Although filing for bankruptcy could have made debtors instant pariahs some years ago, the process has lost most of its social stigma during the current recession as bankruptcy has become an almost ubiquitous solution to today’s financial woes. The total number of personal and business filings in Nevada rose sharply from 5,542 in 2006 to 10,951 in 2007, to 18,709 in 2008, to 29,805 in 2009 and to 23,248 for the first three quarters of 2010, according to statistics provided by the American Bankruptcy Institute and the U.S. Bankruptcy Court of Nevada. Business filings rose from 321 in 2007, to 505 in 2008, to 978 in 2009 and to 756 for the first three quarters of 2010. Figures for the fourth quarter of 2010 will be available the middle of this month.
Amidst the almost constant speculation about whether the economy has bottomed out yet, many bankruptcy attorneys say they believe that bankruptcy will continue to be a choice for a lot of Nevada businesses in the near future. “With the people I talk to and the facts that I observe, I don’t see this turning around for at least two or three years and then it will be slow,” explains Jim Greene, a partner in Las Vegas-based Greene Infuso, LLP. “Bankruptcies will increase until we get past [high] unemployment and housing foreclosures,” says Janet Chubb, insolvency partner for Armstrong Teasdale in Las Vegas.
It doesn’t take a rocket scientist to understand that Nevada’s once thriving economy, that depended upon continued growth in construction, has been especially hard hit by the current economic doldrums. And it’s not rocket science to comprehend that some of the industries affected the most (and at highest risk of bankruptcy) are construction, gaming and real estate. “We were building so many houses. A lot of raw land isn’t even saleable now,” Chubb says. “We’ve seen so many developer bankruptcies,” explains Dawn Cica, a bankruptcy attorney at Lewis and Roca in Las Vegas.
Not only has the recession affected the number of bankruptcies filed, but also the essence of them, according to Bob Olson, shareholder at Greenberg Traurig, LLP in Las Vegas. “The largest change is the nature of the real estate bankruptcies. We have lots of people who have put together parcels of property to make money,” he explains. Successful speculation in real estate depended upon an economy that continued to grow and expand, however.
“Before, there were a lot of companies with internal problems that needed to reorganize. In the last couple of years it’s companies, such as single asset real estate companies, where the value has fallen,” Cica says.
The typical bankruptcy client is a person or group that owns strip malls, retail space or property for development, according to Greene. “The bulk of parties coming to me are in real estate and real estate development. They acquired the property for speculation,” he says.
Liberal credit and high property values made loans for speculative real estate fairly easy to come by just a few years ago. As property values plummeted and the economy tanked, however, many borrowers found themselves upside down, with inadequate cash flow to service their loans. Greene’s typical case involves a small shopping center whose value fell from $4 million to $1.8 million in just a few years. The owners are under water with a loan of $2.8 million which they can’t pay from the proceeds of the business. With the asset base devalued and a personal guarantee on the loan looming over their heads, borrowers who find themselves in this kind of scenario are likely candidates for bankruptcy filing. Some of Greene’s other clients have even larger liabilities, however. “I have clients whose net worth was in the tens of millions and now it’s negative,” he says.
While the number of businesses in bankruptcy is disturbing enough, it’s equally unpleasant to recognize names of those who’ve made the list, such as Las Vegas Monorail Company, USA Commercial, Station Casinos and Riviera Holdings Corporation. As many people root for the success of CityCenter to help reinvigorate the economy in Southern Nevada, they are dismayed to learn that the restaurant owned by Beso LLC in the Crystals mall has recently filed for bankruptcy in order to reorganize its debt.
When considering the option of filing for bankruptcy, it’s important to understand that it does not necessarily have to mean the end of a business, but perhaps the initiation of a new beginning which directs the financial reorganization of the enterprise. “Bankruptcy is good if you can use it for your benefit,” Olson explains. For income producing entities, such as retailing and manufacturing, it’s possible for the company to get rid of substantial debt and still come out with a viable business. “Plans for reorganization are approved every day and people come out of it with another opportunity,” Chubb says. “A lot of people breathe a sigh of relief when they file.”
With a history that goes back to English courts in 1542, bankruptcy originally favored creditors over debtors. The penal nature of the procedure was harsh, with debtors thrown into prison until their families could pay off what was owed. Over the years the process obviously became much more humane, but until quite recently still harbored antisocial overtones. Bankruptcy in the U.S. is filed in the U.S. Bankruptcy Court which often is dependent upon state law. In Nevada, filings can be completed at the Southern division in Las Vegas and at the Northern division in Reno of the U.S. Bankruptcy Court of Nevada. Depending upon individual circumstances and desired outcomes, businesses can choose to file for Chapter 7 or Chapter 11 of the Bankruptcy Code.
