the University of Chicago Law School. “Sometimes it’s a good
idea because there is a full capacity industry and the highest,
best use of its assets is to merge with another company. The
company, the jobs, are kept intact.” For some, the conventional wisdom that a working company is better than a liquidating
one makes sense and any bankruptcy that leaves the debtor
intact is a successful one. A company that folds takes jobs with
it, and no one really wants that. Also, in terms of speed, a company that can sell quickly can sell at its prime and move on to
conducting business again, generating more value for the
estate and, theoretically, its creditors.
The other side of the coin is that whereas in Chrysler, GM
and Lehman Brothers it was clear that the goal should be to
reorganize the firms as going concerns, this might not be so
obvious in smaller cases. If, as GM, Chrysler and
Lehman Brothers have illustrated, a bankruptcy
should be geared toward doing what’s best for the
economy, a proceeding that cares for the creditors,
but also results in the debtor company’s dissolution
might be the best possible option. It’s unfortunate to consider, but just because a Chapter 11 filing saves jobs doesn’t
Just because a Chapter 11 filing
saves jobs doesn’t necessarily
mean it was the best thing for
the economy in the long term.
necessarily mean it was the best
thing for the economy in the long-term.
The problem with making 363 sales the norm in the middle market is that it could conceivably give a dying firm more
time to raise debt and harm other businesses by not paying
them. Sometimes, a liquidation that pays off all creditors to
some degree and allows that money to make it back out to
more worthy customers may be the best option.
Policy
As these questions have gained notoriety and Congress has
held hearings on the subject of “Too Big to Fail” firms and
other bankruptcy and antitrust issues, many legal changes
have been proposed. Some have suggested a return to the
Code as it was established in 1978 under the Bankruptcy
Reform Act of 1978, before the 2005 passage of the Bankruptcy Abuse Prevention and Consumer Protection Act
(BAPCPA). “The orthodox method involved the debtor seeking long-term relief. The debtor would negotiate for DIP
[debtor-in-possession] finance, and once the business was
stabilized, it would assemble trade creditors who had a longterm interest in the debtor’s survival,” said Robert Keach, ABI
president, referring to the typical corporate restructuring
process as it was after the 1978 Code. “A plan was developed
and voted on, and rarely crammed down. Cases took sometimes years. Section 363 sales were by no means the norm,
and principles of creditor democracy, absolute priority and
fundamental fairness were paramount.”
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For creditors, there’s much to like about the pre-BAPCPA
Code, but since so much has changed since the legislation was
passed, including the distribution of secured debt and the
ascendance of non-traditional lenders, a revival of some of
that legislation’s ideas, rather than a full scale reversion, is
more likely. “The fight in ’78 was that the Senate position was
for public companies, the absolute priority rule must abide in
all conditions. The House provision prevailed,” said Richard
Levin of Cravath, Swaine & Moore LLP, noting that the House
measure that made it into the 1978 Code was a bit more flexible. “Today, the absolute priority should apply, but the force
of the creditors’ argument and their own demands have made
it seem like a given when it was just the opposite in ’78.”
“The concept of absolute priority has become demanded,” he
added. “The concept in ’78 was not that there would be this
rigidity.” To secured creditors, such an idea may not be popular, but a move to take the “absolute” out of the absolute priority rule certainly has its virtues. “In ’78, what made sense was
a consensual dividing up of the pie,” said Levin. “Leaving
something for junior classes was part of the deal.” A reversion
back to this philosophy of distribution could help trade creditors and potentially increase their willingness to lend to a
struggling customer, which in turn would help them maintain
their business and their employees.
Others think that 363, as popular \