Predicted upsurge fizzles despite shaky economy
If bankruptcies are bellwethers of a business community in crisis, then the business community in Rhode Island is weathering the storm quite nicely, thank you.
Nearly nine months after analysts predicted an upsurge of businesses in the state filing for bankruptcy or receivership in 2002, the rate at which businesses are going broke in Rhode Island is essentially the same as it’s been for the last two years – despite a string of ominous economic forecasts.
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Thirty-seven companies have filed for bankruptcy in Rhode Island through July this year, and 14 have filed for receivership, according to federal and state bankruptcy court records. Those numbers compare to 36 bankruptcies filed in the first seven months of 2001. Sixty-four Rhode Island businesses filed for receivership in 2001.
In fact, businesses are faring better here than in the rest of the country, according to federal bankruptcy statistics. The number of businesses across the nation filing for chapter 11 bankruptcy rose 11 percent from June 2001 to June 2002, from 10,272 to 11,401, according to data recently published by the Administrative Office of the U.S. Courts. Chapter 11 status allows a business to continue operations while formulating a plan to repay its creditors. Overall, business filings rose to 39,201 from 37,133 in the same period, a 5.6 percent increase.
During the same period, the total number of bankruptcies filed in the federal courts broke all records. From June 2001 to June 2002, bankruptcy filings rose to 1,505,306 from 1,386,606. That number, an 8.6 percent increase, was the largest number of bankruptcy cases ever filed in a 12-month period.
Part of the reason that Rhode Island’s business bankruptcy rate is flat-lining while national numbers spike is that many companies here file for receivership instead of bankruptcy, experts say. Rhode Island offers financially troubled businesses two options in resolving their issues – filing for bankruptcy in Federal Bankruptcy Court, or filing for receivership in the state’s Superior Court.
Both actions yield the same results – they protect a company from its creditors while it reorganizes its operation and prepares to emerge from debt, sell itself or liquidate its assets. Many states have statutes that allow for receiverships, but the filing is especially popular in Rhode Island, where a core group of bankruptcy lawyers and judges favor the practice.
But the rate at which businesses in Rhode Island are filing for receivership is not rising either. Put together, the number of businesses seeking protection from their creditors in one form or another is actually slightly lower in the state than at this time last year.
And businesses in Rhode Island are staying out of court despite the fact that the state’s economy has floundered in the past six months and is now hovering on the line between growth and recession, according to several recently published reports.
Many local bankruptcy insiders admit they expected to see a larger number of businesses go belly-up in 2002.
"It is surprising, only because you read the news and it tells you that there’s a slowdown in the economy. My guess is that a slowdown first impacts marginal companies. So if there really is a slowdown, where are they?" said Rhode Island Superior Court Judge Michael Silverstein, who as the presiding judge of the court’s business calendar handles all receivership filings. "I would have anticipated an increase of at least some cases, but I haven’t seen it."
Allan M. Shine, a bankruptcy lawyer and partner at Winograd, Shine & Zacks, in Providence, said his firm expected to become receiver to an increased number of businesses this year, but it hasn’t happened.
"We did expect more businesses coming into receivership because of the economic downturn," said Shine, whose firm is currently operating six Rhode Island businesses in receivership.
Now, Shine and others are revising their analyses in an attempt to account for the seeming lack of financial ruin in the state. They point to several factors as possible reasons: Banks here have been particularly prudent in trying to minimize insolvency situations for their business borrowers. Lowered interest rates have helped many local businesses to stay afloat. Businesses that were shaky at the start of the recession have already gone out of business. And bankruptcy is often a lagging indicator of economic hardship, analysts suggest.
"It takes a while for things to really go downhill," said Leonard Lardaro, a University of Rhode Island economist who manages the state’s Current Conditions Index. "Bankruptcies are a lagging indicator. They don’t start to really rise until after a recession ends. I would say that the aftershocks of last year’s recession will probably start to be seen in the fourth quarter and in the first quarter of next year."
Many businesses are staying afloat with the use of low-interest loans that many banks are offering their business clients these days, according to Robert Keach, co-chairman of the American Bankruptcy Institute Business Reorganization Committee and a chapter-11 bankruptcy specialist at Bernstein Shur Sawyer & Nelson, in Portland, Maine.
"It’s helping people that interest rates are low – the low cost and high availability of business borrowing are helping companies avoid filing," said Keach.
At the same time, in recent years banks have been quicker to foreclose on businesses drowning in red ink, say many bankruptcy specialists. As a result, many of the state’s weaker businesses went bankrupt at the start of the economic slowdown, in 2001.
"We’ve really weeded out a lot of inefficient firms already," said Lardaro.
Despite all, most analysts said they still expect to see an increase in the number of businesses filing for bankruptcy in the coming months.
"I do expect an up-tick. If the economy really goes into a double dip, you’re going to start seeing those numbers rise," said Lardaro.
"I don’t think Rhode Island is that peculiar," said Keach. "If the downturn continues I think we’ll see more bankruptcies in New England and nationally, and I think Rhode Island will be part of that trend."
But others aren’t so sure. Edward J. Bertozzi, a bankruptcy lawyer and partner at Edwards & Angell, LLP, said it has become increasingly hard to predict the future for Rhode Island’s business community. He isn’t making any predictions.
"It’s a very hard thing to get a handle on what’s happening in Rhode Island in this economy," said Bertozzi.
