January 30, 2017
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Jonathan Friedland
Tricia Schwallier [1]
Sugar Felsenthal Grais & Hammer LLP
30 North LaSalle Street, Suite 3000
Chicago, Illinois



The economy, stupid. [2]

- James Carville

THE CORPORATE RESTRUCTURING profession has become, much like the broader economy, increasingly a world of few “haves” and many “have nots.” This is not by accident, and it is not going away.

Those who see and accept the industry for what it is—and pivot accordingly—will continue to be winners.

Those who possess a limited repertoire of moves and simply hope for economic downturns will continue to fight for limited market share.

 

How We Got Here

 

Chapter 11 Was Once New Technology

The Bankruptcy Code is a technology [3] that was adopted— successfully—for corporate restructuring. The pace of its adoption increased between enactment in 1978 up to the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005.

Adopted by whom?

  • By distressed companies, of course, but also by their lenders. Back when lenders more often kept the paper they originated. When they nurtured long-term human relationships with the principals of their borrowers.
  • And, by private funds and other “masters of the universe,” which recognized Chapter 11 as an effective means to take control of companies. They used “loan-to-own” strategies involving the purchase of controlling (or at least blocking) positions of fulcrum securities.

Chief among the earliest adopters were a small number of law firms that, right around the Code’s enactment, jumped into the relatively vacant space with both feet.

Chapter 11’s First Pioneers

Have you read Outliers by Malcolm Gladwell?

In Outliers, Gladwell writes about people who might have been successful in any event, but, because they were at the right place and at the right time, became successful at a very particular thing.

One example: in Outliers, Gladwell discusses how Bill Gates became, well, Bill Gates.

Gates happened to grow up in a prosperous area of Seattle. His private school was one of the only schools in the United States that, in 1968 (when Gates was 13), provided its students with access to computers.

Gladwell did not suggest that Gates’ success is attributed only to the luck of being in the right place at the right time. His point, rather, was to show there is an undeniable relationship.

Compare Gates to acclaimed restructuring attorney, the late Harvey Miller.

Miller was 46 years old in 1978. He joined Weil Gotshal & Manges nine years earlier as the firm’s 14th partner. If he had been 20 years younger or older, or perhaps if he did not happen to be at Weil, or perhaps if any number of other variables had been different, Harvey Miller would be known as a giant in some other legal specialization.

Nevertheless, Miller was in the right place at the right time. This allowed him to understand the potential of the new Bankruptcy Code. And he mastered it.

The Single Most Important Aspect of the Bankruptcy Code

The Bankruptcy Code of 1978 (which replaced the old Bankruptcy Act) brought many changes to bankruptcy, but perhaps most important was the change regarding professional compensation.

In a nutshell, the Bankruptcy Code established that attorneys and other professionals working on bankruptcy cases are entitled to be paid the same hourly rate they command outside of bankruptcy.

This was simply not the case pre-Code. Consequently, most of the largest and most sophisticated law firms had little-to-no interest in a bankruptcy practice prior to 1978. With about 116 attorneys in 1977, Weil was considered a large firm. [4]

Miller was among the first to understand the new Code’s potential for clients, as well as the lucrative opportunity it presented for those attorneys who could master it to achieve their clients’ objectives. Miller’s head start (and, of course, his widely acknowledged brilliance and drive, among other attributes) helped him rise to the pinnacle of the profession.

Miller was not alone, of course. Whereas no major law firm had a significant corporate restructuring practice prior to 1978—and the very concept of the “restructuring firm” did not yet exist (the first was likely AlixPartners, founded in 1981)—the industry exploded starting almost immediately after the passage of the Bankruptcy Code. [5]

Then, Chapter 11 Evolved Into a Less-Perfect Regime

Supply ≥ Demand ≠ Lower Cost

COUNTLESS PROFESSIONALS FOLLOWED in the footsteps of Harvey Miller, Jay Alix and the other early pioneers of modern corporate restructuring.

In time, the complex Chapter 11 bankruptcy industry saturated. Competition for work became—and remains—fierce.

