When a company files for Chapter 11 protection a second, third or even fourth time, who’s to blame?
It is said that success has many fathers and failure is an orphan. Many investors in distressed debt and securities use their leverage in restructurings and Chapter 11 cases to pursue the aim of capitalism, i.e., to quickly make money. By acquiring substantial debt of distressed entities, such investors are able to control the administration and plan formulation under Chapter 11.
A primary objective of such investors is expedition—a fast confirmation of a Chapter 11 plan and the receipt of the Chapter 11 consideration in the form of cash or securities. As a consequence, there is not, in most cases, a rehabilitation of the underlying business but, usually, a limited financial restructuring with some deleveraging, substantial administrative expenses and a light approach to the feasibility under the Bankruptcy Code.
By the investors exercising this control, the Chapter 11 plans are consensual. The parties, united in their purpose, do not challenge the feasibility requirement. The bankruptcy judge rules on the evidence that is presented to her. The bankruptcy judge does not have the facilities or obligation to make an independent investigation as to feasibility but must rely on the parties who appear before him and present the case for confirmation. There is no independent party to test feasibility, as there was under the corporate reorganization chapter, Chapter X, of the former Bankruptcy Act.
Finally, recidivism may occur because we live in a volatile, unique world in which events happen much more quickly than in prior periods. Economic cycles occur with greater frequency. Competition is much more prevalent and challenging, and in some industries, such as gambling casinos, there is a failure to recognize the particular material facts surrounding that industry and certain geographical and demographic factors.
The blame, if there is blame to be charged, is among many parties but is primarily on the parties who have developed and compelled the proposed plan and have accepted it.
Harvey Miller is a senior partner of Weil, Gotshal & Manges based in its New York office.
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