Longtime bankruptcy lawyer Joel Zweibel sits by a dining room table in his apartment on New York's Upper East Side. Paintings, ceramics and photographs adorn walls and cabinet tops. A music stand displays a book of Irish whistle tunes.
Bookstore chain Borders Group Inc. had announced that it would be liquidating, after only five months in Chapter 11. That development, Zweibel says, is sad, but understandable. "I've been a book reader since I was a kid. Now I have a Kindle. So I don't go to Barnes & Noble or Borders. I order my books on Amazon."
Zweibel, 76, says the bookstore chain's demise is indicative of what's going on in bankruptcy these days. "The trend of faster cases will continue, and there will be more liquidations, like Borders, where the company or business gets outpaced by the business trends of the time."
Zweibel graduated from Yale Law School in 1958, at a time when the very notion of bankruptcy law was unsavory: "A Yale Law School graduate going into bankruptcy practice? My God!" he quips. He eventually founded and headed the bankruptcy practice at Kaye Scholer LLP, then Kramer Levin Naftalis & Frankel LLP and finally O'Melveny & Myers LLP. He retired from practice in 2001, after which he dabbled in arbitration.
Now, he's looking at the state of bankruptcy from an objective distance. Through his undergraduate alma mater, Baruch College, he's mentoring and providing scholarships to a group of young students. He has helped 18 of them and considers them his kids. That's in addition to his own two daughters, one of whom is an artist, the other a Yale Law School grad and former public-interest lawyer who's now a teacher at Collegiate School in Manhattan.
Zweibel is part of the generation of lawyers whose practices blossomed as bankruptcy moved from slightly disreputable to mainstream. His career tracked the trajectory: from the domain of small, relatively obscure firms to an increasingly vital part of commercial law and, subsequently, major practices in major law firms.
It was a small fraternity in the days when the first big wave of modern-day bankruptcies burst on the scene. Zweibel describes meetings in which the same lawyers showed up, case after case.
"Each one of us knew the others' points of view, attitude," he says. There was Leonard Rosen, name partner of Wachtell, Lipton, Rosen & Katz; John Jerome, who headed restructuring at Milbank, Tweed, Hadley & McCloy LLP; and Harvey Miller, who still practices at Weil, Gotshal & Manges LLP. Miller, a debtor counsel, and Zweibel, who represented creditors, were legal adversaries for years. In one famous incident, Zweibel tried to play peacemaker between Miller and another lawyer in the Eastern Airlines bankruptcy case.
"We had a conference one evening, in Judge [Burton] Lifland's chambers. Bob Rosenberg was there, representing a prospective buyer, who ultimately didn't get involved. Bob and Harvey got into a tiff, and Harvey raised his hand as if to punch him. I blocked Harvey's arm."
Miller is well over six feet tall. Zweibel is, well, much shorter.
The Deal magazine's Matt Miller recently spoke to Zweibel about his career in bankruptcy law and his take on how it is practiced today. The following are excerpts of that conversation.
The Deal magazine: When you were attending law school, did bankruptcy ever enter your mind?
Joel Zweibel: Not in the slightest. I had a course in what was then called "debtors estates" at Yale Law School, where everything is constitutional law. Somehow it became constitutional law and not bankruptcy law. So I had absolutely no idea of bankruptcy practice.
I had planned to graduate, take the bar exam, be married and then go into the armed service. The first three of those occurred, but I received a draft deferment at the last minute. So there I was without a job.
My first wife's father [Asa Herzog] was a bankruptcy lawyer back in the days when it was frowned upon. He became a referee [judge] in bankruptcy the year before I married his daughter. He introduced me to a small law firm, 20 lawyers, that had a bankruptcy practice and was well known in those days. The large firms did not have bankruptcy practices. It was a life-changing event.
Bankruptcy lawyers are the only renaissance lawyers. While you're dealing with the Bankruptcy Code, which is a particular federal statute that evolves over time, with case law and amendments, you also have a company that's in reorganization.
That business has real estate problems, trust problems. It has labor law problems, intellectual property problems. You don't get to be a full-fledged expert in all those areas, but you get to know a reasonable amount about them.
In the field of lawyering, there are two general areas, litigators and general corporate lawyers. For bankruptcy you do both. It is a wonderful, wonderful project. It's great for the mind. It's great for the personality. It's great for the spirit.
At Krause, Hirsch, Gross & Heilpern, I worked for the senior partner, Sydney Krause. Sydney gave me some wonderful opportunities. For example, we had a case, Slenderella Systems. It was a chain of fitness clubs throughout the city. Sydney always did debtor work.
