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Bankruptcy is a game of corporate finance and law played out in courtrooms and conference rooms. Sandra Mayerson has had to practice bankruptcy law in both, whether it was getting all the parties negotiating Key Plastics Inc.’s reorganization into a conference room on a Friday morning and keeping them there until a deal was done the following Thursday, or acting as the examiner in the 1991 Interco Inc. case and writing the seminal report defining just what constitutes fraudulent conveyance. And yet for Mayerson, the head of New York law firm Holland & Knight’s bankruptcy practice, her proudest moments took place on the streets of Fargo, N.D., where she spent a year early in her career representing bankrupt Steiger Tractor, the state’s second-largest employer. Housewives would stop her on the street to wish her luck, she says, and the company’s Chapter 11 filing was important enough to convince the governor and the state’s senators to call her. “You just knew the outcome affected the entire state and a lot of people wanted me to know that we had to reorganize Steiger Tractor or the state of North Dakota just goes down the tubes,” Mayerson recalls. “It was extremely satisfying because we were able to pay every creditor, a hundred cents on the dollar, and save 95 percent of its jobs in North Dakota.” Such a result isn’t surprising, considering the way former clients and colleagues describe her painstaking preparation and her bankruptcy acumen. “She had the ability to assimilate some very complex issues by cutting through the fog and then boiling them down so all the conflicting interests and parties could understand them,” says Larry Schwentor, the chief financial officer of Key Plastics, which left bankruptcy via its buyout by Dallas-based Carlyle Management Group. “She also has a great courtroom demeanor and showed herself to be very well prepared in her interactions with all the other lawyers in the case.” Mayerson turned a lot of heads on Wall Street as court-appointed examiner in Interco’s Chapter 11 filing when she criticized the investment banking industry for its lax standards after Interco was crippled by the poison pill it swallowed. Her report concluded that a fraudulent conveyance suit against a bank consortium that financed the deal was justified but recommended that the banks settle and reduce their claims rather than drag the case through costly litigation. The report’s biggest winners were the holders of Interco’s 8.875 percent medium-term notes after Mayerson recommended full payment of their claims while the bank consortium and other bondholders got less than 100 percent. The report said St. Louis-based Interco had intentionally hindered payment to holders of $200 million of those medium-term junk bonds in its $3 billion recapitalization in 1988. “She came in as an independent examiner to present the issues in a crystal and clear way and that was the reason Interco entered and exited Chapter 11 within a year,” said Steven Cousins, counsel to the mid-term noteholders and head of bankruptcy at St. Louis law firm Armstrong Teasdale. “Her report was a fait accompli that lawyers couldn’t expand on and it prevented four or five major parties from going through years of advocacy analysis to seek to buttress their case.” Ohio-bred Mayerson went to Yale University, graduated cum laude in 1973 in the first class to admit women and still had visions of becoming a journalist during her years at Northwestern University Law School. Her move into bankruptcy practice in the late 1970s, came at a time when she “was always the only woman in the room, and I’m very proud that some young women lawyers view me as a role model.” A single mother of a school-age daughter, Mayerson was one of the first women in New York to head a department at a major law firm as head of bankruptcy at Kelley Drye & Warren. She’s been hailed by Working Woman magazine as one of the five “Best in Bankruptcy” during her 23 years of practice. “I’ve seen judges kick women out of their court for daring to wear a pants suit instead of a skirt and would really like to live long enough not to see things like that happen anymore,” she says. The Daily Deal‘s Terry Brennan recently sat down with Mayerson in New York to discuss fraudulent conveyance, how Chapter 11 proceedings have changed and what the future has in store for the bankruptcy bar. TERRY BRENNAN: Could we start with a legal definition of fraudulent conveyance? SANDRA MAYERSON: There’s two kinds of fraudulent conveyance. The easiest one is where there is actual fraud and it means exactly what it says: A conveyance of some property for fraudulent purposes; that is, to defraud creditors. In most jurisdictions today, there’s also what’s called a constructive fraudulent conveyance, which may not involve fraud or a conveyance, and that’s the harder one to identify. Basically what that amounts to is a transaction where the company is left with some badge of insolvency. Either it becomes insolvent, or it’s left with too little capital to operate its business. And at the same time it got less than equivalent value for its assets. Now with such an amorphous definition, as you can imagine, a lot of transactions have been shoehorned into this [latter] definition, some correctly and some not correctly. And I think what we saw happening in the late ’80s and early ’90s