NHL Lawyer Serves Up Meat Loaf - Bankruptcy Beat - WSJ

I have taken a bit of a break from blogging about bankruptcy, and have been diverted to politics, namely health care and Joe Wilson. That being said, I love the NHL case in Phoenix. In particular the attorney for the NHL, Tony Clark, who seems to find more obscure pop culture references that I can--this is, after all, how I evaluate brilliance. First, it was Seinfeld--please see my earlier post here Seinfeld Theory Argued In Coyotes Case - Bankruptcy Beat - WSJ --now Meat Loaf (the singer not the dish).

Trying to prove a point, he explained that unlike the Meat Loaf song, 2 out of 3, was bad. Unfortunately, the Judge was not a fan of Mr. Loaf, and Mr. Clark was forced to explain his joke (never a good idea). Trying to explain Meat Loaf, Mr. Clark could only come up with the fact that "he is a big fat guy" who may or may not be around. Then he tried to smoothly remove his foot from his mouth (also an indication of intelligence) by saying he may no longer be fat. Well, he was close. Mr. Loaf, like many of us, fights an up and down battle with weight, and is still around (doing movies and commercials).

NHL Lawyer Serves Up Meat Loaf - Bankruptcy Beat - WSJ

My Article in Minnesota Bench & Bar on Counseling a Financially Distressed Business Client; Beyond the purely legal!

http://www.scribd.com/doc/18502559/Bench-Bar

Please read my new article in the Minnesota State Bar Association magazine Bench & Bar on counseling a financially distressed business client. Instead of dealing with the purely legal aspects of restructuring, it addresses the psychological, practical and spiritual issues that individuals in financial distress face.

I, along with my partner, Tom Wallrich, will be giving a seminar at the MNCLE Annual Closely Held Business Institute on August 20, 2009, called The Practical, Ethical and Psychological issues of representing a Business in Financial Distress. This seminar will be a panel discussion with Tom and I leading a licensed psychologist, a workout specialist, the former head of the Minnesota Lawyer's Board, and a brand expert through hypothetical situations.

See the brochure here.

http://www.minncle.org/materials/seminars/44210.pdf

SENATE DEMOCRATS LOOK TO REVIVE CRAMDOWN PROPOSAL

As the foreclosure rate continues to climb, Senate Democrats are taking a second look at a failed proposal to allow the modification of troubled borrowers' mortgages in chapter 13, Dow Jones Daily Bankruptcy Review reported today. At the hearing before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts today, Sen. Richard Durbin (D-Ill.) called on the Senate to adopt the proposal he's been championing since 2007 that was defeated in the Spring of 2008 and then in the Senate earlier this year: allowing bankruptcy judges the power to cram down the mortgages of homeowners in chapter 13 bankruptcy. Subcommittee Chairman Sheldon Whitehouse (D-R.I.) warned that failing to allow cramdowns this time around would exacerbate the economic downturn. Yet opponents of cramdowns, including Ranking Member Sen. Jeff Sessions (R-Ala.), argued that allowing cramdowns would create troubling consequences both for lenders and for future borrowers. ABI Resident Scholar Prof. Adam Levitin of Georgetown University Law countered that lenders wouldn't punish borrowers with higher prices as long as cramdowns didn't cause them to lose more than they would in a foreclosure. However, this isn't possible, he said, because bankruptcy law requires that creditors recover at least the same amount of their claims in a bankruptcy as they would in a liquidation or foreclosure. Mark A. Calabria, director of financial regulation studies at the Cato Institute, said such efforts wrongly assume that the foreclosure crisis was caused by predatory lending practices that created so many subprime borrowers. Rather, he claims that the crisis was actually caused by the combination of falling home values and what he called "negative income shock," including job losses.

As all my loyal readers know, I am a big fan of mortgage cramdown legislation, as it allows owner occupied real estate to be maintained by the homeowner. While this creates a short term loss for the banks, it forces them to have their books reflect reality. Good Senator Durbin! Let's get this done.