Nevertheless, for those of us fortunate to work in the space, average hourly rates rose steadily. These high rates, together with the sheer number of professionals involved in any given case, make Chapter 11 an increasingly expensive solution for troubled companies and their constituents.

But Wait…

If there are relatively more professionals than work, why would hourly rates keep rising?

Is something amiss?

Should you call the U.S. Trustee?

No. It’s not that simple.

 

The Basic Economics of Corporate Restructuring

 

CONSIDER THAT THERE have been significant peaks and valleys of Chapter 11 work since 1978. The mid-to-early 1990s, for example, were grueling years for the profession. During such times of famine, heaps of bankruptcy lawyers changed focus—some became real estate lawyers (especially in states like Arizona), where others fled to various alternative practice areas.

Sure, some lawyers return with the “good” times (or bad, depending on where you sit). But, without consistent practice [7], those who leave and come back are not—and cannot be expected to be—as expert as those who continuously practice.

There are thousands of restructuring professionals in the United States, but only a handful of us had the good fortune (and laboring chore) of honing our skills over the course of 2,000 – 3,000+ hours a year, year after year, without interruption.

Why You Need to Understand the Three Tenors

With the context above, I introduce you to the parable of the three tenors. It is not my creation; I read about this years ago and tried, to no avail, to locate the source for attribution. [8]

Here is my paraphrasing, based on memory:

____________________

Who are the “Three Tenors?” They are Luciano Pavarotti, Plácido Domingo, and José Carreras.

But who is fourth?

That is, after the first three, who is the next “best” tenor of his time?

Assuming any of the three tenors would be paid $10 million for a performing at Carnegie Hall, how much less would the fourth tenor receive?  $9 million?  $8 million?

No. Probably a lot less. [9]

____________________

This reminds me of the Sprint commercials featuring Paul, who used to be with Verizon, asking us why we would pay so much more for Verizon when Sprint is 99% as good.

Sprint’s logic may work, depending on how you use your phone. But, if you are a highly compensated professional working on high-stakes matters, you may very well be willing to pay much more money for a very small improvement in service. Does this analogy make sense?

Let’s try another…

If you were the owner of a financially distressed company, would you settle for the fourth best restructuring attorney to help save the business?

Would your answer change if I told you that you could pay 10% less for the fourth best than you would for the first best? What if I told you could pay 20% less?

Clearly, these are not simple “yes or no” questions.

As the creator of this presently unattributed parable went on to explain (again, solely my imperfect paraphrasing), the demand for the “best” was exacerbated by the revolution in communication and transportation technology—together with the phenomenon of specialization—over the past 100 years or so.

Imagine, if you will, it is 1908. You own a large manufacturing concern located in a suburb of Columbus, Ohio. Imagine further that the business is experiencing extreme financial distress. Whom will you hire?

You will, gosh-darn-it, spare no expense to hire the best attorney in all of Columbus, that’s who! Indeed, if there is a better attorney in Cincinnati, you will even consider that.

What about today? If this happened today, who would you want?

First, you don’t want just “the best attorney.” Rather, you want the best “restructuring attorney.” Indeed, you want the best restructuring attorney with experience in your industry if you can get her.

Second, we now have access to interstate highways, planes, UPS and FedEx, the internet, e-mail, conference calls and video calls. If your company is facing an existential threat, you will want the best you can get—not in your home city or state, but in the country.

Maybe even the world.

This is why, despite the high cost, the system is not broken. It is working exactly as it was meant to. The structure may be imperfect, but pricing is determined by the market—exactly as Congress intended.

Speaking of something not being broken…

 

The BAPCPA

 

CHAPTER 11 CASES have become exceedingly more complex and expensive to run in the past decade or more, thanks to the BAPCPA, or Bankruptcy Abuse Prevention and Consumer Protection Act. [11]

BAPCPA was the most significant overhaul of the Bankruptcy Code ever made, and it was driven by a host of special interest lobbying.

