Let’s discuss time-tested brands and Chapter 11: The New Norm? Why are so many time-tested, brand-name businesses filing for Chapter 11? Attention is focused on the Radio Shack Chapter 11 case pending with 9,000 jobs on the line. Is Chapter 11 the best mechanism for saving a failing business?
The answer is usually “yes.” Through the flexibility of Chapter 11, a business’s “ongoing” value can be salvaged in numerous ways. When most people think about a Chapter 11, they understand Chapter 11 to be a reorganization of the existing entity. The traditional understanding of Chapter 11 seems to be as such: (1) the same corporate entity, shareholders, and leadership will remain active and in charge, 2) existing secured debts will be reduced to market value and bad leases rejected, and 3) unsecured creditors will be paid at a dramatically reduced amount. This scenario is a very common goal and outcome of Chapter 11. But, a more “liquidation-type” scenario is many times much more appropriate and beneficial to the overall ongoing concern of all parties.
To salvage overall value and to prevent collective societal waste of resources, Chapter 11 many times is used to “liquidate” into a “reorganized” state. This simply means that several “buyers” or “bidders” will come to the table to purchase different aspects (or the entirety) of the business in an auction-like scenario. Many times, these “bidders” will desire to purchase the name of the business and continue operation with existing employees. Other times, these bidders will choose to absorb or merge the companies’ resources into another company, creating a variety of “salvaged” scenarios. Just because a Chapter 11 is moving toward a more liquidation route does not necessarily mean that the brand name or employment arrangements will not continue.
Remember cases such as American Airlines and Kmart where Chapter 11 saved these brand-name companies. Kmart not only recovered from Chapter 11 bankruptcy but went on to purchase the Sears Corporation five years after their Chapter 11 bankruptcy filing. Chapter 11 can be the only option powerful enough to save the value of a business and protect as many employees from losing their jobs as possible.
With our high-debt, ever-changing economy, these Chapter 11 filings – that are now so prominent and common place in the news – may only be the beginning. Our economy is encountering fundamental changes with technology and problems with over-dependence on complex debt systems: much greater overall “reorganization” is almost inevitably on the horizon.
– Indianapolis Bankruptcy Attorney John F. Bymaster