Changes in the Bankruptcy Code in 1978 Meant More Money for Lawyers

When the current U.S. bankruptcy code changed in 1978the first time in 80 yearsprovisions made it more profitable for lawyers to make big money from the transactions. The larger firms were not in the bankruptcy business pre-1978 because the feeling was they could get paid better elsewhere, attorney James Sprayregen told students recently. Today, every big firm in the country has gotten into the bankruptcy business in a big way.

Sprayregen, a partner at Kirkland and Ellis LLP and lead counsel in the United Airlines Chapter 11 case, spoke to students in a Business Law class on February 25 at Gleacher Center. The 1978 law’s sweeping changes included allowing debtors to preside over their own bankruptcy, barring objections from creditors, and allowing lawyers to dramatically boost rates they charged for bankruptcy cases, he said.

In legal terms, filing under Chapter 11 today yields an automatic stay over all of a company’s debts, requiring court approval to pay any, Sprayregen said. Secondly, the process brings out two types of creative financing: debtor in possession (DIP) loans that encourage lenders to work with post-bankruptcy debtors by guaranteeing repayment of their loans over other debts; and cash collateral use, which requires unwilling lenders to loan to a debtor if the lenders' current asset ratio is not declining.

Ideally, bankruptcy brings a plan of reorganization creating a new capital structure on emergence from bankruptcy, Sprayregen said. A pre-established priority scheme determines which creditors get paid first; the rule of absolute priority stipulates each class of creditors be paid in full before a lower class, he said. A class of creditors can approve a settlement if those voting in favor represent half of the claims and two-thirds of the claims' dollar value. If a class rejects a vote, you go to the ‘cram down' part of the code where you can get it done over their objections, Sprayregen said.

 

Phil Rockrohr