Businesses right to reorganize is questioned

The House Judiciary Subcomittee on Commercial and Administrative Law held a hearing on Chapter 11 of the Bankruptcy Code, and whether the 2005 amendments have pertinence in the face of today’s impending business distress. Chairwoman Linda Sanchez (D-Calif.) opened the hearing with a comparison between the retail industry’s recent increase in ‘reorganizational’ bankruptcy claims and the debate over the $700 billion bailout for Wall Street that President Bush has proposed.

The question Sanchez wanted answered is whether Chapter 11 works the way Congress intended it to, or if the Bankruptcy Abuse Prevention and Consumer Privacy Act is making it harder for businesses to reorganize, thus reverting to the straight liquidation in Chapter 7 of the Bankruptcy Code. Witness Lawrence Gottlieb of Cooley Godward Kronish LLP said that Chapter 11 has become, “nothing more than a vehicle through which secured lenders, whether they be banks, hedge funds, or private equity, sell the assets of a company through a quick sale process that provides very little, if any, opportunity for retailers to restructure their debt and rehabilitate their business”.

Professor Barry Adler of the New York University School of Law said that “it is better to have failed firms be liquidated, because if they’re dead economically, they’re going to liquidate anyway. The assets can be redeployed to better uses, if the liquidation is quick, and creditors can receive a higher return than they would originally receive”. The question remains of whether a failing business will better serve the economy if bailed out at the expense of taxpayers, or left to the hands of Adam Smith.