October 11, 2018 - Two recently published articles raise important questions about the fairness of the US bankruptcy process (a question we will be addressing head on at a panel, “Is the Bankruptcy Code Fair?”, at the LSTA’s 23rd Annual Conference on October 24th).

The WSJ recently reported that KKR & Co. and Bain Capital, two of the private equity firms that sponsored the buyout of ill-fated Toys ‘R’ Us, have agreed to establish a $20 million fund to make payments to thousands of former employees.  What is unusual is that the fund is not required under the bankruptcy code and appears to be designed to be administered outside the bankruptcy process.  According to the WSJ, the funding will be provided by the private equity firms’ partners.  This raises the obvious question: Why the seemingly magnanimous action by the owners?

First, some background.  Toys R Us was purchased in a $6.6 billion LBO in 2005 by Bain, KKR and Vornado Realty Trust but struggled under a heavy debt load and the difficult environment for retail (particularly from online competitors including Amazon).  They filed for bankruptcy last year hoping to restructure but ended up closing all of their more than 800 stores and liquidating, leading to the loss of 33,000 jobs.  Former workers started to agitate for severance, protesting in Washington, D.C., and New York, targeting, in particular, the PE sponsors and their investors.  The new fund may be in response to that pressure.

Is this a “one-off” event or a harbinger of a new “social fairness” trend?  While only time will tell, Melissa Jacoby, a law professor at the University of North Carolina, takes on a number of provocative issues, including fairness to “involuntary” participants in bankruptcy, such as employees, in her recent law review article, “Corporate Bankruptcy Hybridity”.  The article contends that corporate bankruptcy is a hybrid form of law, best understood as a public-private partnership, rather than an entirely private field of law, the commonly held belief.  She suggests that a number of features of Chapter 11, taken together, distort the system’s balance, particularly in large cases.  She argues, in particular, that the control exercised by secured lenders, the doctrine of equitable mootness and permissive venue laws, lead to this distortion.  She offers a number of suggestions, including, provocatively, that rethinking who gets “ a seat at the table” and diversifying beyond the cohort of largely white men who have dominated in legal academics as well as the corporate bankruptcy field, could help to restore the bankruptcy model to the public-private partnership she supports.  Ms. Jacoby, and her paper, will be part of a robust discussion at the annual conference’s panel on bankruptcy, which will also feature Jennifer Hagle of Sidley and Danielle Spinelli of WilmerHale.

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