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Bankruptcy Courts Part 6 - Much Needed Study to Reform Chapter 11 Underway
After discovering miscarriages of justice and inconsistent applications of the law when investigating the Delphi bankruptcy and its connection to the auto bailouts, I started noticing something fishy about the Chapter 11 process and bankruptcy courts in the U.S. The mentality that is rampant in the "U.S. bankruptcy industry" revolves around theories of "foxes guarding hen houses" and the need for speed speed speed justified by the urgency of "melting ice cubes" and "rotting fish". Seriously?? Unfortunately that is resulting in a lot of very fat foxes in New York and many slaughtered hens across the USA. Is anybody even aware, let alone watching, how the Southern District of New York's wealth redistribution slaughterhouses (er, administrative courts?) actually operate?
Before diving deeper into these dark and hidden recesses of the court system, let's have a look at what one organization is doing to shed a little bit of light on the matter. The American Bankruptcy Institute's Commission to Study the Reform of Chapter 11 Bankruptcy has been meeting for several months now to determine areas where bankruptcy reform might be needed. I recently attended two of those commission hearings, one in San Diego and most recently one in Tucson, during the ABI's Winter Leadership Conference. At first I wondered if these hearings were just another case of the foxes organizing hen house guard assignments, but from hearing some of the debates between panelists and witnesses, like the one pictured above, it is clear they are looking to improve the process and make meaningful changes to what is quickly becoming an antiquated system.
After the Tucson hearing I spoke with Bob Keach, co-chair of the commission. A video of the interview and a full transcript of the interview appear below. In addition to being co-chair of the commission, Keach is co-chair of the Bernstein Shur Business Restructuring and Insolvency Practice Group. He has been recognized by Best Lawyers in America for over ten years for his work in bankruptcy and creditor-debtor rights.
I asked Keach about how the commission got started. He explained, "We put together a symposium during the year that I was president of the ABI. That was at a time right after the GM and Chrysler cases. It was actually at a time when we were talking about "too big to fail."
Keach continued, "If you talk to the founders, people like Rich Levin, who wasn't on the panel today, but normally he is, and also Ken Klee, who was on the panel today... Ken Klee and Rich Levin are among the people who wrote the 1978 code when they were on the hill. They would tell you that at the time they wrote it, they thought it would have a thirty or forty year shelf life. If you look at the history of bankruptcy reform in this country, it sort of happens every forty years or so, so it was just time."
The commission will wrap up these hearings in 2014 and will then compile a reform recommendation for Congress to address with a target date of reform legislation in 2018, forty years after the 1978 reform.
ABI Executive Director, Sam Gerdano and Keach both explained they entered into this process without any agenda for the outcome. Clearly the hearings I witnessed seemed to be diverse in input and robust in feedback from both the panelists and the witnesses.
I asked Keach what success looks like to him when they reach the end of this process. "Well success would be a bankruptcy statute that works better to restructure companies and preserve jobs, and preserve values for stakeholders, that more equitably treats all of the stakeholders in the process... so employees, claimants, secured creditors, unsecured creditors, pretty much across the board. The idea is to make sure that businesses that deserve to be saved, can be saved, so that those jobs are preserved, and the values are preserved for the people who invested money into those companies; that the communities where those companies exist, benefit, that the local [government] benefits because they have a tax base, all of the original reasons why we have a bankruptcy code in the first place."
Toward the end of the Tucson Commission Hearing, commission member Professor Ken Klee and testifying witness, Barclay's Mark Shapiro got into a rather sharp debate about making the process for DIP (Debtor in Possession) financing more competitive. Prof. Klee argued there should be more competition for DIP financing to help bring the cost of these fairly low-risk loans down. Shapiro responded that he would like to see more competition so he could be in more deals, and that where there was more competition the costs usually went down and terms for the debtor usually improved. He then fell right back into one of the bankruptcy culture's themes, there just isn't enough time... we must rush this through.
ABI Commission to Study Reform of Chapter 11 Bankruptcy - Tucson
While attending the ABI Winter Leadership Conference I asked some of the other judges why so many of these high profile chapter 11 cases are handled in the Southern District of New York (SDNY) and Delaware Courts. Are the judges in our other bankruptcy courts not knowledgeable enough to handle these large case files? Or, more likely, has a broken system that favors the foxes decided to make it easy for law firms, hedge funds and investment bankers to run their games on these hand picked courts?
In future postings of this series, I will take a look at this and some of the other areas I learned about during these hearings and during the ABI conference. Are hedge funds white knights or evil villains? What about the courts? Are your retirement pensions, 401Ks and public stock investments safe from the reaches of these bankruptcy courts and their novel theories? Are bankruptcies filed in SDNY to keep otherwise local creditors and employees from seeing what is really going on? Could Judge Gerber's General Motors bankruptcy come unraveled because of a back-room deal?
There are some serious issues in these huge, pre-packaged, high-speed corporate bankruptcies that can make one wonder if justice is being served. Many of them could directly affect you, your family or your neighbors. Just ask the salaried retirees of Delphi who got slaughtered without proper representation in Judge Robert Drain's SDNY Court. They have found out just how unfair and inconsistent a court can be.
