Bankruptcy and Restructuring

In a nutshell

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The essential task of bankruptcy and restructuring lawyers is to avoid a client’s bankruptcy. The term ‘bankruptcy’ itself is a technical term that refers to when financially distressed companies, unable to restructure on their own, file for Chapter 11 to undergo a court-supervised restructuring.

In order to avoid this scenario, a company must successfully “restructure its debt to keep the company together and retain its value,” head of Davis Polk’s insolvency and restructuring practice Don Bernstein explains. But the path to financial viability – through court or not – can be convoluted. The legal know-how required and the multitude and variety of actors involved make bankruptcy and restructuring a rather complex practice.

Bankruptcy and restructuring attorneys must be adept at transactional work and litigation across a range of areas like M&A, securities, banking, labor and employment, environment, tax, and IP. “Bankruptcy is the last bastion of the generalist,” Harvey Miller, partner and founder of Weil Gotshal’s restructuring group, tells us.

Troubled companies will first attempt out-of-court restructuring, or corporate reorganization, in which they try to reach an agreement with their creditors. Doing so can be exceedingly difficult. Both GM and Chrysler attempted an out-of-court restructuring but, after failing to come to an agreement with their creditors, filed for bankruptcy under Chapter 11. Bankruptcies also come about as a result of liquidity shortages.

Chapter 11 provides for a court-supervised restructuring and, crucially, protection from creditors, who are barred from seeking to retrieve their money until the company is restructured. A notable feature of Chapter 11 work is the growing prevalence of 'distressed M&A', which describes the selling of parts – or the whole – of the ailing company (e.g. Comcast’s $17.6 billion purchase of Adelphia while it was in bankruptcy). Such sales are done under the provisions of Section 363 of the Bankruptcy Code and often referred to as ‘363 deals’. Deals can also take place outside of court, but it is less common; buyers often prefer the safety of court-sanctioned sales.

The number of parties involved in a restructuring can be vast. They come from all walks of a company’s life and often have competing interests. Acting for the debtor is a challenge unto its own, because then “everyone’s problem is your problem. You have to deal with every creditor and ensure the pie is allocated fairly,” Don Bernstein explains.

Representing creditors is often more straightforward –“trying to recover as much as you can from a debtor” – but there are many different types of creditors to choose from. 'Secured' creditors include commercial and investment banks, insurance companies and hedge funds, while 'unsecured' creditors include bondholders and vendors, or 'trade creditors' (e.g. auto parts suppliers). In Chapter 11, there are official committees of unsecured creditors and debtor in possession (DIP) lenders, while out-of-court proceedings will have bondholder committees.

Other parties involved may include strategic buyers and private equity firms and hedge funds interested in acquiring distressed assets. They engage in the purchase, sale and trading of debt claims. This has become one of the biggest administrative components of Chapter 11 cases, and was a major part of the Lehman Brothers case.

A special committee set up by the board to oversee the restructuring may also be involved and, in instances of 'gross mismanagement' by the company, a trustee is appointed to handle matters, as was the case with Enron.

BigLaw firms may represent all types of actors, though some may focus more on representing one kind. Kirkland & Ellis, for instance, is renowned for its debtor work, while Simpson Thacher is renowned for its creditor work.

What bankruptcy/restructuring lawyers do

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Out-of-court restructuring for debtor 

  • Analyze the situation in order to determine the feasibility of staying out of bankruptcy – What’s the problem? What caused it? How big is it? Will it result in a default that is uncontrollable? Who’s in the creditor body? Are they secured or unsecured? What’s the litigation status? What’s the liquidity status? Are there sufficient funds to stay in business while being restructured?
  • Look for 'red flags', such as jurisdiction. “You need to know if the entity has international operations, how it operates, how it’s interconnected,” Harvey Miller explains.
  • Work with financial advisers to create a model of how the crisis will be dealt with.
  • Try to persuade creditors to “just stand still” and not pursue immediate payback. “You need to focus on the nature of the debt in order to determine who you approach to get a standstill or moratorium,” Miller says.
  • Negotiate with creditors and try convincing them that the problem is best solved out of bankruptcy.
  • If negotiations are successful, work out payment plans for each creditor.
  • If not successful, file for Chapter 11.

Court-supervised restructuring for debtor 

  • Initiate a Chapter 11 case to pursue restructuring within the protective provisions of the Bankruptcy Code (usually known as ‘filing for Chapter 11’).
  • Prevent stigmatization of employees and business operations. Create a detailed communication plan to include regulators, shareholders, employees, vendors and clients. “Entry into Chapter 11 should be made as smooth and unruffled as possible,” says Davis Polk’s insolvency and restructuring group co-head Marshall Huebner.
  • Secure financing. “Without liquidity to pay the bills, all is for naught,” Huebner explains.
  • Once liquidity is secured, work with management team and financial advisers to decide what’s core and non-core to the business. Establish the company’s new vision.
  • Build creditor consensus around the chosen exit strategy. This can be a lengthy process and require delicate negotiations.
  • If creditors think they are being economically harmed, there could be extensive litigation.
  • Document and effectuate the eventual agreement.

