American Bankruptcy Institute Update

November 10, 2005

In This Issue

Highlights

LEGISLATIVE UPDATE

Senate Reconciliation Bill Contains Pension Reforms

Bankrupt companies terminating their defined benefit plans may have to make a new payment to the Pension Benefit Guaranty Corporation under legislation passed by the Senate on Nov. 3. The Deficit Reduction Omnibus Reconciliation Act of 2005 (§1932) contains several provisions designed to increase revenue to the Pension Benefit Guaranty Corp. (PBGC). Notably, the Senate bill includes a new premium requiring companies that terminate their defined benefit plans through bankruptcy to pay a premium of $1,250 per participant for three years after the company successfully emerges from bankruptcy. Sen. Mike Enzi (R-Wyo.) explained on the Senate floor that “repaying part of the money that had to be potentially paid out, and paid out during the time the company was going through bankruptcy, should be a part of coming out of bankruptcy.”

S.1932 also establishes some conditions under which the Secretary of Education will repay, and thus discharge, a borrower’s liability on a student loan. These payments extend to such situations as where institutions close or a student’s loan eligibility is falsely certified. The Secretary is authorized to seek recovery, including pursuing claims available to the borrower against the institution and its affiliates and principals.

Reconciliation legislation is designed to achieve Federal budgetary savings, and often includes substantive changes to laws that will increase revenue to the federal government. The timing of the conference action is uncertain, as House consideration of similar legislation was postponed today.

Read the bill.

FASB WILL REVIEW PENSION DEFICIT REPORTING RULES

The board that sets U.S. accounting standards will consider an overhaul of pension rules and may force companies to include plan deficits and surpluses on their balance sheets by the end of next year, Bloomberg reported today. The Financial Accounting Standards Board (FASB) unanimously approved a staff proposal to reconsider a 20-year-old rule that permits companies to delay recognition of pension plan investment gains and losses, and changes in obligations to retirees. Companies use such tactics to “smooth” the effects of short-term market volatility.

The review follows a U.S. Securities and Exchange Commission report in June that found that an estimated $535 billion in pension deficits were placed off balance sheets by publicly traded companies. FASB's adoption of the proposed rule could prompt more companies to abandon pension and benefit plans in favor of employee savings, or 401(k), accounts. “This is enormous. Most people don't realize it but the bulk of S&P 500 companies all have defined benefit pension plans. It's not just the old-line automakers,” said Tim VandenBerg, a senior policy analyst at Washington Analysis, a research firm that advises Wall Street firms, in an interview before the vote.

The SEC report found fault with how companies are treating pensions, leases and other “off-balance-sheet” expenses. VandenBerg said that 29,000 companies have defined benefit pension plans, which pay a fixed monthly amount to retirees.

BUSINESS CREDIT IMPACT OF HURRICANE KATRINA

Experian recently released the results of a study that showed that commercial properties in the Gulf states had as much as $40 billion in payables outstanding at the time that Hurricane Katrina struck the region. The study was based on 635,000 businesses from Experian’s business information database. The study found that businesses in the counties and parishes that the Federal Emergency Management Agency (FEMA) declared the most affected by the hurricane had an estimated $7 billion in outstanding balances. Experian said that the hurricane’s impact on cash flow and outstanding debt has significant implications for the local economy and for the suppliers depending on that revenue.

The dilemma facing suppliers with receivables associated with these Gulf state businesses is in deciding how much they will work with customers to help them recover. Suppliers inclined to help their customers reestablish themselves may suspend their normal collections policies for a certain period of time. Experian pointed out that inevitably, there would be bankruptcies caused by the severe economic dislocations caused by the disaster.

The study showed that professional and business services firms were the hardest hit by the disaster, and owed the most ($8.8 billion – 22 percent of the total). Other industry groups significantly affected were retail trade ($8 billion/20.2 percent), wholesale trade ($5.9 billion/14.7 percent) and construction ($5.7 billion/14.2 percent).

OPINION: DUELING NUMBERS ON ASBESTOS CLAIMS

STATS Study: What’s fairer for asbestos victims - the tort system or the Fairness in Asbestos Injury Resolution (FAIR) asbestos act? The U.S. government is considering adopting the FAIR Act (§852), which exchanges litigation in the tort system (e.g., lawsuits against companies for damage due to asbestos) for an entitlement: show that you’re a victim of asbestos, and the U.S. government will compensate you. Where does the money come from? Companies that have a history of using asbestos. It sounds perfect – the guilty companies pay, and asbestos victims receive, without having to go through the difficult and stressful judicial system.

