Friday, June 25, 2010

People, Puh-leez! BP Bankruptcy

Puh-leez, people! If I've made the point once, I' ve made it a hundred times and it looks like I will have to make it again: bankruptcy would not be a "horror" and a "disaster" for BP. The horror and disaster happened 65 days ago, Bankruptcy is just something that happens. The worst you can say for it is that it might be a way for making folks (finally) face up to what has already happened.

So let's review the bidding. The key issue here is: will BP be worth more going forward as a going concern? Or should we dissipate the assets and break it up? I think the answer is almost certainly that it is worth more than as a going concern.

That's point one. So, next issue: is this going concern value high enough to pay off creditors, with a surplus to the shareholders (or is it not?)? If the answer is "yes," then fine, we all go to the seashore. If the answer is no then the company belongs to the creditors. The point is that creditors get paid before shareholders. Creditors may take some kind of a haircut. Shareholders can go climb on the bus. End of story.

Bankruptcy doesn't interfere with this logic at all. Quite the contrary, if there is any doubt whether the company can satisfy its creditors, bankruptcy may be the perfect place for sorting this issue out. Everybody comes together before one judge and figures out how to share the pain.

Could I be wrong? I don't think so, but to be fair, let's consider the options.
  • Bankruptcy takes too long and costs too much; the patient dies on the gurney. Okay, granted, could be, but doesn't have to. Chrysler and GM went through bankruptcy like a bullet through butter. Indeed generally speaking, there has been a tendency for " business reorganization" bankruptcies to go faster and (correspondingly) cheaper.

  • Bankruptcy lawyers get paid too much. This is a subset of the previous point, but it's a contentious issue and deserves special attention. My own take is that on the whole it is not true (particularly considering "faster") above--but even at the most extreme, the numbers are not big enough to torpedo the process. So at worst, it is an issue of fairness that has nothing to do with the overall effectiveness of he process.

  • Creditors get squeezed in bankruptcy. The simple answer to this one is that of course creditors get squeezed: that is what bankruptcy is all about. A more subtle answer is: actually, yes, sometimes particular kinds of creditors get flim-flammed out of their rights in bankruptcy--either because their claims are too ephemeral or obscure, or because they aren't effectively represented (old-time observers will remember how aggressively Judge Robert R. Mehrig massaged the rules in the Dalkon Shield case because (as it was widely alleged) he liked his goodbuddies the shareholders and didn't like those crude and rude PI lawyers. But that's an artifact of the particular case, not a general rule.
Anyway, to repeat: a well-run (!) bankruptcy case can be an ideal mechanism for preserving going[-concern values and adjudicating just claims. If anybody has anything to fear there, I cannot imagine who, and why.

Statement of Interest:
someone will say "you are a bankruptcy lawyer, you're biased." Narrowly speaking, not true at all: I've taken senior status in the bar and am no longer authorized to represent clients or give advice. I used to be a lawyer and I did practice bankruptcy law. But I was mostly a professor, never quite focused or disciplined enough to go after those big bucks that everybody talks about.


RustyShackleford said...

It might not be a horror for BP, but I wonder if it would be a horror for the people hurt by this spill.

Buce said...

"I wonder if it would be a horror for the people hurt by this spill."

Why would it? If it is viable, then it can continue to do business with the people it dealt with before. If not viable, BK can't save it.

If it owes more than it owns--again, bankruptcy can't make that problem go away. Even if you tossed the keys on the table and let the creditors take over the company, that still might not be enough. Bankruptcy may expose that problem, but bankruptcy does not create the problem--if the problem is there, so be it. What bankruptcy can do is that it can provide for some kind of formula distribution rather than letting all the money go to the early movers.