Portions of this post were contributed by David Asmus, Esq. from the Hinshaw & Culbertson, St. Louis Office.

Commodity v. High Tech: How we need new technology in automobiles

I think you will notice that most of the companies that have filed bankruptcy over the past 9 months are producing commodities as opposed to high tech products. In fact, many high tech companies, including RIM and Apple are actually doing quite well. In contrast to lots of the other negative news out there, I think this is actually a good sign. Moreover, if the government takes note, it will encourage it to take the right steps with regard to the ongoing automobile bankruptcies.

A commodity, as defined by Webster's dictionary is:

A physical substance....... which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn't know what the selling price will be.

High tech proprietary products, however, are not subject to the same economic principals as commodities. For instance, Apple has essentially been able to set the price of Iphones for the last few years. As such, it is generally better for a company to be selling high tech proprietary products, as opposed to commodities.

Alas, all products become commodities. Even Iphones are having significant pricing pressures as competitors such as the Palm Pre enter the market.

The genius of the U.S. capitalist system is that it has always provided the greatest incentive for the creation of high tech proprietary products. That is why we lead the way in early industrialization, the computer revolution, and the information technology boom. Unlike our European counterparts, we were not hamstrung by entrenched businesses and the business interference of royalty that were able to mold the laws and markets to encourage the continued purchase of their outdated and fungible products.

In contrast to the U.S., look at countries that really heavily or solely on a commodity based economy. Take for instance, Saudi Arabia. When the price of oil drops, so does Saudi Arabia's economy.

Unfortunately, while we have benefits by a diverse and fluid economy in which new technology is always replacing tired commodities, some businesses have worked against this dynamic system to stack the deck in their favor. Many of our industries have promoted laws and regulation that encourage the artificially inflated prices for their commodities. There is no better example of this than the pharmaceutical companies. The same companies that created lifesaving drugs during the first half of the 20th century, but morphed into sales, marketing and lobbying companies during the second half. Name one drug that has cured anything over the past 25 years. Can't, can you? However, you can probably name 5 diseases that didn't exist 25 years ago, and the corresponding drug that can "cure" it. Yes, I know, we are all grateful that "restless leg syndrome" has been eliminated from our life. All of this culminated with the Medicare Prescription Drug Modernization and Improvement Act, signed into law in 2003, which made it a crime to negotiate with the drug companies for lower prices.

Applied to the automotive industry and the recent bankruptcies, a substantial part of the vehicle has become a commodity. Don't cry to much, as the industry has had almost a century of operating as a high tech businesses with the same technology. That is why Hyundai has one of the top luxury cars in the world, the Genesis, at such a cheap price. The reason for this, is twofold. First, that the existing infrastructure is set up to make the internal combustion engine. I have blogged about this in detail, as well as the need for the government to facilitate a move to new technology. The second, is government incentives that encourage consumption of petroleum. This lead to GM tabling the eclectic car, though it had an over 12 year head start. This needs to be eliminated immediately. If higher gas taxes aren't palatable, substantial investment in new propulsion technology is crucial. After all, the Pruis, which is the only production car with a high tech engine is selling like crazy. Why? Well there is a certain amount of brand status, but also because it is a silent engine. This was emphasized on the show Weeds, where UTURN, the local drug dealer outfitted all of his couriers with Prius, so "no one knew when they were coming." If the current automotive bankrupties are done right, we can revolutionize the automobile with high tech proprietary technology, no one will know that America is coming, and we will rule the next generation of car manufacturing.

Internet searches show brand damage for GM.

This will not be a shocker for anyone who has read my blog, but a review of the Internet searches since it filed bankruptcy on Monday illustrative that GM's brand is damaged. See attached link. The most common Internet search regarding GM is related to the bankruptcy, not a desire to buy a shiny new Corvette or any other GM car for that matter. This is consistent with how bankruptcy will damage any brand. As I said on Monday, while bankruptcy does a great job of managing existing debt, it without question damages revenue.

