Strategic Bankruptcy: How Corporations and Creditors Use Chapter 11 to Their Advantage

445 Pages·1999·0.95 MB·English

by  Kevin J. Delaney

Strategic Bankruptcy : How Corporations
title: and Creditors Use Chapter 11 to Their
Advantage
author: Delaney, Kevin J.
publisher: University of California Press
isbn10 | asin: 0520073592
print isbn13: 9780520073593
ebook isbn13: 9780585092737
language: English
Corporations--United States--Finance--Case
studies, Strategic planning--United States--
subject
Case studies, Bankruptcy--United States--
Case studies.
publication date: 1992
lcc: HG4061.D45 1992eb
ddc: 658.1/6
Corporations--United States--Finance--Case
studies, Strategic planning--United States--
subject:
Case studies, Bankruptcy--United States--
Case studies.
Page iii
Strategic Bankruptcy
How Corporations and Creditors Use Chapter 11 to their
Advantage
With a New Preface
Kevin J. Delaney
UNIVERSITY OF CALIFORNIA PRESS
BERKELEY LOS ANGELES LONDON
Page iv
University of California Press
Berkeley and Los Angeles, California
University of California Press, Ltd.
London, England
First Paperback Printing 1998
© 1992 by
Kevin J. Delaney
New Preface © 1998 by
Kevin J. Delaney
Library of Congress Cataloging-in-Publication Data
Delaney, Kevin J., 1960-
Strategic bankruptcy : how corporations and creditors use
Chapter 11 to their advantage / Kevin J. Delaney.
p. cm.
Includes bibliographical references and index.
ISBN 0-520-07359-2 (alk. paper : pbk)
1. CorporationUnited StatesFinanceCase studies.
2. Strategic planningUnited StatesCase studies.
3. BankruptcyUnited StatesCase studies. I. Title
HG4061.D45 1992
658.1´6dc20 91-22489
CIP
Printed in the United States of America
1 2 3 4 5 6 7 8 9
The paper used in this publication meets the minimum requirements
of American National Standard for Information SciencesPermanence
of Paper for Printed Library Materials,
ANSI Z39.48-1984.
Page v
To Susan, Connor, Doreen
Delaney, and the memory of
my father, Jim Delaney
Page vii
Contents
Preface to the Paperback Edition ix
Acknowledgments xv
1. Bankruptcy: From "Broken Bench" to "Fad of the Year" 11
2. Theories of Corporate Bankruptcy 37
3. The Manville Corporation: Solving Asbestos Liability 60
through Bankruptcy
4. Continental Airlines: Using Bankruptcy to Abrogate 82
Union Contracts
5. Texaco: Using Bankruptcy to Frustrate a Business Rival126
6. Bankruptcy as Strategy: Avoiding Financial Burden and160
Shifting Financial Risk
References 191
Index 205
Page ix
Preface to the Paperback Edition
Since the original publication of Strategic Bankruptcy in 1992 I have
become more convinced that bankruptcy is really politics by another
name. Many Americans who never thought they would care about
corporate bankruptcy found themselves unwitting parties to the
complex process of Chapter 11 reorganization in the 1980s and 1990s.
The bankruptcy arena, formerly the province of bankers, financial
managers, and their attorneys, became the arena in which some of the
biggest social issues of our time were decided: the fate of asbestos
victims and compensation to women injured by the Dalkon Shield
intrauterine device and those suffering ill-health after receiving
silicone implants. In bankruptcy court, rather than at the negotiating
table, workers saw their wages slashed and their union contracts torn
up. Bankruptcy even played a key role in the battle over the opening
of a nuclear reactor (the PSNH case; see Eckstein 1997) and in
attempts to address corporations that had failed to adequately fund
their employees' pension plans.
We need look no further than Orange County, California, to see that
bankruptcy is about politics. When that county filed bankruptcy in
1994, it laid off workers and slashed local budgets. The citizens left
holding the bag will pick up a tab estimated at $1.5 billion. In Orange
County, for a time, most political discussionsfrom local taxes to
highway repair to school fundingwere driven by what was happening
in bankruptcy court.
Page x
More people are now coming to see that bankruptcy no longer means
"being broke." As I show in this book, bankruptcy is sometimes an
offensive weapon used by the rich and powerful rather than a refuge
for the weak and ailing. While this remains contrary to popular
wisdom, it is more true today than when I originally wrote this book.
Although bankruptcy is politics, it is politics of a certain sort. Chapter
11 is the consummate insider's game. It takes a good deal of money,
knowledge, and experience to play the game well. As such, the
"repeat players" who make their living in bankruptcy have amassed
more social power than at any time in recent history, and corporations
continue to use bankruptcy in innovative ways (Delaney 1996). The
recent Dow Corning bankruptcy mirrors other "mass tort"
bankruptcies like the Johns-Manville case discussed in chapter 3.
Despite being a highly profitable company, Dow Corning filed for
Chapter 11 bankruptcy rather than confront the thousands of
individuals suing the company for health problems they believed were
caused by leaking silicone implants. Other companies have filed
Chapter 11 to avoid cleaning up toxic waste dumps, eliminate unions,
keep competitors at bay, escape overpriced contracts, settle takeover
disputes, and transfer underfunded pensions onto the Pension Benefits
Guaranty Corporation (a government-backed insurance agency),
among other strategies (Sheppard 1995).
And what about the law? In my view, bankruptcy law has been left to
chase the action. That is, creative lawyers have come up with new
ways of stretching the bankruptcy code to handle specific problems in
particular cases. Judges, who often stake their reputations on keeping
large corporations afloat, approve such strategies even without clear
direction in the law. Eventually these innovations find their way into
bankruptcy law. No better example can be found than in the most
recent round of legal reforms. The Bankruptcy Reform Act of 1994
gave its blessing to the very strategy I described in the Manville case
(see chapter 3). Manville used a strategic bankruptcy filing to create a
settlement vehicle for asbestos