The theory behind this kind of program is appealing. Most importantly, in the current system, asbestos victims are not getting compensated fully, equitably or in a timely fashion. Currently, operating trust funds for asbestos victims are paying between 5 and 10 cents on the dollar for asbestos claims; they just don’t have the money. Companies that have lost big money in the courts have been forced into bankruptcy. Victims take years to recoup any compensation through the tort system.

Read the full story

ANALYSIS: BANKRUPTCY LAWS ADDRESS VALUING INTELLECTUAL PROPERTY AND INTANGIBLES

As the American economy changes, so do the issues in today's corporate bankruptcy proceedings, the Tampa Business Journal reported this week. "In the old days, people had equipment and machinery. Today they have intellectual property. It's difficult to sell these kinds of items, difficult to put a value on them," said Roberta Colton, a bankruptcy specialist with the Tampa law firm Trenam Kemker. But valuing them, and valuing them quickly, is particularly important for high-tech companies—which might have such assets as copyrights, patents, software, covenants to not compete, domain names and consumer databases, Colton said. "They need to be sold quickly because they lose their value so fast," she said. A software program might soon become obsolete, while consumer data can get old.

But consumer data also can be tricky to handle. With the new bankruptcy law, some companies filing for chapter 11 must have a privacy ombudsman appointed before they can sell or lease certain kinds of consumer information in order to protect the consumers' interest. Much of the concern was generated by the 2000 bankruptcy of Toysmart.com, an online toy store. The company's databases and customer lists were put up for sale even though the company had promised that such information would not be shared with a third party. As a result, the company's principal shareholder, Walt Disney Co., paid $50,000 for the data and then destroyed it, Colton said.

The focus on these intangible assets "really has changed how companies liquidate," she said.

Read the full story (requires free sign-up).

THE FALL OF ENRON

After trimming $25 million from the fee requests of lawyers, accountants and others who worked for Enron during its bankruptcy, a committee recommended Tuesday that more than $689.5 million be paid out, the Houston Chronicle reported. The Enron Fee Committee conclusions are advisory. Final approval from New York-based U.S. Bankruptcy Judge Arthur Gonzalez may come at a December hearing.

Enron's bankruptcy was not the biggest in U.S. history, but experts say it was likely the most complex. The $689.5 million total represents fees and expenses for professional work done for Enron during the bankruptcy period from December 2001 to July 2004. The firms requested about $22 million more in fees and more than $3 million more in expenses, but the review committee found some excesses.

The biggest chunks of the funds are earmarked for lawyers: $157.4 million in fees and expenses to Weil, Gotshal & Manges; $87.3 million to examiner Neil Batson and his Atlanta law firm; and $61.8 million to Milbank, Tweed, Hadley & McCloy. But accounting firms were recommended for up to about $35 million as well. The total also covers investment advice, economic specialists and others, and includes lawyers who represented Enron employees called to testify before Congress and professional work done in the ordinary course of Enron's business. Some investment bankers had professional contracts that were excluded from the committee's review. Legal, accounting and other professional fees paid by Enron after its bankruptcy settlement in July 2004 would also not be included in these totals.

BUSINESS SCHOOL GRADS' STARTING SALARIES RISE

The salaries of Harvard, Dartmouth and Stanford business graduates rose, fueled by increasing hiring at investment banks and consulting firms, the Washington Times reported today. The average compensation of June graduates of Harbvard Business School’s MBA program increased 11 percent to $174,580. For MBAs from Stanford’s Graduate School of Business, the average totaled $149,913, up 9.5 percent. Dartmouth business school grads received $150,000, up 15 percent. All three schools are participating in ABI’s Corporate Restructuring Competition this weekend.

