By day, Daniel Seman runs a 700-person company that provides security for major events, from Minnesota Vikings games to last year's Republican National Convention. On Thursday, he helped monitor the overflow crowds at Carl Pohlad's funeral in the Basilica of St. Mary.
A mounting bankruptcy mess
Bankruptcy used to mean a fighting chance at saving a business. But for many companies of late, it's been a dead end.
January 11, 2009 at 4:17PM
But by night, Seman sheds his suit and tie and is just another uniformed security guard fumbling through the dark with a flashlight. From 8 p.m. to about 4:30 a.m., the 50-year-old prowls Twin Cities businesses and deserted industrial parks looking for vandals, thieves or worse.
The former police officer has been working this grueling, 18-hour-a-day schedule since August, when Avalon Fortress Security Corp., his Brooklyn Center security firm, filed for Chapter 11 bankruptcy protection. "Frankly, I thought I'd be out of this mess by now," he said as he steered a GMC Yukon through an empty industrial park in Savage.
"But the banks just aren't lending money anymore."
For decades, bankruptcy was a convenient vehicle for businesses hobbled by bad debts to stay afloat. A company would emerge from bankruptcy stronger, having wiped away excess debt and underperforming assets.
No longer. With banks tightening credit after the mortgage meltdown, bankruptcy has increasingly become a death sentence for many businesses -- large and small -- that are unable to obtain enough financing to reorganize.
A rise in business liquidations could have a cascading effect on all areas of the U.S. economy, experts say. Many jobs that might have been saved through orderly reorganizations would vanish for good. Tax revenue would be lost with each closing. And suppliers of the companies that go into liquidation could also be forced to shut down.
Historically, about 20 percent of businesses that file for Chapter 11 emerge intact. But this year, with the credit markets still frozen, the picture is bleaker. Jack Williams, resident scholar at the American Bankruptcy Institute (ABI) in Washington and a bankruptcy law professor at Georgia State University, predicted that that number will drop to just 5 percent in 2009.
"It used to be that businesses that were worthy of help could get it through bankruptcy," he said. "Now, if you've just filed for bankruptcy, it's probably too late."
The switch was flipped
Chapter 11 bankruptcy filings are meant to be a refuge of sorts from creditors. Once the papers are filed, courts issue an "automatic stay" that prevents collection actions and foreclosures over a certain period. Ideally, that gives companies time to arrange new financing and develop plans for returning to profitability.
Related Coverage
In the past two recessions, in 1990-91 and in 2001, the system worked largely as it was intended. Businesses that simply had too much debt, but were operationally sound, were often able to arrange new financing through a slew of nontraditional lenders such as CIT Group and General Electric Capital. So-called "prepackaged bankruptcies" became increasingly popular, in which businesses would go into court with financing already in hand and often emerge from the process just months later.
Macy's, Delta Air Lines, Texaco, Conseco, Pacific Gas & Electric and Trump Hotels & Casino Resorts are among the thousands of companies that have successfully emerged from Chapter 11 bankruptcy protection over the past two decades.
But the severity of the current recession caught many business bankruptcy attorneys by surprise. What began as a housing slowdown mushroomed into what some economists consider the greatest financial crisis since the Great Depression. Stuck with billions of dollars in worthless real estate loans, more banks began tightening standards and hoarding cash.
"It's as if someone just flipped a switch," said Clinton Cutler, chairman of the bankruptcy practice at Fredrikson & Byron in Minneapolis. "I've been practicing law over 20 years in this area, and it's one of the fastest turnarounds to the negative I've ever seen."
A number of large, publicly traded companies -- including retain chains Linens 'n Things and Mervyn's - that sought Chapter 11 bankruptcy protection began liquidation proceedings within months after filing. "That's unprecedented," Williams said.
The number of national lenders that specialize in debtor-in-possession financing has dwindled from about 40 to just six in the past year, according to Williams. "Your best bet is to try to convince your existing financing company to roll over your debt," he said. "New financing is nearly impossible to get if you're already in bankruptcy."
Plunging real estate values have made loans harder to get, because companies have less collateral against which to borrow, bankruptcy attorneys say. "Trying to get businesses to come up with fresh collateral when most values have receded is an extreme challenge," said Thomas Wallrich, a business bankruptcy attorney in the Minneapolis office of Hinshaw & Culbertson of Chicago.
Paul Stueber, founder and owner of River Valley Power Equipment Inc. of New Ulm, said he recently was asked by a lender to put his own home up for collateral. His company filed for Chapter 11 in October after one of its major creditors -- facing financial difficulties of its own -- demanded full payment of its loan within 24 hours, he said.
"The banks want everything you got as collateral," said Stueber, who says his company's cash flows remain strong. "It's frustrating. If they didn't want it before, why do they want it now?"
Seman, even with Avalon's revenue of $6 million a year and a stellar client list, hasn't been able to secure a loan, despite personal visits to every major bank in the Twin Cities. His company owes more than $3 million to creditors, including $1.5 million in back taxes to the Internal Revenue Service.
The worsening economy was the major reason for the filing, as corporate clients slashed security budgets. But Seman blames himself for the tax liability, which includes unpaid sales and payroll taxes, he says. The company has since fired seven of its 10 administrative staff because of the mistakes. "The fact that it happened is embarrassing," he said. "But I'm the captain of the ship, and I take full responsibility."
Even so, Seman said his cash flow was strong and the debts are manageable -- if only creditors gave him enough time to work out new payment plans and sell some assets.
To save on costs, Seman works the night shift seven days a week, while still running the company during the day. He figures working the two shifts saves $94,000 a year.
Answer's always 'no'
The obvious downside is lack of sleep. Most days, Seman doesn't get home until 5 a.m. Since bankruptcy, he's learned to take afternoon naps at his desk by laying his head on his arms. "My kids don't appreciate it so much," confessed the father of four. "I'm never around."
He has until the end of the month to meet a court-imposed deadline for filing a plan to restore the company to profitability. "The banks treat me like a leper," he said. "They say, 'Hey, you've got a nice company,' or, 'Gee, you've got nice cash flow,' but the answer is always 'no.' "
Chris Serres • 612-673-4308
Pioneering surgeon has run afoul of Fairview Health Services, though, which suspended his hospital privileges amid an investigation of his patient care.
