Credit Slips

A Quick Look at Revised Article Nine; Seven and a Half Years in.

Although the Revised Article Nine drafters were severely and justifiably criticized for increasing the complexity and length of the statute and for destroying the work of art that was Grant Gilmore’s Magnus Opus, their product has so far been very successful in meeting the drafters’ goal of increasing certainty for business lenders and borrowers. Their lightning fast and complete ratification by the fifty state legislatures was nothing short of miraculous. Their decision to abandon the general principles of the original version of Article Nine and replace them with a host of specific rules backed up by comments and, if necessary, commentaries or even phone calls from the drafters has made the rules clearer to borrowers, lenders and particularly to judges. This system of rules will, however, require that as new or unanticipated types of transactions or issues arise the Code must be amended rather than expecting these unanticipated  issues or transactions to be decided under the general principles of the Code. Let’s look briefly at two issues, the Code’s treatment of individual names and its effort to integrate agricultural statutory liens into Article Nine. 

More Good News from the Big Three

More good news from the Midwest - GM has announced its plans to "reform" its retiree health benefits to help its financial crisis.  (Here's an article from today in the Detroit Free Press.)  What's the plan?  Make the workers pay higher percentage of the health insurance premium?  Well, sort of.  How high -- 20%? 50%?  Hmm, try 100%.  Yup, they're canning health insurance altogether for retirees.  (In fact, it's actually worse than 100%, because that would be 100% of a group-priced health insurance policy -- presumably now the retirees will scrounge for medigap insurance in the healthcare state of nature spot market.)  As a bone, GM's going to increase the defined-benefit pension payment by up to $300/month.  Sounds like yet another shuffle from defined-benefit to defined-contribution, writ large.

I'm not picking on GM.  Economic life sucks here (although Google opened a facility in Ann Arbor -- so let's keep those hopes for the new Michigan economy alive).  I'm just sharing the news...

What Would a Fannie/Freddie Conservatorship Look Like?

One of the possible rescue options for Fannie Mae and Freddie Mac is a conservatorship.  But what would this look like?  The New York Times relates that "Officials said that [Treasury Secretary] Paulson wanted to convey the message that...a conservator would have to prepare a plan to restore the company to financial health, much like a company in Chapter 11 bankruptcy proceedings." 

That's the general idea, but the devil is very much in the details, as explained below the break.

New Bankruptcies from Michigan!

I forgot to alert Credit Slips readers last month about an exciting new chapter 11 here in Michigan. No, not an auto parts supplier, and no, not (not yet) one of the Big Three. It's the Greektown Casino, in good ol'  Detroit. If mayoral sex scandals aren't enough to distract you from a floundering economy, apparently neither is the escapist joy associated with emptying your wallet pursuant to a random (but certainly sloped) dissipation curve. (By the way, did "gambling" change to "gaming" the same time "debt" changed to "credit"?) And for the curious, the Greektown casino is not run by Greeks but another ethnicity with an established tradition of running casinos.

And yes, there's currently a casino expansion project underfoot (about $500 million at last count).

Piccadilly Post-op

Since I have written occasionally about the Supreme Court’s treatment of bankruptcy and related laws, the authors of Credit Slips asked that I use my final post to say a few words about Monday’s decision in Florida Department of Revenue v. Piccadilly Cafeterias.

As most bankruptcy observers know, this was the case that was meant to resolve questions about the timing of Bankruptcy Code § 1146(a) (f/k/a 1146(c)): Are Chapter 11 bankruptcy sales tax-exempt no matter when they occur, or must they occur after plan confirmation?

The short answer: On a heavily textualist analysis, Justice Thomas, writing for the majority (Breyer and Stevens dissenting), holds that the tax exemption is available only for sales after plan confirmation.

The decisions itself is, i/m/h/o, probably right. But for the wrong reasons.

Ex Appeal--Reveal

In my prior post, I described some data we’ve generated on the somewhat surprisingly infrequent use of examiners in large Chapter 11 cases. I said that in this post, I would offer some thoughts on what is going on here.

Before revealing our theories, I should note that our data are preliminary. Although we have reviewed 650 dockets and hundreds if not thousands of pleadings, we have not yet found strong predictive trends in these data. We have also interviewed nearly 30 lawyers, judges, former examiners and other participants in the bankruptcy system. While these interviews are often illuminating, they are inherently subject to bias. In short: This is all preliminary and subject to change without notice.

Where Do All the Corporate Debtors Go During Reform Time?

Dr. Terrence Halliday, a sociologist at the American Bar Foundation, shifted us back to corporate insolvencies. His paper, Missing Debtors: National Lawmaking and Global Norm-Making of Corporate Bankruptcy Regimes, discusses the systems that are created to regulate corporate debt and corporate debtors. He notes that some debtors who have a keen interest in corporate bankruptcy regimes are missing from the table when those regimes are being discussed at UNCITRAL meetings, in World Bank or IMF discussions. Why are they absent?

Frontier and First Data Corp.

Felix Salmon has a great piece in CondeNast portfolio.com about the role of First Data Corporation in precipitating Frontier Airline's bankruptcy.  It's unusual to find a story that connects consumer credit card rights with a corporate bankruptcy, so I'll summarize the interaction beneath the break. 

Lubben on Corporate Bankruptcy Costs

Professor Stephen Lubben of Seton Hall University (and a former Credit Slips guest blogger) has recently published the findings from his massive study of professional fees in corporate reorganizations. The paper appears under the very descriptive title of "Corporate Reorganization & Professional Fees" in volume 82 of the American Bankruptcy Law Journal at pp. 77-139. This paper will be a standard reference on corporate bankruptcy costs.

Lubben reports on a dataset of 1,026 cases that filed chapter 11 in 2005 in thirty-three separate judicial districts. Among Lubben's key findings:

• Courts rarely deny applications to retain professionals and rarely reduce professional fees
• Time in bankruptcy is not related to the level of professional fees
• Professional fees in chapter 11 are subject to economies of scale (i.e., larger bankruptcies result in a lower percentage of value being devoted to professional fees)
• Thirty-five percent of chapter 11 cases result in no payments to professionals whatsoever.

You'll have to read the study for the details. Professionals who work in chapter 11s and who like to get paid will want to do so. It contains a lot information about the expectations for the costs of an average chapter 11. In a "big case subsample," Professor Lubben provides separate data for the biggest corporate reorganizations.

I'm not quite sure how one goes about getting a copy of the study. The American Bankruptcy Institute, which provided the funding for Professor Lubben's study, was selling a CD-ROM with the study's contents. Full disclosure notice: I served on the advisory committee for Professor Lubben's study.