IN TIME FOR THE NEW LAW: THE CONSUMER BANKRUPTCY MANUAL (SECOND EDITION)

Written by ABI Consumer Bankruptcy Committee Co-chair Thomas Yerbich, the Consumer Bankruptcy: Fundamentals of Chapter 7 and Chapter 13 of the U.S. Bankruptcy Code (Second Edition) provides both new and experienced practitioners with the fundamentals of consumer bankruptcy proceedings under chapter 7 or 13 of the Code. The second edition covers changes made by the new law. Topics covered include how the two statutory schemes work, their differences, the duties of the debtor in the bankruptcy process, the rights and procedures applicable to creditors, dischargeability/discharge, the automatic stay, commonly asked questions and much more. Softbound, 170 pages.

Product #05-020
Member: $9 Non-member: $16
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ABI COMMITTEE PRESENTATIONS AT WINTER LEADERSHIP CONFERENCE

The 17th Annual Winter Leadership Conference, December 1–3, 2005, in beautiful Indian Wells, California, at the Hyatt Grand Champions Resort & Spa, will feature presentations and sessions from ABI’s committees.

Uniform Commercial Code Committee will present a panel program, “The Intersection of UCC Article 2A and the Bankruptcy Code.”  The panel will discuss aspects of Article 2A that commonly arise in bankruptcy proceedings, including true vs. financing lease issues, the ability to assert defenses against finance lessors, and the protection and recovery of leased property in bankruptcy cases.

The Asset Sales Committee program will focus on BAPCPA’s Effect on §363 sales. The program will be led by Kit Weitnauer of Alston & Bird LLP in Atlanta, Robert Brady of Young Conaway Stargatt & Taylor, LLP in Wilmington, Del., and Jeffrey Levitan of Proskauer Rose LLP in New York.

Watch this space for other ABI committee presentation descriptions in upcoming ABI Update editions.

Register here!

ABI’S SECOND CARIBBEAN INSOLVENCY SYMPOSIUM COMING IN FEBRUARY

Join ABI in Miami for the Second Caribbean Insolvency Symposium, February 9-10, 2006, at the Eden Roc Resort & Spa in Miami.

This year’s program brings together top international speakers to discuss the issues of the moment in international insolvency and restructuring. The Eden Roc Resort & Spa, right in the heart of Miami Beach, provides a memorable venue for the conference.

The program of 7.25 CLE credit hours features a faculty of outstanding scholars, judges and practitioners from across the United States, the Caribbean and South America. Timely topics include:

  • CAFTA and New Chapter 15: Forum-shopping in the Caribbean
  • Introduction to the New Bankruptcy and Restructuring Law in Brazil 
  • Small Business and Individual Chapter 11 under BAPCPA 
  • Tough Ethical Dilemmas after BAPCPA 
  • Dealing with Disasters: The New Bankruptcy Law after a Natural Disaster
  • Views from the Bench

Be among the first to register for this important program in a tropical location.

2005-06 ABI MEMBERSHIP DIRECTORY PRINT EDITION AVAILABLE FOR PURCHASE

The print edition of the 2005-06 ABI Annual Membership Directory is now available. This 1,000-page edition lists more than 11,000 insolvency professionals. An online version of the Directory is available at the ABI World Web site (www.abiworld.org), which is continually updated. All members received a complimentary CD-ROM version of the Directory with their November ABI Journal.

The $55 cost of the printed version includes shipping and handling. Visit the ABI bookstore to order.

NEW CRACKING THE CODE ARTICLE

"Seventh Circuit Warns of Shaky Legal Foundation for NOL Trading Restrictions" by Andrew Feiner, Andrews Kurth LLP; Houston

Since the Second Circuit decision In re Prudential Lines Inc., bankruptcy courts have routinely granted motions to restrict trading in a debtor¹s stock (and sometimes its debt) to protect the debtor¹s net operating losses (NOLs). Read the article here.

NEW FAQ ON “DO YOU KNOW THE ABI WORLD WEB SITE?"

Do You Know? ABI's official Web site, ABIWorld.org, provides thousands of bankruptcy-related documents and numerous other services for ABI members. The tutorials for negotiating ABIWorld now include an FAQ section, which will help you to focus your search for information on the site. Check it out today!

GET INVOLVED!

Do You Know?From publishing opportunities to committee involvement, ABI offers many options for members to raise their professional profiles. Click here for more opportunities.

Latest Job Postings at ABI Career Center

Check out the ABI Career Center. The Center is a one-stop site for job seekers and employers in the insolvency community. Career Center resources are available free to both employers and job seekers. New positions are featured daily. The latest listings include: