%1

There were 631 commercial chapter 11 filings registered in October 2023, an increase of 106 percent from the 306 filings registered in October 2022, according to data provided by Epiq Bankruptcy, the leading provider of U.S. bankruptcy filing data. Overall commercial filings increased 14 percent to 2,188 in October 2023, up from the 1,916 commercial filings registered in October 2022. Small business filings, captured as subchapter V elections within chapter 11, increased 47 percent to 176 in October 2023, up from 120 in August 2022. Total bankruptcy filings were 40,628 in October 2023, a 24 percent increase from the October 2022 total of 32,707. Individual bankruptcy filings totaled 38,440 in October 2023, registering a 25 percent increase from the October 2022 30,791 filing total. There were 22,473 individual chapter 7 filings in October 2023, a 31 percent increase over the 17,125 filings recorded in October 2022, and there were 15,901 individual chapter 13 filings in October 2023, a 17 percent increase over the 13,618 filings in October the previous year. “Increased prices for goods and services, along with higher borrowing costs, add to the economic challenges faced by distressed families and businesses,” said ABI Executive Director Amy Quackenboss. “Bankruptcy provides a proven process for struggling consumers and companies to alleviate their intensifying debt loads and a chance for a financial fresh start.”

In a closing argument, a prosecutor told New York jurors Wednesday to follow the overwhelming evidence of FTX founder Sam Bankman-Fried 's “pyramid of deceit” to find him guilty of defrauding customers and investors of at least $10 billion, while a defense lawyer said prosecutors were unfairly portraying an honest entrepreneur as a monster, Reuters reported. Assistant U.S. Attorney Nicolas Roos launched a day of closings in Manhattan federal court by saying Bankman-Fried was at fault for stealing billions of dollars from investors worldwide despite four days of testimony in which Bankman-Fried insisted that he was unaware that his customers' deposits were at risk until weeks before his companies collapsed. “He told a story and he lied to you,” Roos told jurors a day after Bankman-Fried concluded his testimony at the monthlong trial. The prosecutor said Bankman-Fried wanted jurors to believe that he had no idea what was happening at his companies or what was happening was wrong, but that his words conflicted with the testimony of his fellow executives, his “partners in crime,” and other evidence including financial documents and public statements Bankman-Fried had made.

Lordstown Motors Corp. on Tuesday got the green light from a Delaware bankruptcy court judge to begin soliciting votes for the electric vehicle developer’s plan of bankruptcy reorganization, the Cleveland Business Journal reported. U.S. Bankruptcy Court Judge Mary Walrath approved Lordstown Motors’ disclosure statement — the document that contains detailed information to enable a creditor to make an informed decision about the debtor’s plan of reorganization — during a Tuesday morning hearing. Lordstown Motors and its attorneys will use the disclosure statement to solicit votes from creditors and shareholders to approve or reject the company’s plan to emerge from bankruptcy court, likely late this year or early next year.

Water Gremlin Co., rattled in recent years by pollution scandals, has filed for chapter 11 protection and is in the process of trying to sell the company, the Minneapolis Star Tribune reported. The White Bear Township, Minn.-based company, founded in 1949, makes lead battery terminals and fishing sinkers. Water Gremlin had significant clashes with regulators in 2019 over pollution from its facility. The company had to pay more than $7 million in fines to the Minnesota Pollution Control Agency (MPCA) over toxic air emissions. The MPCA's commissioner at the time said the company "put people's health at risk." The MPCA levied another $325,000 fine in 2021 over alleged violations of hazardous waste and industrial storm water rules. The MPCA issued a new air emissions permit with "more stringent emissions limits and operating requirements" to the Water Gremlin facility in June. In July, Tokyo-based Okabe Co. Ltd., parent company of Water Gremlin, said that the litigation could lead to Water Gremlin "incurring substantial liability." An affidavit filed in the bankruptcy case cites possible liability from lawsuits related to the pollution cases and a decline in sales. The company's sales fell from $57.8 million in 2018 to $46.8 million in 2022, according to the court papers.

Hwa Yuan Szechuan, one of Manhattan’s most critically acclaimed Chinese restaurants, filed for bankruptcy on Monday, a sign of the pressures that restaurants around the country are facing as they fight to keep their slice of consumers’ stretched food budgets, WSJ Pro Bankruptcy reported. Started by Taiwanese immigrant Yu Fa Tang in the late 1960s, Hwa Yuan has operated in its current location in New York’s Chinatown since 2018. Famed for popularizing cold sesame noodles in the U.S. and frequented by A-list celebrities such as Jennifer Lawrence and Gwyneth Paltrow, the restaurant hasn’t recovered from the impact of COVID-19-related lockdowns on its finances, according to court papers. Even though it received a publicity boost when former New York Mayor Bill de Blasio visited the restaurant in February 2021 to promote the resumption of indoor dining in New York City, Hwa Yuan defaulted on its mortgage because of its pandemic-related loss of revenue and now faces an imminent foreclosure from its mortgage lender, according to court papers. The restaurant’s bankruptcy filing in New York’s Southern District will stave off the foreclosure and give the Tang family time to find a new loan that could repay the defaulted mortgage, court papers said.

Wall Street's top regulator must correct "defects" in a new rule on share buybacks adopted earlier this year, a federal appeals court has ruled, marking a partial win for powerful trade groups waging the legal challenge against it, Reuters reported. A U.S. Securities and Exchange Commission spokesperson said Wednesday the agency was reviewing the decision. In a rule adopted in May, the SEC required public companies to disclose share buyback data, saying this would help investors evaluate the rationale behind them. Critics of share buybacks - which last year amounted to almost $950 billion in the U.S. - say they often boost a company's share price or pad executive compensation rather than allow for more investment into company operations. But on Tuesday, the U.S. Court of Appeals for the Fifth Circuit sided with some arguments from business groups, including the U.S. Chamber of Commerce. They had sued claiming that the SEC had not considered suggestions during a notice-and-comment period on how to quantify the rule's economic effects and also had not backed up its claims that the rule would benefit the investing public. "The SEC acted arbitrarily and capriciously ... when it failed to respond to petitioners' comments and failed to conduct a proper cost-benefit analysis," according to the opinion from a three-judge panel.

Crypto exchange Bittrex received bankruptcy court approval on Monday to shut down its U.S. operations after a months-long effort to return crypto deposits to customers, Reuters reported. U.S. Bankruptcy Judge Brendan Shannon approved Bittrex's bankruptcy plan at a court hearing in Wilmington, Del., clearing the company to emerge from bankruptcy with a wind-down plan that would pay remaining creditors in full. Bittrex filed for bankruptcy protection in May, shortly after the U.S. Securities and Exchange Commission charged it with operating an unregistered securities exchange. Bittrex chose to shut down its U.S. operations and return assets to customers in the wake of the SEC complaint. It reached a $24 million settlement with the SEC in August. Seattle-based Bittrex said the bankruptcy filing would not impact Bittrex Global, which serves customers outside the United States. The company's non-U.S. operations are based in Liechtenstein.

Over and over on Tuesday, Sam Bankman-Fried, the founder of the failed FTX cryptocurrency exchange, denied knowing that billions of dollars in customer money had been misappropriated until shortly before his company collapsed last year, as a federal prosecutor grilled him for a second day in his criminal fraud trial, the New York Times reported. The 31-year-old onetime crypto mogul fumbled for an answer when the prosecutor, Danielle Sassoon, repeatedly asked whether he had told his employees not to spend FTX customer money on investments, pricey real estate and other expenditures. Mr. Bankman-Fried also couldn’t name any employees who might have authorized the use of FTX customer money for that spending. “I don’t recall giving any direction,” Mr. Bankman-Fried said three times about the spending of FTX customer money before he concluded his testimony. Both sides rested their case before lunchtime on Tuesday, with closing statements set to unfold on Wednesday. Mr. Bankman-Fried was on the stand for a third day testifying before a jury in his own defense for a trial that has come to symbolize the highs and lows of the volatile crypto industry. The entrepreneur has been accused of masterminding a yearslong fraud to steal as much as $10 billion from FTX’s customers and then funneling the money to extravagant real estate purchases and other spending, as well as using the funds to prop up a crypto trading firm he also founded, Alameda Research. FTX, which was valued at $32 billion at its peak, imploded spectacularly last year, leaving many customers unable to recover their deposits. Mr. Bankman-Fried has pleaded not guilty to seven counts of fraud, conspiracy and money laundering. If convicted, he could face what amounts to a life sentence.

In the U.S., 516 publicly listed firms have filed for bankruptcy from January through September 2023. Many of these firms have survived for several years with surging debt and lagging sales, CNBC.com reported. “The share of zombie firms has been increasing over time,” said Bruno Albuquerque, an economist at the International Monetary Fund. “This has detrimental effects on healthy firms who compete in the same sector.“ Zombie firms are unprofitable businesses that stay afloat by taking on new debt. Banks lend to these weak firms in hopes that they can turn their trend of sinking sales around. “A really healthy, well-capitalized banking system and financial sector is one of the most important factors in ensuring that unhealthy firms are wound down in a timely way rather than being propped up,” said Kathryn Judge, a professor of law at Columbia University. Economists say that zombie firms may become more prevalent when banks or governments bail out unviable firms. But the Federal Reserve says the share of firms that are zombies fell after the COVID-19 emergency stimulus measures were implemented. The Fed says banks are refusing to keep weak firms in business with favorable extensions of credit. The Fed economists point to healthy balance sheets at U.S. firms, despite the increasing weight of interest rate hikes. The effective federal funds rate was 5.33% in October 2023, up from 0.08% in October 2021.

Small businesses account for close to half of U.S. private sector employment, so there’s always considerable focus on their prospects, especially during periods of rising interest rates and contracting credit. Smaller firms have fewer financing options than larger peers, and they’re much more exposed to variable-rate loans, making them something of a canary in the coal mine. No doubt, the recent run-up in interest rates makes 2024 a year to watch, but America’s smallest employers mostly seem to be tolerating the headwinds and can continue to tread water for awhile longer — just not indefinitely, according to a Bloomberg News commentary. Consider what’s happened so far this year. Small business bankruptcies within chapter 11 (specifically, Subchapter V elections) rose consistently in the first nine months of the year, giving the appearance of a deterioration in firm finances. But business failures were uniquely low during the COVID-19 pandemic thanks to extraordinary federal support. Some businesses survived that would otherwise have gone under even in the absence of the COVID disruptions. So it’s conceivable that part of the increase in bankruptcy activity is simply a reversion to “normal” levels from artificially compressed levels in 2021-2022. That doesn’t mean that small businesses are bulletproof, of course, especially after the recent run-up in borrowing costs. Read more.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.