UPDATE (4/21): Professor Lubben wrote me to say a copy of the paper is available on SSRN here.

Final Aloha, Aloha

Update on Aloha: giving up the ghost and ending passenger service after 60+ years.  May sell its cargo business, but lots of sad and confused travelers are going to find canceled flight they'll have to rebook!  Story  here.

Aloha, Aloha

Some readers might have seen that Aloha airlines went into chapter 11. Again. They earlier flew there in 2004, scrubbed their books a bit, and then emerged.

Why back in? Couple reasons, they say. First, fuel is really expensive. (Who knew?) Second, Mesa (allegedly) ripped off their business plan in violation of a confidentiality agreement signed during the 2004 proceedings when they were soliciting capital. Bankruptcy whining? Not necessarily: Mesa lost a trial against fellow plaintiff Hawaiian airlines just recently (and is appealing).

This raises a question in my mind. Is Aloha's refiling a "failure" of chapter 11? Is it a chapter 22? On the one hand, if it's just gas-is-expensive, then maybe they should have foreseen that. Or, more precisely, maybe if their viability is so marginal that even a freshly restructured Aloha can't survive with these gas prices, then they should liquidate.

On the other hand, if they got screwed unexpectedly by a commercial party, then maybe it's just bad timing. As such, is refiling "per se" proof of a chapter 11 system failure?

Bear's Bankruptcy Alternative

Would a bankruptcy have been better for Bear than a $2/share sale? We don't know. But I think a comment made by Alan Blinder, the noted Princeton economist, on the News Hour with Jim Lehrer this evening is telling precisely because it was wrong.

Blinder noted that the sale was basically the same result as a bankruptcy because equity was largely wiped out. That's true, but misses a very important point about bankruptcy: process matters.

Solutia Solution

I didn't want Credit Slips readers to miss the settlement of the Solutia lawsuit that occurred at the end of February.

Solutia sued its consortium of DIP lenders for trying to back out of a $2.05 billion exit financing loan.  The justification for the weaseling, said the banks, was that the credit markets had gotten tough(!) and that it would be hard to syndicate and/or sell the DIP loan(!!), and so this was the sort of "material adverse change" that would allow rescission of the commitment under the contract(!!!).

I'd like to say this is consensual resolution of a contested matter, but I noticed that the "settlement" apparently involved the banks ponying up $50 million more in funds -- which sounds like someone got scared when Solutia said it'd be happy to have a bankruptcy judge weigh in and set a precedent.  There are some rosy press releases from Citigroup, and Solutia has happily emerged from 11, but there's more to this than meets the eye.  This would have been a watershed precedent -- either way -- in a turbulent credit market.  Smells like the banks didn't like their prospects here.  But the audacity of their (attempted) repudiation of the exit financing commitment on the "tough market" defense suggests (in addition to chutzpah) that the credit crunch really is proving tough all 'round.

Bankruptcy Claims Trading: Part II

I’ve greatly enjoyed my stint blogging at Credit Slips for the past two weeks. It’s given me new respect for the energy and commitment of the blogosphere community, and I’ve learned at least as much as I’ve taught. Bob Lawless has already posted a very kind goodbye, but before I go back to lurking, I have one last post to make, namely a follow-up to my general introduction to bankruptcy claims trading.

Claims trading, like any other investment, has risks. The question is what risks does one assume when one purchases a bankruptcy claim?

Corporate Bankruptcy Costs and Recoveries in the UK

I'm thrilled to have been invited to be guest blogger on Credit Slips for this week. I'm hoping to cover a number of issues; starting with some recent empirical work I've been doing on business and consumer bankruptcy, then some comments on recent issues in European bankruptcies that may be of interest to readers.

I'm going to start today by discussing the impact of the UK's most recent reform of corporate bankruptcy law. Details below the fold.

Bankruptcy Claims Trading: Part I

Let me turn to a true bankruptcy nerd topic tonight—corporate bankruptcy claims trading. Bankruptcy claims trading is the buying and selling of claims against a bankrupt corporate debtor. (Trading in consumer bankruptcy claims is an issue that has not been academically explored to the best of my knowledge.)

Bankruptcy claims trading is virtually unregulated in the U.S. Although claims trades can effect changes in corporate control, they are not subject to securities or mergers and acquisitions regulation. There is also little case law on bankruptcy claims trades; my next post will address a very recent decision in the Enron bankruptcy that is the most significant to date.

So who on earth would want to buy a bankruptcy claim?

A High Grade for High-Grade

Apologies in advance for this post.  When my co-bloggers and I brainstormed this site, we talked about trying to merge scholarly issues with accessibility.  This post woefully shortchanges the latter.  But I can't help myself -- I'm just too excited about the recent High-Grade opinion out of Judge Lifland's chambers.

One of the quiet successes of BAPCPA was finally getting Chapter 15 passed into law, which pertains to cross-border insolvency proceedings, an area that I write about a bit.  Yet there have been fits and starts in some early opinions by courts who, how shall I put this in a politic manner -- seem to be struggling.

One of the big deals from the theoretical side is Chapter 15's embrace of an idea that goes by the label "universalism," which basically means we would be better off with a coordinated system of choice of law in cross-border proceedings following some jurisdiction-selecting rule, as opposed to reverting to the choice of law "state of nature" of territorial sovereignty.  (Our European cousins are off and running with the centre of main interests test ("COMI") under their Regulation.)  One of the necessary foundations of a universalist approach to regulating transnational bankruptcies is what I dub "jurisdictional hierarchy," recognizing that some jurisdictions are going to have to bite the bullet and bow to the laws of other jurisdictions in any given case.

Chapter 15 imposes such a jurisdictional hierarchy by requiring U.S. courts to distinguish between a "main" and "non-main" foreign bankruptcy proceeding when a U.S. Chapter 15 proceeding is opened.  (A Chapter 15 is opened by a foreign representative, like a trustee, in a bankruptcy proceeding taking place abroad.)  And yes, the COMI test is used: if the foreign proceeding is being conducted in the country that houses the debtor's COMI, then it is a foreign "main" proceeding.  One reason it is important to get this distinction (i.e., is it a request from a main or a non-main (or possibly neither!) proceeding?) is because it signals the jurisdictional hierarchy.  If the proceeding is recognized as a foreign main proceeding, that means the U.S. court will be mindful of its necessarily inferior legitimacy to legislative (and maybe adjudicative) jurisdiction over the dispute.  If the proceeding is recognized as a non-main proceeding, the assistance offered to the foreign representative is curtailed, on the theory that he's not really the person who should be travelling abroad asking for help.