Slenderella had done a lot of advertising of its telephone number. As soon as it filed, the telephone company said, "You owe us thousands of dollars. We are going to cancel your phone number." Sydney said, "We're going to argue that the telephone number is property of the estate. You can't take it away once a petition has been filed just as inventory." We won in bankruptcy court. We lost in district court. Sydney said, "We should take this to the U.S. Court of Appeals for the 2nd Circuit. How would you like to argue this?" I was out of law school a year and a half.
Did you win?
No, I lost. I'll never forget the argument. I started to go into my opening statement, and [one of the three judges said], "Counsel, let me interrupt. What are we doing here? The United States Court of Appeals for the 2nd Circuit, just below the U.S. Supreme Court, arguing about a telephone number?" I said, "Your honor, with due deference, this is a reorganization under the U.S. Bankruptcy Code, and the whole issue has to do with the company's reorganization under the federal courts."
That satisfied him, but I think he promptly went to sleep.
You wrote a text on bankruptcy at a young age, right?
With my late father-in-law, I co-authored "Herzog's Bankruptcy Forms and Practice." That was early on in my career. I did several editions after he got older.
You joined Kaye Scholer and became partner in 1969, but were doing mostly banking work. What happened?
Bankruptcy started to become more active, and they knew I had a bankruptcy background. So they said, "We'd like you, fellow partner, to establish a bankruptcy practice here." That's when I got into it on a full-time basis.
Any case from that era come to mind?
United Merchants and Manufacturers, a manufacturer of textiles. We were retained by Equitable Life and John Hancock, which were the two largest creditors in the case. Would have been in the mid-'70s. I took it up to the Court of Appeals, and this time I won.
It was a fascinating issue. I prepared the proof of claims for my client, which every creditor has to file. I decided to include in it two unusual elements, a prepaid penalty banks and insurance companies had, the theory being that they were going to lose interest if the borrower prepays. I also decided to include legal fees. The U.S. Court of Appeals on prepayment issue, to everybody's surprise, said, although they didn't use these words, "Zweibel is right."
You went to O'Melveny & Myers in 1990 after being personally approached by O'Melveny chairman and former Secretary of State Warren Christopher. You said you accepted the offer because his entreaty was so compelling. But the timing was difficult, right?
I was smack in the middle of the Eastern Airlines case, which was filed because of a labor-management dispute. The head of Eastern, Frank Lorenzo, was a union buster. Three unions went on strike and closed Eastern down. It was a very, very difficult case.
Eastern was losing a lot of money. The creditors' committee was very, very upset with the way it was run, and the committee asked me what they could do about it and how they could get rid of Lorenzo. I said that it's very rare in a large reorganization that trustees are appointed [because] you have to prove fraud, misconduct or gross mismanagement.
They asked what I thought, and I said we had a chance to prove gross mismanagement. We made the motion in April. A month later -- unlike every other area of litigation, in bankruptcy it moves fast -- we were at trial at the bankruptcy court. The judge appointed a trustee. It turned out to be a disaster of a liquidation.
You like to distinguish between types of bankruptcies. Could you elaborate, using your own experience?
One I would call the cases that were purely economic in origin. LTV Steel was a good example of the macroeconomic issue. It was the second-largest steel manufacturer in the United States, but steel manufacturing to a large extent had gone to Japan.
What I'd call a microeconomic issue was the [R.H.] Macy [& Co.] case. A big retailer, it was expanding so fast it had subsidiaries and stores everywhere. Before you knew it, expenses started to outpace revenues. The then-chairman of the board didn't want to hear about bankruptcy until the end of one workweek [when] they were down to some $250,000 in cash nationwide. He finally realized he had to file. I represented the banks.
Another kind of bankruptcy I would call sociopolitical issues. A very good example of that was Public Service Co. of New Hampshire, the largest utility in the Northeast. It was the biggest investor in building the Seabrook Nuclear Plant. Because that was a very exciting and prospectively good thing, the utility board in New Hampshire permitted the utility to include the cost of work in progress, the building of the nuclear plant, in their rate base, so that in effect they could be charging their current customers for the cost of building a future facility.
Then along came Chernobyl, and the entire attitude toward nuclear power in this country changed to severely negative, and -- lo and behold -- the New Hampshire legislature changed the law. PSNH got caught up and had to file Chapter 11 because they could no longer recover the cost of building the plant.
