A Fresh Start

A Fresh Start
Bankruptcy Conference Speaker Offers Views on a Successful Rehabilitation

By Jay Dismukes

The U.S. Bankruptcy Code could use a face lift, according to a former CEO whose national retail chain filed for bankruptcy in 2001.

Speaking at the July 27 Bankruptcy and Financial Reorganization Conference, Joseph R. Ettore, the former chairman of Ames Department stores, made a case for certain revisions to the Chapter 11 process that he believes could alleviate some of the pressure that bankrupt companies, already between a rock and a hard place, currently face.

“In the first days and weeks following a (Chapter 11) filing, there is turmoil in the company,” said Ettore, who joined Ames in 1994 and was with the chain through its bankruptcy proceedings. “At the commencement of a case, to make an early decision about a lease is just not right.”

Under Chapter 11, companies currently have 60 days to decide whether to assume or reject unexpired leases. Delivering the conference’s luncheon address, Ettore said the time period is too short, especially for large debtors with hundreds of real property leases. He is in favor of more time to make the decision.

Similarly, he feels the 120-day time limit that applies to a company’s exclusive right to file a reorganization plan may be insufficient to the creation of a “reasonable” plan to pay creditors’ claims. Rather, he feels that extensions of this exclusive period to file the plan should be left to the discretion of the judge sitting on the case.

Ettore also suggested that bankrupt companies should have more jurisdiction over their employment contracts. In particular, he supports increasing the one-year cap on the compensation under a debtor’s employment contracts to three years.

In proposing these changes, Ettore noted that if bankrupt companies are to have a chance of emerging from their financial quagmires, he believes that they need to at least be given a “running start.” To that end, he advocated in his speech the use of KERPs, or key employee retention programs, which he feels can be critical to the success or failure of a company trying to reorganize.

“Chapter 11 results in a significant reduction in the workforce, which results in an increased workload for those who are left,” said Ettore, who feels that KERPs are very beneficial in preventing the loss of key people.

In a related follow-up presentation, Anthony P. DaSilva, a principal with KPMG, discussed different types of compensation plans, noting that most organizations with under a billion dollars in revenue offer their key personnel a “stay bonus” plan.

Without such a plan, companies have to consider whether the loss in their key employees could result in the migration of talent to competitors, the loss of intellectual capital, lost customers and a value reduction in the Chapter 11 reorganization, among other concerns.

Organizations with more than a billion dollars in revenue offer other types of plans, including severance plans and emergence and incentive bonus plans, DaSilva said. Emergence plans usually cover the top five most senior positions in a company, encouraging them to guide the organization through the bankruptcy. Mention of this plan, however, prompted a conference attendee to observe that in certain situations, the top executives created the problems and can be the biggest liability to a company’s recovery.

“Sometimes the devil we know is better than the devil we don’t,” DaSilva responded, while pointing out that all plans should be linked to key business objectives.

Ultimately, though, according to Ettore, the future of a bankrupt company is also determined by aspects other than proposed revisions to the code or different types of retention plans.

A “spirit of partnership,” especially between the company and the creditors committee, is integral to the possibility for financial recovery, Ettore said.

The NYSSCPA’s Bankruptcy and Financial Reorganization Committee, chaired by Ronald R. Fink, sponsored the Foundation for Accounting Education’s Bankruptcy and Financial Reorganization Conference. Sam Rosenfarb chaired the event.