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Zywicki on Review of Bankruptcy Reform

One result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has been the increased speed with which companies are making decisions, something that is not necessarily a bad thing says Professor Todd Zywicki.

"Not all reorganizations succeed," Zywicki told Law 360, adding, "having the possibility of a long, extended reorganization on the back end increases the risk of lending on the front end." He pointed out that sometimes a workout can be completed prior to a Chapter 11 filing and also that a lengthy reorganization can provide collateral damage to surrounding businesses, as in the case of a failed anchor store in a strip mall.

"So, while it is possible that the one impact of BAPCPA is that some firms will liquidate that otherwise would successfully reorganize, it also means that firms that would have failed eventually will be put out of their misery sooner, allowing their assets to be redeployed to more efficient purposes elsewhere in the economy."

3 Years Later, Bankruptcy Reform QuestionedLaw 360, October 1, 2008. By Evan Weinberger.

Excerpt:
"The exclusivity changes have pushed more companies into making quick decisions about whether they will liquidate or file a reorganization plan. 'I think if the parties know that if waiting out the debtor isn't a winning strategy, then people will get down to serious negotiations sooner,' Goffman said.

"On the creditors' side, Henry David, a partner and co-chair of the commercial litigation group at Dreier Stein Kahan Browne Woods George LLP, said that streamlining preferences rules would dramatically reduce the amount of litigation early in bankruptcy proceedings. 

"Under current preference rules, debtors can choose among the creditors that supplied goods immediately prior to the bankruptcy filing and decide which to pay. The debtor also has the right to bring any of the payments they made 90 days before the filing, David said.

"Those provisions make it less likely for companies to sell to a company that is known to be struggling, a condition that happened with Mervyn's. David represents creditors in the Mervyn's bankruptcy. 

"Tightening up the preferences rules could help the other side of a bankruptcy as well. 'You end up with a lot of litigation in the beginning and huge cash drains during the bankruptcy, such that these companies may not be able to reorganize,' David said. 

"Goffman said that the 2005 bankruptcy amendments tipped the balance of the procedures in favor of creditors. 

"Bean agreed, saying, 'If Congress wants to promote reorganization to retain jobs, it's important that there be a pretty level playing field.' 

"But is reorganization always an unalloyed good? Todd J. Zywicki, a professor at George Mason University School of Law, said no. Speedy decisions are not necessarily a bad thing, he said.

"'Not all reorganizations succeed,' he said in an e-mail. 'In fact, many fail. So having the possibility of a long, extended reorganization on the back end increases the risk of lending on the front end.'

In many cases, a workout, rather than a liquidation, can be completed prior to a Chapter 11 filing, he said.

"And a drawn-out reorganization can cause collateral damages to surrounding businesses, Zywicki said. He pointed to the long process that led to Montgomery & Ward & Co.'s bankruptcy. 

"Zywicki said that there was a Montgomery Ward outlet near his home that served as the anchor to a strip mall. As the reorganization plan dragged on, the Montgomery Ward store grew more dilapidated, which lessened the foot traffic to other stores in the area, he said.

"Once Montgomery Ward finally left the premises, a new tenant moved in and brought the mall back, Zywicki said. 'So, while it is possible that one impact of BAPCPA is that some firms will liquidate that otherwise would successfully reorganize, it also means that firms that would have failed eventually will be put out of their misery sooner, allowing their assets to be redeployed to more efficient purposes elsewhere in the economy.'"

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