March 14, 2009
Harvey Miller Testimony Before the House re Chapter 11
Harvey Miller's testimony before the House on Wednesday is great. You can access it here. The House subcommittee was "concerned" that chapter 11 perhaps is not working anymore since Circuit City failed so quickly and went out of business leaving 34,000 employees stranded. The Weil Gotschal mega bankruptcy attorney argues that chapter 11 in 1978, designed to rehabilitate distressed debtors, has been whittled away by special interest groups to the point that today the prime objective of chapter 11 is the maximization of creditor recovery. He says:
"Thus, chapter 11, more often than not, is used as a means to validate and sterilize the sale of a debtor’s assets. This is accomplished by the use of section 363(b) of the Bankruptcy Code to effect a
expeditious sale of all or substantially all of the debtor’s assets, early in the case, to expedite
distributions, essentially, to secured creditors. The process provides early gratification of the
secured creditors and gives buyers the benefit of asset sales that are blessed by a court and, often,
are free and clear of liens, encumbrances and claims pursuant to section 363(f) of the Bankruptcy
"Virtually every group with an effective lobbyist came forward and was able to obtain special interest legislation that included protections for personal property equipment lessors, commercial property owners, shopping center owners and lessors, financial institutions, government agencies, unions, and
retirees, to name just a few. The biggest special interest victory is the ill-conceived BAPCPA."
He cites specifically the time restrictions for assuming leases and for filing plans. Because the chapter 11 must assume or reject leases and file a plan early or liquidate, it will more often concede early that it cannot reorganize and therefore must liquidate.
In fairness, he also points out that retailers did not, until a few years ago, generally give lenders a security interest in the inventory. Today they do which makes inventory vendors more nervous for obvious reasons and creates a cash collateral problem which simply cannot be resolved at the beginning of the case without simply acceding to the demands of the cash collateral creditor.
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