An ominous early case, SPhinX, tried to pooh-pooh the relevance of main vs. non-main, cavalierly implying it doesn't really matter because U.S. bankruptcy judges have such wide discretion they can shape and fashion almost any sort of remedy (and so get a non-main proceeding representative the sort of relief generally intended for a main proceeding representative).  In addition to stumbling a bit doctrinally, the SPhinX case was worrisome for trying to scuttle the very foundation of jurisdictional hierarchy so central to universalism -- and so importantly advanced, albeit gingerly, in Chapter 15.

Enter High-Grade.  In that case, the actual holding denied the (Cayman) foreign representative's request for assistance because it was found not only was the Cayman proceeding not a main proceeding (COMI of Bear Stearn's investment fund was, unsurprisingly, in New York), it wasn't even a non-main proceeding, because the connection to the Cayman Islands was purely a legal formalism devoid of economic substance (incorporating offshore for tax advantage).  Yet what is so important about the case is that (arguably in obiter dicta) it goes through a thoughtful and careful analysis of the centrality of the distinction between foreign main and non-main proceedings and hence of the importance of jurisdictional hierarchy in a Chapter 15 world.

SPhinX's retirement will be welcome; I predict it is High-Grade that will get the cites.  I just couldn't help but give it a "shout out" as it rolled hot off the presses.

Apologies again for readers who are now utterly bored.  You were warned.

Trenwick--The End of Jaw-Boning

When Credit Slips’ management learned that the Delaware Supreme Court issued a remarkably brief order a couple weeks ago affirming the Chancery Court in the Trenwick litigation, they asked me to reprise my role as guest blogger here. I am, of course, happy to oblige.

Trenwick was the latest in a series of cases at the increasingly congested intersection of bankruptcy and corporate governance. Trenwick involved both breach of fiduciary duty and "deepening insolvency" claims. I won’t belabor the fiduciary duty issues, as I've already discussed them here (you have to scroll to the bottom). Deepening insolvency, on the other hand, warrants a few words. 

The basic idea behind deepening insolvency seems simple: Creditors claim they were harmed when the corporation incurred debt which, rather than salvaging the company, merely prolonged the agony, "deepening" the distress. Instead of losing 75% of their claim, for example, creditors might say that the deepening insolvency "misconduct" caused them to lose 85%. Thus, creditors bring a lawsuit against the managers and others who they believe caused this additional loss. The legal issue is whether and to what extent the courts will give the creditors a remedy if they can prove these facts.

Unlike the closely related question of directors' duties to creditors, there is no obvious predicate doctrine which might guide a court trying to determine how to respond to such a claim. Although most analysts trace deepening insolvency back to the 1983 Schacht case from the 7th Circuit, no one has been able to figure out if deepening insolvency is really a unique cause of action that could be asserted against corporate fiduciaries or professionals, a measure of damages, or both, or neither.

The logical problems with the claim are pretty clear. In many cases, incurring additional debt may actually save the company, but of course you won't know this until it’s too late. Moreover, it is not clear what work this deepening insolvency "doctrine" would do that other doctrines—including breach of fiduciary duty, fraudulent conveyance and good faith—could not already do.

These were certainly the views Vice Chancellor Strine expressed—repeatedly—in his ginormous, 90-page, 25,000+ word Chancery Court opinion in Trenwick, which is what the Supreme Court affirmed--in a mere two sentences. 

In truth, it is not clear why VC Strine bothered to say much of anything in Trenwick. Many of the plaintiff's claims were obviously problematic, including that the plaintiff clearly lacked standing to sue, and the debtor was evidently solvent at all relevant times. As with Gheewalla and some of the other recent Delaware jurisprudence on these issues, the results are probably correct—the curiosity is in the analysis.

Until the Trenwick Supreme Court opinion, it seems the Delaware courts were saying a whole lot more than was necessary in cases that could easily have been resolved with little discussion. Thus, I recently argued in Stanford's Journal of Law, Business and Finance that Delaware courts appeared to be engaged in the "expressive function" of judging. This is just a fancy way of saying that they have been doing a lot of jaw-boning to try to send messages to their audience—lawyers, directors, etc.—about what is and is not acceptable behavior when a firm is in distress.

Trenwick would seem to be the end of this jaw-boning, although there is clearly more that could be said. After all, we should not forget that the net result of cases like Gheewalla and Trenwick will be that Delaware has foreclosed many doctrinal avenues that creditors might reasonably want to pursue against directors and other corporate actors. In fact, contrary to Vice Chancellor Strine’s Chancery Court analysis in Trenwick, it would appear that, in all but extraordinary cases, neither breach of fiduciary duty nor good faith claims will lie in the wake of Gheewalla and Stone v. Ritter.

Perhaps Trenwick means Delaware has said all it means to say on deepening insolvency (and related matters, such as directors' duties to creditors). Perhaps it means they have gotten (or given) the message—and they are going to keep quiet for a while.  Or, perhaps it just means that VC Strine has finally worn the Supreme Court out. Only time--and more jaw-boning--will tell.

Firm, Taut Prepack?

I've been following a little bit the Bally's Total Fitness chapter 11 in SDNY.  A couple things of note.  First, it sounded like it would be nice and smooth, with something like 99% of senior debt pledging support.  Then some unhappy creditors came in grumbling about the DIP proposal (which had priming provisions, so three guesses why they were irked).  Next thing I saw is an amended plan with some equity fund injecting cash, but a much different (and lower) level of support than the initial bold predictions of 99%.

So what's going on (I wonder semi-rhetorically to the Credit Slips audience)?  Is this case imploding, or is this par for the course?  Can a prepack "unwrap" itself and morph into a full-blown 11 (in which case, who tied the knots)?  Also, I'm wondering more generally why this business is bust.  Shouldn't be tied to mortgage market, and I'm not aware of corporate malfeasance.

Come to Houston for Your Chapter 11s?

In a recent court opinion, Judge Marvin Isgur ruled that one partner's lack of disinterest would not be imputed to his entire law firm. Hence, the law firm of Bracewell & Giuliani--yes, it's that Giuliani--could represent Cygnus Oil & Gas in its bankruptcy even though one of the partners served as a corporate director for Cygnus shortly before its bankruptcy filing.