Realities of the job

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  • Being a bankruptcy and restructuring attorney can be hugely satisfying. “You get to save companies nobody else could save,” Marshall Huebner explains.
  • The extent to which transactional work and litigation cross paths during a restructuring cannot be overstated. “There is a transactional aspect even when in court. You litigate by day and negotiate by night,” Don Bernstein describes.
  • Debtors face innumerable difficulties. They have no political muscle, whereas creditors do – and flex it. Though bankruptcy laws are constantly amended, they continue to favor creditors. “Nobody likes being a debtor, even those who successfully go through the labyrinth of reorganization,” Weil’s Harvey Miller states.
  • In order to lead such a diverse group of parties to a consensus, debtor attorneys must possess strategic, tactical and managerial skills.
  • The current Chapter 11 was passed in 1978, but it comes from Chapter X, which was passed in the 1930s. “The Bankruptcy Code has its roots in the Great Depression,” Don Bernstein says.
  • Chapter 15 is the provision for cross-border bankruptcies that dictates proceedings in the USA when the main proceeding is in another country. Designed to ensure that all creditors and debtors are treated fairly irrespective of jurisdiction, it may also involve Chapter 11 proceedings if the debtor’s assets are sufficiently complex.
  • Bankruptcy and restructuring is considered a countercyclical practice. When the market is healthy, bankruptcy attorneys may find themselves working on more diverse corporate matters.
  • While the debtors’ lawyers negotiate with the creditors to try to persuade them to “just stand still,” creditors’ lawyers do a similar analysis to “determine where they have the most leverage and figure out what the consequences would be if they forced bankruptcy upon their debtors,” Harvey Miller says, adding that “you have to be much more innovative working for a debtor because they generally have less in the way of leverage.” 
  • Negotiating terms for debtors in possession is a complicated balancing act. Attorneys must assess liens or security interests, prioritize creditors, determine the value of secured properties and argue for or against continued possession of secured properties in order to remain operating to better pay off creditors.
  • Lenders’ needs have to be attended to carefully, Marshall Huebner says, because “very frequently if lenders have a vested interest in a company, they’re the ones who will get wiped out; more typical than not they become Chapter 11 financiers.” As such financiers, lenders tend to impose very difficult and sometimes onerous terms on the debtor to stimulate sales and liquidations.

Current issues

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  • Attorneys don’t currently foresee another major upheaval of the financial system, but they do expect in the next few years the bankruptcy practice will be dominated by the aftershocks of the financial crisis.
  • Despite the overall number of bankruptcies diminishing, big names have continued to go under since 2010. Casualties include MF Global (one of the biggest bankruptcies in history, with $41 billion in assets), the parent company of American Airlines, General Maritime Corp and Kodak.
  • Bankruptcy lawyers have seen a shift in the type of work they've been engaged in due to the turbulent economy. While activity as a whole has diminished, there has been a surge in debt refinancing and restructuring work as big companies rush to secure their assets.
  • Bankruptcy and restructuring has “very much evolved into an M&A practice,” Don Bernstein says. “If a bank loans a company money that the company can’t repay, it will offer the bank equity instead of cash. These claims become like stock and it's possible to buy them up to take over the company.”
  • “As credit becomes more available, debt is being stretched out rather than paid off, so a lot of amendments are being made to existing agreements,” he adds.

What top bankruptcy/restructuring lawyers say

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Harvey Miller, partner, Weil, Gotshal & Manges

“The common assumptions one makes about bankruptcy – be they informed or uninformed – in law school are generally erroneous. I never thought I would end up in this area of law. It sounds mundane but it’s really not.”

“If you are a person who thrives on high energy, who wants to work in an area that is equally transactional and litigation-based, you will love bankruptcy. If you want to be doing a deal by noon and going to court in the afternoon to get the deal approved, you will eat this up.”

“It’s rare to get well-informed applicants, because bankruptcy law is a one-semester class at most law schools, so I wouldn’t expect our new attorneys to be up-to-date on the most current legal issues. It’s definitely a ‘learn on the job’ type of practice. In essence, you get an MBA on the job.”

“Bankruptcy lawyers are like ER doctors. We have to be able to react instantly – and accurately – or else we could lose the patient. Patients are brought in in various states of distress. They might just have a broken arm, or they might have been in a serious car crash. You very quickly have to descend, assess the obvious injuries and the less obvious injuries that may nonetheless have a long-term impact. You have to develop a plan to stabilize and rehabilitate the patient. If all goes well you’ve saved a life and the patient is able to walk on and become a useful member of the community again.”