Baird, other business law experts to speak on panel tonightBy Peter Schuler
Douglas Baird, the Harry A. Bigelow Distinguished Service Professor of Law and former Dean of the Law School, argues in a new paper that a Chapter 11 bankruptcy filingemployed recently by such companies as United Airlines and K-Martno longer plays anything like its traditional role. Chapter 11, Baird said, does not ensure that a firm with dedicated assets remains intact as an independent firm.
Baird made this point in the paper, The End of Bankruptcy, co-authored with Robert Rasmussen of Vanderbilt University Law School, and he will share his expertise in this area at a panel discussion among business law experts tonight at the Universitys Gleacher Center.
Baird, a noted expert on bankruptcy who also is the vice chair of the National Bankruptcy Conference, will be joined by Saul Levmore, Dean of the Law School, Edward Snyder, Dean of the Graduate School of Business, and Dennis Carlton, Professor of Economics in the GSB, as well as Steven Rothmeier (M.B.A.72), a University Trustee and the former chairman and CEO of Northwest Airlines. The discussion, titled Prospects for United Airlines, will take place from 6 to 7:30 p.m.
These huge corporations hit the front pages with a Chapter 11 filing and the public assumes that a judicial process will give the company breathing space to stave off creditors and devise a new way to run its business, Baird said. In fact, Chapter 11 today is almost always used as a convenient administrative structure to sell assets and divide up the proceeds.
Baird cited two examples. In the TWA bankruptcy filed two years ago, Chapter 11 was only used to sell all of the planes and landing gates to American Airlines. In Enrons recent bankruptcy, its principal assets, the trading operations and the pipelines, were sold within a few months of their Chapter 11 petition.
Baird explained that the rules for corporate bankruptcies were originally devised for the 19th-century railroad industry, an industry with huge companies and specialized assets, such as their rails, which had only one dedicated use. Most railroads operated at a profit but could never begin to recoup their construction costs, and many went bust, Baird said. So a body of law was created to offer a second chance at life for these giant enterprises.
A fundamental problem, Baird explained, is that most businesses are not like the 19th-century railroads. Even in that era, the assets of most companies were fungible and their preservation was not essential for the companys operations: they could be divided up, sold, and used by others quite easily. Baird noted that today, with service- and information-based companies predominating, the old focus on indivisible hard assets has become an anachronism.
Chapter 11 only makes good sense when the company has the wrong business plan to operate at a profit and its assets are primarily ones that are unique to that company and need to remain intact, Baird said.
This rarely applies to big corporations today. Baird and his colleague Rasmussen argue that the survival of the firm through reorganization should not be a guiding principal. Even with small firms, which make up the majority of Chapter 11 filings, they argue that saving the firm, which usually benefits only the owner, rarely justifies the costs of doing so, which fall on unpaid workers, creditors, tax collectors and others.
You can make a case for a Chapter 11 law that facilitates the survival of firms but it is a hard case to make. The days when reorganization law promised substantial benefits are gone, he concluded.
Information on tonights event at the Gleacher Center and a link for reservations are available at http://www.law.uchicago.edu/lectureconf/.