Designed to facilitate the liquidation of property, Chapter 7 provides for the sale of assets and the distribution of the proceeds to creditors with the assistance of a case trustee. The process begins when the debtor files a petition with the bankruptcy court along with pertinent financial and business records. Chapter 7 is appropriate for debtors who have no desire to continue in business and simply want to find a solution to their financial problems. For borrowers who want to salvage their businesses, Chapter 11 allows them to reorganize under the direction of the court while the business continues to operate on a day-to-day basis. Once a plan has been negotiated, creditors are given the opportunity to vote on whether it meets their approval or not. Although these two options may seem overly simplistic as described, bankruptcy attorneys emphasize that the process is usually quite complex. “The first time people come in they only retain about half of it since it’s very complicated,” Greene says. Not only is it complicated, but it can also be costly. “Chapter 11 is very expensive because it’s not simple,” Cica says.
Before jumping to conclusions that filing for bankruptcy is the only way out, however, attorneys emphasize the importance of just sitting down and attempting to work out a settlement with the creditors. “They need to try and work with the bank. I do a lot of loan modifications,” Cica says. To avoid being sued, borrowers need to be proactive in trying to find solutions. They need to admit they can’t make the payments and provide full disclosure with appraisals and financial statements. “The best advice, being a lender’s lawyer, is to be honest with your lender,” Cica explains. “I think they [banks] have been making an effort to restructure.”
Greene agrees that debtors need to try to work out a settlement if at all possible. “You need to get the lender to see you have a plan that can work with income generated from the property,” he says. “Some lenders will work with borrowers and give concessions.” As an attorney who primarily represents borrowers, he isn’t quite as optimistic as Cica about the possibility of success, however. “The majority of lenders will start foreclosure if you go into default. Seventy to 80 percent have taken a very hard line approach and refused to negotiate.”
Whatever route the borrower eventually takes, the importance of having a plan can’t be over-emphasized. “The sophisticated debtor will go into bankruptcy with a plan to get out of it,” Olson explains. Formulating the plan also involves professional assistance. “They need to get help before it’s too late. Sooner is better,” Chubb says.
Greene says it’s critical to get an attorney on board right away. “I would advise people to hire an attorney first. As soon as you figure out that the project isn’t cash flowing, get professional help right away. You need to analyze your options,” he explains. Waiting too long will only make matters worse by limiting options. “Unfortunately a lot of companies are in denial,” Olson says. “One of the things that doom bankruptcy to failure is that the company waits until it’s too late. A lot of people file for bankruptcy right before the foreclosure sale.”
Owners of businesses that cannot meet their financial obligations would be wise to view their situation realistically. “I think somebody who is in financial difficulty should take the problem head-on. I’d caution not to take money out of an IRA or personal assets to make it work,” Greene advises. In these difficult economic times, even business owners who are able to make their payments would be wise to look at their financial situation with an objective viewpoint. “They should make sure they are minimally leveraged and that they realistically estimate income and expenses,” Olson says.
For the professionals who are in the bankruptcy trench day after day, the process can be both challenging and rewarding. “The most challenging part is managing people’s expectations. Some people have given up hope and other people are optimistic and think that the white knight is around the corner,” Olson says. “The most rewarding part is taking a business that’s not doing so well and helping the owners turn it around.”
Unfortunately, recent economic statistics indicate that business is likely to remain brisk at the U.S. Bankruptcy Court in Nevada, at least into the near future. The good news is that from the third quarter 2010 to the third quarter of 2011, Nevada is expected to gain 23,906 non-farm jobs for an increase of 2.1 percent, according to the U.S. Bureau of Labor Statistics. Reno will enjoy a bump of 2.1 percent and Las Vegas 3.2 percent.
As long as business vacancy rates remain high, Greene says it will be difficult for the economy to turn around. “There’s too much inventory now. It will take a long time for that to be absorbed. We’ll need 85 to 90 percent occupancy for rental rates to go up,” he says. Low rental rates increase the likelihood of more bankruptcies as property owners find it more difficult to service their loans. Olson believes that many more bankruptcies are yet to come because lenders still have a lot of bad loans they have not foreclosed on. “It’s called amend, extend and pretend,” he says. “I don’t think we’ll see the number of filings slow down yet.”