LSTA panel: Bankruptcy code, restructuring has evolved, Chapter 11 now more flexible

By Andrea Heisinger

New York, Oct. 30 - The way companies are restructured has changed throughout the years as the way the Chapter 11 code is interpreted has become more flexible, a panel of lawyers said at the Loan Syndications and Trading Association meeting in New York City on Thursday.

The basic fundamentals have not changed much since Chapter 11 was written in the late 1970s, said the panel's moderator, Richard Levin of Cravath, Swaine & Moore LLP.

It still takes between one and four years, but the operating business is essentially gone at the end of the process and secured debt is paid off, said Harvey Miller of Weil, Gotshal & Manges LLP.

"They're basically establishing a sale - a disposition of assets," Miller said. "That's a change from the '80s. You're going to be turned into a liquidator. Easy credit has changed Chapter 11."

J. Ronald Trost of Vinson & Elkins LLP said that the bankruptcy process "has become an established way to change the capital structure in a positive way.

"The jury is out as to whether bankruptcy is an efficient process," he said.

The process has essentially become one of prepackaged bankruptcies, said J. Gregory Milmoe of Skadden, Arps, Slate, Meagher & Flom LLP. "There's been a paradigm shift," he said, "but they're still completed in the traditional one to four years."

He cited the Delphi and Interstate Bakeries cases as recent examples of taking that period of time.

Distressed debt trading has also changed the process, the panelists said.

"Hedge funds have caused a shortening of the bankruptcy process," Trost said.

Miller said that the code has been changed almost every legislative session due to special interest groups and lobbyists.

"The lobbyists are fantastic," he said. "The code passed in 1978 is not what's happening now."

The panel then talked about the opinion on the Chrysler case and whether it followed the intentions of the Chapter 11 legislation.

"I don't think it was a watershed case," Miller said. "Valuation is certainly not a science. We've done things with Chapter 11 that the code never contemplated."

He mentioned Chrysler and General Motors Co., saying "When did anyone think the U.S. would come in and finance [their] restructuring? Now we've broken the barrier. They government will be involved in large industries."

The panel then shifted its focus to other changes in how restructurings and bankruptcies are handled.

"The thing that hasn't changed is denial," Milmoe said. "Companies going into bankruptcy are still in denial. There has been less denial on the part of secured creditors recently, and with financial institutions. I am finding it an exciting time. When there's the issue of systemic risk, we will see greater government activism."

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