The bankruptcy lawyer wears all these clothes - and that's just the beginning of his wardrobe. A bankruptcy practitioner is a jack-of-all trades, shifting from one role to the next: one day negotiating the credit facility that will keep the debtor operating through bankruptcy, the next day massaging the employee retention package into place, and the day after that striding into court, guns blaring, to defend the debtor from a threatened, and potentially fatal, supply shutdown. The bankruptcy lawyer is
the last of the old-time generalists, armed and willing to perform any task necessary to protect his client.
At the heart of all of the bankruptcy lawyer's functions lies one central role: rescue worker. Companies are in bankruptcy for a reason - they've hit the perfect storm, and somebody's gotta come in and haul that boat into port, or at least make sure there arc enough lifeboats to go around. That someone is the bankruptcy lawyer - out to salvage the equipment, the crew, or, with luck, the whole boat.
Jack-of-all trades and rescue worker
Keep both these phrases in mind, and you'll go a long way toward understanding what makes the bankruptcy practice one of the most unique and vibrant areas of law. It's a practice for those who enjoy the adrenaline of the courtroom and the art of the deal; who are looking for variety in practice, the chance to use all sides of your legal brain; who are hoping to work with a collegial, welcoming community of fellow practitioners. This guide will give you a taste of life in this community, walking you through the bankruptcy process, showing you how to enter and travel through the bankruptcy world, and providing you with an insider's view of what life in this practice is all about, month to month, day to day.
What is Bankruptcy Law?
Technically speaking, bankruptcy is the process under federal law through which a corporation or individual unwinds, winds down or rewinds, with the United State Bankruptcy Court as the playing field and the United States Bankruptcy Code, or the Code, as the rule book. More practically, bankruptcy means different things to different debtors. For some, bankruptcy is a procedure of last resort, where businesses shut their doors and squeeze the value out of their assets through liquidation. For others, bankruptcy is a financial planning tool, enabling individual and corporate debtors to resolve their debts, streamline their contracts, and get a fresh start. And for the risk-takers who spur economic growth, bankruptcy is a "safety net," protecting "the honest guy who took an honest chance," in the words of practitioner Brian Behar of Aventura, Florida-based Behar, Gutt & Glazer, P.A.
A bankruptcy lawyer is an expert at helping debtors navigate the bankruptcy process, or to avoid it altogether. The debtor and its creditors often have great business ideas for rebuilding the business or maximizing the value of the debtor's assets; it's the bankruptcy practitioner who translates and adapts those ideas to bankruptcy and makes them a successful reality.
Estate sale or fresh start?
For many corporate debtors, bankruptcy is a death knell, a supersized estate sale where the assets are liquidated and proceeds distributed to creditors, who receive pennies on the dollar for their claims. Think of TWA, a once grand airline, reduced to no more than a bundle of flight routes and airplanes sold to the highest bidder. In those liquidations, bankruptcy allows the debtor to wrap up its affairs with the tidiest bow possible, with salvageable assets changing hands, free of all liens, encumbrances and other nasty remnants of their former owner, the debtor.
For other debtors, including individuals and many businesses, bankruptcy provides for a blessed time-out and, ultimately, a fresh start. Upon the filing of the bankruptcy petition in bankruptcy court, a protective bubble - the automatic stay - descends, allowing the debtor to continue its economic life without (or at least with less) threat of litigation, foreclosures, liens, and other aggressive efforts by creditors to collect on their debts. By the end of the case, the debtor can move on with a new business plan, a lighter load of assets, and, best of all, the erasure of all old debts.
Unsecured creditors on top
Corporate bankruptcy proceedings anoint the unsecured creditor as king, or at least give him as much power as possible. Unsecured creditors - little guys like the butcher, the baker and the candlestick maker without collateral from which to seek satisfaction of their debts - enter bankruptcy as the weakest link in the creditor chain. By contrast, secured creditors - banks and other creditors who have the right to reach out and grab the debtor's assets to satisfy their claims - enter the battlefield as Goliaths, senior (at least to the extent of the value of their collateral) to all other comers.
The United States bankruptcy system, as opposed to insolvency schemes in many other countries, attempts to make up for this handicap, by striving to protect and maximize returns to the weakest creditors. Unsecured creditors get a loud voice in the bankruptcy process through an official committee of unsecured creditors, represented by counsel paid for by the debtor's estate. They also get a crucial say in the debtor's future, voting for or against the plan of reorganization or liquidation under which Chapter 11 debtors' structure their futures (or lack thereof). "Best interest of creditors" is also the standard for court approval of various actions, such as dismissal, or conversion to Chapter 7, of a Chapter 11 proceeding.