How do I know this? You make all kinds of friends, apparently, running a blog. An employee of the public relations firm of Hellerman Baretz sent me an unsolicited e-mail suggesting the case would make a good blog story. Those sorts of e-mails now find themselves in my inbox, but this one caught my eye. The e-mail suggested the case was a great reason for corporations filing bankruptcy to do so in Houston, a fact that not coincidentally redounds to the benefit of the Houston legal community.

Gheewalla - What's at Stake?

The past two posts have been about what's wrong with the Delaware Supreme Court's opinion in the Gheewalla case, which holds that directors of distressed corporations have little in the way of fiduciary duties to creditors. I pointed out a variety of flaws and gaps in the case. 

But just because a case is wrong, doesn't mean it matters. Courts get things wrong all the time, and we adjust. So, perhaps a more important question than "what's wrong with Gheewalla" would be "what's at stake?"

If you've read my last posts, or anything else I've written about this, you'll know that the only constituency that seems to me to have legitimate normative and economic concerns about Gheewalla will be involuntary creditors of distressed corporations. These creditors axiomatically cannot protect themselves contractually, and I am not persuaded that the legal architecture of bankruptcy and creditors' rights--in particular, priority and fraudulent conveyance doctrine--will do much to protect them from directorial opportunism, either. 

But this assumes both that involuntary creditors are, in fact, vulnerable, and that corporate directors would exploit this vulnerability. If a few recent telephone calls are any evidence, there may be reason for concern. 

Gheewalla Gaps

The last post labored on about flaws in Gheewalla, the Delaware Supreme Court's recent opinion on directors' duties to creditors. This post discusses some gaps created by the case.

Recall that  Gheewalla tells us that directors of the distressed (insolvent) firm are, for unarticulated reasons, still fiduciaries for corporate creditors in a derivative sense. This presumably means that any suit by the creditor will be in the name of the corporation, and any recoveries will go to the corporation, to be shared by all corporate constituents. But this leaves at least four gaps in the law.

Gap 1--How Does this Work?

The first gap involves the procedural rules that apply to derivative suits in Delaware. Rule 23.1 of the Delaware rules of procedure requires that shareholders first make "demand" on directors before they will have standing to sue in the corporation's stead.

Fine, but what does this mean for creditors? The statue says nothing about creditors--only shareholders. Does this mean it simply does not apply? If not, then what sort of procedural predicates must occur for a creditor (or class of creditors) to pursue the derivative claim?

Vice Chancellor Strine chided counsel in Production Resources because they "ha[d] not burdened [him] with input" on this question. Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 795-96 (2004). I can see why. It would be nice to know.

Gheewalla-Palooza (or, Delaware to Creditors: Drop Dead)

A Few Words About My Few Words

Before rolling into the blog-jam, I want to thank the keepers of Credit Slips both for setting up this site, and for permitting me to squat here for a week. I also want to thank Professor Pottow for his very generous introduction.

Since there has not yet been a discussion here of the recent Gheewalla decision--and because I want to promote a forthcoming article on it--I am going to devote the first few posts to some flaws and gaps in the decision, which is the Delaware Supreme Court's first substantive utterance on directors' duties to corporate creditors.

Gheewalla-Palooza

After many years of speculating and handwringing among lawyers and academics, the Delaware Supreme Court has finally told us what sort of duties directors of distressed Delaware corporations owe to corporate creditors: None, really. 

Gheewalla holds that directors of a distressed corporation owe no direct duties to creditors, and at most only derivative duties when the firm is actually insolvent. N. Am. Catholic Educ. Programming Found., Inc. v. Rob Gheewalla, _ A.2d _, 2007 WL 1453705 (Del. May 18, 2007) aff’g 2006 WL 2588971 (Del. Ch. Sept. 1, 2006). As I will discuss in this and the next post, derivative duty claims as currently envisioned by Delaware are unlikely to have much force. Thus, net-net (as the accountants might say), Delaware is really telling us that directors have little to fear from creditor duty suits.

The Gheewalla decision has been greeted with a mix of relief and self-congratulation. Lawyers that advise directors of distressed Delaware firms now have at least the appearance of clarity on the murky challenges created by cases like Credit Lyonnais and Production Resources, which suggested (although did not actually hold) that under certain circumstances directors might be liable in a direct fiduciary capacity to creditors when a firm is in distress (i.e., "insolvent" or its "vicinity," whatever that means). See Credit Lyonnais Bank Nederland, N.V. v. Pathe Commc’ns Corp., No. 12150, 1991 Del. Ch. LEXIS 215 (Del. Ch. Dec. 30, 1991); Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004). For their part, Professors Bainbridge (here and here) and Ribstein have engaged in a virtual high five, satisfied that they have halted the creep of a doctrine could have had the unseemly effect of benefitting creditors at the expense of directors.

What no one seems to have paid much attention to, however, are some odd flaws and gaps in the Supreme Court's decision. While I think the result of the decision is correct in the sense that this creditor--if the plaintiff even was a creditor--had no fiduciary claim, these flaws and gaps are troubling. I will blog today about the flaws, and thereafter about the gaps and what's really at stake.

Executory Contracts & Puzzles of the Code

Tomorrow I'm going to be busy at the law school's graduation, so I think I'll make this my last post.  I really appreciate the chance to post here at Credit Slips.  I'll end with my musing about one of many puzzles I see in the Bankruptcy Code.

Courts and academics often proclaim, with little analysis, that the Bankruptcy Code prohibits non-debtor termination of contracts. Specifically, because section 362(b) of the Bankruptcy Code does not mention termination of contracts with the debtor, several courts have held that non-debtor parties are precluded from unilaterally terminating a contract or lease with the debtor, absent relief from the automatic stay. Why this should be so, especially in cases where the contract would be terminable outside of bankruptcy, is unclear. Arguably the automatic stay should not give the debtor greater contractual rights than it enjoys outside of bankruptcy.

Instead, I argue that careful reading of sections 362 and 365 shows that the Bankruptcy Code simply ensures that the non-debtor party will have to pay full breach damages if it terminates a contract solely because of the debtor’s bankruptcy filing. In most cases paying damages is an unattractive option, since the debtor will likely incur substantial costs to cover. In short, the Code often effectively precludes termination by the non-debtor party, by making it prohibitively expensive, but there may be instances in which a party could advance sufficient “cause” to lift the automatic stay for purposes of breaching a contract.

Am I wrong? What are some other puzzles you see in the Code?

Some that I wonder about are: (a) where does it say in the Code that administrative expenses come after secured claims (it was the other way around in receiverships with regard to "six month" claims) and (b) where exactly does it say that a chapter 11 debtor can’t pay prepetition debts in the ordinary course of business?