Then there are the cases that are the result of a major lawsuit. Texaco is the biggest example. In a Texas court, Pennzoil got a jury verdict against Texaco of over $8 billion with interest running at over $100,000 a day. Harvey [Miller] represented Texaco. Texaco brought in special counsel, a good friend of mine, David Boies, who was at Cravath at that time. Texaco was intent on getting to the Supreme Court because they wanted a clear finding that these punitive damages were unlawful.
I'm not a constitutional scholar, but I did enough research to find out that the Supreme Court takes only a fraction of petitions for certiorari, as they're called, and most of those that they take are criminal cases. It was unlikely that the Supreme Court was going to take this case. In addition, this was an issue of state law, tortious interference of contracts. It was not an issue of federal law. I tried to convince Harvey and David, and they would not be convinced, and I don't blame them.
I had one recourse, and that was the very famous issue of bankruptcy and reorganization called the exclusivity period, the exclusive period the debtor has to file a plan of reorganization. In those days it was 60 days and then could be extended by the court for cause. Texaco got one exclusivity extension. I spoke to the committee, and I expressed my view that the committee should oppose the next extension, because in any extension of exclusivity, the creditors have no bargaining power.
I said to the committee, "I just can't go into the court and just say no. I have to give the court good reason, a basis for how we can file a plan. I'd like you to authorize me to do it, negotiate with Pennzoil and come to a settlement on their $8 billion claim."
[Bankruptcy law scholar and lawyer] Ken Klee was one of the lawyers representing Pennzoil. Ken and I worked on it, and Pennzoil eventually agreed to a $3.3 billion settlement that enabled me to go into court and the exclusivity hearing and argue to terminate because we had a plan that could solve the case.
The chairman of the [creditors'] committee was MetLife. Its representative on the committee was Charles Luce, who had headed Con Edison and was also a member of the MetLife board. Chuck had a wonderful habit of riding his bike around the city to visit Con Ed workstations. We're getting him ready for the biggest hearing at what was then the biggest reorganization of all time. Chuck Luce was going to be my No. 1 witness.
I got a call. He was in the hospital. He was sideswiped by a bus. He had a broken pelvis. As it turned out, he got out of the hospital, and was on a lot of medication, but did a good job. The judge effectively terminated exclusivity, took our plan, and the creditors got 100 cents on the dollar.
Would you say you're philosophically opposed to liquidation?
Liquidation is always the worst alternative. Eastern Airlines was a good example. Creditors did absolutely terribly.
What about the more common use of Section 363 sales?
Generally speaking, the cases are shorter. That seems to be due to three factors:
One is the availability of financing. Many companies have not just first-lien groups but second-lien groups. That leads to a diminution of any equity interest and the greater likelihood of trying to work out a prepack or a prebankruptcy agreement with the secured creditors and foreshorten the case, as opposed to my day, when the unsecured creditors were arguing with the equity holders over the equity after the first-lien holders.
The second reason: In my day, in every case as a creditor's lawyer, I would find myself fighting before the court over what was called KERP, key employee retention plan. That was where the senior executives and maybe someone coming in from the outside wanted these big bonuses, these big severance payments in order to remain with the company. We'd fight over it often, and we'd lose. In 2005, Congress amended Section 503 of the Bankruptcy Code to put a number of limitations on these key employee retention plans. As a result, the key employees no longer have motivation to remain in Chapter 11 while they're getting these huge fees.
The third reason: In my day, there was a fairly active market in distressed debt, but it has become many multiples of what it was. It's huge and it's very sophisticated, and distressed debt moves very, very quickly. As a result, those who want to get out can get out very quickly, while those who want to stay in for the play, can stay in. That has led to an expedition of these cases.
In my day, there weren't that many who were in for the big play. Macy had gotten the biggest recovery of any reorganization for their clients because Federated Department Stores wanted to take over. It wasn't easy because Macy didn't want to be taken over. It so happened that there was a second distressed debt buyer that had a large claim. I convinced that buyer to enter into an agreement that it would not vote for a plan other than one that paid 100 cents to my clients, the secured creditors. There was a lot of controversy in those days about whether such an agreement was proper. The court upheld it. Our clients received 100 cents, plus prepetition interest plus postpetition interest.
We had a final bank group meeting, and the claims had traded very, very actively in that case. There were about 30 members of the bank group, [but] we had 50, 60 people at that meeting because there were a lot of traders.
I remember somebody standing up after I said something and saying, "I'm here and I'm willing to buy claims for 95 cents on the dollar." And I said, "Too bad, you've got to pay 122 cents on the dollar to get these guys."