In addition, unsecured creditors are protected against each other. Creditor equality is a major principle in bankruptcy, with a series of rules making sure that similar creditors are treated alike. For example, all unsecured creditors not holding special or "priority" claims generally receive pro rata distributions on those claims. "Bankruptcy is the most socialist area of law in the United States," observes James Bromley, partner in the Workout and Bankruptcy Practice Group of the New York office of Geary, Gottlieb, Stcen & Hamilton.
Taken together, these and other mechanisms give unsecured creditors far more leverage and protection during bankruptcy than they had before the bankruptcy petition was filed and stamped.
Pity the lowly equity holder
On the flip side of the corporate priority ladder sit the equity holders, around whom the planets spin in flush times, and at whom the planets spit in bankruptcy. (Equity holders are people or other entities who own equity in the debtor.) Once a corporation sails or flops into bankruptcy, equity holders lose control of the company, with management or a government-appointed trustee calling the shots and all decisions made for the benefit of creditors, not equity holders. At best, an equity holder committee will be formed to give stockholders some say in the bankruptcy process.
And at the end of the day, equity holders receive no distribution on their stock until all creditors' claims are satisfied in full; fortunate and few are those who receive some return on their once-valuable stock certificates at bankruptcy's conclusion.
Corporate process in litigation's clothes
Bankruptcy is unique in the legal world - a hybrid of transactional and litigation processes. All bankruptcy cases, whether corporate liquidations, going-concern reorganizations, or consumer proceedings, arc essentially transactional procedures. Asset sales, debt and/or equity restructuring, reorganization of business units and subsidiaries - all involve agreements and negotiations and due diligence and all the other bells and whistles of the "corporate" side of the fence. The difference in bankruptcy is these transactions arc done under the auspices of a court, requiring approval by a judge.
Unknowledgeable attorneys often mistakenly think of bankruptcy as the province of litigators. The reality is that bankruptcy is at heart a transactional exercise, with as much, if not more, of the process occurring in the boardroom as in the courtroom, giving bankruptcy practitioners that rare ability to forever forestall their choice of transactional law or litigation.
Just one alternative of many
For many so-called bankruptcy attorneys, the "bankruptcy" in their title is somewhat of a misnomer. Bankruptcy is just one tool in the arsenal of insolvency mechanisms, and for many of its practitioners, the world of "bankruptcy" includes these non-bankruptcy alternatives as well. Bankruptcy is a creature of the federal government, providing for an efficient resolution of a corporation or individual's financial difficulties. But bankruptcy is not the only game in town for the debtor in a rough financial patch. States have their own methods of liquidations and reorganizations, ranging from the appointment of receivers to assignments for the benefit of creditors. And many distressed companies manage to avoid all of these processes through debt restructurings and out-of-court workouts.
Depending on the breadth of the bankruptcy lawyer's practice, he is typically at least aware of these alternatives, often fluent in their use, and, in some cases, specializes in these non-bankruptcy alternatives. And appropriately, this guide includes attorneys who specialize in these out-of-court processes within its definition of bankruptcy practitioners.
The many faces of a bankruptcy lawyer
Bankruptcy is a haven for Geminis, sufferers of Multiple Personality Disorder, and those who are a little bit country and a little bit rock-and-roll. As will be a recurring theme in this guide, no other practice allows the practitioner to try on so many different roles - and the opportunity to excel at them. Gregory Willard, head of Bryan Cave LLP
's Bankruptcy, Restaicturing and Creditors' Rights Client Service Group, speaks for most bankruptcy practitioners when he describes bankruptcy as the "last bastion of generalists."Bankruptcy is a court-managed transactional process, with every corporate decision having a litigation counterpart and vice versa. Within the transactional and litigation worlds, every area of law is touched upon. In bankruptcy, "every legal relationship has to be resolved," observes New Jersey-based practitioner Ben Becker of Becker Meisel, LLC, and those relationships run across the substantive spectrum of law, giving the bankruptcy practitioner the chance to step into all sorts of shoes.
Among the most common roles for a bankruptcy attorney are:
- Litigator: It's no surprise that in many law firms, the bankruptcy group is a subgroup of the litigation practice. Bankruptcy is a courtroom process, with a bankruptcy judge overseeing each bankruptcy proceeding and approving all major debtor - and some creditor - business decisions. Accordingly, most bankruptcy attorneys spend much of their time in court, arguing for or against debtor and creditor motions and often participating in full-scale trials.
