Daily Archives: January 9, 2021

On January 3, 2021, in In re Ditech Holding Corporation, Case No. 19-10412 (JLG), an unpublished opinion, Bankruptcy Judge James L. Garrity, Jr., discussed an important distinction for creditors of a non-individual chapter 11 debtor versus those of an individual debtor.

The essential facts are that prepetition, a creditor, Dr. Nassar, sued Reverse Mortgage Solutions, Inc. (RMS), as mortgage servicer, in Texas, on various legal theories including breach of contract and fraud. Several months later, RMS filed bankruptcy in New York and later confirmed a plan which took effect. Under the plan, Reorganized RMS, as successor to RMS, is now the servicer of Dr. Nassars mortgage.

The problem arose when, post-confirmation, Dr. Nassar continued his lawsuit despite an injunction in the plan prohibiting continuation of prepetition lawsuits like his. Debtor filed a motion to enforce the plan injunction and Dr. Nassar defended, inter alia, based on an alleged violation of due process because, as a known creditor, he was entitled to service of actual notice of the material events in the bankruptcy but was never served with notice of the commencement of the case, the claims bar date, the confirmation hearing or the confirmation order. Debtor had filed notice of the commencement of the bankruptcy and imposition of the automatic stay in the Texas lawsuit but had not served Dr. Nassar. Nonetheless, Dr. Nassar conceded that he knew of the bankruptcy filing before the extended claims bar date and Debtor argued that Dr. Nassars knowledge imposed on him the duty to ascertain the relevant dates and protect his interest in the bankruptcy case. Debtor also had published notice of the confirmation hearing but did not serve Dr. Nassar with actual notice. Debtor did not publish notice of the commencement of the case, the general claims bar date or the confirmation order.

After determining that the court had post-confirmation jurisdiction as the motion to enforce the plan provided a sufficiently close nexus to the plan itself, the court looked at the record. Judge Garrity found that although Dr. Nassar was listed as a creditor with a contingent, disputed and unliquidated litigation claim of an unknown amount, no address was listed and no proof of service of any type was filed listing Dr. Nassars address. Thus, the issue arose of whether Dr. Nassars actual knowledge of the bankruptcy was sufficient to discharge his claim and make him subject to the plan injunction even though he had never been served with formal notice.

Judge Garrity first determined that reasonable notice of the bankruptcy is a required element of due process for a known creditor and that no such notice had been provided to Dr. Nassar. The judge next examined the cases that find informal notice is sufficient to require a creditor to stay informed and comply with deadlines such as filing a claim. However, those cases involve individual debtors, not corporate debtors. Citing Spring Valley Farms, Inc. v. Crow (In re Spring Valley Farms, Inc.), 863 F.2d 832 (11th Cir. 1989), Judge Garrity followed the rationale of the Eleventh Circuit: Section 523(a)(3) places a burden of inquiry upon a creditor only when the debtor is an individual debtor. A corporate debtor is not an individual debtor for the purposes of Section 523. Id. at 834.

There is another aspect to the courts analysis. In large part, the distinction between the burden imposed on a creditor with actual notice of a bankruptcy obtained from a source other than actual service of that notice by a debtor when the debtor is an individual versus a non-individual is based on the Federal Rules of Bankruptcy and how specific they are regarding the due dates for filing proofs of claim. In chapters 7 and 13, the Rules enable a creditor to calculate the approximate date when a proof of claim is due, simply from the date the bankruptcy was filed, by piecing together a combination of Rules. But in chapter 11, Rule 3003(c)(3) requires the court to set the bar date, which occurs after a motion requesting that a date be set. In that circumstance, general knowledge of the bankruptcy filing is not sufficient information to counteract the requirement that a known creditor be provided formal notice prior to barring the creditors claim. The courts ruling is in accord with decisions of the Courts of Appeals in the First, Third, Seventh, Ninth and Eleventh Circuits. Note, however, that the Fifth Circuit ruled otherwise in Robbins v. Amoco Prod. Co., 952 F.2d 901, 908 (5th Cir. 1992) (creditor with both actual and inquiry notice of the bankruptcy proceedings but who failed to take any action to avoid discharge of her claims bound by chapter 11 plan). Accordingly, the Court refused to enforce the discharge injunction against Dr. Nasser.

