Corporate Bankruptcies Rise 20% Before U.S. Limits Take Effect
Corporate Bankruptcies Rise 20% Before U.S. Limits Take Effect
Oct. 10 (Bloomberg) -- Business bankruptcies rose almost 20 percent at the busiest U.S. courts last quarter as companies such as Delphi Corp. and Northwest Airlines Inc. seek protection from creditors before a new law forces them to accelerate reorganization plans.
``Anybody that is thinking about filing a bankruptcy case would be crazy not to take advantage of the old law,'' said Kenneth Klee, a partner at Klee Tuchin Bogdanoff & Stern in Los Angeles who teaches business bankruptcy at the University of California at Los Angeles Law School.
Starting Oct. 17, companies will be limited to 18 months to fashion reorganization plans. The law, signed in April by President George W. Bush, also will cap compensation designed to keep executives from leaving and limit to 210 days the time companies have to reject real-estate leases.
Business bankruptcy filings since July 1 were 19.5 percent higher than in the previous three months, according to data compiled by Bloomberg News on 30 of the 85 U.S. courts that supervise reorganizations and liquidations. The period included the September bankruptcies of Northwest and Delta Air Lines Inc. and the filing Oct. 8 by auto-parts maker Delphi.
Delphi, based in Troy, Michigan, had warned its unions it would file by the Oct. 17 deadline if it didn't get wage concessions. The new law was ``one of several factors'' Eagan, Minnesota-based Northwest considered in deciding when to file its petition, spokesman Kurt Ebenhoch said. Delta spokesman Anthony Black said the changes weren't a factor in the Atlanta-based company's decision to file the largest bankruptcy of the period. Both airlines filed in New York on Sept. 14.
Filings Data
From July 1 through Oct. 4, 546 companies seeking to reorganize filed for bankruptcy protection in 30 U.S. courts, including New York, Wilmington, Delaware, Chicago, Houston, and Detroit -- among the most popular business jurisdictions. From April 1 to June 30, 457 businesses filed for protection in those same courts, according to data compiled by Bloomberg.
The Administrative Office of the U.S. Courts has no statistics yet for the same period,
``There is definitely a shift in the balance of power from the debtors under the current laws to the creditors under the new laws,'' said Lenard Parkins, a bankruptcy lawyer with Dallas-based Haynes & Boone.
Both Delta and Northwest won permission Sept. 15 to pay all workers at existing salaries. Northwest said Sept. 16 that it had negotiated a new compensation agreement with Chief Executive Officer Douglas Steenland, who agreed not to leave for a year and to receive his same pay, incentive bonuses and severance.
Bankruptcy lawyers said his compensation might have been reduced under the new law, which limits an executive's compensation to 10 times the average worker's pay.
No Rejections Yet
Neither airline has yet proposed ending or renegotiating payments on airport-gate or other real-estate leases covered by the new law.
Delta and Northwest did ask judges for permission to end or renegotiate leases on more than 100 aircraft in their fleets. Those types of leases aren't covered by the new law.
In comparison, Kmart Holding Corp. took 20 months to decide what to do about more than 2,000 stores after filing for bankruptcy protection in 2002, court papers show. Before emerging from bankruptcy in 2003, it shut 599. It now is part of Hoffman Estates, Illinois-based Sears Holdings Corp.
Collins & Aikman Corp. and other companies have also benefited from filing for bankruptcy protection before the Oct. 17 deadline. Collins & Aikman, a Troy, Michigan-based supplier of car interiors, won a judge's approval Sept. 12 for an executive pay package that includes $1.75 million in salary and bonuses for Chief Executive Officer Frank Macher.
A Bonus
Under the plan, he would be eligible for $7 million more if the company ends its bankruptcy, which began in May, with a market value or sale price of at least $2.25 billion.
Pay to retain key employees during bankruptcies has been a standard part of reorganizations for a decade. Under the new law, only holdover executives who get competing job offers would be eligible for such payments. The new law will also allow creditors to recoup some bonuses paid before a bankruptcy filing.
Northwest's Steenland received $472,649 in salary last year. He also received stock and other compensation that made his total pay $4.42 million. Under the new law, he might have had to take a pay cut and his severance would have been restricted.
The new law limits ``transfers'' of any value not just pay made for the purpose of ``inducing'' a person to stay with a bankrupt company.
Two Interpretations
A judge might interpret the new law as limited to situations involving executives who claim they plan to leave to take other work, said Lynn LoPucki, a bankruptcy law professor at UCLA. At the same time the language is broad enough that a judge might apply the pay limit to requests to extend existing pay, he said.
Northwest said in its bankruptcy filing that it had about 39,000 employees and a monthly payroll of $186 million. That works out to an average annual pay of $57,230 for all employees.
Northwest's Ebenhoch and Delta's Black said they couldn't provide a breakout for nonmanagerial workers, the formula element used in the new law.
Using the 10-fold limit of the new law and the average pay for all workers, Northwest executives would have been limited to about $572,230 in pay had they filed their bankruptcy petition after Oct. 17. Delta's executive limit would have been about $481,400, using its bankruptcy figures and the same computation.
Even without the new law in effect, Delta cut the pay of its top officials, including CEO Gerald Grinstein, by 10 percent in March. Grinstein, who gave up half his salary in 2004, will receive $450,000 this year and isn't eligible for bonuses. Grinstein received no stock options last year as other top Delta executives had.
The Delta case is In re Delta Air Lines Inc., 05-17923, U.S. Bankruptcy Court, Southern District of New York. The Northwest case is In re Northwest Airlines Corp., 05-17930, U.S. Bankruptcy Court, Southern District of New York.
To contact the reporter on this story: Tom Becker in U.S. Bankruptcy Court in New York at 9245 or tbecker5@bloomberg.net
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