Bankruptcy Judge Paul W. Bonapfel of Atlanta wrote an elegant essay on the justification for hurting some creditors while allowing others to escape from bankruptcy unharmed.
The November 12 opinion by Judge Bonapfel arose from an all-too-familiar outcome in chapter 11: The debtor sold all its assets as a going concern, leaving unsecured creditors with nothing.
The debtor operated a chain of restaurants. The secured lender had a claim for $51 million, secured by all the assets. After the debtor and the creditors’ committee searched without success for a third-party buyer, Judge Bonapfel approved the sale of the assets to the lender in return for a $27 million credit bid, leaving the lender with an unsatisfied, unsecured claim of $24 million. The lender assumed some of the leases, paid post-petition claims, and provided cash to pay the expenses of administration, including fees owing to counsel for the debtor and the committee.
With nothing left to pay prepetition unsecured claims, the debtor filed a motion to dismiss. Several unsecured creditors objected, imploring Judge Bonapfel to convert the case to chapter 7.
Judge Bonapfel recited the hardships suffered by the objectors who were receiving nothing. He added, “There are a lot of other people and companies with valid debts that the Debtor has not paid, and it is likely that many of them are suffering similar financial hardship.”
Judge Bonapfel quoted one of the objectors, who said, “There has been too much corporate welfare in this country . . . . [H]igh pay execs still have their jobs . . . . They should not be released from their moral and legal responsibilities when they still have the means to pay the debts to small businesses . . . .”
“Sadly, the Court has no remedy for these creditors,” Judge Bonapfel said in response. The debtor, he said, no longer has any assets and is not operating. With no remaining assets, “nothing can be done to pay other creditors,” he said.
The “unfortunate result for the objectors,” Judge Bonapfel said, “arises under the bankruptcy laws enacted by Congress.” Confirming a plan would be impossible, and conversion to chapter 7 would be “futile,” he said. “Nothing can be accomplished in the bankruptcy case to produce any money to pay the objectors and other creditors.”
Judge Bonapfel explained that the “primary purpose of the bankruptcy laws is to preserve the going concern value of a distressed business in order to maximize payment to creditors. Preservation of going concern value also avoids loss of jobs that occurs when a company shuts down.” He pointed out that many employees still had their jobs and some of the landlords still had tenants.
“Unfortunately,” Judge Bonapfel said, “the bankruptcy system has no answer” for unsecured creditors “who will receive no payment on their clams and have suffered as a result.”
“The problem arises from the economic realities of the Debtor’s situation, not the way the bankruptcy laws work,” Judge Bonapfel said. The “disaster” for some creditors “resulted from financial circumstances, not the operation of the bankruptcy laws,” he said.
Judge Bonapfel saw no “corporate welfare” when the debtor’s owners lost their investments. High-paid executives still have their jobs, but the purchaser “did not have to hire them,” the judge said.
In “many bankruptcy cases,” Judge Bonapfel said, “there are no good alternatives, only less bad ones.” In the case at hand, he said “there were not even ‘less bad’ alternatives.”
Overruling the objections and allowing dismissal, Judge Bonapfel said, “The court is saddened that it can offer only an explanation for what happened and why.”
Observation
The results we see today in bankruptcy are not ordained by the U.S. Constitution. They flow from decisions made by Congress. Little is immutable in bankruptcy aside from the guarantee of due process and uniformity.
Today’s bankruptcy laws were developed decades ago when secured lenders did not invariably hold security interests in most or all assets. Since then, lenders have taken advantage of the law to enhance their outcomes, typically at the expense of employees and smaller creditors.
Our bankruptcy laws as they read today are not a given. To the extent there is a consensus for change, amendments are possible.
Bankruptcy Judge Paul W. Bonapfel of Atlanta wrote an elegant essay on the justification for hurting some creditors while allowing others to escape from bankruptcy unharmed.
The November 12 opinion by Judge Bonapfel arose from an all-too-familiar outcome in chapter 11: The debtor sold all its assets as a going concern, leaving unsecured creditors with nothing.
The debtor operated a chain of restaurants. The secured lender had a claim for $51 million, secured by all the assets. After the debtor and the creditors’ committee searched without success for a third-party buyer, Judge Bonapfel approved the sale of the assets to the lender in return for a $27 million credit bid, leaving the lender with an unsatisfied, unsecured claim of $24 million. The lender assumed some of the leases, paid post-petition claims, and provided cash to pay the expenses of administration, including fees owing to counsel for the debtor and the committee.
With nothing left to pay prepetition unsecured claims, the debtor filed a motion to dismiss. Several unsecured creditors objected, imploring Judge Bonapfel to convert the case to chapter 7.