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Early in December, the big bankruptcy story was about “dot-bombs.” By the end of the month, it was about retail failures. On Dec. 29, Chicago’s multi-billion dollar retailer Montgomery Ward & Co. announced it was going to close up shop by summer. Two days earlier, Braintree, Mass.-based Bradlees Inc. announced that it had filed for Chapter 11 protection after 42 years in business as a discount department store chain. Although government statistics show that corporate bankruptcy filings have steadily decreased since 1993, including another 6.6 percent last year, a reversal of the trend may be around the corner. Most bankruptcy law firms are expecting an increase in business filings this year and are adding lawyers to handle the possibly greater workload, says Samuel J. Gerdano, a lawyer and executive director of the American Bankruptcy Institute. The major new filings by Ward’s and Bradlees, he explains, “add to the belief that a tightening of business credit will make it harder to refinance business debt.” So, apparently, Gerdano says, did the Dec. 28 announcement by Cleveland steel maker LTV Corp. that it, too, was considering filing for bankruptcy protection if Chase Manhattan Corp. would not extend it another $225 million in credit. Nevertheless, other bankruptcy experts invariably predict, there will be a continued — even a stubborn — preference among the corporate creditors that they counsel to avoid rushing to bankruptcy court. If bank refinancing is not available, they say, less traditional debt restructuring tools will just have to be tried. WORKING WITH DEBTORS A growing number of court decisions have encouraged such out-of-court problem solving, the bankruptcy lawyers say. But, they add, “practical experience” has been the best teacher. Those who lived through the recessions of the 1980s and 1990s “have come to understand that collections on past due accounts receivables are most often maximized through cooperation with the debtor,” says Richard J. Mason, a partner in Chicago’s Ross & Hardies. “Cheaper, simpler, faster” is the way, says Samuel R. Maizel, a partner at Los Angeles’ Pachulski, Stang, Ziehl, Young & Jones, explaining today’s ongoing allure of the out-of-court settlement — and the reluctance among trade creditors to abandon it, despite growing economic fears. Some of the more creative pre-bankruptcy problem-solving strategies may even sound extreme. For example, insistence upon a turnaround expert to supplement a debtor’s struggling management team in return for continued “cooperation” is among the available options, says Robert Patrick Vance, a partner in New Orleans’ Jones, Walker, Waechter, Poitevent, Carrere & Denegre. William A. Brandt Jr., president and chief executive officer of Chicago-based Development Specialists Inc., is one lawyer-turned-consultant who has gained particular notoriety by putting out fires at large national companies, most recently at the once-scandal-plagued Mercury Finance Co., an auto-loan company based in Lake Forest, Ill. “My job is done and I can truthfully say Mercury is off to the races again,” Brandt says. Also viable, if the conditions are right, says David A. Lander, a partner in St. Louis’ Thompson Coburn, will be counseling the creditor on how to become a successful investor in the debtor — unlike GE Capital Services, which financed an ill-fated leveraged buyout of Ward’s in 1988. Some troubled companies, Gerdano says, may even be candidates for outright sale to a creditor that would then sell off various divisions at a profit. But the more likely and certainly less risky tack to take should the bank loan spigot be shut off in the coming months, experts say, is simply approaching other trade creditors to set up an “informal” committee to negotiate more favorable repayment terms with their mutual debtor. When faced with “lost causes,” many trade creditors’ lawyers will reluctantly resort to the bankruptcy courts, Vance acknowledges. But, he adds, even that strategy of last resort will often include a “prepackaged bankruptcy plan” that will invariably shorten the time spent in court. EVOLVING COURT OPINIONS While the bottom line plays a key role in the favored bankruptcy-avoiding strategy, Schorling says, it is also being driven by a still-evolving major shift in the courts’ interpretation of the federal bankruptcy law. “Especially in the last four to five years,” he says, “the courts have given much more leeway to creditors” and their ability to cut deals with debtors. In contrast, trade creditors had historically run a high risk in even trying to deal with business customers on the brink of bankruptcy, Schorling says. First, Schorling explains, most trade creditors are unsecured creditors who are lowest on the pecking order of those who can receive payment from a debtor’s depleted assets should a bankruptcy petition be filed down the road. But even if new terms could be forged before the filing of a bankruptcy petition, he says, trade creditors have had special trouble dealing with the Bankruptcy Code’s controversial “preferential transfers” rule. Under that pivotal provision, Schorling says, a debtor can avoid any payments it would make to a creditor within 90 days of the bankruptcy petition’s filing so long as the terms involved are greater than the creditor would have gotten had a liquidating bankruptcy court been doling out the cash. The only defense that a trade creditor has to the once rigidly enforced preference rule, Schorling says, was to be able to somehow show that it was made in the “ordinary course of business” and was consistent with industry norms. But Mason says that as early as 1993, the 7th U.S. Circuit Court of Appeals became one of the first appeals courts to suggest that the so-called preferential transfers of money should be clearly unusual or even “idiosyncratic” to be outside the ordinary course of business or industry norms. MORE ‘LIBERALIZED’ RULINGS By 2000, he says, the bankruptcy courts in several other circuits — including the 3d Circuit, the one encompassing the influential Delaware district court — would also issue holdings that arguably took a more “liberalized” view of the lone affirmative defense. As a result, Schorling says, such proactive, protective measures as a sudden reduction in the amount of goods shipped to a struggling business debtor will now usually be treated by most courts as “in the ordinary course of business.” Still, Schorling and Mason warn that increased pressure on a debtor to pay up just before an impending bankruptcy filing is one of those pre-bankruptcy collection strategies that most courts will still readily void — so is pushing for quicker-than-normal payments, they say. On the other hand, Schorling concedes, he still adheres to the “cardinal rule” — that “the trade creditor should take whatever money he can get, whenever he can get it.”

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