Why Think About Delaware?

In his response to my thoughts about Delaware, Lynn LoPucki writes that "many believe Delaware venue is not worth discussing because there is no way to ban it while Joseph Biden remains in the Senate."  To the extent that this suggests I am wasting my time, it would be easy to dismiss as the unkind words of a respected scholar who has been harshly attacked by some in the bankruptcy community.  After all, why is my paper less useful than his book?  Senator Biden has been entrenched for a long, long time, long before Courting Failure came out.

But I do think that Lynn's comment raises an important point:  why do scholars think and write about issues that will never change?  In this case, I have two responses.  First, I'm not sure that the Senator will be in his post for that much longer.  While his Presidential hopes are unlikely to be fulfilled, it is quite possible that he could take a cabinet post in a future administration.

Second, my sense is that bankruptcy practitioners and judges are still smarting from Lynn's criticisms.  Even those folks that support removing Delaware's privileged place in the chapter 11 system, which they argue is inherently unfair in a supposedly uniform federal system, often express their discomfort with Lynn's claim that the courts he highlights were not acting in good faith. 

For these two reasons alone I think studying Delaware still has some merit.  I'd be interested in what others think about this.

Professional Fees & Overhead

As some of you know, I spend a good deal of my time thinking about professional fees in chapter 11. One thing that has always puzzled me is the issue of "overhead." It is still common to find courts stating that certain items (e.g., secretarial overtime, attorney late night meals, word processing) are not recoverable in bankruptcy because they constitute "overhead." A variation on this same theme is those courts who announce that certain categories of expenses are not compensable "in this district."

Assuming these items are passed on to the client outside of chapter 11, the bankruptcy court that adopts this approach is essentially accusing the professional of double charging its clients.

More to the point, I wonder how the bankruptcy court knows that these items are overhead? Indeed, the fact that some law firms have two hourly rate structures, one with separate charges for expenses and one, higher hourly rate structure without these charges, suggests that these items are not part of overhead. And since law firm billing systems can easily assign these items to specific client and matter numbers, why assume they are overhead? 

In short, is it time for bankruptcy judges (and the U.S. Trustee) to drop the notion of "overhead"?

And Now for Something Completely Different

For a person interested in the history of corporate bankruptcy, living in Northern New Jersey can be great fun, as every day provides reminders of the great bankruptcy cases of the past, particularly those involving the many railroads that once converged here, all of which were in receiverships and/or section 77 proceedings at various points in time. The sign pictured here is one I see every morning at the Newark's Pennsylvania Station, even though the last Penn Central train departed several decades ago. I'm sure this has confused more than a few tourists over the past few years!

The Delaware Thing

I want to thank the Credit Slips folks for having me visit for the week.  I thought I'd start off with a short post, on an uncontroversial subject.

Next week I'll be flying off to Vienna (yes, academic life is rough) to present my paper on Delaware's role in corporate reorganization at a conference on financial distress at the Vienna Graduate School of Finance. Unless you’ve been living under the well known rock, you know that for the last couple of years the bankruptcy community has been riveted by Lynn LoPucki's controversial thesis that Delaware is the central part of a system where "competing bankruptcy courts offer high fees to bribe the lawyers to bring them cases." In particular, as I understand Lynn's argument, he contends that Delaware is so desirous of big corporate cases that it (a) bribes professionals to come to Delaware and (b) goes easy on the 1129(a)(11) feasibility analysis, leading to more refilings.

As I note in the paper, even would be defenders of Delaware seem to have accepted that that Delaware cases refile at an abnormally high rate, and debates then proceed from that point. I remain unconvinced.

203 N. LaSalle St -- The Photo

I figured we might as well make today photo day here at Credit Slips. It could have been somewhat like the days of my youth when we used to go to photo day at Busch Stadium. I could never get close enough to Lou Brock for a decent photo, so instead I have a stack of photos in my desk drawer at home of players like Ted Sizemore and Mike Tyson (the other Mike Tyson). Not all of us are that photogenic enough for that kind of photo day. You Credit Slips bloggers know who you are.

What I got instead is the photo to the left. I was teaching Bankruptcy Reorgs this semester and remembered I had a photo of 203 N. LaSalle St. sitting on my hard drive. And, yes! It is THAT 203 N. LaSalle St. from the U.S. Supreme Court case of the same name which ruled on the applicability of the fresh capital exception in chapter 11.

I thought others might have a use for this photo also. I took it one Sunday morning several years ago as we were driving out of Chicago. Feel welcome to use it for any noncommercial purposes such as for the classroom. Click on the photo for a larger version.

If you want to use this photo for commercial purposes, such as in a collection for publication, please contact me. You have bigger problems than just needing copyright permission.

Chapter 11 Textbooks

After my last post about my Bankruptcy Reorgs class, I figured I might as well make it chapter 11 day on the blog. The other thing that is on my mind this morning are textbooks for chapter 11 courses or advanced bankruptcy courses. Again, for you nonbankruptcy types, law schools generally offer a course in bankruptcy that is a broad overview of the subject. Like many other schools, we also offer an advanced elective that focuses on chapter 11 bankruptcy for businesses. My law school decided to inflict me on the students this year for that advanced course.

To my knowledge, there are three textbooks that might be used for the course: Mark Roe's Corporate Reorganization and Bankruptcy from Foundation Press; Mark Scarberry, Ken Klee, Grant Newton, and Steve Nickles's Business Reorganization in Bankruptcy from West; and Michael A. Gerber, Marcia Goldstein, Lawrence Gottesman, and (Credit Slips guest blogger) Ted Janger's Business Reorganization from Lexis Publishing. I always have used my own materials for the course, but I was wondering whether others who teach such a course have had experience with these texts. Are these texts widely used? What are the strengths and weaknesses of these texts?

Looking Back at the Oldies (Cases)

Sorry for the light blogging the past few days. This is what happens when you have six academics running a blog as an adjunct to their teaching and research and the end-of-the-semester crunch hits. We have not collectively fallen off the face of the Earth, although looking out my window right now makes me wonder. It was snowing when I woke up this morning. Snow in April? Whose idea was that? More to the point, whose idea was it to move from the University of Nevada, Las Vegas back to the Midwest?

Yesterday, I was teaching my Bankruptcy Reorgs class, and I had two of my students arguing a motion to confirm a chapter 11 plan. The question was whether the plan properly classified creditors. For the nonbankruptcy types, a brief digression is in order. Everyone else can skip below the jump . . . meaning that if you are a bankruptcy type you should not be reading these words. Stop it. I mean it. Skip below the jump.

