The 2005 Chapter 11 Amendments: Facilitating a downward spiral?
This is the first opportunity we have to see the new 2005 Chapter 11 provisions in action for big retailers--and they don't work. This week, Businessweek takes a look at the dysfunctionality of the 2005 amendments. The article explains that under (1) the new 210 day cap on the amount of time bankrupt companies have to decide whether to keep a lease and (2) the requirement that bankrupt companies pay cash to utility companies and other suppliers, many retailers are simply liquidating, instead of engaging in the longer and often value-preserving process that the old law facilitated.
According to the article, this year, 15 retailers with assets of $100 million or more have filed for Chapter 11 protection, and almost all that filed in the first three months of the year have rapidly liquidated. Compare that outcome with Professor Lynn LoPucki's research showing that in the 20 years prior to 2005, only 41% of the 94 retailers that filed for bankruptcy went out of business, with Kmart, Winn-Dixie Stores, and Macy's being among those that emerged successfully from the process.
Bankruptcy is supposed to mitigate the impact of an economic downturn, allowing companies to pause and reorganize to preserve value--which means jobs and taxes for local communities. As Professor Warren points out in the article, "Bankruptcy is countercyclical--it is a tool designed to be a cushion during a downturn so that everybody takes a small hit for the short term and emerges stronger for the long term." The 2005 amendments prevent bankruptcy from operating that way, narrowing the window for reorganization so significantly that truly distressed companies are left with no reorganization opportunity at all.
I wonder what this will mean for communities already struggling with foreclosures, job losses, diminished tax bases and higher commodity prices--it seems like a downward spiral that the old bankruptcy laws were intended to prevent.
Just which of these zombie retailers are you suggesting we taxpayers* bailout?
* Most of them are going under because they're overleveraged and owe the banks more than they can pay. Since we taxpayers are being required to backstop those banks who won't be getting repaid, in the end we're the ones who'll be bailing out those retailers.
August 13, 2008 11:45 AM | Reply | Permalink
I don't see a suggestion that we bail anyone out, just an observation on yet another reason why 2005's bankruptcy "reform" was a really bad idea.
August 14, 2008 6:46 AM | Reply | Permalink