was a huge public outcry against leveraged buyouts, because LBOs collapsed [and] hurt the moms and pops that had bought bonds while corporate raiders were getting wealthy beyond all their imaginations. People needed to find some theory by which to right the wrongs, and the theory of fraudulent conveyance was stretched to its limits to accommodate the typical LBO transaction. What happens with fraudulent conveyance is it’s often very easy with hindsight to say that [a particular] transaction left the company insolvent. What is important, if you are going to be pure in your application, is you try to not judge it with hindsight but step back and see what were the motives of the parties who put the transaction together at the time. Was it foreseeable that it would render the company insolvent or leave it with too little capital to pay its bills and to operate? And that’s where the fraudulent conveyance analysis comes in and that’s the more difficult part. Q: You said that the law, both the theory and the case load, evolved to respond to this change in the situation with LBOs. A: What happened, first of all, applying fraudulent conveyance law to LBOs was a big surprise that hit in the mid-’80s. I mean somebody was really stretching the limits of the theory. And what happened is the court said, “We’re going to ignore the actual steps in the transaction and look at the overall result of the transaction. If the overall result is that the company received less than equivalent value and was rendered insolvent, then we’re going to say it was a fraudulent conveyance, no matter what the steps were in between.” Q: Why were people so surprised? A: People were surprised that courts would ignore the form and look at the substance of the transaction. But now things are tightening up again. Practically the first thing that happens is the LTV Corp. case. The [judge in the] LTV case attacked a structure that was created to avoid some of the problems that were perceived in a typical LBO structure — instead of liening the assets of the parent company in order to acquire the company, the parent creates a new company and sells its receivables to the new company. The liens are at that level and that was considered a way of [both] getting financing and allowing the people providing the financing not to take the risk of a fraudulent claim. And what has happened is, in the LTV case the judge said, “Well, you know, I think you just take the assets of the special purpose vehicle and stick them back up in the parent corporation that’s bankrupt.” But that’s the way the big LBO rash of cases started [in the early 1990s]. Somebody tried to find a way to help the little guy that they perceived to have been hurt by the fancy financial community with its high-priced lawyers. And you can see that there’s the same atmosphere happening a second time even though the cases are unrelated. Q: The law will be bent then? A: That’s when new law is created. Because if you look at fraudulent conveyance, the law itself had been around since Elizabethan times. Bankruptcy is a very organic area of the law because the code itself is very vague and it’s an area of the law that allows for a lot of creativity. Q: In the LTV case, people are challenging restructuring advisory firm Jay Alix & Associates because there’s a perception that these high-powered turnaround specialists and these New York law firms don’t deserve all that money. Does that attitude generally start in the hinterlands and then move its way to New York or Wilmington? A: Those are two separate issues. New York lawyers with New York prices are always fair game when they’re not in New York. There’s a widespread public perception that bankruptcy is a feast for professionals to pay [and] spend unlimited amounts of money and take it right out of the creditor’s pocket. In most instances that’s a misconception, but I don’t think you’ll ever be able to change it. I just finished a deal [involving Key Plastics] where we were literally locked in a conference room for six days ’round the clock and if anybody had walked out and didn’t have the stamina, this company would have liquidated and lost 7,500 jobs. The professionals saved 7,500 jobs but nobody’s coming to them and saying, “Thank you.” And I think they earned every bit of their $500 or $600 an hour. Q: If the environment is there for some bends in the application of the law, do we see fraudulent conveyance surfacing again? A: We’ve seen most of what’s going to be done on a transactional basis. You’re going to start to see fraudulent conveyance used more to get back what people might perceive as inflated salaries or dividends to insiders. So somebody may go back and try to get those bonuses back and say, “Those were fraudulent conveyances, we didn’t get reasonably equivalent value for that $2 million [bonus]. If it had stayed in the company, we would have helped the company pay its debts.” Or [the CEO] took $2 million out knowing the company was going to go under and therefore he defrauded creditors. I can see it really being used more and more to challenge the status quo. Q: Why was Interco such a seminal case for fraudulent conveyance? A: There were a lot of unusual elements present at Interco and because there was an examiner it really allowed for an almost academic discussion of fraudulent conveyance laws. It was a little different from most [cases] because it wasn’t an