The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

The number of publicly traded companies that filed for bankruptcy protection under either Chapter 7 or Chapter 11 declined in 2011, compared to the year prior, although the 2011 bankrupt companies collectively  listed greater amounts of pre-petition assets than 2010 bankrupt public companies did, according to data recently released by BankruptcyData.com (here).

According to the report, 86 publicly traded companies filed for bankruptcy protection in 2011, compared to 106 in 2010, and compared to 211 in 2009. The number of 2011 filings represents a 17% decline from the prior year, and nearly a 60% decline from 2009. Though the number of public companies filing for bankruptcy declined in 2011, the 2011 public company bankruptcies represented aggregate pre-petition assets of $104 billion, compared to $89.1 billion in assets in 2010. The 2009 public company bankruptcies represented $281 billion in assets.

The company average pre-petition assets rose to $1.2 billion in 2011 from $840 million in 2010. The increase in aggregate and average assets that the 2011 bankruptcies represent is largely a factor of two very large public company bankruptcies during the year: the $40.5 billion asset MF Global bankruptcy and the $25 billion AMR Corporation bankruptcy. Those two bankruptcies alone represented more than close to two thirds of all of the aggregate 2011 asset value. The MF Global bankruptcy represents the eighth largest U.S. bankruptcy of all times. None of the bankruptcies in 2010 are among the top ten. The two large 2011 public company bankruptcies had the effect of driving up the average bankruptcy size during the year.

The report notes that the increase in aggregate and average pre-petition asset size during 2011 is “all the more striking considering the low number of financial company bankruptcy filings” during the year. Bankruptcies in the Banking & Finance industry “typically reflect a higher pre-petition asset figure than other industries.” But there were only four public company bankruptcies in the sector during 2011, compared with 2010, when 21 of the 106 public traded bankruptcies involved companies in the Banking & Finance sector.

The sector with the largest number of 2011 bankruptcies was Health Care & Medical, which had a total of 11 bankruptcies; followed by Technology and Energy which each had nine filings each.

Though the number of public company bankruptcies has declined in each of the last two years, the public company bankruptcies remained at elevated levels. The 86 public company bankruptcies in 2011, though below the annual totals in 2010 and 2009, are above the totals in the years preceding the credit crisis and going all the way back to 2005, when there were also 86 public company bankruptcies.

In terms of what may lie ahead, the report includes the comments of one observer, George Putnam III, the founder of New Generation Research, BankruptcyData.com’s parent company, as saying that, “I expect to see an increase in bankruptcies in 2012 as some of the massive amount of debt that was issued before 2008 begins to come due.” These comments about the likely bankruptcy levels are consistent with other public commentaries (refer here) that have also suggested that 2012 could be a busy year for business bankruptcies.

A January 10, 2012 Los Angeles Times article about the public company bankruptcy data can be found here.

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According to data from the American Bankruptcy Institute, the high water market for business bankruptcies during the financial crisis occurred during the second quarter of 2009, when there were 16,014 business bankruptcies. The number of business bankruptcies has declined each quarter since then.  During the second quarter of 2011, there were 12,304 business bankruptcies, representing a decline of about 23% from the quarterly high two years prior.

But while the quarterly business bankruptcy filings are down from the credit crisis highs, they still remain at elevated levels. If you compare the 12,304 business bankruptcy filings during the second quarter of 2011 to the quarterly filing levels prior to the fourth quarter of 2008, the 2Q11 filing levels are higher than any quarter since the first quarter of 1998 (when there were 12,410 business bankruptcy filings). So even though the number of bankruptcy filings has declined over the last two years, there are still very significant numbers of businesses filing for bankruptcy.

In addition, there are some concerns that we could be in for a new round of increased bankruptcy filings. In an October 10, 2011 Reuters article entitled “New U.S. Bankruptcy Ripples May Emerge in Tough Economy” (here) the authors suggest that “corporate failures may be about to pick up again, with some big-name companies struggling for survival.” Among the factors the authors cite as possible causes for a new round of bankruptcy filings are “the weak economy, lackluster consumer spending, a shaky junk-bond market and increasingly tight lending practices.”

The authors also suggest that some companies that managed to get through the last couple of years by restructuring may now have to face the music. The article’s authors note that “confidence in the economy and easy access to debt allowed companies to complete restructurings in 2009 and 2010 with business plans and debt loads that were based on an economic pickup that has now faltered.” These circumstances “could create the potential for trouble at companies that have already restructured once.”

An October 26, 2011 article in Corporate Counsel entitled “Bankruptcies Are Down, But the Business Picture Still Isn’t Rosy” (here) sounds many of the same themes. The article’s author notes that while business bankruptcy filings are down, many lenders are burdened with underperforming and nonperforming loans.  Eventually, push will come to shove on these loans.  The article quotes one leading practitioner as saying that activity is up and that 2012 “will be a busy year” and that 2013 and 2014 will be “extraordinarily busy year for restructurings.” In addition there are “huge maturities” coming due in 2014 and 2015. These circumstances could force many companies to seek protection under the bankruptcy laws.

