Let’s Not Just Create Jobs, Let’s Save Them, Too

In his State of the Union speech on Tuesday, President Obama talked a lot about job creation. I am all for growing the economy and creating more U.S. jobs, but I also am for saving jobs and keeping people employed at U.S. companies, even if those companies fall upon hard financial times. Strikingly, approximately 18,500 people lost their jobs when Hostess closed its doors; 34,000 people lost their jobs when Circuit City suffered the same fate; and over 9,900 people were let go as a result of four casinos in Atlantic City closing in the past twelve months.

It is undeniable that chapter 11 changes people’s lives. It can save an employee’s job, continue a customer relationship for a vendor, and preserve a tenant for a landlord. It also can, however, devastate all of these relationships in what feels like a nanosecond—relationships that many people rely on to support their families or their own business operations. As I suggested in an earlier post, I believe that the human face of chapter 11 often gets lost in all of the noise concerning the rate of return to creditors, disputes among institutional creditors, and whether a company should be sold quickly, or at all, through the chapter 11 process.

So this leads me to ask the question: Is the bankruptcy system working as effectively as it could? Admittedly the bankruptcy system cannot (and should not) save every company, and we cannot ignore the rights of senior creditors who most likely have a claim on all of the company’s assets by the time the company files for bankruptcy. But that doesn’t mean we should ignore failures in the system that we could improve if we tried. For example, a system that encouraged earlier filings by companies so that the parties had more time and resources to assess the company’s restructuring alternatives could help. (For some of my additional thoughts on this timing issue, see here and here.) Parties might then be able to better assess viability—restructuring the company through a plan or a sale if viable, and providing more notice for asset and human transitions if not. A company that files with the entirety of its enterprise value leveraged and milestones in its postpetition financing facility to close a sale or confirm a plan by a specific date simply does not have the ability to perform such an evaluation.

How can we encourage earlier filings? One important step is convincing company management that they will not lose control of the process if they file (except of course for bad actors who should be replaced upon the filing, if not before). Yes, the “debtor in possession” concept under the Code allows management to continue to operate the business and run the reorganization, but many companies fail to see viable exit strategies under the Code. Rather, the current narrative suggests that chapter 11s result in quick sales or liquidations, with the resulting loss of jobs and future value. Particularly in the small and middle-market space—representing approximately 90% of all chapter 11 debtors—companies are reportedly working to avoid chapter 11 filings at all costs.

The ABI Commission considered the impact of chapter 11 on all constituencies—human and institutional. The Commission’s recommendations strive to fix some of the failures of chapter 11 without creating new ones. For example, the recommendations propose a modest moratorium on certain case-determinative events (e.g., certain financing provisions and going concern sales); they seek to enhance negotiations over labor contracts and to increase priority wages that may be paid to employees upon a filing; and they attempt to resolve splits in the case law that may be creating uncertainty and discouraging filings. Some may argue that these changes do not go far enough; others may argue that they go too far. At least they start the conversation.

*Note: The views expressed in this post are those of the author and are intended to spark a meaningful dialogue about chapter 11 reform. They are not attributable to the American Bankruptcy Institute or the ABI Commission to Study the Reform of Chapter 11.

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