Chapter 11 plans treat creditors by classes, and creditors vote on the plan by class. A class is considered to have accepted a plan if one-half of the number and two-thirds of the dollar amount of the claims in the class vote to accept. And, for the bankruptcy court to confirm a chapter 11 plan, at least one impaired class of claims has to have voted to accept the plan. Thus, the debtor has strong incentives to arrange the classes so there will be a relatively friendly class of creditors who will vote to accept the  plan. The Bankruptcy Code says the debtor cannot place dissimilar claims in the same class, but the Code is not clear on whether there are limits on the debtor's ability to place similar claims in different classes. Can the debtor gerrymander the classes so as to create a class that will vote to accept? It is an ambiguity in the statute or, as such a situation is known to lawyers, it is litigation happy-funtime. Now, we'll get back to stuff those nosy bankruptcy types can read.

Up Esopus Creek

Several of us Credit Slips bloggers regularly teach or write about corporate bankruptcy, although we have not been writing about business issues much lately. I'm going to change that, at least for today. A recent case from the Delaware Court of Chancery raised the issue of exactly what a state court can do in the face of a litigant's threat to file bankruptcy.

The case is Esopus Creek Value LP v. Hauf, No. 2487-N (Del. Ch. Nov. 29, 2006), and it involved some creative transactional planning. A company wanted to sell its major subsidiary, a deal that would require the approval of its shareholders. Although the company was doing well financially, it had previous financial problems and had not prepared audited financial statements. So what? Regulations of the U.S. Securities Exchange Commission bar companies from calling shareholder meetings and soliciting proxies if they have not been able to prepare audited financial statements and file SEC reports. That's what. No shareholders' meeting, no deal. The lawyers then hit upon what seemed like a great idea: put the company into bankruptcy and sell the subsidiary through the bankruptcy process. That is where the fun begins.

The (Belated) AALS Report

Contrary to popular belief, the regular Credit Slips bloggers are not being held for ransom by guest blogger Jack Ayer. When we set this up, Ayer kindly offered to start last week when law school academics tend to have their attention turned elsewhere. And, where else are law school professors the first week in January except the annual meeting of the Association of American Law Schools (a/k/a "the AALS") in Washington, DC? I had promised to report in from the event, but the Internet connection in my room did not want to work. Other than that and the small fire at 2:15 AM in the morning that caused an evacuation of my part of the building, the hotel was great.

For those fortunate enough never to have known the AALS meeting, a little background is in order. It meets over three and a half days. The first day is typically turned over to a plenary event that would be of interest to all--this year it was law school rankings--and the rest of the meeting is dominated by small section meetings organized by subject-matter specialty. For Credit Slips readers, the most germane section is the one on Creditors' and Debtors' Rights. (I've seen others refer to it as the Section on Debtors' and Creditors' Rights--all depends on your perspective.) There were four papers presented at the section meeting from Ed Morrison (Columbia), Robert Chapman (visitor, Baltimore), Cre Johnson (Ohio State), and Adam Feibelman (North Carolina). So what is on the minds of bankruptcy academics?

What the Market Needs: More Regulation!

The old saw goes that nothing burdens the market like the stifling oversight of government regulators.  But real life is much more complicated than sound bites.  Sometimes a market needs facilitating regulation to function.

An interesting derivation of this theme is the role of "creditor's rights" in comparative insolvency.  Some international comparative works have sought to support the intuition that if creditors have weak protection -- for example, the State can nationalize all property without compensation -- investors will exhibit expected skittishness.  If this intuition is correct, how sophisticated is it?  Sure, nationalization is scary.  But are investors really more scared off by, say, the American employee priority rule, with its higher wage level, than the Canadian one (currently under amendment) with its lower priority wage cut off?

Here's where readers may want to look at the new study by researchers from the United States and Finland (Timo Korkeamaki, Yrjo Koskinen, and Tuomas Takalo)  on what happened when Finland INCREASED regulatory oversight in insolvency proceedings and DECREASED creditor's entitements: investment returns seemed to increase. (!).  While I haven't had the chance to read the full article yet, this surely warrants exploration.  Article link: Phoenix Rising: Legal Reforms and Changes in Finland During the Economic Crisis

Hedge Funds v. Private Equity

The Wall Street Journal's Money & Investing section had an article yesterday (10/17/2006) entitled Debt Buyers v. The Indebted: Showdown Between Hedge Funds and Private Equity May be Inevitable. The article highlighted the tension between private-equity firms, who borrow money from wealthy individuals and large institutions, to buy distressed companies, and hedge funds, who borrow money from wealthy individuals and large institutions, to buy the debt of distressed companies. Apparently, the private equity companies are alarmed at the increasingly aggressive role that hedge funds are playing in workout negotiations and in bankruptcy cases such as Tower Automotive, in which a hedge fund steered the creditors' committee.  According to the article, some private equity firms are trying to prevent certain notoriously tough hedge funds from getting ahold of debt in the companies that they own--a difficult task given the lively market for debt. The article predicts that if the economy tanks, and interest rates climb sharply, the Chapter 11 will be the stage upon which the duel between private-equity firms and hedge funds takes place.

Travelers Fees

One of the great things about running a blog is that hear more from all of your far-flung friends. Stephen Lubben at Seton Hall wrote me with the following: "When the Boston Red Sox failed to make the playoffs, my life lost most of its meaning. I turn to your blog postings daily for the insight that can only come from someone wise enough to follow the St. Louis Cardinals. What have you to say about the news that the Supreme Court agreed to hear the Ninth Circuit decision in the PG&E bankruptcy about Travelers' attorneys fees?" Well, I don't have the original e-mail anymore, but I remember it something like that. And, OK, some of that was only implicit in Stephen's e-mail.

OK, actually, none of that was implicit in the e-mail. In reality, I asked Stephen if he had any thoughts on the case with the hope that he would allow me to post them here. He wrote back with the following:

"By Cancelling These Debts, We Want to Give Rise To An International Debate on Lender Responsibility"

The title of this post is a quote from the development minister of the nation of Norway.  Norway is unconditionally forgiving debt owed to it by five countries (thanks to Adam Feibelman for the tip).  Some sovereign debts can be characterized as illegitimate or, in some cases, even "odious" (in general because they are unbeneficial to, and perhaps affirmatively bad for, the people of the debtor nation) and there is no standard mechanism by which they can be released of those obligations.  Countries and institutions are not exactly lining up to unilaterally forgive other countries' debts, so Norway's decision to do so is highly significant.  But the stated and suggested reason for the debt forgiveness is also notable - that the lending was motivated by Norway's self/sovereign-interest and not legitimate developmental objectives in the five debtor nations.  Although lending to countries and individuals are two very different animals, those in the sovereign debt and consumer/private entity debt worlds are engaging in parallel responsible lending debates.   