outsider coming in, [but] the company responding to an outsider with a highly leveraged management buyout. That meant that the people who knew what the company was most capable of doing were the ones putting forth the projections. There was some very unusual restructuring [that needed to be done] to get around having to pay bondholders and there were some liens that had to be addressed. So the people that were in charge were the people that knew the company best and so it was more fraught with opportunities to say that these were deliberate things done to harm creditors. Q: There haven’t been that many cases of fraudulent conveyance recently? A: Recently, no. But now you’re faced with the sudden economic downturn, where people can lose a way of life they’ve gotten used to real quickly. You’ll start seeing more and more litigation and not just of fraudulent conveyance but lots of bankruptcy issues. This is the time new law is made. Q: In these cases in the late ’80s, early ’90s, there were really multiple debt levels and very contentious classes. Why don’t you see classes battle as much today? A: You will. Your friends today can be your enemies tomorrow. Q: I was just at a Winstar Communications Inc. organizational meeting and [there were] six or seven different bond issues. Each one has different claims as to where it stands vis-�-vis a new asset to the company. Will they start warring with each other or will they take a united front? A: With these dot-com companies and these high-tech companies, huge amounts of money were loaned unsecured and in different tranches. They’d each have different rights. So I think you’re going to see warring but it’s going to be at the unsecured [level], whereas before it might have been at the secured level. Q: Do you see indemnification surfacing as an important issue? A: I’m the wrong person to ask about that because I don’t believe in indemnity. I don’t think investment bankers should have indemnification because you’re hired to do a job and if you can’t do that job to an appropriate standard then you should pay the price and there’s no reason that the debtor should pay you for not doing your job right. Q: How important were the changes in bankruptcy practice stemming from the Bankruptcy Code of 1978? A: What happened in 1978 that was very important was that [the new code] took away the requirement that you had to be insolvent to file Chapter 11. What happened is Chapter 11 almost became a corporate finance tool which it couldn’t have been before and never was before. The nature of the bankruptcy practitioner changed. Historically the bankruptcy bar had been largely small, largely Jewish firms, people that due to anti-Semitism couldn’t get jobs in the white-shoe law firms. And when the code changed in ’78, people started to realize that Chapter 11 was really part of the corporate finance arsenal. Twenty-five years ago, a Holland & Knight wouldn’t have a bankruptcy department and now we have 60 lawyers practicing bankruptcy. None of the white-shoe firms had bankruptcy practices. They farmed that out. Texaco was the real turning point because its Chapter 11 was used solely as a litigation strategy. It really made people wake up and say, “Hey, we better get on this bandwagon. Why are we farming out this work to these little boutiques?” It’s a very small bar today, but it was an even smaller bar and a lot of things were done on a handshake. Now you’re getting major firms in bankruptcy. Q: Do you see any major changes or trends in bankruptcy? A: I don’t see the major trends which I would like to see. Q: What are they? A: I believe that the issue of conflicts and disinterestedness in bankruptcy needs to be revisited because I don’t think we have a professional code of ethics for attorneys that works well in bankruptcy. The traditional code of professional responsibility is geared toward a two-party dispute where you have a plaintiff and a defendant and it’s very clear who’s adverse to whom. That’s not reality in bankruptcy. My ally today could be the person objecting to my client’s allowance of fees tomorrow. There’s constantly shifting loyalties in bankruptcy. I mean today the secureds and the unsecureds may see eye to eye on something and then later when we know how much money is there they may be fighting each other tooth and nail. Q: Were you a little surprised at the disinterestedness issue cropping up in objections for turnaround specialists? A: As turnaround specialists become more integral to the cases, they’re clearly coming within the spotlight more. When I started practicing law back in the dark ages the attorneys cut the deals. Then it became the investment bankers. Q: When did that change? A: In the late ’80s and early ’90s when the companies were not the problems, [but] the balance sheets were. It was then perceived that investment bankers gave more value because they could do debt-for-equity swaps and those types of things. Twenty years ago [lawyers] had much more of an integral role than they do today. At the same time, litigation has become more frequent. It’s really the crisis manager and investment banker that’s doing the actual turnaround of a deal. Everybody plays a role and the personalities make a difference, but bankruptcy lawyers are much more hired guns than they used to be. Copyright (c)2001 TDD, LLC. All rights reserved.

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