MDM spoke with Howard Levine, partner at Sussman Shank LLC in Portland, OR, and attorney for Western Tool Supply in its reorganization through Ch. 11 bankruptcy. He spoke about the process and what factors make success more probable.
MDM: Provide an overview of what it means when a company files for Ch. 11 bankruptcy protection.
Howard Levine: The bankruptcy code is simply a tool that’s available to companies in financial distress that empowers the company with certain provisions of the law to change agreements that it has with its creditors. In its simplest form that is what bankruptcy is. What Ch. 11 does to a large extent is changes the leverage between the debtor and its creditors.
In Ch. 11 the idea is that the creditor and debtor are supposed to get together and figure out a business solution to their problems. In my view, it’s a shared problem. Through this process the idea is to negotiate a resolution where parties recognize the strength and weakness of each other’s position, incorporate that resolution into a large business plan that considers the interest of other creditors, to utilize the bankruptcy code to improve its balance sheet and improve its business operations, and develop a reorganization plan – essentially a contract with all the creditors – and get it approved by the court. And then honor the contract after Ch. 11.
MDM: Have creditors been more willing to work things out with debtors due to economic conditions?
Levine: The answer is a qualified maybe. There is recognition in many quarters that you need to work things out because it is a shared problem. The lenders don’t want the collateral back when they can’t sell it. They can’t sell a half-built subdivision but they don’t want to finance the debtor to finish it. So what do you do? That’s a difficult business problem for the bank – because the banks for regulatory reasons and for internal reasons don’t really want it back, and they don’t want the responsibility of dealing with it.
My experience with banks for the past two years has been that banks sometimes make bad business decisions because of regulatory pressures put to bear on the bank. Or you have the issue of lender paralysis where they can’t or won’t make a decision. The other side of that is that some banks are extremely cooperative because the alternative of being difficult is not in its best interest.
MDM: Have vendors been more flexible?
Levine: They are in a conundrum themselves. They have two problems. They have a large receivable that they may not be able to collect from a customer that may be important to them and that they may not be able to replace.
… The bankruptcy code does provide for payment of trade debt on a high-priority – it’s called an administrative expense claim. There are protections in the bankruptcy laws for people who supply credit to debtors in Ch. 11. Some vendors are willing to accept that; others are not.
MDM: How long does the process take?
Levine: It varies by company, industry, personality, by bank, by motives, by skill, by expectations. There is no time frame I could tell you with any confidence. There are timeframes that are built into the process. Different judges in different places will be more or less flexible on shortening time and compressing processes to accommodate a debtor or a circumstance.
… There is a lot to be said for discussing issues before bankruptcy. Sometimes you can work things out in advance and have a pre-packaged plan. When you file you move forward and get it approved by the court very quickly. The court likes to see progress and likes to see people getting along and working together to have a plan confirmed.
There really is no reason not to talk. But it can be hard for people to work things out at least initially. It is a negotiated process. … Very few Ch. 11s succeed if everyone is litigating.
MDM: How often does a company get sold after filing bankruptcy?
Levine: What’s being sold is usually not the company but the assets of the company. You have a company in Ch. 11 – it’s a viable business – but it can’t be reorganized for one reason or another. So to pay your creditors you can sell assets. It is usually a court-supervised auction. It happens with more frequency now than it used to. It’s a particularly good tool for the acquiring company to buy assets.
MDM: When an economic downturn occurs, when do you see the most bankruptcies?
Levine: When the economy starts going badly we get a lot of efforts to restructure either informally or formally through Ch. 11. The most successful time in my opinion for companies to emerge from Ch. 11 is not when the economy is starting to fail. The most successful time is when the economy is turning around.
If you file Ch. 11 on the way down, the opportunity to reorganize is going to be jeopardized. Because even if you shed old debt, you still are struggling in a bad economy. It’s difficult to pull the airplane out of a dive.
Contrast that with the economy that has bottomed and the problems behind you. You have a much better opportunity to tell the court that things are getting better and that you can improve. Filing Ch. 11 when the economy is turning around is a very good tool if you need to use the provisions of bankruptcy to help you.
MDM: What factors can contribute to success in a Ch. 11 filing?
Levine: The outcome of the case can depend on the quality of the client and the company, the quality of the lawyer, the ability of lawyers to get along, the ability of lawyers to persuade their clients to do certain things, the integrity of the client and how much the creditors like the owner of the company. You can’t discount the human aspect of Ch. 11. It is not entirely cold and sterile.
I think it’s not a good idea to file Ch. 11 and not have a business plan on how you’re going to extricate yourself. Ch. 11s are often filed like that. Some are filed because a foreclosure is about to happen, and the company decides to go to a lawyer at the last minute. I think you should have a pretty good idea of what you want to accomplish before you go in. Ch. 11 will not make a sick business well.
MDM: What else should companies keep in mind about this process?
Levine: It is very expensive and time-consuming. It is a drain on management and a distraction. That hurts business. There’s a lot of paperwork. You have to go to court. You have to testify. These are all unpleasant things.
But there are successes in Ch. 11. And the bankruptcy code does a pretty amazing job of providing a vehicle for a range of businesses to restructure.