Creditors' Resource : Bankruptcy and Creditors Rights Advisor : Corporate Recovery Associates : Richard J. Feferman : Creditors Committee, Reclamation, Unsecured Creditors

We all know the housing bubble was inflated by easy credit and that market has become totally unhinged.


The Credit Market's issues are far from being sorted out. Certainly this is not going to be resolved in the short term. I think it is a fairy tail to believe the same abundant levels of consumer credit will return anytime soon. Money is going be more expensive and in shorter supply, hence we will have fewer dollars chasing houses. The next paragraph (and corresponding chart) shows why I think housing may be far from a bottom.


The S&P/Case-Shiller Home Price Indices are the gold standard for measuring aggregate home price fluctuations. The below chart, illustrating monthly changes in year-to-year comparisons, shows nationwide home prices falling at a faster rate each month.

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Loren Steffy of the Houston Chronicle wrote an article about a couple who have filed suit against several debt buyers who apparently ignored a Judge's discharge order. Although this blog is for Creditors, the whole notion implied in Steffy's well written article is that debt buyers who are so cavalier as to have complete disregard for a Federal Bankruptcy Judge's Order have thus far not been called to account.  This is unconscionable.


This case could be a big deal. I'll keep you posted.

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As I reported earlier 2008 is turning out to be a difficult year for retailers. What do you do when one of your Tenants files Chapter 11?


Here are three important issues:

I.    Ensure Your Rights To Payment
II.   Will The Lease Be Assumed Or Rejected?
III.  How To Improve Your Odds At Minimal Cost



I.    Ensure Your Rights To Payment. First things first, consult counsel and determine if there is any reason you do not want to file a Proof of Claim.  Then immediately review the tenant's (“Debtor’s”) account and lease files with your bankruptcy counsel. There are three classifications of claims typically filed by landlords:


1) Pre-Petition Claim. Everything the Debtor owes you up to the filing of the Bankruptcy Petition.



2) Ordinary Course Administrative Claim. Bankruptcy Code Section 365 (d)(3) requires the timely payment of your rent. Is the Debtor using your property to the benefit of the Bankruptcy Estate? Yes, and you are to be paid rent on time from the date the case was filed. If the Debtor is failing in its obligation to keep current on its Post-Petition rent then consider filing a Motion For Stay Relief as a precursor to an eviction proceeding.


3) Lease Rejection Claim. If the Debtor decides to terminate your lease you will be entitled to make a claim for your “Rejection” damages.


II.    Will The Lease Be Assumed Or Rejected? The Tenant will have 120 days to decide to Reject or Assume the lease. This may be extended, for cause (its usually granted), another 90 days. If the lease is assumed all arrearages must be paid immediately or adequate assurance of performance must be provided.


III.    Improve Your Odds At Minimal Cost. One of the best methods for improving your treatment in a Chapter 11 case without coming out of pocket with cash is get appointed to the Creditors' Committee. This is not a big time commitment and you can get lots of bang for the buck. Appoint an administrative staff member to represent your company on the Committee. The Committee will hire professionals (at the expense of the Bankruptcy Estate). Committee members have conference calls as needed. Good professionals will keep the Committee informed and handle the matters on a day-to-day basis. An effective Creditors Committee often will enhance the treatment of unsecured creditors.


Be proactive. Remember get counsel early and ask questions right away. Inquire about the formation of a Creditors Committee.

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Today I spoke to a credit manager with an interesting problem. He called to discuss a letter he received demanding the payment of almost $400,000 from a customer that is in bankruptcy. Adding insult to injury, the customer still owes over $75,000 on its account. What a paradox! What my credit manager friend just received is called a Preference Demand Letter.  Dealing with preferences is one of the most common encounters with the bankruptcy process for today’s Credit Professional, and preference litigation is the most common type of adversarial proceeding in bankruptcy court.


Certain payments within 90 days (1 year if the payee was an insider) of the date of the filing of a bankruptcy petition may be considered preferential and are potentially recoverable by the bankruptcy estate.


The whole notion of the return of preferential payments under the Bankruptcy Code is the “fair and equal” treatment of all unsecured creditors. This is accomplished in a “Water Leveling” process in which property (money) is recovered from the recipients of preferential payments for the benefit of the estate. It does not seem very fair when you’re the one asked to pay back money from a company that still owes money.


I am going to discuss this subject on a regular basis here, so continue to check back if it is of interest. We will be discussing the elements of a preference as well as how they are prosecuted and defended.


If you’ve received a demand, don’t ignore it, be proactive and seek the advise of counsel experienced in these matters.  If you like, please call my office.  We are experienced in the analysis of these matters and can possibly refer you to experienced legal counsel.

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