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To the list of all the hoped-for reforms that have been derailed in the aftermath of Sept. 11, add one more: the efforts to create a uniform, international bankruptcy code. “It will be a while before people begin to focus again on this issue,” said Richard Miller, a partner in Greenberg Traurig’s New York office and co-chair of the firm’s 40-lawyer national bankruptcy and reorganization practice. “But things will get back on track after this disaster and people will seek to build a structure to facilitate cross-border investments that allow both investment and recovery.” Despite the current crisis, expanding economic globalization will continue to create the need for a uniform bankruptcy regime. “You want to know under each system how you will be treated and you want to know, whether you’re a native or a foreigner, that you will be treated fairly and that assets are fairly applied to pay the creditors’ debts,” Miller said. “We’ve moved a great way toward recognizing the global nature of business with the goal being … uniformity, or homogenization, and the recognition of one country’s rules by another country.” The Model Law on Cross-Border Insolvency is the international provision aimed at standardizing global bankruptcies. The United Nations Commission on International Trade Law created the law in 1997 but so far it has only been adopted by the northeast African state of Eritrea. Its counterpart in the United States is Chapter 15 of the U.S. Bankruptcy Code. That effort has had more success: It has passed both houses of Congress and is now stalled in a conference committee. Miller calls Chapter 15 an important effort to reconcile different cultural approaches among different legal systems, and is eager for its completion, even though he harbors no illusions that it will smooth the world’s cultural differences in a bankruptcy setting. MISSED OPPORTUNITIES The 49-year-old Miller should know. In 1994, he represented both the Rockefeller family — at the time the minority owners of Rockefeller Center — and the Mitsubishi Estate Co. Ltd. management company — its Japanese majority owner — when he was at New York-based Dewey Ballantine. The negotiations, he says, became a “case study of cultural differences, miscommunications and missed opportunities.” “We tried to work things out for about a year and a half before the bankruptcy filing and it was very clear that the parties didn’t talk to each other, but talked past each other,” Miller said. “And at the end of the day, it was only tens of millions of dollars keeping the American and the Japanese parties apart from either filing or not filing.” Mitsubishi ultimately chose to file for bankruptcy in 1995 after it asked the Rockefeller family to invest a relatively small sum in a billion-dollar problem and the Rockefellers said “no,” Miller said. “The owners went back to Tokyo and the board approved the filing,” he said, “and by the time the Rockefellers approved the investment, it was already too late.” The Japanese majority owner was playing multilevel chess while the American, minority side played a different game, he said. That led to over-analysis and mistrust of the others’ motives and subsequent miscommunication and miscalculation. “The positions were hardened and the American opportunity to first restructure and then reorganize was lost over tens of millions of dollars, not hundreds of millions, in a billion dollar project,” he said. While Miller believes that cultural hurdles are less pronounced than in past cross-border filings, he still comes across European managers with multinational operations who have difficulty fully understanding the U.S. bankruptcy system. PERSONAL LIABILITY “The hardest thing for some European managers to accept is the fact that the U.S. bankruptcy judge has great discretion while judges there have very set rules and more rigid guidelines,” he said. That greater judicial latitude has created a situation in which two U.S. judges in different circuits can come up with two different answers to the same question and differing circuit standards have consequently evolved, he said. Senior managers tend to become increasingly concerned about their personal liability in companies that need a complete overhaul, Miller said, and that concern expands when foreign ownership is involved. Managers and directors in Continental Europe have to be careful in distressed companies, while the American system provides liability protection as long as there’s no gross negligence. All of this is what advocates for a more uniform system hope to overcome. The inherent lack of uniformity ultimately leads to so-called “court shopping” in the United States where debtors seek what they perceive to be the most responsive forum for their particular needs, he said. “You can still pick your district but you can’t really pick your judge anymore, even though it’s become clear that there are certain issues where different circuits have formed different standards,” he said. Bankruptcy has changed dramatically since Miller started his bankruptcy career as a creditor’s counsel in New York’s garment district in 1979, just after the 1978 Bankruptcy Code revised the rules, elevated professional standards and made restructuring a more viable business option. Miller saw firsthand how “the Code” turned bankruptcy from a field where the handshake and backslap were the norm into a profession