Slips Across the Blogosphere

A few random items around the blogosphere that caught my eye and might be of interest to Credit Slips readers. Yes, this means I didn't have time to compose a lengthier post:

• The Executive Office of U.S. Trustee ("EOUST") extended its waiver of the credit counseling and debtor education requirements for bankruptcy filers in areas struck by Hurricane Katrina. The waiver affects bankruptcy filers in the Eastern, Middle, and Western Districts of Louisiana and the Southern District of Mississippi. The press release is here. The 2005 bankruptcy amendments added these requirements and gives the EOUST power to waive requirements when they find the services are unavailable. Previous posts by Katie Porter and John Pottow discuss the increased power of the EOUST under the 2005 amendments, and this power to waive the counseling and education requirements is a good illustration of that increased power.
• In the business bankruptcy area, the September 21 issue of The Economist had an article entitled "In the Shadows of Debt." The subtitle says it all: "Business is being reshaped by a massive borrowing binge, but much of it is unseen, unregulated and little understood." The article is available online here for subscribers or those willing to watch an ad.
• An article in the N.Y. Times (reg. req'd) about skyrocketing housing costs and stagnating incomes. The second paragraph: "[M]any of the biggest jumps in the percentage of people paying a burdensome amount of their income for housing occurred in the Midwest and in suburbs nationwide, making it clear that the housing squeeze has reached deep into the middle class."

Hold the CHAOS!

District Judge Marrero handed down his decision in the NWA appeal today.  He reversed the bankruptcy court and enjoined the union from implementing CHAOS (which, by the way, I was wrong to suggest would not involve mass walkouts).  "Court Tramples Right to Strike" is how the flight attendants cast it --see the flight attendants webpage.

Let me say this: at over 100 pages, it is an extremely thoughtful analysis that really tries hard to cut through the seemingly conflicting goals of federal labor and bankruptcy policy here.  In essence, the judge said that Congress really wanted national railway carriers (and their modern-day airline analogues) to negotiate and negotiate and negotiate under the cumbersome and intentionally drawn-out provisions of Section 6 the Railway Labor Act for as long as possible, before giving up.  Only at that "Despondence Day" [my term, not a legal one] -- when the Section 6 negotiating process has run its couse -- can the parties resort to self-help (i.e., labor can strike).

In bankruptcy, a debtor can change the rules somewhat: if it wins an 1113 motion, the debtor can change the terms of a labor CBA -- even if it never negotiated up to Despondence Day under Section 6 of the RLA.  So the question is: if Congress had ever thought about the issue directly -- which it never did, so a judge has to predict Congress's intent -- would it have analogized the granting of an 1113 motion as an "acceleration" to Despondence Day (in which case the labor State of Nature obtains and self-help is a go), or would it have seen an 1113 order as merely an "alteration" of the Section 6 negotiating environment: allowing the debtor to reject the CBA and alter some rules, but not excusing either party from finsishing the Section 6 dance before self-help?

Given the desire to avoid strikes that was a "primary objective" of the RLA, Judge Marrero held that Congress would have probably wanted the latter: the parties have to keep slogging through Section 6 before self-help, even though the CBA has been rejected under section 1113 of the Bankruptcy Code.

But wait a minute!, cried the flight attendants, Northwest gets the best of both worlds: It gets self-help right away (after all, self-help for management *is* the unilateral imposition of labor terms), but the union's hands are tied (no strike) until the end of Section 6.  How is that fair?

It is fair, answered the judge.  Yes, management can impose unilateral terms, but not *any* unilateral terms; they are bound only to implement the terms of their last proposal in the 1113 process.  And by the way, recall that the only reason NWA won the 1113 motion is because the bankruptcy judge had to find that the union rejected that proposal without good cause.  So what at first blush may appear like unfairness is not nearly so one-sided as the flight attendants tried to paint.  That's what I think Judge Marrero is trying to say in his book-length opinion and why the bankruptcy judge was reversed.

This isn't over yet: (1) on the litigation front, the union may appeal to the Second Circuit; and (2) on the negotiating front, they've got to continue with the Section 6 process with NWA.  Who knows, that still may end up going all the way to Despondence Day without an agreement.  And then, let slip the dogs of war!  But it may not.  Just maybe, if the Congress that designed the RLA correctly predicted that as tempers subside over time, voluntary agreements can work out, then NWA and the flight attendants will hunker down, hash something out, and put all this customer-irritating unrest behind them.  That's what I'm hoping for.

CHAOS Anyone?

As resident blogger from Michigan, I feel compelled to alert readers to the interesting labor developments at Northwest Airlines.  (Northwest "hubs" in Detroit and employs a good swath of people in this area.)

A very complex issue of federal jurisdiction is unfolding regarding the intersection of federal bankruptcy law, federal labor law, federal court injunctive jurisdiction (the Norris-LaGuardia Act), and the specific provisions of the Railway Labor Act.  As the various airlines have gone through this round of bankruptcies, they have avoided this issue by settling with their respective unions by extracting voluntary concessions -- so it has never been litigated.  Not so with the flight attendants at Northwest.  They are pushing this issue to an explosive head (unperturbed by Northwest's effective ignoring of the earlier mechanics' strike).

The legal issue at dispute pertains to the ability of the attendants to strike.  As bankruptcy types know, federal bankruptcy law allows the judge to order the "rejection" of a collective bargaining agreement with a labor union upon request by the debtor, provided the debtor clears a hurdle showing need (a hurdle that is much more onerous than the general one required to reject a regular business contract).  NWA did indeed request to reject the flight attendant contract, made its showing, and was thus recently granted permission by the court.  With no CBA in place, NWA was unfettered by contract and could implement its own labor rules.  And it did.

The thorny battle arises over what happens next: the union takes the position it can now initiate a strike, making the fairness argument that if management can impose unilateral work rules, workers should be able to respond with the "ultimate sanction" in labor disputes.  Management contends that this is not so, for reasons that are difficult to get down in bloggable format.  (If you really want to know, the argument depends in part upon the fact that to order rejection of a CBA, the bankruptcy judge must find that the union did not have good cause to reject the last offer in negotiations -- which he necessarily did because he granted the motion -- as well as the general duty to bargain in good faith in negotiating an initial CBA.)

