For the past 23 years, Chuck Benjamin has been working as a turnaround
consultant, primarily for troubled private companies with annual
revenues of $25 million to $250 million. During that time, his company
— Benjamin Capital Advisors of Rye Brook, N.Y., and Boca Raton, Fla. —
has handled some 70 cases. "My endgame is to save companies," said Mr.
Benjamin, 71, "hopefully for their owners."
That has become much more difficult in recent years, he says, as
changes in bankruptcy law have given unsecured creditors more power
and made bankruptcy more expensive. These legal changes and increased
costs have in turn pushed troubled companies to liquidate their assets
instead of reorganizing, Mr. Benjamin said, which ends up eliminating
the original owners — and many jobs — in the process. The following is
a condensed version of a recent conversation.
Q. You say the bankruptcy process is broken. How so?
A. When bankruptcy evolved, it was to protect debtors, the owners. The
whole concept was forgiving debts or restructuring so the business
would survive in the hands of the owners. But the rules have changed
over the years. Today, if they have to go into Chapter 11, the odds of
the owners keeping the business are much lower. So there's no
incentive for the owners to enter Chapter 11 and reorganize. Why save
a company for somebody else?
Q. What changed?
A. First, the Supreme Court's 1999 LaSalle decision basically meant
that any company that entered bankruptcy was on the market and could
be bought either whole or piecemeal. And then in 2005, Congress passed
the Bankruptcy Abuse Prevention and Consumer Protection Act, and that
changed the face of Chapter 11 for privately held businesses. No. 1,
B.A.P.C.P.A. changed the landlord's position. It limits the time to
just seven months for debtors to decide whether to accept or reject
the lease in bankruptcy. It used to be you could get extended almost
forever the time you could accept or reject a lease. Now they have
seven months. That's not a long time to decide which locations to
close while you're in trouble and you're trying to work through all
kinds of other issues.
The second change is exclusivity, that is, the debtor's exclusive
right to file a plan of reorganization. It used to be you had all
kinds of extensions. Sometimes bankruptcies used to take two, three,
four, five years. I had one that was in Chapter 11 for seven years.
But it survived. Now you have 18 months where the owner has the
exclusive right to file plans for reorganization. Unsecured creditors
know that after 18 months they can file a plan excluding the debtor.
After you're in Chapter 11 for eight or 10 months, creditors say, "I'm
just going to hang on. I'll file my own plan and take over the
company. Or after 18 months we'll just liquidate it."
Q. It's hard to see anything positive about a bankruptcy that takes seven years.
A. Sometimes staying in bankruptcy a longer time was better, because
it gave a debtor time to catch its breath.
Q. Who wins from this change?
A. The LaSalle decision and B.A.P.C.P.A. have given unsecured
creditors a huge advantage, and the result is the cost of bankruptcy
has gotten so high — because of professional and other costs — that
the ability to continue the company under current ownership has
reached almost zero. I understand the plight of unsecured creditors,
but everyone who sells on unsecured account understands the risk.
Every businessman understands this when he sells and makes a credit
decision.
Q. Really? Small-business owners offer credit like this routinely. You
don't think they expect to get paid?
A. You know that old saying, "Let the buyer beware"? I think it's
every businessman's responsibility to know to whom he sells and offers
credit. If I sell to you and you begin to pay very slowly — which
often happens before a bankruptcy — I should stop selling to you on
credit. But if I continue to sell to you to make a buck, it's not your
fault, it's mine.
Q. So what happens instead of reorganization these days?
A. Companies are liquidated. Back in 1983, the Lionel case allowed
companies the freedom to sell off assets as opposed to filing a plan
of reorganization. It expanded what could be sold in a "363 sale." The
363 component was originally designed to allow companies to sell off
spoilable product, like fruit. If you were in the grocery business and
you filed bankruptcy, it allowed you to sell off assets. The Lionel
case expanded that so you could sell major assets, virtually including
the whole company. That's a quick way to avoid a plan of
reorganization.
Q. How does a 363 sale work?
A. The 363 sale requires nothing more than saying, "I'm going to sell
you my equipment," and I publish that, and for 30 or 40 days people
have a right to object to it and the judge can decide, O.K., sell it,
or if there's a higher or better bid, it goes to the highest or best
bidder. That happened in the Brunschwig & Fils bankruptcy where I was
the chief restructuring officer. I sold the company's assets for $10
million, very successful, but the original owners lost control and 116
employees lost their jobs. In the old days we would have been able to
reorganize the company.
Q. How do these changes affect a troubled company's ability to get
financing during reorganization?
A. All of these changes say to the world that the chance of a company
surviving bankruptcy is much lower. And if it's much lower, the banks
aren't going to give debtor-in-possession financing — and rightfully
so. The D.I.P. financer gets a priority lien. Last in, first out. But
the company has to survive to have the money to pay that
super-priority lien.
Q. Does this change how troubled companies act?
A. Debtors are delaying seeking help longer and longer and longer.
They're very frustrated. They're walking in molasses. They figure if
they wait another week the economy is going to turn.
Q. What should business owners do instead of filing for Chapter 11?
A. People need to seek help quicker, change their business plan
quicker, and avoid Chapter 11. It's just an absolute last resort. It's
virtually nonsurvivable. One of the things we do as consultants is
take two weak companies that are facing annihilation and we merge them
and we get one survivable company — without a bankruptcy. We also try
to make out-of-court settlements with creditors, as opposed to Chapter
11 proceedings. In Chapter 11, the debtor pays for attorneys,
accountants and consultants of the creditors' committee. They even pay
for the investment bankers. The owner is paying the other side to
oppose him. It's tilted to the unsecured creditor side.
Q. But doesn't this law fix some biases toward debtors that allowed
them to drag out the process, hurting their creditors as they did so?
A. The law probably does fix some problems, but you have to look at
the nuances. There are some cases with the tighter rules where the
creditors get a little more but the company fails. The other option is
the bankruptcy lingers and the creditors get a little less but the
company survives, and that way the creditors continue to have a
customer.
Q. You're a small-business owner yourself. How is your business doing?
A. Business right now is kind of quiet. I think this is the calm
before the storm.
For more information on these matters please call our office at 305
548 5020, option 1.
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