The American Bankruptcy Institute Commission to Study the Reform of Chapter 11 was organized last year to analyze the chapter and recommend changes to the current law, after there was consensus that Chapter 11 needed a reboot during the 2009 event "Chapter 11 at the Crossroads: Does Reorganization Need Reform?" During the event, the group of founding fathers of the 1978 Bankruptcy Code revealed that when it was passed, it was expected to have a shelf life of roughly 40 years.
Last year, the commission held several public meetings to discuss opinions on Chapter 11 and collect data in Boston, New York, Phoenix and Tucson, Ariz., and Washington. This year, public meetings will continue from February to June in Las Vegas, New York and Washington.
During the first meeting, held on April 19 in Washington, ABI president Geoff Berman told the attendants that there are several reasons why reform of Chapter 11 is needed.
"The Bankruptcy Code was developed in an era where the biggest employers were manufacturers. Today, America's biggest businesses are retailers, technology-driven enterprises and service companies," Berman said. "Further, the typical financing structure of business has changed, with more sophisticated forms of debt and bondholder components, including a robust market for all forms of distressed debt, and with the role of a more typical unsecured trade creditor greatly reduced."
Berman continued, "The unparalleled expansion of distressed-debt markets and claims trading has often made modern Chapter 11 a financial and takeover play, minimizing the debtor's ability to control its own Chapter 11 destiny."
The commission was assembled with some of the top people in the bankruptcy world nationwide, co-chair Albert Togut at Togut, Segal & Segal LLP says.
Commission members include, among others, D. Jan Baker of Latham & Watkins LLP; retired New York bankruptcy judge Arthur J. Gonzalez; Kenneth N. Klee of Klee, Tuchin, Bogdanoff & Stern LLP; Harvey R. Miller of Weil, Gotshal & Manges LLP; James H.M. Sprayregen of Kirkland & Ellis LLP; and Bettina M. Whyte of Alvarez & Marsal LLC.
In addition, more than 100 people were organized into 13 advisory groups to study certain issues for the commission, says Togut, who is debtor counsel for Dewey & LeBoeuf LLP and represents the official committee of retired employees of Nortel Networks Inc., among other assignments.
The advisory groups are studying issues such as financing Chapter 11, labor and benefits, governance and supervision of Chapter 11 cases and companies, multiple enterprise cases and the sale of substantially all of a debtor's assets.
In 2013, the commission will continue its study of Chapter 11 with a "top to bottom look" at the code, Togut says.
No specific changes have been recommended, and the commission won't be close to specifics until it gets reports from all of its advisory committees, Togut says.
Berman noted during the April meeting that studies have shown the absence of an effective reorganization statue discourages entrepreneurship. In addition, he said, reorganization today is "less efficient, more litigious, more contentious and more costly."
According to Richard B. Levin at Cravath, Swaine & Moore LLP, who is on the commission, over time various interest groups, such as utilities, unions, landlords, employees, counterparties on financial derivative products, secured lenders, the Federal Deposit Insurance Corp. and others, have come to Congress to say their situation is different and they need special treatment in bankruptcy.
But if everyone is entitled to special treatment, the only company that can use bankruptcy is one that has no financial problems and can pay its debts in full, Levin says, adding, "if everyone is first in line, then no one is first in line."
It's a difficult balancing act, says the New York attorney, who is the mediator for Nortel and represented independent directors of General Motors Corp. during its case.
The public meeting process has been going very well and has brought attention to the commission, co-chair Robert Keach of Bernstein, Shur, Sawyer & Nelson PA says.
According to Keach, a number of people and entities are interested in the process and contributing to it. Both the lending community and trading community have been actively involved.
The commission, of course, is not the first group to suggest changes to the Bankruptcy Code, but it is the first group in a long time to be looking at a complete overhaul, Togut says, adding that most groups recommended tweaking this provision or that one.
The National Bankruptcy Review Commission suggested changes in 1997, and the Select Advisory Committee on Business Reorganization issued reports in 2001 and 2004 proposing changes to the time and cost of Chapter 11. Some of the changes were adopted and others were not, Togut says.
The last significant changes to the Bankruptcy Code took effect in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act. The 2009 conference panelists generally agreed that some parts of BAPCPA, such as the shortened time to assume or reject leases, went too far and may have hurt restructurings.
The commission "is trying to come up with an integrated statute rather than Band-Aids," Togut says.
The commission, which is just looking at corporate Chapter 11 and the parts of the code that affect business bankruptcies, expects to complete its report in the spring of 2014, Keach says, adding that by the end of 2013 the commission should have a good idea of what the report will look like.
The report will have two components: ideas for change where there is a consensus and proposals that lack a consensus. Since the ABI doesn't lobby Congress for legislation, an organization or a combination of organizations will likely work to convert the report into legislation, says Keach, who has been debtor counsel for Kingsbury Corp., Munce's Superior Petroleum Products Inc. and Irving Tanning Co. and represents deferred compensation claimants in the Nortel case.
Once someone introduces a bill into Congress, it would take the normal legislative course, which is unpredictable, the Portland, Maine, attorney says.
According to Levin, if the changes get buy-in from the bankruptcy community as a whole and there is a general consensus that the changes are necessary, then Congress might look at it. "The easiest thing to do in Washington is to stop legislation from moving, but if most of the major groups are on board, there is a chance that it might get attention," he says. (Smaller bills looking to tweak Chapter 11 repeatedly have stalled in recent years.)
"If we go by history, we will have a new bankruptcy bill in 2018," Keach says, adding that generally every 40 years in a year ending in eight, there has been bankruptcy reform.
Indeed, in 1978 it was felt that the Bankruptcy Code needed to be revised because the entire underlying credit economy in the business world had changed dramatically since the 1938 Chandler Act, which set up the previous version of the code.
"The idea is to develop a statute for the next 40 years that will get us through as well as this one did," Keach says.
French mergers and acquisitions lawyer Laurent Faugerolas joined Dechert LLP. For other updates launch today's Movers & shakers slideshow.
After announcing in July that it was exploring strategic alternatives, TeleCommunication Systems Inc. has agreed to sell to Comtech Telecommunications Corp. in a transaction with an enterprise value of $430.8 million. More video