Practice Point: When representing a creditor who did not receive formal notice of the bankruptcy, be sure to investigate the law in the jurisdiction where the bankruptcy was filed to ascertain your clients right to pursue the claim post-confirmation.

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Informal but Actual Notice of Bankruptcy: What Difference Does It Make? - JD Supra

Revlon Inc. successfully avoided bankruptcy in 2020, but as the company moves into 2021 and the coronavirus pandemic ensues, there are several more hurdles to clear.

Theres more debt to refinance, but theres also the need to accelerate growth across a brand portfolio that was hit hard during the pandemic.

Revlon posted $477 million in net sales for the quarter ended Sept. 30, a 20 percent year-over-year dip. For the nine months ending Sept. 30, net sales declined more than 25 percent, to $1.27 billion.

Elizabeth Arden, which until 2020 had been the bright spot in the business, also saw significant sales declines. For the three months ending Sept. 30, Ardens sales were down almost 14 percent year-over-year, to $106.3 million. For the nine-month period, sales dipped nearly 20 percent, to $282.4 million.

Revlons newly appointed chief marketing officer Martine Williamson said that COVID-19 has accelerated the transformation plan that Revlon had already begun executing in 2020.

Over the course of the year, Revlon made many moves, including restructuring its executive team. Serge Jureidini, the former chief marketing officer, and Silvia Galfo, former global brand president for the Revlon brand, were out. Former Revlon executive Williamson, who also worked at Topix Pharmaceuticals and Glansaol, an early beauty incubator that went bankrupt, was in.

The business also went through furloughs during COVID-19, planned layoffs and several rounds of debt negotiations during the year.

Going forward, Williamson said Revlon plans to double down on key initiatives, which will include growth in Asia, especially China, as well as skin-care and e-commerce sales.

But critics say a modernization effort is needed for Revlons products to succeed with consumers.

The Revlon brand has stayed true to the celebrity spokesmodel formula for years, even as other brands shifted towards promotion via social media influencers and user-generated content, according to Coye Nokes, a partner at OC&C Strategy Consultants. In August, Revlon hired Megan Thee Stallion as a brand ambassador.

It feels like what they are doing is quite an old strategy, Nokes said. Get the celebrity endorsement, put them all over your ads. That worked for a while. Now, a lot of whats appealing to consumers is hearing about it from other consumers.

Williamson said Revlon is pivoting to working more nimbly and effectively across functions, in terms of marketing, and that she plans to use the digital experience she gained at start-ups to inform the digital and e-commerce strategies of the Elizabeth Arden and Revlon brands.

This is already underway as we evolve our marketing function to focus on market-specific needs as part of our continued effort to get closer to our consumers, Williamson said. Ultimately, we want to ensure they are getting the products they need, want and desire and I believe that will strengthen our leadership in the global beauty market.

In order to make progress in 2021, Revlon will not only need to reach consumers, but will also need to safeguard liquidity, according to Debtwire restructuring editor Reshmi Basu.

They were able to stave off a filing [in 2020] thats positive but I wouldnt say they exactly engendered goodwill across the lender and bondholder group, Basu said, referencing debt deals Revlon made that alienated the lending community, including one where the company moved intellectual property out of certain lenders reach.

More refinancing for the business lies ahead. The company has several different maturity dates in July and September, and has said in SEC filings that it anticipates refinancing those loans.

The capital structure is still going to be a front-and-center issue with them. Its not as if all their balance sheet issues have been solved. Theyve gone a long way in working towards it, but a couple of the deals that theyve done theres definitely investor ire in how these deals were done, Basu said.

For more from WWD.com, see:

Revlon Restructures Exec Team Following Debt Deal

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Revlon Avoided Bankruptcy: What's Next? - WWD

The coronavirus pandemic appeared to be the final straw for a number of retailers that filed for bankruptcy in 2020, a year in which major apparel companies including J.C. Penney Co. Inc., Neiman Marcus Group, J. Crew Group Inc., Brooks Brothers, Tailored Brands Inc. and more filed for Chapter 11.

