Tina Brozman has strong opinions on bankruptcy. The former chief judge of the U.S. Bankruptcy Court for the Southern District of New York thinks the American practice of “rescuing” failed enterprises, rather than liquidating them, is one that other countries might do well to emulate.
On the other hand, she believes the U.S. should adopt the United Nations Commission on International Trade Law’s (UNCITRAL) model law for cross-border insolvencies, which provides for cooperation between foreign courts in insolvency cases. Brozman is partial to the model law because she helped craft it and served as the judge in the notorious case that inspired it — the 1991 bankruptcy of Maxwell Communications Corp. Adopted — or pending adoption — in seven countries so far, the model law has been “mired in politics” in the States as part of the current bankruptcy-reform legislation.
Now an attorney with Bingham McCutchen LLP, Brozman, 50, sits on the other side of the bench these days. Recently, she also sat down with CFO deputy editor Lori Calabro to discuss her hopes for the model law and for bankruptcy reform. As for bankruptcies themselves, Brozman sees no end in sight: “We will continue to see a very busy docket in the bankruptcy courts for probably the next two years.”
We’re in the seventh year of bankruptcy-reform legislation. How optimistic are you that it will pass this year?
There’s a better chance this year because of the composition of Congress. But there’s also a great deal of sensitivity to bankruptcy issues as a result of some of the very large cases that have filed recently, and what their implications might be.
After so many years, you must be incredibly frustrated.
I wouldn’t put myself in a camp with someone who is advocating a complete overhaul of the bankruptcy laws. I am mostly frustrated that the new Chapter 15 in the law — the embodiment of the UNCITRAL model on cross-border insolvency — has been essentially held hostage to the bankruptcy-reform legislation even though it is widely recognized as valuable.
Do you have any problem with the latest version of the bill?
Some of the provisions with respect to consumers are draconian. And on the business side, I’m not in favor of some of the legislative limitations on judicial discretion. Judges should be given the discretion to adjudicate when, for example, extensions of various time deadlines in the code [are requested]. It is next to impossible to impose a one-size-fits-all scheme on widely different types of companies that may be undergoing rehabilitation.
One provision in the proposed law allows a company’s investment bank to serve as its bankruptcy adviser even if it underwrote the company’s securities. Wouldn’t this be a potential conflict of interest?
[Currently] there is an automatic disqualification under the disinterestedness standard if an investment bank has been an underwriter of securities in the past two years…. The disqualification does not relate to [debtor-in-possession] financing, but to representation of the debtor. I believe that disqualification is sufficient as written [and] should not be eliminated, as is being considered.
Do you think the banks may have an unfair advantage in bankruptcies just because they can provide DIP financing?
Unfair is a very subjective word. [After all,] lenders, if they are going to put up new money, are entitled to certain protections in return for undertaking that risk.
What about the true-sale safe harbor? Should securitization be protected from review by bankruptcy judges through safe-harbor legislation?
I’m of two minds about that. There is certainly a history in the bankruptcy law of looking at the economic substance of transactions, being guided by the substance of those transactions rather than their label…. To declare that all securitizations are safe is to depart from this long history…. On the other hand, securitization is an important part of financial markets now, and some benefit can be gained from certainty in these transactions. So, to some extent, I guess there is a tension here.
If you had a clean slate to rewrite the bankruptcy code, where would you start?
The basic tenets of Chapter 11 work well. We have a “rescue” culture in this country, which is the best in the world. There are small areas in the bankruptcy [code that] might need fine-tuning. [For example,] the rules governing conflicts of interest are difficult to apply and difficult to work one's way through. Part of [the problem] is that, because so many people are involved in a bankruptcy case, it isn't always easy to know [when there are conflicts of interest among parties].
Obviously, you'd like the UNCITRAL model law added to the code. How important is it that the United States approve such legislation?