As such, without a cohesive business plan, the company will not survive a reorganization (or will liquidate shortly thereafter). And with all do respect to the political talents of Brian Deese, a Yale law graduate--who prior to this job was a political operative--is not qualified to put together such a plan. As a Democrat it is insulting that a purely political talent is being put in charge of this process. The reorganization of GM, and the saving of 3 million jobs, should not be politicized. I am not naive enough to believe that political consideration won't be a part of this process; however, all efforts should be to remove politics from these decision.

It is pragmatically, and politically imperative that a plan is set forth quickly. Michigan Governor referred to a Green Industrial Revolution (my words) in her speech on Monday. That is a great tag line, but substance is needed. A Manhattan project of automobile propulsion could put the US on the forefront of the auto industry for the next 50 years. The alternative is not good.

I was right! I was right! Anyone listening?

Not to say I told you so, but I told you so. Bondholders are in line, but Bankruptcy is still immiment, or innevitable, or something that is going to happen like really, really soon. As I said yesterday, the whole showdown was a facade, and whether the bondholders were on board was irrelevent to the necessity of filing.

The new plan seems a bit different than what I opined yesterday, as it seems to be a basic "boot strap" reorganization, where the "bad assets" are shed, while the good assets are reorganized in some form of ongoing entity. Oh, and it looks like all the government aid, some 20 billion or so, is going to be forgiven--I hope I get a Holiday Card for my share.

This is a fairly lame solution to a complex issue, and that it doesn't force technology evolution in a way that would revolutionize the car industry. It is ultimately a buy time resolution, where what is really wrong with the car companies will be dealt with later. That being said, as I said yesterday, 3 million jobs is a whole lot of jobs, and now might not have been time for a bold solution.

Latest Automaker Bond Dance merely a Charade.

It is final, it has happened, and no one is going to stop them now. GM will be filing bankruptcy; by June 1, or sooner. Than again, maybe later, but who really knows. The imminent filing which has been reported on almost a daily basis for the past month. They ran out of adjectives about 10 days ago when imminent didn't seem appropriate anymore. Journalists may no longer be intersted in the truth, but they are at least good with grammar, and "now" wasn't appropriate in the past tense. The reality is the last month of negotiations have been nothing more than a foolish game, one where the only possible solution was some form of bankruptcy filing.

See, even if the government was able to negotiate a deal with the bondholders, which was almost an impossibility given that many of their positions are insured--thus making a negotiated solution less preferable than a total loss-they would still have to deal with the legal liability of all dealers they intend to close. To many of the owners, their dealership is their sole source of living. When it gets unceremoniously yanked, it is not like they won't sue. Bankruptcy was and is the only solution to these contingent liabilities.

As I have said before, bankruptcy is not a bad option for these companies. It is important to restructure the bloated distribution infrastructure. However, bankruptcy won't do anything to modernize the propulsion technology. Remember, and I can't say this enough, cars have the same propulsion system today they had 100 years ago. Why? Is it because we don't have new propulsion system's that would work in cars? No, the electric engine has been available for over 25 years! Because, the new propulsion system's are as efficient? No, we all know hybrids are way more efficient! The main reason, and there are others, is because the massive infrastructure in place is built to make the internal combustion engine. Remember the Brady Bunch episode when Peter Brady was recruited to be Johnny Bravo because the suit fit, that is our auto industry. We continue to build internal combustion engines because that is what we are set up to build--the suit fits. 3 million American jobs rely on the status quo, and in the midst of this current recession, we can't afford to send them on there merry way to find new employment.

While I don't take the needs of the 3 million workers lightly, retaining the current infrastructure, and by design creating ongoing disincentives to develop new propulsion technology, comes at a cost. Imagine what would happen if that infrastructure collapsed, and incentives to develop new technology existed. I am just guessing, but the hybrid engine would look prehistoric in 2 years. Let's remember folks, this is America. We developed the car, we can take it to the next generation. That being said, we won't get there with financial, economic and government incentives against it.