BAPCPA—A Problem In Search of a Solution

In the Spring of 2005, I co-authored a five-part series of articles for Dow Jones’ Daily Bankruptcy Review titled The New Bankruptcy Code – A Solution In Search Of A Problem with a bright young attorney named James H.M. Sprayregen (I think the kid may have a future in this business). [12]

In the Dow Jones series, we analyzed major aspects of BAPCPA and concluded that those aspects were an attempt to give certain groups more leverage in Chapter 11.

It could be accurately characterized as “anti-general creditor” and “pro-special interest.”

Among other things, BAPCPA resulted in the following changes:

    1. The court may no longer extend a debtor’s exclusive right to file a plan beyond 18 months from the petition date and may not extend the period for soliciting acceptances beyond 20 months. We noted that in complex Chapter 11 cases, negotiations involving a debtor’s value and its ability to operate under a potential plan may take significantly longer than the time allotted. A complete elimination of courts’ discretion was not a logical solution for desired speed. In other words, we found this cap on extensions to be an overly blunt instrument because it may cause debtors in complex cases to make poor, premature decisions.
    2. Amended §1112 was modified to require a court to convert or dismiss a case if the movant proves any of 16 (non-exclusive) enumerated acts or omissions that constitute “cause,” with only three exceptions. Motions to dismiss or convert Chapter 11 cases thus became more difficult for courts to deny, evidencing Congress’ view that judges weren’t giving sufficient attention to such motions. We questioned the wisdom of this.
    3. A debtor may no longer agree to pay an insider to remain with the company unless the person already has a bona fide job offer from another business at similar or greater compensation and their services are “essential to the survival of the business.” If allowed, the amount is capped, as are insider severance payments. Even for non-insiders, the Code already prohibited unjustified transfers and obligations, including transfers to officers, managers, or consultants hired after the petition date. It appeared to us that such provisions would make it significantly more difficult to retain qualified managers in Chapter 11, causing the process to suffer overall.

These—and other changes—made Chapter 11s more expensive and less predictable. These, in turn, created a regime about which some (including me) previously called “one-size fits all.”

It was far less attractive—particularly to smaller businesses and those in need of the operational fixes that Chapter 11 can facilitate.

BAPCPA Is Not the Only Problem; The Players Have Changed

Again, BAPCPA is not the only reason Chapter 11 is not as attractive an option as it once was for troubled companies. An even more significant problem is that, just as BAPCPA changed the game board in significant ways, the players experienced significant changes, too.

Banks Got Bigger, Loans Changed Hands & Relationships Matter Less

Once upon a time, long ago (measured in the way restructuring professionals measure time. Meaning not so long ago), when companies in need of a loan went to a bank. The owner or CEO of a company and the management of a bank would get to know each other. They might even become friends.

And, when the company experienced problems, that personal relationship mattered.

This might have meant extracting a little less in exchange for permitting use of cash collateral, allowing the company more time to formulate a plan, agreeing to more favorable plan terms or any number of other things that might increase the likelihood of a successful reorganization.

The number of commercial banks and thrift holding companies, independent banks and independent thrifts declined by about 50% since 1984. Most of the decline is attributable the community bank sector—especially among the smallest of them. [13]

Example: Suppose Company X runs into trouble and looks to its historic relationship with the good folks at tiny Bank Y? How helpful can those folks be when Bank Y was previously sold to Bank Holding Corp Z?

Enter the Masters of the Universe

Another major shift, at least equally harmful to incumbent equity of distressed businesses, began roughly at the same time: the “loan-to-own” era began.

The concept of a holder of debt taking over a delinquent company is not new. Article 9 of the Uniform Commercial Code is not new, after all, and the practice predates Article 9 by many centuries.

Private equity players and hedge funds understood early on that Chapter 11 provided a particularly effective means to engage in the practice.

Loans move from one bank to another during bank M&A activity. More and more banks sought to jettison defaulting loans, even at a loss. This created a secondary market in which private funds—and other “master-of-the-universe” type opportunistic players—purchase defaulted loans at pennies on the dollar.

While some distressed debt buyers seek to be repaid cash on the face amount of the loan (plus interest and fees), many do not. Instead, they use their debt position (and may even loan more money to a company) as a means to take over the company.

