Academics Consider Proposal of ‘Super Chapter 11’ to Avoid Systemic Collapse

The best way to avoid debt gridlock is to use government support to keep the number of bankruptcies below the tipping point at which they become systemic, says Joseph Stiglitz, a Nobel laureate economist at Columbia University, BloombergBusinessweek reported. If government aid fails to stem the tide, Stiglitz says, the fallback should be what he calls “super Chapter 11” — building on the chapter of the Bankruptcy Code that’s designed to keep a company in business. It would resolve the problems of many companies at once under the auspices of a government-appointed supervisor. It also would be fast, usually keep management in place, and give more consideration to workers and less to creditors than in conventional bankruptcies, in his vision. In some cases, the federal government would inject money in return for shares, so taxpayers would get a piece of the potential upside. “This is going to be rough justice,” Stiglitz says. Systemic bankruptcy is more than a remote threat. The record jump in initial claims for unemployment insurance shows that companies are in extreme distress and a lot of consumers are having trouble paying bills. The underlying problem is that, as Harvard economist Lawrence Summers has put it, economic time has stopped because of the pandemic, but the financial clock continues to tick. What’s needed, says David Skeel, a University of Pennsylvania Law School professor, is a yellow flag like the one waved at a Nascar race when there’s an accident. The flag doesn’t stop movement, but it locks all the cars — in this case, all the debtors and creditors — in the same order so that no one gets an advantage during the pause.

U.S. Jobless Claims Top 6 Million for Second Consecutive Week

A staggering 16.8 million Americans have filed for unemployment benefits in the last three weeks, with weekly new claims topping 6 million for the second straight time last week as the impact of the COVID-19 coronavirus outbreak continues to devastate the economy, Reuters reported. Today’s weekly jobless claims report from the Labor Department, the most timely data on the economy’s health, strengthens economists’ expectations of job losses of up to 20 million in April and their conviction that the economy is in deep recession. It also underscored an urgent need for more fiscal stimulus to halt the free fall, economists said. Initial claims for state unemployment benefits slipped 261,000 to a seasonally adjusted 6.606 million for the week ended April 4, the government said. Data for the prior week was revised to show 219,000 more applications received than previously reported, taking the tally for that period to 6.867 million. All told, a record 16.78 million people have filed claims for jobless benefits since the week ending March 21.



 

Commentary: Time Is Running Out to Protect Americans’ Relief Payments from Debt Collectors

A critical piece of Congress’s coronavirus relief bill, the CARES Act, provides for direct payments to American households. The U.S. Treasury is currently gearing up to start direct-depositing funds into Americans’ bank accounts, with paper checks or other forms of payment to follow in the coming weeks or months. When American families finally receive their relief payments, however, they could lose them before they can use the money to pay for food, utilities and other necessities. This is because Congress failed to address an important issue: debt collection through garnishment, according to a Harvard Law Review blog post by Profs. Pamela Foohey, Dalié Jiménez and Chris Odinet. The solution to this problem is simple, according to the professors. The CARES Act gives Treasury Secretary Steven Mnuchin the power to issue rules necessary to carry out the law’s purpose. The Treasury only has to code the payments in the same way it codes Social Security and similar government benefit payments when it sends them to financial institutions (with a “XX” code that denotes a “federal benefit payment exempt from garnishment”). Banks are required to protect from garnishment at least two months’ worth of such coded funds in a person’s bank account. Giving a similar “XX” coding here will ensure that relief payments are given the same protection as other federal benefits — nothing more and nothing less. Time is of the essence. Treasury will begin processing payments in the next week, payments that debt collectors may swoop in to take away from Americans.


 

New Fed Programs Could Pump $2.3 Trillion into the Economy

The Federal Reserve announced today that it could pump $2.3 trillion into the economy through new and expanded programs, ramping up its already extensive efforts to help companies and state and local governments suffering financially amid the coronavirus, the New York Times reported. The Fed said that it would use Treasury Department funds recently authorized by Congress to buy municipal bonds and expand corporate bond-buying programs to include some lower-rated and riskier debt. The Fed also rolled out a highly anticipated business-lending program that targets midsize companies, including those not eligible under a Small Business Administration loan program. The measures push the Fed far beyond anything it attempted in the 2008 financial crisis, and expand its already significant efforts to cushion the economy and calm markets, which have included money market interventions and an unlimited bond-buying campaign. The Fed had previously rolled out about $500 billion worth of emergency lending programs, so this could more than quadruple the size of those programs. “We are deploying these lending powers to an unprecedented extent, enabled in large part by the financial backing from Congress and the Treasury,” said Fed chair Jerome H. Powell. He pledged to continue using those powers “forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.” Congress recently gave the Treasury Department $454 billion to back up Fed emergency lending facilities, which the Fed uses to keep credit flowing into the economy in extreme circumstances. The facilities need to be insured against losses when they have credit risk, so the extra backstop has enabled the central bank to expand its programs. The Fed’s moves on Thursday expand its emergency lending powers into new territory. The central bank has avoided buying municipal debt and lower-rated company debt, out of concern about credit risk and to avoid picking winners and losers. But amid market disruptions, calls for Fed action in both areas have been building.