But the economic downturn sparked by the pandemic is expected to have the slow-burn effect it often does, with more companies headed for financial trouble as the pandemic persists into 2021 and the point of widespread vaccinations still lies months away, experts said.

I think there are a lot of retailers out there who were just on the edge, and trying to make it through, hoping that the holiday season would be successful for them, and successful enough to see a greater future that would allow them to avoid bankruptcy, said Schuyler Carroll, a partner at Loeb & Loeb LLP.

What Im hearing is that there are some of those, and there are some of those that are not going to be able to make it and will be looking to a bankruptcy to try and preserve some future, he added.

I think most of the retailers that have made it this far, theyre hoping to avoid a liquidation, he said. If their holiday season was not good enough, theyll have to resort to liquidation or resort to bankruptcy to bring in new investors, or a sale, or slim down their operations in some way.

Bankruptcy attorneys are also anticipating a ripple effect from retailers financial troubles, expecting that the impact on landlords and suppliers will start to become more apparent in 2021.

More recently, real estate investment trusts including mall operator CBL & Associates Properties Inc. and the Pennsylvanian REIT have filed for bankruptcy protection.

From the landlord perspective, the economics have shifted, said Brad Sandler, who co-chairs the creditors committee practice group at Pachulski Stang Ziehl & Jones. REITs that are less stablethey tend to be [those] that have the B- and C-quality malls and I think that we very well may see some of them restructure, either in or out of court in 2021.

The U.S. courts system issued findings in July that said business bankruptcy filings at that point were about the same as a year ago, at nearly 22,500 filings.

Bankruptcy filings tend to escalate gradually after an economic downturn starts, according to the report. Following the Great Recession, new filings escalated over a two-year period until they peaked in 2010.

But the pandemic has accelerated trends that were already eroding traditional retail. In August, mall traffic at large real estate companies including Simon Property Group Inc., Brookfield Property, Taubman Centers Inc. and others had declined roughly 15 percent from last year, according to a report by S&P Global Market Intelligence analysis based on information from data collection company AirSage.

E-commerce has continued to soar, with online sales over the 2020 holiday season increasing 49 percent from last year, according to data from Mastercards data arm Mastercard SpendingPulse.

An issue tied to all of that is going to be dealing with the supply chain, and drawing customers in and making sure your supply chain doesnt get tied up with disruptions, said Sandler of Pachulski Stang Ziehl & Jones. Its going to be really important for retailers in 2021 to focus on their supply chain management.

Bankruptcy courts, meanwhile, have stayed busy and functional throughout the pandemic, with judges adapting their processes, hosting virtual hearings, conferences and mediations to shepherd cases along, and granting rent deferrals during the bankruptcy where retailers seek it.

Having remote proceedings has allowed stakeholders who previously might not have been able to travel to physical proceedings to now simply appear electronically and be heard in court, said Melanie Cyganowski of Otterbourg PC, a former bankruptcy judge in New York.

I think the bottom line is that the bankruptcy courts are very sensitive, and are able to respond to the nuances of the time period that theyre facing, said Cyganowski. And so, if the bankruptcy laws permit a flexible approach, more likely than not, they will take it.

Another development that has made the bankruptcy court more accessible is the relatively new Subchapter V process, which was created by the Small Business Reorganization Act of 2019 to make the process more affordable for small businesses with smaller debt loads. Furla USA, for instance, is currently in the process of reorganizing through Subchapter V of the Chapter 11 process.

The amount of fees that will be spent in these Chapter 11s is enormous, if youre somebody who has one store, or two stores, you typically really couldnt do it, because it was so expensive, said Paul Aloe, partner at Kudman Trachten Aloe Posner LLP.

I think Subchapter V is going to be very important, he said. You really have an expedited, streamlined procedure.

Ultimately, the fashion industrys recovery and fate will hinge on keeping up with the role of clothing in a pandemic world. The restricted opportunities for dressing up, from corporate offices continuing to allow employees to work remotely to the dwindling number of social events, will have implications for how people think about their wardrobes, said Cyganowski, the former bankruptcy judge.

What are we using clothes for, if people are not going out, if theyre not going out to dinner, if theyre not going on dates, if theyre not going to the theater, if theyre not going to work? she reflected.