We already have, under Section 304 of the bankruptcy code, some provisions of the model law, and we have a body of judicial precedents for dealing with cooperation in cross-border cases. However, that doesn't mean we don't need the law; we do. We need it as a catalyst to induce our trading partners to adopt it, particularly in civil-law jurisdictions, where judges don't enjoy the same kind of discretion that common-law judges do. Civil-law judges need a statutory framework in order to implement some of what is necessary in the cross-border context. [In civil jurisdictions, judges often view liquidation, not rehabilitation, as the most appropriate method of dealing with bankruptcy.]
The model law actually had its genesis in a case you presided over — the mammoth bankruptcy of Maxwell Communications back in 1991. Why was that so groundbreaking?
The initial conditions surrounding the cases were such that I was faced with the choice of allowing the parties to engage in jurisdictional legislation [since Maxwell was headquartered in the UK but 80 percent of its assets were in the United States, creditors were poised to square off over which country had primary jurisdiction and possibly delay proceedings until all assets were gone], which would have been time-consuming, expensive, and disruptive to the rehabilitative process, or trying to do something different.
Although there wasn't any precedent for it, I understood that there was potential for courts to work together, and I thought we should at least attempt to do this. I directed that an examiner be appointed, and gave him the mandate of harmonizing the two proceedings and working with the joint administrators to formulate a so-called protocol, which essentially was a memorandum of understanding on how the cases would be conducted. This was a massive step forward in dealing with cross-border cases [in a way that] enhances asset value rather than ensuring liquidations and fights over jurisdiction.
How does the Maxwell case rate in terms of the speed in which it was done and the end result in terms of getting the maximum value of the company?
There was a related plan of reorganization in 16 months. Now, 16 months for a case of that size is a relatively brief time frame when you consider what could have been the alternative. It's actually nothing short of astounding. And in return to creditors, I can't tell you what the exact return on the dollar was because I'm not sure if I ever heard it, but it was approaching 70 cents. That's a respectable return to creditors under any scenario, let alone a cross-border scenario.
Despite the success in the Maxwell case, there continues to be a bent toward liquidation worldwide.
Yes and no. There is much more recognition of the value of saving those enterprises that warrant saving. That doesn't mean that you salvage everything. [For instance,] UNCITRAL is involved in a new project, in which it is attempting to craft a legislative guide for insolvency systems in emerging economies. There is a clear recognition in the reports issued so far that it is advisable to have a regime that permits rehabilitation when rehabilitation is warranted.
You contend that U.S. bankruptcy law is the best in the world. Critics say it isn't painful enough.
The bulk of [bankrupt companies] don't make it, so I guess that it's pretty painful. Twenty-five years ago, filing for Chapter 11 had such a deleterious effect on the conduct of the business that it could sound a death knell [for the company]. The public is now accustomed to buying products from retailers in Chapter 11 or flying on an airline that is in Chapter 11. There is still, in every case, an adverse affect from filing for Chapter 11. The question is, does the company have the wherewithal to turn things around? But because the stigma has been reduced, there may be a perception that it isn't painful enough.
Do you think Chapter 11 is overused?
Are cases ever filed that are an abuse of the system? Yes. Is that commonplace? No. Do judges have the ability to dismiss cases that are an abuse of the process? They sure do.
Critics have charged that judges bear some responsibility for allowing bad reorganization plans to be approved. Do you agree?
Bankruptcy judges have a statutory responsibility to determine that the plan complies with the requirements for confirmation, including that the plan is feasible — that is, that confirmation is not likely to be followed by the need for further financial reorganization or liquidation. That being said, judges under our system of jurisprudence are not inquisitors; they adjudicate disputes. Where a judge is presented with unanimity among the major credit constituencies and their financial advisers, with all agreeing that the plan is feasible, it is unlikely that the judge will overrule them and find the plan not feasible, unless there is a patent defect in it.
What do you consider a successful bankruptcy?
Overall, if you are salvaging value for creditors, preserving a viable enterprise, and in the process preserving employment, that's a successful outcome.... Republic Steel, for example, was a successful case because although we weren't able to confirm a plan of reorganization, we were able to save the steel company and a high percentage of the jobs associated with it, then sell the company, which is still operational.