Management and the union went to court to thrash it out.  They argued passionately.  And a decision came down.  The Bankruptcy Court judge said the union could strike (more precisely, there was no jurisdiction to enjoin the flight attendants from striking).

Victory for those who control the means of production?  Not quite -- the ruling was immediately appealed.  In bankruptcy, an appeal goes to the federal district court in the relevant district (here, the Southern District of New York, i.e., Manhattan).  The District Court judge responded to the appeal by entering a temporary, limited injunction blocking the union from striking for the time being -- until he has a chance to rule on the merits of the appeal.  Clinging desperately to the hope of a consensual resolution [that is my read], he asked the parties to tell him what the prospects for future discussions looked like.  NWA said they were still willing to talk; the flight attendants said they couldn't see the point in more discussion.

The District Court judge's ruling in the appeal is expected shortly -- although my prediction is the loser will probably turn around and appeal up the legal ladder to the presiding appellate court: the U.S. Court of Appeals for the Second Circuit (which sits in Manhattan and hears appeals from trial courts in New York, Vermont, and Connecticut).

In the meantime, the flight attendants talk about a semi-strike, "CHAOS," which will entail random sickouts and slowdowns, but not an outright walkout.  For its part, NWA has recalled all furloughed flight attendants, which in better labor-relations times might have been good news; here it may be nothing more than a preemptive strategy to fend off possible strike-induced shortages.  I am waiting to see what happens, especially since it is not beyond comprehension that one of the bankrupt airlines will not survive chatper 11.  Will NWA's labor dysfunction, I wonder, prove the key to its undoing?  We will see.

Links: Flight Attendants Webpage.
          NWA Chapter 11 Webpage.
          Detroit Free Press.    (Journalist Jewel Gopwani has excellent, unbiased coverage.)

Dana Redux: Bank Power!

When Sen. Edward Kennedy (D-MA) got 503(c) into the new bankruptcy bill, I am sure he thought he was protecting rank-and-file employees from the perceived ravages of excessive corporate executive compensation.  And maybe he was.  But as someone who doesn't think KERPs are inherently evil, I was struck by Floyd Norris' insightful reporting in today's New York Times -- which I just saw Co-Blogger Lawless has posted a link to -- regarding the denial of the Dana executive compensation package under 503(c).  I will not repeat Professor Lawless's thoughtful comments, but I will add another, which may buttress his, that troubled me with the ruling.  I don't mind purposive statutory interpretation, but one must acknowledge that it can sometimes open a can of worms.  And one of the worms that has crawled out in this case is the well placed criticism that Dana's exec comp package doesn't look all that different from Calpine's, which recently got the judicial OK.  At pains to distinguish Calpine, Judge Lifland noted that the creditors there logrolled with the plan, whereas with Dana, they did not.  (For that matter, neither did Dana's shareholders, employees, nor even the US Trustee.)  But was that the basis of distinction that Congress truly wanted, if we are searching for legislative purpose -- whether the creditors said it quacked too much like a KERP?  Was according creditors another veto right in the debtor's magement affairs what Sen. Kennedy had in mind when pushing 503(c)?  I am doubtful.

Lifland Rules

Judge Lifland ruled against Dana Corporation yesterday. Floyd Norris continues his good reporting on this story in today's N.Y. Times. According to Mr. Norris, Judge Lifland said, "This compensation scheme walks like, talks like, and is a KERP." A "KERP" is a key employee retention plan, and if you are unfamiliar with this case, see my previous postings here and here.

If I ran the world, Judge Lifland would be right, but I am not sure the statute Congress passed supports his reasoning. The statute does not reach things that walk like, talk like, and look like KERPs. Rather, it reaches payments "for the purpose of inducing [a corporate insider] to remain with the debtor's business." Here, the payments were made for the purpose of inducing the corporate insider to reach certain performance benchmarks. They may have been easily met benchmarks, but they were still performance benchmarks. Yeah, one might say the benchmarks were so low that they were essentially done for the purpose of inducing the insider to remain with the company. That argument proves too much, however, as every bit of salary and benefit paid to an employee is done to induce the person to remain with the company. There is no indication that Congress intended courts to apply the new rules to all forms of compensation to corporate insiders.

In the end, this case comes down to the question of whether we apply the statute the way it was written or the way we think Congress wanted to write. (This is a pervasive question in statutory interpretation as I previously discussed.) I wish Congress had written the statute the way Judge Lifland interprets it, but I am not sure it did.

All of my comments on this case are based on Mr. Norris's reporting in the N.Y. Times. It will be interesting to see if a written opinion emerges to explain Judge Lifland's reasoning more fully. Until we can assess how broad this ruling might be, I wonder what it will mean for Manhattan as a venue choice for publicly traded companies filing bankruptcy.

Will Dana Be the New K-Mart?

Floyd Norris continues his reporting (N.Y. Times) on the battle over executive pay for bankrupt Dana Corporation, an auto parts maker. Restrictions passed in 2005 limit the ability to pay executives of bankrupt companies a bonus merely to stay with the company. I previously posted on another of Mr. Norris's columns noting that corporate bankruptcy attorneys expected this provision to have little substantive effect. It is easy to structure a bonus plan so the payment is for some easily attainable goal, such as having the company emerge from bankruptcy, rather for staying with the company.

Today, however, Mr. Norris notes that the U.S. Trustee has filed a brief opposing Dana's bonus plan. That ups the ante. The U.S. Trustee has joined Dana's creditors in arguing that the company's compensation plan should be recharacterized as a retention plan. Dana would pay its executives a  large bonus if the company emerges from bankruptcy and another large bonus if the company's securities hit certain targets six months after bankruptcy. The U.S. Trustee and the creditors argue that the targets are so low and likely to be met that the bonuses are not true incentives and thus are better characterized as retention bonuses.

What will happen if the bankruptcy court rules against Dana? Will such a ruling cause bankrupt companies to avoid filing in Manhattan, much as a ruling in the K-Mart case caused bankrupt companies to avoid filing in Chicago? Is Dana's compensation plan out of line with what other companies in chapter 11 are doing?

Chapter 11 as Federal Tax Collection?

Debtor-creditor types tend to focus on private creditors in the business of extending credit or loaning money. Of course, debtor-creditor relationships vary considerably and accordingly have rather different dynamics. The findings in several empirical studies of chapter 11 should ke