Chapter 11 Isn’t Ready ‘For The Trash Heap’Corporate Law Center in Wall Street Journal Bankruptcy Beat Blog, April 01, 2009
By David McLaughlin
The chief judge of one of the most prominent bankruptcy courts in the country is wading into a debate that’s dividing big players in the restructuring world as the recession wipes out more and more companies that are struggling to survive.
These days, with bankruptcy reorganizations frequently disintegrating into liquidations, some bankruptcy lawyers are questioning whether Chapter 11 is still effective in helping to revive distressed companies, arguing the law is tilted too far in favor of creditors.
On Tuesday, Judge Stuart Bernstein, the chief judge of the U.S. Bankruptcy Court in Manhattan, jumped into the debate, giving some ammunition to big banks and landlords that have seized a lot more control over bankruptcy cases thanks to a series of changes to the law.
Speaking at Fordham University’s Corporate Law Center, Bernstein acknowledged that creditor groups have successfully lobbied Congress for more protections and that he couldn’t think of any “pro-debtor change.” But he said claims about the death of Chapter 11 as a tool to allow companies to stay in business and preserve jobs have been exaggerated. And in any case, there’s no alternative.
“I’m not convinced it’s ready for the trash heap,” he said.
Bernstein’s comments come as leading bankruptcy attorneys in favor of revamping the law have found some sympathetic ears in Washington. A few weeks ago, Harvey Miller, a partner at law firm Weil, Gotshal & Manges who helped create the modern practice of bankruptcy law, testified before Congress, urging changes to give companies a better shot at reorganizing.
In an interview, Bernstein refused to take a position on whether the law should be changed. And with the auto makers potential candidates for his courtroom, he also steered clear of a big question now: Can Chrysler LLC and General Motors Corp. survive bankruptcy? Bankruptcy, he said, offers “a lot of tools, but you’ve got to be able to use them.”