Its like, 75 percent of a wardrobe is not being used if people dont get excited about, Oh, Ive got to get a holiday dress, Ive got to get a winter coat, she said.

The pandemic is affecting so much of a part of our lives, that I just think that retail is going to have a very difficult time coming back, Cyganowski said.

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The State of Retail Bankruptcies in 2021 - WWD

ByMaura Webber Sadovi

Chapter 12 family farm bankruptcies fell in 2020 for the first time in six years, in part because federal aid helped offset pandemic supply chain problems that resulted in the forced dumping of milk this spring. But declining farm cash receipts and high debt levels have many worried that Chapter 12 filings will resume their upward tack once government aid programs are rolled back, according to two economists.

Tractor spraying pesticides on soybean field with sprayer at spring

The total number of family farm bankruptcy filings dipped last year to 523, below the nine-year high of 567 in 2019 but still the second-highest annual amount since 2010, federal court filings show. The decline comes even as larger farms became eligible to file for specialized relief after the debt cap was raised in August 2019, the economists said.

A decline in Chapter 12 filings would mark an end to the multi-year rise in farm bankruptcies due to a range of woes, including the trade war with China. But its not yet clear whether the downshift marks a sustainable change in momentum or a temporary pause.

Court closures in the wake of the Covid-19 pandemic have made it more difficult for farmers to file for bankruptcy relief, and a wave of pandemic-related federal aid ranging from specific farm aid to the Paycheck Protection Program has propped up farm finances, according to the economists and a farmer.

I dont think were getting a clear view of bankruptcies this year, said John Newton, chief economist at the American Farm Bureau Federation, one of the countrys largest farm lobbying groups, in an interview withDebtwire ABS in late December. Its going to take some time to really evaluate all the economic impacts.

Commodity prices, land values may not be enough

Early in the year farmers were reeling as shuttered schools and restaurants disrupted their supply chains and slaughterhouse closures due to Covid-19 made it difficult to find places to process cattle, hogs and poultry, he said. By year's end farmers were helped by higher commodity prices, but that wont be enough to keep some out of bankruptcy, according to Joseph Peiffer, an Iowa attorney.

An anticipated 43% rise in net farm income in 2020 to $120 billion was driven in part by $46.5 billion in payments from thefarm billand conservation programs as well as such ad hoc stopgap federal programs as the Coronavirus Food Assistance Program, Newton wrote in a December 3 report. Through the latter, the USDA bought billions of dollars in produce, milk and meat which was then distributed through food banks, churches and non-profits.

Meanwhile, projected farm cash receipts from product sales dipped to $367 billion in 2020 from $370 billion in 2019, according to Newton. This year, if the ad hoc farmer aid is stripped away, net farm income will likely drop to the $90-$100 billion range, proving that farm income in 2020 was a false positive, Newton wrote.

It is also possible that bankruptcies may be stabilizing, but debt levels held by farms are still elevated, said the second economist. That will keep pressure on farmers, and could result in more filings if the emergency aid drops off in 2021, said the second economist.

Another factor is land values, which have allowed many strapped farmers to tap their equity for more debt or sell and get out of farming altogether rather than filing for bankruptcy. Unlike the 1980s farm crisis, the average value of farm real estate per acre has risen annually since 2016, but mostly plateaued in 2020 at $3,160, according to an August USDA report. Values in Kansas, Nebraska and the Dakotas were an exception, falling 2.3% on average, according to the report.

The most powerful kind of bankruptcy

Strong land values are a lifeline for both the distressed farmers who use Chapter 12 to reorganize and stay in businesses and those who end up liquidating in Chapter 12 which lets them avoid paying taxes on their farm sales, the sources said.

For instance, a farmer who sold his Iowa farm out of a Chapter 12 bankruptcy in early December for $3.47 million faces $600,000 in federal taxes on the sale at closing, according to Peiffer. But the farmer will be able to discharge that tax through his bankruptcy case, something that would not have been possible if he had filed a Chapter 7 bankruptcy.Chapter 12 is the most powerful chapter of the bankruptcy code, said Peiffer.

The stew of federal aid and rapidly shifting business patterns leaves many farmers unsure where they stand. Carol Clement, who lost her father to the virus last spring, still isnt clear about the full impact that the pandemic has had on her businesses in 2020 due to myriad changes in expenses, costs and consumer demand.

