If there was ever a reason for bankruptcy
reform the two recent headline-grabbing cases are prime examples as
why there should be an overhaul to our bankruptcy code.
If you have been vacationing on an
island in the Pacific with no media, I’m alluding to Enron, the
largest bankruptcy filing in U.S. history and K Mart the largest
retail bankruptcy filing to date. Both of these companies have filed
for protection under Chapter 11 reorganization and therein lies the
Millions of dollars will now be
dolled out by these companies not to creditors, employees,
stockholders or landlords but to firms and individuals acting as
either attorneys or “advisors” to pave the way through the
reorganization process that does not hold any guarantees that they
will be successful if and when they emerge from bankruptcy protection.
Unsecured creditors have
constantly questioned why there are never sufficient assets to pay
against their pre-petition claims. The filing by K Mart this week
seeking approval of payment to outsiders to assist them through
bankruptcy may answer this question. The following schedule of fees
was filed with the bankruptcy court for approval:
$495 per hour; Attorneys: $740 per hour; Bankruptcy
consultants: $350 per hour; Automation consultants: $225 per hour;
Clerical: $95 per hour; Real estate advisors: $150,000 per month plus
$75,000 per month if they dispose of any real estate; Investment
bankers: $335,000 per month.
The schedule did not include the
salaries of any “in house” professionals that K Mart presently has
on staff. Enron’s schedule has not been filed or was unavailable at
the time this article went to print, however, it is known that in
addition to outside professional fees there will be additional
requests for severance packages for its officers and directors.
In light of this there are
creditors who cannot wait to continue to do business with these
companies. One credit manager I spoke with this week informed me that
their company is eager to resume shipments because K Mart contributes
over a million dollars to their annual revenue. The pre-petition
balance owed them in excess of six hundred thousand that represents
purchases made before December will, no doubt, eventually be written
off. This credit professional was dumbfounded when informed their
company would have to generate an additional fifteen million in
revenues just to offset the write off.
Congress should be looking at
restructuring Chapter 11 along the lines of the Chapter 13 provisions
applied to individuals. In Chapter 13 the petitioner devises a plan
where all pre-petition creditors receive an orderly payout out
of their claims either in full or on a pro-rata basis. Under this plan
there is no need for a creditors committee, as all creditors usually
receive something. The present law that allows Chapter 11 petitioners
to pick and choose which creditors receives payment and which do not
is an injustice to those creditors who honored their commitments. If a
company is unable to repay pre-petition debt through reorganization
then they should be required to convert to a Chapter 7 liquidation.
What do you think? We’d like to
hear from you.
I wish you well.