Press

Recent retail cases speak to the debate underway about proposed changes to bankruptcy laws that would make the process cheaper for and potentially more favorable to businesses trying to reorganize, according to a commentary in the New York Times DealBook blog.
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Most discussion and headlines regarding jobs center on the unemployment rate, new jobs created, and economic growth or lack of it. Overlooked is the preservation of jobs and property, during good times and lean times. But when a small business or farmer in Iowa finds the need to reorganize its business under Chapter 11 of the current Bankruptcy Code, the deck is stacked against it.
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While a change of control in any company might cause upheaval or enormous change, it can arguably hit small- and midsize business enterprises, or SMEs, harder because the companies' founders are often substantial shareholders, according to The Deal Pipeline. "The principals who formed the business lose their company either in a reorganization that will wipe out their equity interests or in a straight-out liquidation," said Al Togut, a managing partner of Togut, Segal & Segal LLP. "That is an enormous deterrent and operates as a barrier to their filing. They avoid Chapter 11 because they know it's the end if they file." Togut, co-chairman of the ABI Commission to Study the Reform of Chapter 11, and 21 other turnaround professionals set out to examine corporate bankruptcy statutes, looking to see what problems, if any, within the Bankruptcy Code needed to be solved. The commission's December report suggested significant alterations to the rules governing SME in-court restructurings.
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Determining secured lender cramdown interest rates in Chapter 11 cases has been widely debated, and recent court rulings have proven to be inconclusive. Kaye Scholer Attorneys Madlyn Gleich Primoff and Holly Martin in the May/June edition of the ABF Journal discuss the controversial issue, highlighting the ABI Commission’s recent recommendations that endorse a more favorable approach for secured lenders.
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ABI's Commission to Study the Reform of Chapter 11, charged with drawing up possible changes to corporate bankruptcy statutes, has recommended placing limitations on rollups of pre-petition debt. It also suggested curtailing the use of post-petition financing milestones within the first 60 days of a case.
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The Commissioners effort to “level the playing field” regarding secured lender rights was perhaps the most contentious and important issue the Commission reviewed. While the report reflects substantial compromises and relays the differing views expressed during the negotiations, the end result appears to provide debtors a more reasonable opportunity to survive the bankruptcy process.
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Can a company really melt? Putting aside a business with a perishable product or inventory, does management really wake up one morning and say, “Wow, if we do not sell this company in 30 days or less, we will lose significant value for our stakeholders.” I highly doubt it.
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I just finished discussing the “random walk” theory in my Corporate Finance class, so I thought I would close out my stint on Credit Slips with some “random thoughts” on reform.
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The debate Thursday, Jan. 29, at an American Bankruptcy Institute event centered not on whether to alter the Bankruptcy Code but on specific changes of everything from real estate lease rejection timelines to plan voting requirements. Still, the general consensus of the panelists at the New York event -- put on by the association of bankruptcy professionals to discuss the recommendations in its recent report on revising Chapter 11 statutes -- was that any adjustments to the Code would not be large. Wachtell, Lipton, Rosen & Katz partner Harold S. Novikoff, one of the panelists in an opening discussion, said the Dec. 8 report was not a "teardown" of the Code. The event's moderator, Bill Rochelle of Bloomberg News, later called many of the changes "not radical."
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Anyone who has ever litigated a valuation issue knows that valuation is more art than science. Experts often arrive at widely divergent valuations. Yet, these valuations are of the same company, for the same time period, based on the same data, and often invoke the same model.
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