Two years ago, most people didn't pay much attention to the issue of counterparty risk. Nowadays, it is a constant source of worry for lenders, depositors, investors, and others.
It's one thing to lose money because you made a bad bet. It's an altogether different kettle of fish, however, when you take a hit because a person or firm you do business with suddenly -- and unexpectedly -- goes under.
Yet while most people are familiar with the risks that stem from traditional financial interactions, the current unraveling has made it clear that people are exposed to all sorts of other relationship-type risks.
Some tenants, for instance, have found themselves out on the street even though they paid their rent on time because their landlords have been foreclosed upon.
When Archway & Mother's Cookie Co. told employees in an October letter it would "go out of business immediately," some workers frantically sought medical care while they believed their insurance would still cover the costs.
In Ashland, Ohio, a pregnant employee had labor induced before her due date. Another worker bought a $6,000 insulin pump for her diabetic daughter. "I called my doctor at home and said, 'I need to have my gallbladder removed this weekend,'" recalls Janet Esbenshade, a 37-year-old mother of two who lost her job packing cookies.
Jeff Austen, former Archway oven operator in Ohio, is running a committee 'The Burnt Cookies' to share information among ex-employees. He said he has accumulated $2,000 in medical bills.
Those employees and many others ended up saddled with huge medical bills anyway. Archway was self-insured -- and when it filed for bankruptcy on Oct. 6, there wasn't enough money in its coffers to cover hundreds of thousands of dollars worth of outstanding health-care claims along with all its other debts.
Workers weren't eligible for Cobra, a federal act that gives certain laid-off employees the right to temporarily continue health-care coverage at group rates. That's because Cobra doesn't apply when a company terminates its insurance plan.
The Archway saga reflects the human toll of the credit crunch, as companies increasingly shut down because they can't get financing. Some are abruptly eliminating insurance and leaving laid-off workers with bills for medical expenses incurred before the shutdowns, a trend that is exacerbating health and money problems for tens of thousands of people nationwide.
Catterton Partners, a Greenwich, Conn.-based private-equity firm that owned 72-year-old Archway, scrambled to find financing as it struggled with surging costs of fuel and cookie ingredients. But credit had dried up, a person close to Catterton says, forcing Archway to close down. It filed for Chapter 11 protection, liquidated and laid off all 673 full-time employees.
Now that Archway is bankrupt, all its assets will be divided among creditors, including those with health claims. Archway bankruptcy documents list liabilities of $143 million and assets of $92 million.
This week, the bankruptcy court approved a $30 million sale of Archway's assets to snack-maker Lance Inc. of Charlotte, N.C. Separately, Kellogg Co. bought Archway's Mother's Cake & Cookie Co. unit for $12.1 million.
A person close to Catterton said that decisions made after the closure were ruled by the court, adding that the sales may help relieve some of the problems caused by the bankruptcy.
