- The Washington Times - Tuesday, October 11, 2005

More stringent reorganization law goes into effect Monday


Business bankruptcies rose almost 20 percent at the busiest U.S. courts last quarter as companies such as Delphi Corp. and Northwest Airlines Inc. sought protection from creditors before a new law will force 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 Monday, companies will be limited to 18 months to fashion reorganization plans.

The law, which President Bush signed in April, 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 Friday’s filing by Delphi.

The Troy, Mich., auto-parts maker had warned its unions that it would file by the Oct. 17 deadline if it didn’t get wage concessions.

The new law was “one of several factors” Northwest considered in deciding when to file its petition, said Kurt Ebenhoch, a spokesman for the Eagan, Minn., airline.

Delta spokesman Anthony Black said the changes weren’t a factor in the Atlanta carrier’s decision to file the largest bankruptcy of the period. Both airlines filed in New York on Sept. 14.

From July 1 through Oct. 4, 546 companies seeking to reorganize filed for bankruptcy protection in 30 courts.

From April 1 to June 30, 457 businesses filed for protection in the same courts, according to data compiled by Bloomberg News.

“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 Haynes & Boone in Dallas.

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.

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 also will allow creditors to recoup some bonuses paid before a bankruptcy filing.

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