with serious professional standards. In the garment district, trade associations “would come in as trade creditors and try and fix a company’s problems and would actually decide whether it lived or died,” he said. “These trade associations would hold sometimes colorful meetings and someone, usually with a big cigar, would stand on a desk and tell the debtor, ‘You’re not paying your bills’ and other, usually more colorful things,” Miller recalled. “It was a way of renegotiating the contract or forcing the bankruptcy, and they would basically seize control of the company and liquidate it if they felt it couldn’t be saved.” FINANCIAL REHABILITATION By the early 1980s, those out-of-court workouts became anachronistic. It became a lot easier for management to maintain control of operations, Miller said, because creditors began to acknowledge that it was better to resolve things than to liquidate. “The Code changed the standards of professionalism and people became more refined in their approach once the rules gave the honest debtor more of a chance to effect his financial rehabilitation.” The Code also made it possible for bankruptcy lawyers to be paid at the market rate they charged for nonbankruptcy cases. “The bankruptcy judge no longer had to co-sign checks or administer a case and reorganization became an accepted tool for corporations to work out their financial problems.” A good debtor counsel senses instinctively from experience when management is competent enough to discern industry trends and to decipher what the prospects are for the survival of a troubled company, Miller said. “There’s always a problem, however, because some managers never want to admit that the company they’re running has problems and that they might be even partly responsible for them,” he said. “You have to be particularly careful in a small bankruptcy not to so burden the enterprise so that all they do is pay fees because they’ll never get out from under,” Miller said. “There’s always that balance that has to be done between the investment needed to fix it and what the property or the enterprise is worth.” The ability to attract capital is harder and the margin for error is consequently smaller and the ability to hide operational difficulties through cheap money more difficult in today’s business environment, Miller said. “More companies that file now are in bad shape operationally because it’s become a lot harder to spend your way out of trouble than it was in the early 1990s,” he said. RISING COSTS Miller believes in starting to work on a distressed company as early in its troubles as possible. “The sooner you get in, the better chance you have of getting out,” he said. “You also try to keep it from filing whenever possible, because restructuring can be expensive, particularly in complicated situations, but the expense goes up dramatically once you’re in court.” Those rising costs are compounded in a filing by intangibles that can’t be predicted, Miller said, including which judge will get the case, and how the creditors might respond. “You lose the ability to cut a deal in private and there are now teams of lawyers that have to write pleadings and read pleadings. That can cost a lot of money.” Miller’s greatest triumph was as chief counsel to LG&E Energy Corp. in 1997 in its successful hostile takeover of coal-fired electric generating plants from bankrupt Three Rivers Electric Corp. LG&E had tried to acquire assets from Three Rivers but the rural electric cooperative decided to sell them to an LG&E competitor that planned to move into LG&E’s home market in western Kentucky. “The deal was pretty much dead for LG&E when I was called in,” Miller explained, “and I was able to take a billion-plus dollars worth of utility plants away from a potential competitor who thought they had those assets in their pocket,” he said. “The debtor was struggling; they couldn’t pay their bills; they needed to make a deal; they picked somebody else; and I was able to force them to pick LG&E.” He said the pre-filing agreement was done secretly with the creditors out of court and he offered the court a better deal after the terms were made public in the reorganization plan and the competitor couldn’t top it. FEAR OF BANKRUPTCY “We were able to use both mergers and acquisitions people and our bankruptcy team to get much further than with just an M&A team and others have cited it as a model for an M&A in distress,” he said. “The pre-filing agreement was done secretly with the creditors out of court and we offered the court a better deal after the terms were made public in the reorganization plan and the competitor couldn’t top it. We were able to counter a deal made out of court because LG&E was willing to pay the value of those assets to protect its home market from a potential competitor.” The fear of bankruptcy is a powerful weapon that can often be used to persuade people that they should cut a deal instead of going through the public scrutiny that bankruptcy can bring, he said. “Sometimes you have a business that can’t stand the additional stress, that has special customers that might get scared and go elsewhere, and the other side knows it will harm their business,” Miller said. “Then it becomes a test to see if the enterprise might do it or even whether it has the guts to do it if it needs to do so.” Copyright (c)2001 TDD, LLC. All rights reserved.

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