This can be (and years ago was more commonly done) through a Chapter 11 plan under which their debt position converts to equity, and old equity is wiped out. It can also be done through a 363 Sale in which the debt holder credit bids the debt at an auction of all of the company’s assets.

For more on this subject, read The Dealmaker’s Guide to Buying Distressed Assets—Section 363 Sales and the Alternatives or check out this webinar.

Either way, these changes in the players work together to make Chapter 11 less predictable and riskier from the perspective of equity than it was in years gone by.

The Players Are Human

There are other problems. Any very experienced practitioner, if she or he is very honest, will tell you the following:

    • Some professionals who put their interests ahead of their clients’;
    • Some judges are less effective than others;
    • Some U.S. Trustee attorney-advisors focus on unimportant things that increase time and cost but benefit no one, yet fail to address real shortcomings in the system; and
    • Cronyism still exists.

Still, the system largely works for many debtors because these are exceptions, not the rule. Most Chapter 11 professionals are honest, hardworking people who try their best to do the right thing. Chapter 11 also works, however, because it fosters alternative options precisely because of its limitations.

If The Road is Blocked, Build a New Road

In other words, the toll to travel down the Chapter 11 road has been raised so high that it is prohibitively expensive for many companies to use it.

Besides that, there are more potholes in this road than before. Hence, other roads have been taken, widened, or built from scratch.

Newer Technologies

Chapter 11 is never an end to itself. It is a

It is a means to an end; it’s a tool, used to achieve a business goal. Depending on where you sit and where you want to go, another option may be better.

Depending on where you sit and where you want to go, another option may be better.

If your goal is to sell a distressed business so as to maximize proceeds, then two concepts worth considering about Chapter 11 (and certainly over Chapter 7) are assignments for the benefit of creditors (ABCs) and equity receiverships.

Assignments for the Benefit of Creditors

An ABC involves a company’s organized wind-down or liquidation through an “assignment” of its assets to a third-party fiduciary for the benefit of the company’s creditors. One can think of an ABC as an alternative to a liquidating Chapter 11 or a Chapter 7.

One can think of an ABC as an alternative to a liquidating Chapter 11 or a Chapter 7.

ABC can be quicker, less expensive and more certain than either those two options. And, as in Chapter 11 and Chapter 7 cases, the equity owners of the distressed company can bid at an ABC sale for the company’s assets.

ABCs have been around since the early 19th century and should be viewed primarily as a tool for a debtor since only the company—not creditors—can commence an ABC. They grew rapidly in popularity in the early 2000s, particularly in California during the 2007 financial crisis.

For more about ABCs, check out thisthisthis and this.

Equity Receiverships

Though not yet utilized as frequently as I predict they will be in the coming years (due to a general unfamiliarity with the tool) equity receiverships are becoming a more common means of dealing with distressed companies.

In stark contrast to an ABC—which can only be initiated by the troubled company itself—a receivership is a creditor’s remedy against further damage of their interests by a troubled company. Where the goal is to take control of and liquidate a debtor’s assets, receiverships can provide a faster, more cost-effective strategy for creditors than bankruptcy.

Definition: A receiver, essentially, is a disinterested person or organization appointed by a court to protect property subject to disparate claims by acting as a fiduciary.

Receivers are commonly given wide authority to control all aspects of a debtor business. Both federal and state courts have broad discretion to appoint a receiver at the request of a secured creditor, company shareholders, or a government entity. Factors federal courts commonly consider include:

1) The deficiency of the security to satisfy the debt;

2) The financial position of the debtor;

3) Fraudulent activity on the defendant’s part;

4) Inadequacy of legal remedies;

5) Imminent risk of the property being lost, concealed, injured, diminished in value or squandered;

6) The probability that harm to the plaintiff by denial of the appointment would outweigh injury to the opposing parties;

7) Plaintiff’s probability of success in the action and the potential for irreparable harm to plaintiff’s interest; and

8) Whether plaintiff’s interests will benefit by receivership. [14]

Once a receiver is appointed, it must typically post bond. The bond value is based on the value of the debtor’s assets to protect all parties involved from gross mismanagement of fraudulent activity. The receiver is then vested with jurisdiction to take control and possession of all real and personal property, regardless of the jurisdiction it resides.