In related news, the Federal Reserve and other regulators have granted a sweeping capital break for banks providing loans to small businesses as part of the government’s response to the coronavirus-fueled economic crisis, Bloomberg News reported. Acknowledging that lending through what’s known as the Paycheck Protection Program doesn’t pose a risk for U.S. banks, regulators won’t make lenders maintain capital buffers as a protection for them, the Fed, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency said today. Such loans will be backed by a recently announced Fed lending facility, and the rule’s text says the regulators would agree to “allow banking organizations to neutralize the regulatory capital effects of participating in the facility.” The rule change is meant to smooth the path for banks to facilitate Small Business Administration loans to companies facing the risk of bankruptcy amid the shutdown of the U.S. economy. Roughly $350 billion in rescue funds were made available as part of the $2.2 trillion stimulus package passed last month. Lawmakers are negotiating a second bill that would add $250 billion to the SBA program.

Rural Hospitals Unsure Whether Coronavirus Aid Is Coming

Embattled rural hospitals, some of which are on the front lines of the coronavirus crisis, stand to lose out on billions of dollars in federal aid, and industry experts are worried that financial lifelines could come too late — or not at all, the Wall Street Journal reported. A lack of clarity on what the government will pay for, and when, means that money isn’t available for the hospitals that need it right now, said Andrew Helman, a bankruptcy lawyer and co-chair of ABI’s Health Care Committee. Bankruptcy lawyers across the country are badgering lawmakers, wooing creditors and asking banks to take risks to keep small hospitals alive until aid money comes through. “It feels like I’m trying to pass the hat around for the client to maintain service in a crisis,” Helman said. The American Hospital Association, bankruptcy lawyers and financial advisers working in the field are sounding the alarm over the uncertainty for rural hospitals that serve millions of Americans living outside major cities. Chronically distressed, these small rural hospitals could fall through gaps in the federal safety net because they are bankrupt or troubled. (Subscription required.)


 

Commercial Fishing Industry in Free Fall Amid Plummeting Demand During COVID-19 Pandemic

The novel coronavirus pandemic has destroyed demand for seafood across a complicated U.S. supply chain, from luxury items such as lobster and crab, generally consumed at restaurants, to grocery staples sourced from the world’s fish farms, the Washington Post reported. Now, with restaurants closed, many of the nation’s fisheries — across geography, species, gear types and management — have reported sales slumps as high as 95 percent. Boats from Honolulu to Buzzards Bay, Mass., are tied up dockside, with fisheries in the Atlantic, the Pacific, the Gulf of Mexico and Alaska affected, throwing thousands of fishermen out of work and devastating coastal communities. And those in the fishing industry say that their portion of the $2 trillion relief package for American businesses and workers does not adequately account for losses incurred by the $100 billion U.S. seafood industry. The rescue package allots $300 million for operators experiencing losses greater than 35 percent, including subsistence, commercial and charter fisheries, as well as fish farms.


 

Coronavirus Has Shut Stores, and Retailers Are Running Out of Time

Retailers have furloughed hundreds of thousands of workers, cut executive pay and stopped paying rent, all to conserve cash. For the most indebted retailers, particularly those already struggling before the crisis began, those measures may not be enough, the Wall Street Journal reported. Neiman Marcus Group Inc. and J.C. Penney Co., both of which have looming debt payments, have been reaching out to creditors in the hopes of buying more time. “A lot of debt will have to be refinanced across these companies,” said Oliver Chen, an analyst with Cowen Inc., speaking about retailers in general. “They are all working to renegotiate loan terms.” The retail industry was going through a shakeout before the coronavirus pandemic hit. As shoppers migrated away from malls and bought more online, specialty-apparel retailers and department stores were among the hardest hit. A record number of chains have filed for bankruptcy protection in recent years, and others have closed hundreds of stores. As the virus keeps American businesses temporarily closed, the weak will only get weaker, analysts said. Moody’s and Fitch Ratings Inc. recently downgraded the debt of major retailers, including Macy’s Inc. and Gap Inc., to junk status, which could make it more difficult for them to refinance loans or tap into a government rescue package. The Federal Reserve and Treasury Department are in the process of writing the rules that will govern how $2 trillion in federal aid will be dispensed. Unlike for airlines or national defense, the stimulus package didn’t include any specific help for the retail industry. The National Retail Federation has been lobbying the government to ensure that companies with credit ratings that fall below investment grade have access to loans. “We want them to design these programs to be broad enough to tackle the significant problems of distressed industries such as retailing, which employs a large chunk of the population,” said David French, the trade group’s senior vice president of government relations. (Subscription required.).