Clement and her husband, John Harrison, own and operate Heather Ridge Farm in Preston Hollow, New York, where they raise grass-fed beef cows, sheep, goats, pigs, chickens and turkeys. Clement saw a big uptick in sales early in the pandemic as more down-staters moved to the Catskill Mountain area to work remotely in the spring and summer. But now many of those temporary customers have disappeared.

The viruss November surge meant that Clement had fewer customers for her 20-pound turkeys due to downsized family gatherings. She pivoted, quickly deciding to process some of the birds as ground turkey meat and others into turkey legs and breasts. But Clement didnt add the costs of additional required trips to slaughterhouses to her already rich $6.90 per pound turkey prices. And until she finishes calculating her taxes for the year, Clement wont know how all the changes have affected her finances.

With the virus still raging, Clement and other small farmers are all leery of what the next years going to bring," she said.

Maura Webber Sadovi is a Debtwire ABS editor and reporter. She can be reached atMaura.Sadovi@acuris.com.

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Farm Bankruptcies Drop Thanks To Federal Aid, But Falling Cash Receipts And Elevated Debt Portend Trouble Ahead - Forbes

The Consolidated Appropriations Act (CAA), one of the largest bills ever passed by Congress, was signed into law on December 27, 2020. In addition to providing 2021 federal government funding and further COVID-related relief, the CAA contains several amendments to title 11 of the Bankruptcy Code to provide temporary relief and flexibility to debtors, landlords, tenants, and vendors who have been materially impacted by the ongoing COVID-19 pandemic.

The key takeaways for amendments to the Bankruptcy Code are as follows:

The CAA amends section 365(d) of the Bankruptcy Code for subchapter V small business debtors to allow an additional 60 days to pay rent (this is in addition to the existing 60-day delay permitted under subchapter V), where a small business debtor has experienced and is continuing to experience a material COVID-related financial hardship. Such deferred obligations can now be paid out over time pursuant to the plan (as opposed to the day the company emerges from bankruptcy). (2-year sunset, December 27, 2022).

For all bankruptcy cases, under the CAA, debtors now have 210 days to assume or reject a lease (and, as before, may request an additional 90-day extension). This gives tenant-debtors 300 days (up from 210 days) to try to come up with a viable exit strategy from bankruptcy. (2-year sunset, December 27, 2022).

The CAA helps landlords and trade vendors who provided assistance to their tenants and customers by prohibiting a debtor from avoiding payments that resulted from an agreement to defer payments. To qualify, (a) the debtor and landlord/supplier must have entered into a lease or executory contract before the filing of the bankruptcy case, (b) they must have amended the lease or contract after March 13, 2020, and (c) the amendment must have deferred or postponed payments otherwise due under the lease or contract. This amendment should encourage landlords and suppliers to work with distressed counterparties, with the understanding that negotiated deferred or abated payments will not be subject to clawback as a preference. (2-year sunset, December 27, 2022)

The CAA contains provisions to allow subchapter V debtors to obtain PPP loans, but such provisions will only go into effect in the sole discretion of the SBA administrator. Currently, courts are split as to whether a debtor is eligible for a PPP loan.

The CAA also includes temporary changes that primarily impact consumer bankruptcy cases, including:

Prior SBRA Debt Limit Amendments Not Extended

Certain provisions of the Bankruptcy Code that were recently amended in connection with the earlier stimulus round (which we have previously written about) are subject to expire. Most importantly, the CARES Act increased the debt ceiling for subchapter V small business debtors from $2,725,625.00, to $7,500,000.00. This modification greatly expanded the universe of potential small business debtors that could utilize the many advantages of subchapter V of the Bankruptcy Code.

However, this provision is set to expire on March 27, 2021. Unless Congress acts quickly, a significant number of small businesses will no longer be eligible to file under subchapter V of the Bankruptcy Code. Businesses continuing to experience financial distress may want to consider their options in advance of the March 2021 expiration to ensure that they can still take advantage of subchapter V.

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Key Takeaways from CAA Amendments to Bankruptcy Code; No Extension of Cares Act Provision Increasing Eligibility for Subchapter V - Lexology