History shows corporations can survive bankruptcy

ByBrian Tumulty, Gannett Washington Bureau
May 29, 2009, 7:36 PM

WASHINGTON -- Can General Motors file for bankruptcy and re-emerge from Chapter 11 as a profitable and viable automaker?

Other major American companies such as Texaco, Dow Corning, Delta Airlines and United Airlines have filed for Chapter 11 reorganization and successfully exited.

GM enters the process, according to bankruptcy experts, with the most important element needed for an eventual exit — an outside source of financing going forward.

In GM's case, that source is named Uncle Sam.

"What is distinctive about this situation is that the government is behind GM," said Randal Picker, a professor of commercial law at the University of Chicago Law School. "The government is ready to step up and do that."

GM was hesitant to file for bankruptcy fearing no one would buy its cars, but that appears to have been overcome with the government agreeing to back its warranties, according to Picker.

"I think we have gotten over the mental hurdle," he said. "They have got a have a business plan for selling cars profitably."

Bankruptcy court gives a company the opportunity to reduce costs by disposing of leases, contracts, employee benefits and, in some cases, court judgments or class action lawsuits.

GM plans to cancel about 1,100 dealership agreements, sell its European operations, close more U.S. factories, and implement a new labor agreement with the United Auto Workers as part of the business plan for the new streamlined GM.

GM Vice Chairman Bob Lutz recently characterized the plan as a "radical restructuring."

Airlines such as United and Delta, which were facing competition from low-cost carriers such as Southwest, used bankruptcy reorganization to lower both their operating costs and debt. Pilots and other employees agreed to wage cuts.

GM and Chrysler are in a similar position, trying to get their costs in line with competitors such as Toyota, noted David Skeel, a professor of corporate law at the University of Pennsylvania Law School.

According to the Administrative Office of the U.S. Courts, there were 10,160 Chapter 11 reorganization filings in 2008.

The federal courts do not keep statistics on how many firms emerge from Chapter 11, but Skeel said the general rule of thumb is "the bigger the company, the more likely they are to re-emerge."

In addition, companies with bricks-and-mortar assets have a better chance than a Silicon Valley-type firm whose key asset is its employees, Skeel said. "As folks like to say, their most important assets walk out the door at the end of every day. And most of them don't stick around for a long bankruptcy. With GM, the assets aren't going anywhere. Those plants aren't going to run away."

Companies often fail to re-emerge from bankruptcy as operating entities because of time-consuming legal disputes among the creditors, suppliers, other vendors and parties with legal claims.

"You ever see two kids fight over an ice cream cone when they could have shared it, and instead it fell onto the ground?" asked bankruptcy attorney John Penn. That's how Penn characterizes many of the cases that end up with a liquidation of the assets.

Other firms quickly fail in bankruptcy because there's no viable long-term plan for operating profitably

One the most notable recent failures was Circuit City, which was the nation's No. 2 electronics discount retailer when it filed for bankruptcy reorganization in November with $1.1 billion in pre-arranged financing in place. The retailer instead ended up liquidating its inventory and closing all its stores.

"Usually, shorter is better just because of the cost of the process in terms of the drag on the business," said Penn, a partner at the Fort Worth, Texas, law firm of Haynes and Boone LLP and a past president of the American Bankruptcy Institute.

In both the GM and Chrysler bankruptcies, the so-called bad assets could remain under bankruptcy court jurisdiction for years until they are finally disposed of.

There's much about the GM situation that's different from the companies that have successfully re-emerged from Chapter 11, but the other cases at least highlight that Fortune 500 firms can take the plunge and survive.

"Bankruptcy does not have the stigma attached to it that is used to have," said Sheryl Toby, a bankruptcy attorney at Dykema Gossett PLLC in Bloomfield Hills, Mich.

Some of the most successful reorganizations have been by firms hamstrung by court judgments or class action lawsuits.

In the late 1980s, Texaco filed what at the time was the nation's largest Chapter 11 protection request to deal with a court judgment of more than $12 billion awarded to Pennzoil, a rival that successfully claimed Texaco had interfered in Pennzoil's agreement to acquire Getty Oil. Texaco and Pennzoil eventually agreed on a $3 billion payment made after Texaco exited bankruptcy.

Likewise, Dow Corning's bankruptcy was precipitated by a legal liability. The 1995 filing was made after hundreds of thousands of women lodged billions of dollars in claims against Dow Corning regarding faulty silicone breast implants.

Those cases, however, involved companies with a profitable core business, noted Picker of the University of Chicago Law School.

GM's core business needs more than a few tweaks to become profitable, according to Penn. "You also don't want to make such radical cuts that you wipe out the business because you can cut too deeply," he said. "It's definitely an art and not a science."

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