt in foreign currencies while generating revenues in local currency.

 

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