Housing Crunch Flattens More Companies

Souring Economy Spreads Its Tentacles, Causing Business Insolvencies to Rise

As the housing and credit markets continue to spiral downward, business casualties are rising rapidly in bankruptcy courts across the Washington region.

The number of corporations that have filed for Chapter 11 protection to reorganize so far this year in Maryland, Eastern Virginia and the District has more than doubled, compared with the same time period last year, court records show. The number of mostly smaller firms filing to liquidate under Chapter 7 increased far faster during that time frame, growing more than 12-fold.

"I'm talking to people about liquidating like never before," said Bethesda lawyer James A. Vidmar Jr., who is representing a second-generation Montgomery County developer who filed for Chapter 11 bankruptcy after his builder bailed out of a 1,000-lot Delaware project. The developer had guaranteed a loan on that project with revenue from his Maryland development company, but fell behind on payments and filed for bankruptcy on both after his lender moved to foreclose.

"Selling real estate is not a good business to be in these days," said Stephen Goldberg, a Baltimore area lawyer who is representing Sandy Spring Bank, which called in its $13.5 million loan to the developer.

Vidmar said his firm has filed five business bankruptcies since the beginning of the year. "If you owe more than you think you could get for a project, you may have to sell it or give it back to the bank and start over," he said.

Small businesses are especially affected by economic swings, according to a 2007 report by the Board of Governors of the Federal Reserve System, which said that about a third of all small businesses with employees fail in the first two years, and 56 percent fail within four years.

Many of the companies to file for bankruptcy so far this year appear to be smaller, less experienced or overly leveraged businesses.

For example, one case involves a D.C. couple that staked their retirement, investment accounts and home equity on their first development project: a townhouse community on the Eastern Shore that ground to a halt halfway to completion when the real estate market began to decline.

Though their lender did not foreclose on them, court documents show the couple filed for bankruptcy after the bank moved to garnish their personal accounts, leaving them no way to complete the project or pay their debts. Their lawyer, Stanley Salus, said the couple declined to comment.

Similar scenarios have prompted filings from the developer of an upscale equestrian community in Fauquier County, a luxury housing development in Prince George's County, and an environmental cleanup firm.

It's not just real estate firms in trouble.

In recent months, companies that have filed for Chapter 11 protection include a building materials company in Brookeville, Md., a nanotechnology firm in the University of Maryland business incubator, a Gaithersburg day spa, an Alexandria restaurant and a Baptist church in Camp Springs, Md.