Chapter 11: Often Misunderstood

  Holman Jenkins editorial in the May 25th Wall Street Journal, in which he argues that United Airlines should be liquidated, reflects a common misunderstanding of Chapter 11.  A company reorganizes in Chapter 11 under one condition, when its operating revenues exceed its operating costs (that is, it shows an operating profit), but its accumulated debts exceed its operating profit.  The company is worth saving because it operates at a profit once the debts are forgiven.   The creditors forgive the debts and take ownership of an otherwise profitable firm.  If the operating revenues do not exceed its operating costs, the company should be liquidated in Chapter 7.  United shows an operating profit and needs its debts restructured.  It is a classic Chapter 11 case.  The problem in Chapter 11's is in the execution.  Poor judges either misdiagnosis whether there is an operating profit or let equity holders and classes of creditors get to much in the restructuring.  The theory is sound; at issue is whether consistant application is possible.