 

Analysis: May Is Crunch Time for U.S. Auto Suppliers Amid Coronavirus Shutdown

Suppliers and restructuring experts say major automakers are still paying bills, and suppliers received checks recently for goods shipped in February and March before factories shut down. The real crunch for suppliers will come by mid-May, Reuters reported. That is when the cash backlog runs out unless automakers are able to restart assembly lines, industry executives and consultants said. Fiat Chrysler Automobiles NV (FCA) and Honda Motor Co. Ltd. said this week that they aim to gradually restart production in early May. General Motors Co. and Ford Motor Co. have not set reopening dates. Some Asian and European automakers are aiming to restart U.S. production later this month. “If the auto industry starts back up in early May, most suppliers should be able to turn the lights back on,” said Steve Wybo, a senior managing director at consultant Conway MacKenzie. “But the longer the shutdown lasts, the harder it will be for them to get the lights on.” Many larger auto suppliers were in better shape financially when the coronavirus shutdowns came than they were when the 2008-09 financial crisis hit. But Laurie Harbour, CEO of Harbour Results Inc., a manufacturing consulting firm that works with suppliers, said she is concerned about smaller companies further down the supply chain. “If you weren’t strong going into 2020, your challenges are going to be significant for the balance of the year to get yourself back up to speed.”


 

Latest ABI Podcast Highlights Consumer Commission's Recommendations to Expand Chapter 13 Debt Limit and Create a Chapter 13 Reserve Fund

ABI's latest podcast features members of ABI's Commission on Consumer Bankruptcy discussing recommendations from the Final Report to expand chapter 13’s debt limit and create a chapter 13 reserve fund. Commissioner and Chapter 13 Trustee Henry Hildebrand (Nashville, Tenn.) moderates the discussion with Jenny L. Doling of J. Doling Law, PC (Palm Desert, Calif.) and Prof. Angela Littwin of the University of Texas at Austin School of Law, who were both members of the Commission’s Chapter 13 Advisory Committee..


 

Replays Available for Recent abiLIVE Webinars on the CARES Act, SBRA, Consumer Relief and Preferences

ABI hosted a series of webinars over the past week looking at the "Coronavirus Aid, Relief, and Economic Security Act" (CARES Act) and the Small Business Reorganization Act of 2019, which went into effect on Feb. 19. The programs featured expert speakers looking at how the laws created greater access to financial relief for consumers and small businesses seeking bankruptcy. Former House Speaker John A. Boehner joined a panel on Monday to examine tools to navigate the financial crisis related to COVID-19. Be sure to use your ABI member login on the http://cle.abi.org site to access the replay and materials.
 
"The Small Business Reorganization Act: How It Helps in Today’s Health & Economic Crisis"
Panelists: Bankruptcy Judge Madeleine C. Wanslee (D. Ariz., Phoenix), Robert J. Keach of Bernstein Shur (Portland, Maine) and Attorney Allan D. NewDelman (Phoenix), moderated by ABI Editor-at-Large Bill Rochelle.
Click here for the video and materials.
 
"Tools to Navigate the Financial Crisis Related to COVID-19"
Panelists: Former U.S. House Speaker John A. Boehner of  Squire Patton Boggs (Washington, D.C.), Karol Denniston of Squire Patton Boggs (San Francisco), Michael C. Eisenband of FTI Consulting (New York), Brian Kennedy of FTI Consulting (Washington, D.C.) and Ed J. Newberry of Squire Patton Boggs (Washington, D.C.), moderated by Stephen Lerner of Squire Patton Boggs (Cincinnati, Ohio).
Click here for the video and materials.
 
"The Consumer Provisions of the CARES ACT, and Local Court Responses to the Pandemic"
Speakers: Bankruptcy Judge Tracey N. Wise (E.D. Ky.; Lexington), Attorney Eric Goering (Cincinnati), Prof. Robert M. Lawless of the University of Illinois (Champaign, Ill.) and Reporter for the ABI Commission on Consumer Bankruptcy, and Michael J. McCormick of McCalla Raymer (Atlanta), moderated by David P. Leibowitz of Lakelaw (Chicago).
Click here for the video and materials.
 
"Preference Update: SBRA’s Due Diligence Requirement" 
Speakers: Timothy J. McKeon of Mintz Levin (Boston), Bankruptcy Judge Jerrold N. Poslusny (D. N.J.; Camden), Shane G. Ramsey of Nelson Mullins (Nashville, Tenn.) and Bethany J. Rubis of ASK LLP (Saint Paul, Minn.).
Click here for the video and materials.
 

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