By Robert Sherrill Illustration by Ann Morgan Design by Eric Walljasper It has been long my I deliberate judgment that all bankrupts, of whatsoever denomination, civil or •r religious, ought to be hanged. Charles Lamb, 1829 That may seem a rather extreme attitude, but in fact not many years before Mr. Lamb’s outburst the courts of England did occasionally hang bankrupts (which was at least more civil than the Roman treatment, dismemberment). Needless to say, America’s rulers—being devoted to capitalism and sensibly recognizing debt as a necessary ingredient of it— have always taken a much more kindly approach to those who fall into the financial ditch. In recent years this humanitarian side of our federal government has been particularly evident in its use of the Bankruptcy Reform Act of 1978 (which we will sometimes refer to as the Code) to protect and enrich financially troubled corporations, and others. Let me put that more plainly. By “others” I mean corporate deadbeats, cheats, high-rolling boardroom gamblers, millionaire fly-by- night polluters and a wide variety of other scoundrels. Indeed the bankruptcy policy of this country, since passage of the Code, has been sufficiently perverse that it has inspired scholarly papers with such titles as “Is the Bankruptcy Code a Refuge for Criminal Offenders?” t used to be that bankruptcy carried a strong taint. No more. Not today. We have entered a new age. “Now,” says Ronald Hoelscher, head of a major commercial real estate firm in Houston, a; city whose leading citizens are often drunk on the elixir of bankruptcy, “it’s something you pull out of your satchel when you need it.” Indeed, some of the corporations that take that route these days are so arrogantly casual about it that they remind one of what Wilson Mizner said of a cocky fellow who went through bankruptcy and came out cockier than ever: “Failure has gone to his head.” Traditionally, bankruptcy was a process by which a business that was going belly up could declare King’s X on all its debts, and then let its creditors line up in an orderly fashion to collect whatever money became available in the company’s liquidation. Bankruptcy still usually means liquidation. But thanks to that magical section of the Code known as Chapter 11, bankruptcy now often means simply “reorganization.” ■/ ,C hapter 11 allows anybody, any partnership, any corporation to seek the shield of bankruptcy. They don’t have to be broke. They can be in fact—as many of our recent “bankrupt” corporations have been—highly profitable. When they are received into the bosom of Chapter 11, these bankrupts, though they could easily pay their debts, become instantly immune from creditors. Immediately they can cancel all contracts, all agreements. Current lawsuits against the company enter limbo; no new lawsuits can be started. To be sure, the bankruptcy court may later decide that some of the contracts and agreements should be revved up again, and eventually the litigation may resume. But for the moment, the bankruptcy novitiate is blissfully free of all care and responsibility, and with any luck this blissfulness may last for several years, with creditors and claimants of every sort growing pale and wan at the factory gate as they wait for the “reorganizing” corporation to emerge from Chapter 11. Three years after the Code was passed, Theodore Eisenberg, a law professor at UCLA, flatly judged it to be “a failure.” Generally he was right, but in one respect he was quite wrong. The Code has been a smashing success as a gigantic loophole through which some of our largest corporations have moved to avoid the demands of other federal and state laws. And they have moved with a rush. In the Code’s first three years, the number of businesses seeking the protection of bankruptcy increased 300 percent. The most dramatic development was not in their number, however, but in the 18-karat quality of some of the largest ones—major corporations in the very bloom of financial health, or at least having no more than the sniffles. □ When Johns-Manville took bankruptcy in 1982, it had a net worth (total shareholders’ equity) of $1.2 billion and was making a nice profit. It’s still in Chapter 11 and still making a nice profit. □ When the pharmaceutical firm of A.H. Robins took bankruptcy in 1985, it had annual sales of more than $600 million and profits of more 8 Clinton St. Quarterly—Summer, 1988
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