Bankruptcy Judge Robert Drain on GM, Delphi, and Hostess by Todd Zywicki, Bankruptcy Law Review
Transcript of Interview:
Bob Price: I'm attending the American Bankruptcy Reform Commission today with Bob Keach, who is the co-chair of the Commission on Bankruptcy Reform. There was an interesting debate that went on today, a lot of back and forth, tell us about this commission, and how it got started.
Bob Keach: Sure the ABI commission to study the reform of Chapter Eleven got started really about three years ago when we put together a symposium during the year that I was president of the ABI. That was at a time right after the GM and Chrysler cases. It was actually at a time when we were talking about "too big to fail," sort of at the height of the financial crisis and there had been commentary building over a number of years about the potential need for Chapter Eleven reform... companies were being quickly liquidated, sold, but not restructured, and there had been a number of changes in economic and other environments since 1978, which was the last major reform we had. So we did a symposium, many of the people that were involved in that two day symposium in Washington have since become involved in the commission, but the consensus that came out of that symposium was that we really needed to take a ground up look at the statute because just a number of the factors, the credit environment, etc that were present in 1978 had changed. So we went from that symposium... Al Togut was also involved at the time. We got the idea for doing the commission, we talked to a number of people who were major figures in the insolvency world, and they all agreed that it was time to take a comprehensive look. If you talk to the founders, people like Rich Levin, who wasn't on the panel today, but normally he is, and also Ken Klee, who was on the panel today, Ken Klee and Rich Levin are among the people who wrote the 1978 code when they were on the hill. They would tell you that at the time they wrote it, they thought it would have a thirty or forty year shelf life. If you look at the history of bankruptcy reform in this country, it sort of happens every forty years or so, so it was just time. The factors that came to play, made the statute not really the tool it needed to be.
Bob Price: Well a lot of things have changed since 1978, the industries are a lot different, there are a lot of things going on, the financial world is a lot different, then it was then. What kind of outcome are you looking for from this series of hearings?
Bob Keach: Sure, well in the hearings, that is really only the publicly visible part of what we're doing. There are twenty commissioners, we also have thirteen advisory committees with roughly ten people each, so you're looking at another 130, 140 people. So there are around 150 or so people that are involved in this, who are among the best, brightest, well known people in the insolvency community. Not only lawyers, but bankers, financial advisers, judges, professors and so behind the scenes, those committees are meeting and they're considering topics and subtopics for potential reform. So all that work is happening, so that's the iceberg below the water. We're also conducting field hearings to get additional information. The product of all that is that we would put together a report that is due to be issued in the spring of 2014 that will suggest the framework for a new bankruptcy statute.
Bob Price: And then you will take that to Congress and they will do whatever Congress wants to do with it at that point.
Bob Keach: Yeah, obviously we can't introduce any bills, so at that point in time someone will take our report, will turn it into legislation or draft legislation and then hopefully it will get introduced to Congress. So it's obviously out of our control at that point and that'll have to happen with someone else, but if you look at the history of bankruptcy reform you will see that major bankruptcy reform in this country happens every forty years and years ending in eight, so you know it could take a long time getting through Congress, major reform legislation like this usually does, but if we're lucky maybe we get 2018 and we keep the pattern perfectly going.
Bob Price: When you get to the end of this in 2014, what does success look like?
Bob Keach: Well success would be a bankruptcy statute that works better to restructure companies and preserve jobs, and preserve values for stakeholders, that more equitably treats all of the stakeholders in the process... so employees, claimants, secured creditors, unsecured creditors, pretty much across the board. The idea is to make sure that businesses that deserve to be saved can be saved, so that those jobs are preserved, and the values are preserved for the people who invested money into those companies... that the communities where those companies exist, benefit, that the locale benefits because they have a tax base, all of the original reasons why we have a bankruptcy code in the first place... we just want to make it work better.
Bob Price: Well it seems like there's a lot of back and fourth, it's not just a one sided presentation, or hearing, there's a lot of good debate going on, so it looks like you're going to get a lot of good information, is there anything that you need from the public to better...
Bob Keach: Eventually, I think there will be plenty of opportunity for public input, we're still in very early stages, the commission is still receiving information and receiving the product from these advisory committees. So we're early days, sort of just gathering information. At the point in time when we actually have drafts of things, there will be plenty of opportunity for them to be aired out in public, but right now the idea is to create as open a process as we can, hear from every segment of the insolvency community and beyond business. We want to hear from the creditor side, the debtor side, the investor side, across the board, public policy. The idea is that if Congress had the time to conduct as many hearings as we are going to conduct, if they had the ability to take that amount of time, they would do this. So in many respects, we are trying to do what congress would do if they had unlimited time and access to the community that we do.
Bob Price: For people that are interested in following this and learning more about what you are doing, they can follow this online at commission.abi.org.
Bob Keach: Yeah go to commission.abi.org and you could follow the work of the commission, and we're happy to hear from people.
Bob Price: Well Bob, thank you for taking the time to tell us about that.
Bob Keach: No problem, thank you.