For companies, bankruptcy has pluses and minuses

By , Staff writer of The Christian Science Monitor

Future judges might want to think about going to business school. If the trend of recent years continues, as most suspect, judges will get an increasing role in managing American business. Texaco's Chapter 11 bankruptcy filing, which protects it from its creditors (specifically Pennzoil), puts the future of the nation's third largest oil company in the hands of a bankruptcy court.

``On certain levels one is uncomfortable with a process that brings the judicial branch so heavily into running our major corporations and to making decisions as to how they ought to be reorganized,'' says Harvey Goldschmid, a business law professor at Columbia Law School. ``Given the new use of bankruptcy laws by major companies, Congress should revisit the laws.''

Bankruptcy has definite downsides. A.H. Robins, which manufactured the Dalkon Shield, has found that management goals do not always coincide with those of the judge looking over the company's shoulder, who is more interested in the creditors and plaintiffs. Bankruptcy often closes off access to the financial markets, making it harder for companies to get out of bankruptcy.

Recommended: Default

But there are advantages. Continental Airlines broke its labor contracts and negotiated lower wages when it filed for bankruptcy. Other companies have used it to renegotiate debt agreements with the creditors. For the Manville Corporation, with hundreds of asbestos liability suits hanging over its head, bankruptcy meant the difference between staying in business and not.

As for Texaco, it has bought time, and the case is now in federal bankruptcy court, not Texas state court.

But early on Texaco made a tactical error by not coming up with its own estimates about how much Pennzoil was damaged when Texaco snatched away Getty Oil, a lawyer close to Texaco says: ``You cannot appeal an issue [when] you've introduced no evidence on the record.'' So it will be difficult for Texaco to challenge the multibillion dollar award. Given that fundamental point, he says, the best thing Texaco can do is settle.

As for Pennzoil, ``it is not in danger of anything except the size of its settlement,'' says Samuel Hayes, a professor at Harvard Business School.

The major damage to Pennzoil is that, as an unsecured creditor, it is behind the banks in getting its money from Texaco. But, says Columbia's Goldschmid, ``it may not be such a bad thing to be near the end of the line ... Texaco appears to be a healthy, viable company, and there should be a substantial residual available to Pennzoil.''

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...