The Reuters article linked above identifies a number of high profile companies, including American Airlines and Kodak, that could face bankruptcy filings. The article also references struggling companies in “industries as diverse as shipping, tourism, media, energy and real estate.”

Of course whether there actually will be an uptick in business bankruptcy filings remains to be seen.  But the concerns expressed above underscore the vulnerabilities that financially insecure companies may still be facing. Because of the high claims frequency associated with bankruptcy, these vulnerabilities also imply heightened liability exposures as well. Unless and until the financial recovery picks up sufficient steam to provide positive economic momentum even for financially weak companies, these companies will continue to face both the vulnerabilities and liability risks.  

Perspective on U.S. Securities Laws:  In an earlier post (here), I noted the dismissal that had been granted in one of the securities class action lawsuits brought against a U.S.-listed Chinese company, North East Petroleum Holdings, Ltd. An October 27, 2011 China Daily article (here) discusses the ruling in the case. The article also contains some interesting commentary from a U.S-based executive of the company.

The article quotes Choa Jiang, described as senior vice-president of the company’s New York City office, as saying that as a result of “internal control deficiencies” the company’s CEO, CFO and a director were asked to resign. The company, Chao says, experienced “growing pains” as it made the transition from a private, family-owned business in China to a U.S.-listed company. But, Chao adds, the company “has learned its lesson,” adding that the company is “learning that the laws regulations, operations and culture in the U.S. are different from those in China.” Chao says that “what’s important is that you correct your mistakes, learn from them and move on.” Chao also said that company wants “to encourage other Chinese companies not to lose faith but vigorously defend themselves with the very best professionals.”

It seems that a number of Chinese companies will have the opportunity to defend themselves vigorously, as lawsuits against U.S.-based Chinese companies continue to mount. Just in the last several days there have been new securities class actions brought against JinkoSolar Holding Co. (about which refer here) CNInsure (refer here) and China Automotive Systems (refer here), all three U.S. listed Chinese companies. With the addition of these three latest lawsuits, the number of U.S. –listed Chinese companies that have been named in securities class action lawsuits during 2011 now stands at 35. These companies, like North East Petroleum Holdings, also have the opportunity to learn that in the U.S., laws, regulations, operations and culture are different than those in China.

That’s Billion With a “B”: Those readers interested in Bank of America’s massive $8.5 billion mortgage put-back settlement will want to read the October 19,  2011 Forbes article about Kathy Patrick, the plaintiffs’ lawyer who negotiated the settlement on behalf of a large group of institutional investors. The article, entitled “Wall Street’s New Nightmare” (here) makes it clear that, as far as Patrick is concerned, the Bank of America settlement is merely round one. Among other things, Patrick states that the institutional investor plaintiffs in the case “did not come together just to deal with Bank of America. They came together because they wanted a comprehensive industry wide strategy and an industry wide solution. They started with Bank of America because they thought they could achieve a template that they could extend to other institutions. “

In other words, at least according to Patrick, she is just getting started. Of course there is the small matter of defending the $8.5 billion BofA settlement from the all comers assault it is currently under. 

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Bankruptcy filings overall rose by 20 percent in the twelve-month period ending on June 30, 2010, according to information released on August 17, 2010 by the Administrative Office of the U.S. Courts. Though this filing surge was largely driven by non-business filings, business related filings also remained at elevated levels during the 12 months ended June 30.

According to the Administrative Office’s data, there were 59,608 business related bankruptcy filing in the 12 months ending on June 30 this year, compared to 55,021 in the 12 months ending on June 30, 2008, which represents an increase of 8.34%. The 59,608 for the twelve months ending on June 30, 2010 is the highest number of business-related filings for that 12 month period since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect.

The number of business filings for the 12 months ended June 30, 2010, though only slightly greater than the comparable period in 2009, is also over 76% greater than the number during the comparable period in 2008, and almost 150% greater than during the comparable period in 2007.

Though the number of business-related filings remained at elevated levels during the 12 month period ended June 30, the number of business-related filings declined during each of the three month periods within that 12 month period. Thus, during the first three months of the 12-month period, there were 15,303 business related filings; in the second three months, there were 15,156 business-related filings; in the third three month period, there were 14,697; and in the final three months, there were 14,452.

As reflected in an August 17, 2010 analysis of the bankruptcy filing data by the American Bankruptcy Institute, business filings decreased 4 percent for the six-month period ending June 30, 2010, to 29,059 from the first-half 2009 total of 30,333.

Despite this quarter by quarter decrease in business-related bankruptcy filings, the overall number of filings (including non-business related filings) actually increased during the three months ending June 30, 2010, to 422,061, which is the highest for any quarter during fiscal 2010 (which runs October 1, 2009 to September 30, 2010), and the highest for any April-June quarter since the 2005 third quarter filings.

Though the news about bankruptcy filings overall is discouraging, the news related to business related bankruptcy filings may be slightly encouraging as there appears to be some suggestion that the worst may be past. However, that positive note should not obscure the fact that, even if the number of filings may be declining on a quarter to quarter basis, the number of business filings still remain at elevated levels compared to periods preceding the current economic crisis.

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