Receiverships also enjoy several clear advantages over traditional Chapter 11 cases.

For example, the doctrine of in pari delicto, a defense similar to “unclean hands,” is increasingly used against bankruptcy trustees and creditor committees, but is inapplicable to a receiver. [15]

A Nod to Shakespeare

In case I was not clear above, my position is not that Chapter 11 is dead or that it should be. Quite to the contrary:

I am not here to bury Chapter 11; I am here to praise it!

 

How You Should Use Chapter 11

 

IN THE EARLY 2000s, Harvey Miller, Shai Waisman and, separately, Professors Douglas Baird and Robert Rasmussen questioned the effectiveness of Chapter 11 and its value to the economy overall. [17]

Miller mourned the demise of the conventional Chapter 11 case, where preservation and rehabilitation of the distressed historic debtor entity are the main goals.

Chapter 11 Reorganizations May Be Less Common—But Chapter 11 is Still Essential

In a nutshell, Miller criticized the increasing use of § 363 asset sales for liquidating debtors.

University of Chicago Professor of Law Douglas Baird and Vanderbilt Professor of Law and Associate Dean Robert Rasmussen published a series of articles (together and independently) on this same topic and around the same time.

In stark contrast to Miller, Professors Baird and Rasmussen called for abandoning traditional Chapter 11 altogether and replacing it with a privatized contract-based system to conduct sales.

They based their position largely on the theory that residual owner(s) of a distressed debtor company will not act rationally with everyone’s interests in mind. Baird and Rasmussen also believed there was a decreasing need for Chapter 11 to preserve debtors. They argued that assets are fungible, and going concern value is illusory or rare.

They argued that assets are fungible, and going concern value is illusory or rare.

I disagreed with portions of what Miller and Professors Baird and Rasmussen argued then—and I still do.

As I countered in a co-authored 2005 article, although saving a distressed business is a factor to consider, another overarching goal of corporate restructuring is to maximize creditor recoveries. [18]

Compared to What?

Regardless, Chapter 11 provides a “Compared to what?” function for out-of-court workouts.

In other words, parties negotiating an out-of-court debt restructuring do so with the knowledge that the alternative to an agreement may very well be a Chapter 11. [19]

The import of this baselining function, in actual practice, should not be underestimated; I certainly use it with great frequency.

And, even if Chapter 11’s paramount goal is debtor rehabilitation, there is no reason to think of a § 363 sale as antithetical to that goal. Conventional reorganizations, involving debt-for-equity exchanges, and asset sales can get a debtor and its constituents to exactly the same place, given there is no prohibition against old equity holders bidding at asset sales.

The Economy Needs Restructuring

Finally, to be clear, the death of a failed business is a natural, if not essential, part of a dynamic economy. It facilitates the recycling of assets to higher and better uses.

Joseph Schumpeter would surely applaud such creative destruction.

 

Where will corporate restructuring professionals find work in 2017?

 

Our Crystal Ball

Ok, here we go. Prediction time.

Fossil Fuel Producers (& Those Who Service Them)

North American oil and gas producers—and companies that service them—have been a dominant source of work for U.S. restructuring professionals since crude oil prices began crashing in 2014.

More than 200 North American producers filed bankruptcy in the last two years alone.

Right before the downfall, crude oil was about $110/barrel and dropped rapidly to around $30/barrel in mid-2015 before starting to rebound.

While stabilized prices may save some distressed drillers that would otherwise collapse, it seems that absent an exceedingly sharper oil price rally, oil and gas bankruptcies will continue.

The majority of the 207 senior-level restructuring experts who took part in AlixPartners’ 11th Annual North American Restructuring Survey agree—the oil and gas industry will not stabilize until 2018.

That said, the Intel suggests strongly that the big wave is over. And, pardon the pun, the well of restructuring work in this space is running dry.

Quick Note about Trump: 4 New Uncertainties

The problem with most macroeconomic predictions today, of course, is the uncertainty introduced by a Trump presidency.

