What’s Wrong with This Picture?

Polaroid's passage through Chapter 11 exposes how bankruptcy can give debtors too much power.

Was It a Fire Sale?

Compared with the explosive wide-screen, Technicolor collapses of Enron and WorldCom, Polaroid’s bankruptcy has been more of a long, slow fade. Yet because of the way it used the bankruptcy courts, Polaroid seems worthy of the same kind of scrutiny that accompanied those other collapses.

In theory, of course, Chapter 11 is designed to provide financially troubled corporations with protection from secured and unsecured creditors while a plan is formulated for paying off debts. A court-approved plan gives creditors first crack — often in the form of equity in a new company — with common shareholders typically receiving little or nothing. Along with the court, creditors themselves serve as watchdogs, making sure the company plays by the book and preserves value.

But in reality, according to LoPucki, the competition for business by bankruptcy courts — especially in Delaware and its closest rival district, New York State — creates “a race to the bottom” that invites venue-shopping by companies. The jurisdictions gain reputations for letting debtors call more of their own shots, he says. And this may contribute to a rate of repeat bankruptcy filings in the Delaware bankruptcy court that is 10 times higher than the average elsewhere, except New York.

Some observers suggest that Polaroid didn’t belong in Chapter 11 in the first place. “OEP got the assets at a fire sale,” says Ulysses Yannas, a Buckman, Buckman & Reid Inc. analyst who has followed Polaroid for 30 years. “It’s a company that should never have died.” In his opinion, “the judge should have forced the company to come up with a plan to run the entire company…properly.” Polaroid’s initial bankruptcy petition, citing a July 1, 2001, filing with the Securities and Exchange Commission, actually listed worldwide assets of $1.8 billion and liabilities of $948.4 million — although Polaroid claimed revenue declines had stifled its ability to pay off or restructure maturing loans and bonds. It blamed the sales fall-off on a weak instant-film market, among other factors, while asserting that high manufacturing costs had penalized earnings.

There are no strict standards for what companies qualify for protection, which experts claim may be a good thing. “The bankruptcy code is designed to be very flexible,” says Harvard Business School professor Stuart Gilson. “When you base the reorganization on rigid rules and regulations, you can make costly errors. You can get a lot of gaming by management in that case.” Still, of course, there’s no guarantee that companies won’t game today’s system, either.

Current Polaroid executives, and most other principals, generally won’t discuss the case, citing the continuing court proceedings. In his June 28, 2002, sale order to OEP, though, Walsh praised the participants and said unsecured creditors, particularly, had “achieved a significant result in producing value.” Still, steps by the debtor, which unsecured creditors fought until the 11th hour, seem to have led ultimately to sharply lower valuations than might otherwise have been possible.

Anatomy of a Bankruptcy

Early in 2001, Polaroid retained business advisory firm Zolfo Cooper and investment bankers Dresdner Kleinwort Wasserstein to help it restructure debt or complete a nonbankruptcy reorganization — efforts Polaroid abandoned when it defaulted in July and August on $26.3 million in bond payments. That caused the immediate maturity of $575 million in debt securities, magnifying its financial pressure. It then ramped up its efforts to find a buyer. But former Polaroid CFO William O’Neill, a 30-year veteran who left the company in 1999 and now serves on the board of Polaroid unsecured creditor Concord Camera, says chances were slim that then-managers could create a workable reorganization plan. “Where was the credibility of the old management?” asks O’Neill, by way of explaining Polaroid’s financial plight at the time. “The company needed financing, and who was going to loan them money under the old management? The answer was nobody.”

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