X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Fueled by recession and led by such corporate giants as Enron Corp., Pacific Gas & Electric and Reliance Group Holdings Inc., bankruptcy filings reached a historic high in 2001, a record some fear may be topped in 2002. “I think the second wave is yet to come. We’ve just seen the tip of the iceberg,” says Deborah A. Crabbe, a bankruptcy specialist and member of Foster, Pepper & Shefelman in Seattle, who also chairs the small business subcommittee of the American Bankruptcy Institute. “When the big boys go, you’ll see it slowly trickle down. Next year at this time I think we’ll be talking about the proliferation of mom-and-pop companies filing for bankruptcy.” After two consecutive years of decline in 1999 and 2000, bankruptcy filings in 2001 were well on their way to setting a new 10-year record. By the end of the third quarter in 2001, there were already 1,147,088 business and nonbusiness filings, while in all of 2000 there were 1,253,444 filings. If filings continued at their present rate for the last quarter of 2001, experts say, the final number will exceed the previous 12-month record set in calendar year 1998 with 1,442,549 filings. In some ways the numbers are deceptive. The trend continues to be driven strongly by nonbusiness bankruptcies, which jumped from a total of 1,217,972 in 2000, to 1,117,216 for the first three quarters of 2001, with a bumpy fourth quarter yet to be tabulated. Business bankruptcy filings remained steady in 1998 to 1999 and declined in 2000, but the total for the first three quarters of 2001 (29,872) was on pace to exceed the total for the entire year in 2000 (35,472), according to www.bankruptcydata.com. It remains to be seen whether the year-end total for 2001 will exceed the 54,027 record for business filings set in 1997. But the ominous note in the business bankruptcies marking this economic recession has not been the number, but the size and type of the individual filings. “We have had 22 Fortune 1,000 companies filing for bankruptcy this year; 10 Fortune 500 companies. Normally we get a handful of these,” says Jack Williams, a law professor at Georgia State University in Atlanta who this year has been scholar-in-residence at the American Bankruptcy Institute (ABI) in Alexandria, Va. Even excluding the Dec. 2 filing of the giant Texas-based energy trader Enron Corp., with $63.4 billion in assets, the top 10 list of public filings for 2001 is filled with corporate stalwarts: PG&E, the giant California-based power utility that filed for reorganization with $21.5 billion in assets; Finova Group Inc., the large commercial lender, which filed in March with $14.1 billion in assets; insurance mogul Saul Steinberg’s legendary Reliance Groups Holdings Inc.; the automotive parts giant Federal-Mogul Corp.; and Winstar Communications Inc. Through Dec. 28, 2001, 251 public companies filed for Chapter 11 in 2001 with total prepetition assets of $254.1 billion, compared with 176 public companies with assets of $94.8 billion filing in 2000. CHAPTER 7 Overall, the fiscal year statistics show a 7 percent increase in Chapter 11 filings. But bankruptcy experts say they are more concerned with the filings under Chapter 7, which is typically an asset liquidation of companies and individuals who are not seeking to reorganize and continue. According to the Administrative Office of the Courts, Chapter 7 filings increased 16.5 percent during the fiscal year ended Sept. 30. The Chapter 7 statistics are more reflective of the true state of the economy, Crabbe says. Samuel J. Gerdano, the ABI’s executive director, says the spike in bankruptcies is fueled by “hangover consumer debt from the free-spending ’90s and a weakened economy.” The rising tide of filings has already brought new pressures to bear on the judicial system that processes bankruptcy filings as well as its practitioners in the legal and business community. DELAWARE’S BACKLOG Consider the case of the U.S. Bankruptcy Court for the District of Delaware, long known as the legal capital of bankruptcy filings because so many companies choose to incorporate there. Delaware was one of the districts having the largest decrease in bankruptcy filings during the fiscal year ended on Sept. 30, and experts say judicial gridlock may be the reason. “It’s kind of interesting that we’re seeing more filings outside of Delaware these days and at least one reason may be the difficulty in getting a court date there,” says Glenn E. Siegel, a partner in the New York office of Dechert, who specializes in corporate recovery and insolvency. Siegel noted that several of this year’s major corporate bankruptcies — LTV Corp., Wheeling-Pittsburgh Steel Corp. and the Phar-Mor Inc. discount drugstore chain — were all filed in U.S. Bankruptcy Court in Youngstown, Ohio. In February, Judge Edward R. Becker, chief of the 3rd U.S. Circuit Court of Appeals, testifying before the Senate Judiciary Committee about the now-stalled Bankruptcy Reform Act, urged the Senate to approve the bill’s proposed addition of 23 new bankruptcy judgeships. Becker, whose circuit includes the District of Delaware, told the senators that “there remains a dire need for more judicial resources to handle the burgeoning judicial workload. “Additional bankruptcy judgeships have not been authorized by Congress since 1992 when 35 new judgeships were approved,” Becker testified. “In response to a substantial increase in case filings, the Judicial Conference has made recommendations to Congress for additional bankruptcy judgeships in 1993, 1995, 1997 and 1999. These judgeships have not as yet been authorized by Congress.” The judicial workload — estimated by Becker based on a Judicial Conference formula at “1,500 weighted filings” per judge — will only get heavier if the filing rate continues to increase in 2002 as economists predict. Williams says the impact of the rising tide of bankruptcies — especially large corporate filings — on the static pool of federal judges should not be underestimated: “These big bankruptcy cases are monsters. They take up a lot of court time and a lot of time of the U.S. Trustee.” Williams says that cases such as PG&E will be especially thorny because they involve regulated public utilities and thus bring into play state law and pre-emption issues. For the court system, the Bankruptcy Reform Act would be a double-edged sword, Williams adds. Although it would add 23 new judges, it also carries a host of deadlines and would require even greater judicial supervision of individual cases. KNOWLEDGE GAP Nor is the bankruptcy court system the only part of the industry being pressured by the surge in filings. Legal experts say the bankruptcy bar is struggling to fill the need for experienced practitioners, especially those who have worked in complex cases involving large companies. As a result, firms are searching for new associates wanting to specialize in bankruptcy. Experts say the lawyer shortage in this field is not surprising after the boom economy of the last decade, which resulted in less of an incentive for law school graduates to enter the field. “Because of the unparalleled prosperity we have experienced,” says Dechert’s Siegel, a 19-year veteran of bankruptcy law, “there are a lot fewer people around with the necessary experience. There are a lot of dire predictions right now about what will happen. What I think it means is that a lot of smart people are going to be learning on the job.” Related charts: Top 10 Public Company Filings, 2001 Total Filings Under Chapters 7, 11, 13 Public Firms Filing Under Chapter 11

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.