    1. On the one hand: Trump expressed interest in easing restrictions on domestic oil and gas production.
    2. On the other hand: Trump enthusiastically advocated an aggressive infrastructure program.
    3. On the third figurative hand: Russia is a major oil exporter, and Trump has a blossoming bromance with Putin. [21]
    4. Then, of course, there is the question of tariffs.

These potentially counterweighting levers on supply and demand introduce new variables that simply were not present until Election Night. And this, of course, leaves aside that Trump is the least predictable person to ever sit in the Oval Office.

Retail

Aeropostale, American Apparel, PacSun, Sears/KMart, Sports Authority, The Limited.

To name a few.

The retail industry kept more than its fair share of restructuring professionals busy the past few years, a trend that will not abate in 2017. [22] The dominant culprit, of course, is the internet.

Did Video Really Kill the Radio Star?

Rapidly evolving technology plays a massive role in reshaping consumer shopping behavior. The ease of online shopping shattered traditional brick-and-mortar traffic in the U.S.

If the internet is to blame, an analogy can be made between the radio star and brick-and-mortar retail seller.

Radio stars didn’t go extinct, after all. Some (or even many) evolved.

It may have started with audio and video, with the likes of Amazon, Apple, and Netflix decimating retailers such as Borders, Sam Goody’s and Blockbuster, but it didn’t end there. We now see all sorts of successful e-retailers selling goods that, just a few years ago, one would have thought could not be sold en-mass on the internet.

People want to try on eyeglasses and clothes, after all, right?

Wrong.

We now know that all sorts of goods sell successfully online, and, with advancing technology, the trend will continue.

Want to try eyeglasses on virtually? Just check out Warby Parker, which offers designer eyewear at a revolutionary price and ships up to 5 pairs directly to your home to test for a style.

Want to buy clothes that fit without leaving the comfort of your home? Technology can already assist you with that.

Dinosaurs Didn’t Go Extinct—They Evolved [23]

Moving away from predictions about 2017—and peeking around the corner further—it is safe to say that some retailers, with an assist from their mall-operator landlords, will continue to flourish by becoming destination experiences. We already have seen this, but it is a trend that will accelerate.

Retail as Entertainment

Bass Pro Shops draws more than 120 million visitors annually.

Each location is extensively customized to reflect the ambiance of the region. They may contain giant aquariums full of live fish and elaborate wildlife mounts and dioramas. Some sites even offer exotic restaurants and nature-themed bowling alleys—perks that no internet retailer can match.

The widely popular grocery store, Stu Leonard’s, continues to thrive. This is, in part, because it creates a fun family experience with a vast spread of samples, animatronics, hayrides and even a petting zoo!

Abt Electronics is a family owned business founded in 1936 that continues to flourish. In addition to providing online services, Abt created a 100,000 square foot showroom to provide a unique shopping experience and house many of the company’s fun attractions. The destination includes a dancing fountain, a collection of specialized shops, kitchen showroom, oversized bubble machine, interactive virtual butterfly exhibit and even a fresh smelling atrium that serves over 250,000 cookies every year!

Taking the unique experience strategy to a whole new level, some mall operators stirred up holiday buzz for youngsters this past Holiday Season by offering an animated trip to the North Pole through DreamWorks DreamPlace. Likewise, Adventure to Santa offered visits with Santa through interactive games and a 15-minute cinematic journey in a pop-up theater of sorts.

Irony at its Best

An assist to brick-and-mortar arrives from an interesting place.

In 2016, Amazon—a major factor in the decimation of traditional brick-and-mortar stores—opened its own physical bookstores (which sell more than books).

In 2017, Amazon will open its largest store to date in Manhattan’s Time Warner Center (where Borders once operated).

The e-commerce giant also launched an 18,000-square foot convenience store in Seattle called Amazon Go, which employs a blend of computer perception, artificial intelligence and additional high-tech components to eliminate the checkout line.

The line of demarcation between retailer and e-retailer continues to erode.

Smaller Footprints

Amazon, of course, is not alone.

Warby Parker has about 50 retail locations, and there are many other examples of retailers that started online but have since opened brick and mortar locations. We’re going to see a lot more of this. It just makes sense.