- Commercial Financing: In Chapter 11 cases, where the debtor continues operating as a "going concern," a primary focus of the weeks before and immediately after the bankruptcy filing is negotiating "debtor-in-possession" - or DIP - financing. These loans provide debtors with their financial lifelines, allowing them to continue operating during bankruptcy. Bankruptcy attorneys negotiate and draft these DIP financing agreements, and are fluent in Code provisions and case law governing these special credit facilities.
- Mergers & Acquisitions Attorney: Chapter 7 cases and many Chapter 11 cases revolve around asset sales, often involving the entire business of the debtor. At some firms, bankruptcy attorneys work hand-in-hand with M&A attorneys in creating auction processes, negotiating and closing these sales. More often, the bankruptcy attorney performs all of the M&A work, including negotiating and drafting relevant purchase and ancillary agreements and overseeing the sale closings. In all situations, it is the bankruptcy attorneys who request (and hopefully secure) the Court's approval of these sales.
- Labor & Employment: Bankruptcies involve businesses, and businesses have employees. Bankruptcy attorneys provide counsel in communicating with a debtor's labor force and complying with federal and state employment laws, and stand on the front lines of negotiations of, and disputes about, employee severance and retention programs.
- Uniform Commercial Code/Secured Transactions: Creditors' secured status - and whether debtors can "avoid," or void, a creditor's security interest - is an important issue in all bankruptcies, and most bankruptcy attorneys acquire some knowledge of, and often expertise in, the Uniform Commercial Code and other aspects of security interests.
- Chief Operating Officer: In Chapter 7 proceedings and the occasional Chapter 11 case, the court appoints a bankruptcy trustee, often a bankruptcy attorney, to operate and/or wind-down the debtor's business. Here, the trustee gets to act as businessman and client, typically retaining another attorney to do all legal work.
This list just scratches the surface. Bankruptcies also involve issues of tax, real estate, landlord-tenant relations, environmental law, telecommunications, securities regulation, securities fraud, anti-trust, white-collar crime, domestic relations... well, the list never really ends. Every bankruptcy is unique and involves every aspect of the debtor's financial life. A consumer bankruptcy involving a man in the midst of a divorce will involve all sorts of family law issues; the bankruptcy of a media conglomerate will require knowledge of federal communications regulations. This sheer variety of roles makes bankruptcy a unique and exciting practice, guaranteeing nary a dull moment.
The Scope Of This Guide
A focus on Chapter 11 and Chapter 7 corporate proceedings
This guide focuses on the corporate bankruptcy processes of Chapter 11 and Chapter 7 of the Code, and the attorneys who represent debtors, creditors and other interested parties within those proceedings. Why? The bankruptcy departments at most large firms, and most law school bankruptcy classes, typically concentrate on these corporate proceedings. On a substantive level, these proceedings are also the most sophisticated and complex type of bankruptcy and restructuring processes, on which their state law and consumer (and, in many cases, international) counterparts are modeled. Once you understand Chapter 11 and Chapter 7 corporate bankruptcies, you go a long way towards understanding consumer bankruptcies and non-bankruptcy insolvency procedures.
Looking beyond debtor and creditor attorneys...
Much of this guide discusses the practice of bankruptcy attorneys in private practice representing debtors and creditors, including unsecured and secured creditors and creditor committees. In addition to discussing those attorneys, however, this guide also looks at other types of bankruptcy practitioners, including:
- Attorneys of the Office of the United States Trustee: The branch of the United States Department of Justice representing the interests of the federal government in enforcing the Code.
- Chapter 7 Trustees: Attorneys in private practice who administer Chapter 7 proceedings and serve as trustees of Chapter 7 debtors' estates through the bankruptcy.
- Clerks for United States Bankruptcy Judges: They assist the bankruptcy courts in the performance of their duties.
Some important facts regarding bankruptcies which will be discussed in other articles:
- Consumer bankruptcies: by far the most commonly filed bankruptcies (97.67 percent of all petitions filed between April 1, 2002 and March 31, 2003).
- Out-of-court corporate restructurings and work-outs.
- State law assignments for the benefit of creditors, receiverships, dissolutions and other state law liquidation alternatives to the federal bankruptcy practice.
- International and cross-border insolvency proceedings between the United States and other countries.