I have a theory. There have been rumors that GM will sell off some of its assets to the government after the Chapter 11 filing. Why would they do this? Well maybe they intend to temporarily nationalize the company through the modernization of new propulsion technology. After a period of nationalizaion, the modernized automobile infrastructure which it could then privatize. This would maintain some form of status quo, avoid a total collapse of the car industry(and the 3 million jobs reliant on them), and put America on the forefront of next generation of vehicles.

I like this idea. It is bold, and need I say audacious. However, I don't think it will happen for a few reasons.

1. President Obama is a capitalist. I don't care with Limbaugh and Beck say, while a liberal, the President is a dyed in the wool capitalist. This move is a bold energetic move of socialism.

2. Similarly, the government doesn't have the economic resources to run a car company. Republicans will say that once that infrastructure is developed, it will be hard to dismantle (by the way, not a bad argument). That being said, there will be a lot of out of work car executives. Moreover, our country has such a capitalist value, I don't see a brief experiment in surgical socialism will be something impossible to undo.

3. In addition, the move is way to bold and dramatic for this President. I like Obama, supported Obama, and trust his judgment, but bold moves are not in his playbook. Obama is quite possibly the most temperamentally conservative president our country has ever seen. Nationalizing the car industry to promote ingenuity and innovation may be to wild of an idea for him.

4. Finally, it is expensive. It may be cheaper to simply prop up the existing infrastructure and hope that technology evolves slowly over time.

Only time will tell whether the current strategy for working out the issues in the car industry will be successful. History really does not give us much to work off of. We have never had an industry which was so important to our economy(or any economy for that matter) in such dire financial condition. For us to prosper from the solution, however, we need bold action, and for our private and public sectors to engage meeningfully in the solution.

Surviving the Death of the Old Economy

Mortgage Cram Down Legislation-Rejection of something that really would have helped consumers.

This blog is primarily devoted to bankruptcy issues as they face business; however, the rejection of the mortgage cram down legislation is something that bothers me--both as a bankruptcy lawyer and someone who is politically aware. The reality is that businesses have the right to strip liens on their assets in a Chapter 11. Why shouldn't consumers be able to do the same thing. Moreover, as a practical matter, this legislation would have a positive impact on banks, as it would keep more consumers in their homes. Think of it, unless there are some unique circumstances, people are not going to keep their homes unless it is worth more than the amount of their mortgage. The legislation would have only allowed a forced reduction of the mortgage to the exact value, so homeowners wouldn't be getting a windfall. But homeowners would have incentive to stay in their homes. This is the goal of a number of government programs, but they have, not surprisingly, not been properly managed. The banks have cried foul, as no doubt, some actuary has reported this will damage their profits, but these are the same actuaries who told them they were protected with credit default swaps. The 1978 Bankruptcy Codes stated goal was to "give the honest but unfortunate debtor a fresh start." No kidding, that was what the legislatures who wrote the bill stated. Humane, well written, and operating almost perfectly for 25 years, until the banks (the same banks that now need trillion of dollars of taxpayer dollars) re-wrote the bill in 2005. Let's take back the dignity that bill provided. Mortgage cram down legislation is a great start! Get it done!

Automobile Bankruptcy(s)

Chrysler's bankruptcy filing has done nothing but continue to operate in a dysfunctional matter, continuing to put bad product on the market, into over saturated distribution system, and expecting different results. Politically and practically it may make sense, as it creates a soft landing for Detroit. However, my concern is that it is a battle without an exit plan. They are going to sell the good assets of Chrysler to Fiat, hoping that Fiat will continue to utilize it's suppliers, but then the word is that it will continue to operate in bankruptcy for years. This is an expensive way run a business. Good for lawyers, not good for anyone else. The reality is that what business continues to rely on the same technology it had almost 100 years ago. It would be like if computers still were using vacuum tubes to power computers. The reality is if the current infrastructure continues to be propped up, there will be no radical change in technology. A better solution would have been to national the industries through radical changes in technology. Before you call me a socialist, the government is already paying the executives and the expenses of the bankruptcy, and this would not be a substantial difference. It would allow for a cohesive strategy for rapid technological advancement.