People like to get out of the house to socialize. They like to touch (or otherwise tryout) what they may buy.

More traditional retailers will act in much the same way, moving more of their business to the internet while shrinking the number and square footage of their stores. In this way, retailers will reduce their real estate and inventory costs while getting the marketing value of having physical locations and providing customers the chance to touch and try.

And customers can be saved the trouble of carrying out what they buy.

This is not such a new concept, by the way. When is the last time you went to a furniture store and walked out with a sofa the very same day?

So, What Is the Prediction About Retail?

Panning the camera back in…

The prediction for retail in 2017 (and for the next few years) is massive decimation.

First, the Intel suggests many firms work with retailers already. Second, many lenders and landlords will want out at the first sign of trouble—if they can get out with limited losses—because certainty is a good thing. And that certainty is likely provided by e-retailers with significant cash in the bank and otherwise clean balance sheets.  They’ll look to make land grabs for prime retail space.

So, paraphrasing John Wick:

People keep asking if retail bankruptcy is back, and yeah, I think it’s back.

Corporate Restructuring Opportunities: Looking Even Further Out

Technological change is not, of course, unique to retail. Consider if you will:

    • The impending demise of half of all colleges (click here for more on this)
    • The increasing prevalence of the “gig economy”
    • The impact that hard asset-poor companies like Airbnb, Uber and Dollar Shave Club had—and will continue to have—on industries as diverse as hospitality, auto and livery, and consumer products
    • Techs such as AI, 3D Printing and Virtual Reality, drones, block chain and robotics

Other examples abound.

The point is that all industries face technological change at an increasing speed. We’re going to see massive disruption of virtually every aspect of the economy over the next two to three decades.

Much has been written about the “velocity of innovation.” If you are in business of any kind, you would be well-advised to understand the concept.

Three of my favorite short reads on the topic are this one by Lewis Gersh, this one by Jeffrey Phillips and this one by Jim Carroll.

One last prediction in light of the above:

 

Just as few, if any, companies had chief technology officers or chief information officers, say, 30 years ago, few companies today have “chief future officers” or “chief futurists.”

This will change. Those businesses that adapt to coming massive disruptions will survive or even thrive. Those who don’t, well…

They go the way of the dinosaur.

 


 

[1] Friedland is a partner, and Schwallier an associate, with Sugar Felsenthal Grais & Hammer LLP, with offices in Chicago and Manhattan. Friedland is also the founder and publisher of DailyDAC and Financial Poise. This article is generally written in the singular voice on behalf of Friedland, for ease of reading. Friedland thanks James H.M. Sprayregen, for having co-authored many of the articles on which this one is built.

[2] Carville coined this phrase as strategist to Bill Clinton’s successful 1992 presidential campaign, referring to the need for change following the country’s recession during George H.W. Bush’s presidency.

[3] The Bankruptcy Code of 1978, a new technology? Sure, why not? Technology, after all, is defined as “the practical application of knowledge especially in a particular area” or “a manner of accomplishing a task especially using technical processes, methods, or knowledge.” https://www.merriam-webster.com/dictionary/technology. So, yeah, it qualifies.

[4] The largest firm in the U.S. back then had fewer than 400 lawyers and there were only ten others with more than 200. Seehttps://books.google.com/books?id=BRUdQM-2BD0C&pg=PA215&lpg=PA215&dq=how+many+lawyers+did+weil+gotshal;;+have+in+1977&source=bl&ots=kuaq-eFJV3&sig=_-XDxrUVr2GdwJ1XbJsqe_ND5No&hl=en&sa=X&ved=0ahUKEwi8vPKQ-uLQAhWIr1QKHebDAgEQ6AEILTAD#v=onepage&q=how%20many%20lawyers%20did%20weil%20gotshal%3B%3B%20have%20in%201977&f=false.

