Re: Bankruptcy

["David S. Shemano" <dshemano@xxxxxxxxxxx>]

Michael Perelman writes:

>> One question that intrigues me is the class nature of bankruptcy.  PG&E
>> seems to be coming out of bankruptcy smelling like a rose.  WorldCom and
>> Enron seem to get quite lenient rulings lately.  I confess that I am not
>> an expert and would like to see such companies get spanked.

The fundamental philosophical problem is, who is PGE, Worldcom, Enron?  If the company is insolvent, the shareholders are out of the money and the company is now owned by the creditors.  Therefore, if you spank the corporation (and not individuals who committed wrongdoing), you are effectively punishing the creditors, who are presumably innocent of any wrongdoing.

>> Creditor, like the famous employees of Enron who could not dump their
>> stock, don't seem to get much sympathy from the courts.  Banks do.

Banks are creditors, as are bondholders, trade vendors, employees, landlords, and tort creditors, and the law generally treats them pari passu.  Generally, employees do receive symphathy from courts compared to banks and other institutional creditors.  For instance, it is routine for unpaid wage claims to be paid very early in the case before other creditors.  While it is justified as an attempt to maintain morale and retain the employees during the reorganization process, it does a reflect a general sense that the employees shouldn't get screwed while the big boys fight it out.

There is a general conflict between secured creditors (usually banks) and unsecured creditors. The bank will often have a lien on all of the assets, so the unsecured creditors will attack the validity of the security interest in order to obtain repayment.  The conflict manifests itself at a theoretical in the drafting of the Uniform Commercial Code, which was recently revised in a way that makes it much more easy to obtain and protect a security interest, to the consternation of unsecured creditors,

David Shemano