What’s Wrong with This Picture?

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

Seeing the writing on the wall, the unsecured creditors dropped out, agreeing instead to participate with OEP. For its part, OEP increased the participation for unsecured creditors from the original 6 percent to 35 percent, while lowering the total of the offer to $255 million, plus trade-debt assumption.

Getting Cash Back

Walsh approved Polaroid’s sale to OEP on June 28, after hearing testimony from Dresdner Kleinwort Wasserstein that the bidding had been open and fair. Because the unsecured creditors had withdrawn their bid, the judge didn’t analyze the proceeding transcripts before making his ruling. “There is absolutely no testimony to support the conclusion that anything was withheld from the market in [this transaction],” he ruled. On July 31, Primary PDC Inc., as the “old Polaroid” shell is known, received a check from OEP for $186.7 million, along with 35 percent of the stock of the new company, to be distributed to unsecured creditors. OEP received all of Polaroid’s assets, including all of its nonbankrupt foreign subsidiaries.

Of the $255 million total to be paid, $50 million went directly to prepetition lenders. Other terms of the deal, however, allowed OEP to reduce its price by $18 million. OEP got all of Polaroid’s cash except for $45 million that Primary PDC kept for administrative claims and other costs. Neither OEP nor Polaroid has revealed how much cash was transferred in the deal (the judge allowed a filing of many sale disclosures under seal), but unsecured-creditor estimates show the company having at least $200 million in cash at closing. If the estimates are accurate, the $237 million in OEP payments would have returned it $164 million in cash (plus about $1.5 billion in other assets), for a net cost of $73 million.

Polaroid retirees had feared the results of a sale to OEP, and that fear was justified. After June 28, the company’s cash balance plan was terminated and handed over to the federal Pension Benefit Guarantee Corp., meaning many retirees had their pension payments slashed. Employees on long-term disability received letters informing them that they would not be hired by the new company and that their benefits were being terminated. Indeed, the Massachusetts attorney general’s office had difficulty convincing OEP, as owner of the new Polaroid, to sponsor the retirees’ supplemental Medicare plan, even though that sponsorship costs nothing except time spent keeping the books.

An appeal has been filed in the U.S. District Court in Delaware by shareholder representative Morgan. (Shareholders never received official status in court, because the judge ruled Polaroid’s assets were insufficient to pay them anything.) Several retirees and shareholders have requested that the judge appoint an independent examiner to investigate their claims that Polaroid engineered the bankruptcy filing in bad faith.

Retirees retain the right to sue the company’s directors’ and officers’ insurance policy to cover claims. But Derek Jarrett, a former Polaroid corporate vice president of international operations and now a member of the 2,600-member Polaroid Retirees Association, says retirees are resigned to ending up with nothing, even though the fight continues. “The attitude of the retirees is simple,” he says. “We’ve lost our ESOP shares, health benefits, life insurance, but we are going to get these people that robbed us of the respect for the company that we felt part of.”

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