[5] As an aside, some have argued that the Bankruptcy Code was also responsible for breaking a wall that had largely left Jews out of Big Law. As the argument goes, many major U.S. law firms had an unspoken rule against hiring too many Jews that lasted until about 1980. As suggested above, these same firms also lacked a bankruptcy practice because they didn’t like how attorneys were compensated pre-Code. As a result, in 1978, many Jewish lawyers had become experts in bankruptcies. So, when major firms moved into bankruptcy law, many opened their doors to a large number of Jewish lawyers for the first time in order to acquire the necessary expertise.

[6] Removed

[7] Lawyers and other professionals speak of their “practice” for a reason. As Gladwell has explained in another book, it can take 10,000 hours of practice to become expert at something.

[8] I would love to hear from you if you know who wrote the article to which I refer.

[9] This is not to suggest they actually were paid this amount or that they are somehow viewed objectively as the “best,” whatever that means.

[10] Removed

[11] There are lots of other problems, to be sure. After all, the system is run by people and people are imperfect. For the sake of brevity, I’m limiting my thoughts to the problems BAPCPA introduced.

[12] James H.M. Sprayregen & Jonathan P. Friedland, The New Bankruptcy Code – A Solution In Search Of A Problem, Dow Jones Daily Bankruptcy Review (April 19 – April 25, 2005).

[13] https://www.fdic.gov/bank/analytical/banking/2006jan/article2/article2.pdf

[14] See, e.g., Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316-17 (8th Cir. 1993); First Bank Business Capital, Inc. v. Agriprocessors, Inc., 602 F.Supp.2d 1076, 1094 (N.D. Iowa 2009); U.S. Bank Nat. Ass’n v. Nesbitt Bellevue Property LLC, 859 F.Supp.2d 602, 610, 82 Fed. R. Serv. 3d 654 (S.D.N.Y. 2012).

[15] See Scholes v. Lehmann, 56 F.3d 750, 754 (7th Cir. 1995).

[16] Removed

[17] See, e.g., Miller & Weisman, Does Chapter 11 Reorganization Remain a Viable Option for Distresses Businesses for the Twenty-First Century?, 78 Am. Bankr. L. J. 153 (2004) (hereinafter, “Miller”); Miller, Chapter 11 Reorganization Cases and the Delaware Myth, 55 Vand. L. Rev. 1987, 2011-16 (2002); Baird & Rasmussen, Chapter 11 at Twilight, 56 Stan. L. Rev. 673 (2003); Baird & Rasmussen, The End of Bankruptcy, 55 Stan. L. Rev. 751 (2002).

[18] James H.M. Sprayregen, Jonathan Friedland, and Roger J. Higgins, Chapter 11: Not Perfect, But Better Than the Alternatives, 14 J. Bankr. L. & Prac. 6, (2005).

[19] See Id. at 43.

[20] Removed

[21] That being said, it is unlikely this “bromance” will truly materialize, regardless of Trump’s optimistic efforts. Past U.S. presidents and other world leaders learned the hard way that Putin lies habitually, uses every weapon he can to destabilize the West and doesn’t view the world in the same transactional way as Trump. The deputy chairman of the Central Bank of Russia in the late 1990s when Putin was director of the Federal Security Service, Sergey Aleksashenko, has opined that Putin isn’t a win-win guy, but can be more accurately characterized as  a win-lose guy.

[22] Although retailers are increasingly filing under chapter 11, their chances of completing a successful restructuring is relatively bleak and the majority end up liquidating altogether. Perceptive senior managing directors at FTI Consulting recently opined on the subject, astutely positing that BAPCPA’s creditor-friendly tight deadlines and requirement to pay for merchandise received in the 20 days prior to filing in-full makes reorganization more challenging for retail debtors whose successful restructuring would depend upon more flexibility. Christa Hart and Amir Agam, Why do so many Chapter 11 retailers end up liquidating?, RetailDIVE (January 26, 2017), http://www.retaildive.com/news/why-do-so-many-chapter-11-retailers-end-up-liquidating/434663/

[23] It is now generally agreed that “birds evolved from a group of dinosaurs known as maniraptoran theropods-generally small meat-eating dinosaurs that include Velociraptor of Jurassic Park fame.” See http://www.nhm.org/site/research-collections/dinosaur-institute/dinosaurs/birds-late-evolution-dinosaurs.



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