American Bankruptcy Institute Update

November 22, 2005

In This Issue



ANALYSIS: Judge Alito on Bankruptcy

The agility of the Supreme Court in deciding bankruptcy issues depends upon a number of issues, including the justices’ understanding of the Code and its overall policies, whether the justices are “strict constructionists,” use legislative history or lean toward the sentiments of debtors or creditors. Judge Samuel Alito, nominated by President Bush to serve on the Court, has written or participated in writing a number of Third Circuit decisions that speak to these issues.

Does Judge Alito understand the bankruptcy system and its policies? For the most part, yes. For example, in Belcufine v. Aloe, 112 F.3d 633 (3d Cir. 1997), employees of a chapter 11 debtor sued officers under a Pennsylvania statute that appeared on its face to make the officers personally liable for unpaid pre-petition vacation and retirement benefits. In turn, the officers held potential indemnification claims against the debtor company for these amounts. The lower court found that the automatic stay precluded the debtor from paying the claims and that as a result, the employees could not sue the officers. The district court and the Third Circuit affirmed, finding that the federal Bankruptcy Code preempted Pennsylvania law on this issue. Read the full analysis by Prof. Nathalie Martin, ABI’s Resident Scholar.

COMMENTARY: Don't Blame Pension Terminations on our Bankruptcy Program

Many in the media tend to blame large pension terminations on our bankruptcy system. It’s not uncommon to see articles claiming that companies use the bankruptcy court to eliminate their obligation to pay benefits for the lifetime of their former employees. What you never read about is anyone recognizing that a promise of “lifetime benefits” is good for the lifetime of the employee or the company – whichever ends first.

Blaming chapter 11 for losses of jobs, security and pensions is like blaming emergency rooms for traffic accidents. You find victims of each there , but neither actually caused the victim’s problems. Layoffs and pension terminations arise from a combination of many factors, large and small – including making all types of promises that could not ultimately be kept.

When companies can no longer continue in business and satisfy all of their obligations – including those to current and former workers – they really have only two choices. The companies can close their doors and sell off parts of themselves to start-up companies that would have no “legacy costs.” Or they can reorganize themselves to try to keep existing workers employed, even if they go forward with reduced wages and benefits. Chapter 11 is not sought out as a venue of choice – it is the “least worst option” of the two. Read the rest of ABI President John D. Penn’s article in the Daily Bankruptcy Review.


In her address to the participants in ABI’s 2005 Corporate Restructuring Competition last week, Kathleen Ligocki, longtime automotive executive and current president and CEO of Tower Automotive, told MBA students that the domestic auto industry will profoundly restructure in court and out of court over the next few years, or disappear to be absorbed into successful global players. (See related story, below.) She noted that in good times, the industry buys and diversifies, sometimes forgetting the formulas that made it successful. Then, as it always does, the business climate changes. Now the industry is struggling with high product costs, exorbitant legacy costs, a weak balance sheet, and acquisitions that the automotive companies have no idea how to integrate into their core business.

How did this happen? One component is globalization. Not the ‘80s version of globalization. Not just the developed markets investing in emerging markets—that has been going on for decades, even centuries. Rather, foreign investment in developed markets. The Japanese and Korean automakers are expanding production in NAFTA and Europe. There is a surge in strength of new global players, especially China and India.

A second cause is that U.S. demographics and the design of our health care and pension systems that deliver services primarily through a corporate model have combined to make U.S. companies, especially those with aging workforces and defined benefit plans, uncompetitive in a world where global competitors simply do not bear these costs in the same way. Read the full address, including possible solutions to the auto industry’s current woes.


General Motors Corp. and Ford Motor Co. have been using little-publicized funds to offset losses. But those cookie jars are almost empty, and the Detroit auto makers may soon need to restock them, the Wall Street Journal reported today. Like any financial institution, the two companies' credit arms—General Motors Acceptance Corp. (GMAC) and Ford Motor Credit—must set aside funds to cover bad loans, such as foreclosures or repossessions. They have flexibility with these rainy-day funds and have allowed their loan-loss reserves to dwindle—slowly at GMAC, more rapidly at Ford Credit.

The less money shunted into reserves, the more that goes to the parents' bottom lines, which need buffering: the auto makers each lost more than $1.3 billion in the third quarter in their worldwide automotive operations. Both auto-credit companies, which would be among the biggest financial institutions in the country as stand-alone entities, have drawn down their reserves, according to financial analysts. GMAC and Ford Credit may need to increase loan-loss provisions next year as rising interest rates and energy costs affect some customers' ability to cover their car payments.

"Both companies have been aggressive with their loan-loss provisions," says Dan Mahoney, senior analyst for the Center for Financial Research and Analysis. "The real issue is the ability of GM and Ford to be profitable, and right now they are doing it in part by lower loan-loss receivables."

Read the full analysis.


Stanley Fink has already transformed United Kingdom-based Man Group PLC from a stodgy commodities trader—it once supplied rum rations to the British Navy— into one of the world's biggest hedge-fund companies, the Wall Street Journal reported yesterday. Now, he is hoping to propel Man into the top ranks of independent financial brokers by snapping up a chunk of the futures-trading business of Refco Inc., the scandal-ridden brokerage firm that collapsed a month ago. The deal is the latest step in the remarkably speedy unfolding of events at Refco, which had gone public in a stock offering this past August.

As for Man, by aggressively moving to snatch Refco assets in the United States, Canada, London and Asia away from potential competitors, Fink is signaling that the company may finally be putting recent troubles behind it. In early 2004, some of the company's funds stumbled badly, after a quick change in financial markets' expectation of the direction U.S. interest rates would take. Man's stock fell more than 30 percent over the course of a few months.

Read more.

In Time for the New Law: The Consumer Bankruptcy Manual (Second Edition)

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