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Commission to Study the Reform of Chapter 11

Field Hearing

November 1, 2013; Atlanta, GA

Transcript of Proceedings

Keach: Good afternoon. We're going to go ahead and get started because if history is any the guideline, two hours won't be nearly enough but it's going to be enough today. We're going to try to adhere to the deadline. We'll go ahead and get started. I'm Bob Keach, one of the co-chairs of the Commission. To my left is my co-chair, Al Togut.

Togut: Hi.

Keach: We're going to dispense with our usual opening statement today. This is actually our second field hearing at the NCBJ. We were at NCBJ last year when this effort was just getting off the ground. We've certainly covered a lot of ground since. By way of very brief introduction, we have a variety of topics to cover today. I want to thank our witnesses in advance. Many of the topics are largely around the theme of governance but we also are going to cover both the expenses of Chapter 11 and the entirely appropriate issue of small business Chapter11 which covers a pretty wide field all by itself.

Without further ado, we'll get directly to our panel. Have you guys decided which order you would like to go in? Then I'll just pick Mr. Dunne to start. Mr. Snyder will join us when he gets here but Dennis, we'll start with you. Let me just say to all of you: we've read your papers, they were very good. I thank you also for your papers which will become part of the record the Commission. If you can take about 5 to 10 minutes to summarize your position with the emphasis being closer to 5 than 10 and I'm sure the Commission have lots of questions based on their having read your paper. Dennis. Thank you.

Dunne: Yeah. Thank you, Mr. Keach. Let me start off by saying it's really an honor to address the topic of official committees with this Commission.

Male: Move the mic closer.

Dunne: Let me see if I can work the mic better.

Keach: Yeah, there you go. Perfect.

ABI Chapter 11 Commission Field Hearing, 11-01-20... (Completed 11/07/13)

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Dunne: Al promised me a hot bench so hopefully I'll keep it closer to five. I'm not going to repeat the remarks that I had in my paper. I'm going to just emphasize a couple of points, which is I think that historically that the official committee on secured creditors, mandated by statute, is part of the pillars of Chapter 11. I think one of the reasons we have such a successful Chapter 11 process is that we don't rush to throw the board and management out the door like many of our other sovereign nations, and regimes do. There's no administrators, monitors, liquidators, referees or the like. Part of that process though was to make sure that the creditors had somebody overlooking the company, the board, and management to make sure that we didn't have the negative consequence of doing that, which is that you in effect have the same board and the same management team that manage the company into Chapter 11 continuing to make those business judgments.

Many of those business judgments may not have been the best prepetition. It also deals with the agency dislocation that you have the board of directors that has been appointed by equity, prepetition. In almost all the cases but not always, you're dealing with an insolvent company. Equity is out of the money and the unsecured creditors or the creditors somewhere or the residual economic stakeholder and having a creditors' committee there recognizes that fact. I think that bestowing upon them fiduciary duties means that they're not there to take extreme positions and to drive maximum value to one set of creditors or another. They're there to see what is in the best interest of all the unsecured creditors and what maximizes the value.

And so very often they come out after some amount of negotiation in the exact same place as the debtors. I believe that provides a lot of comfort not just to the creditors but to the courts as well. Let's talk about the evolution of Chapter 11 cases, and the committee, and the maturation of the committees since '78 because it's been a lot of changes that we've seen. On the one hand, there's been the rise of ad hoc committees of bondholders or other investors that are very often very sophisticated parties and who are very zealous and fervent in representing their own interest. I know at various points in time people have said, "Well, why do we need an official committee when you have ad hocs who can do it for themselves." There's a couple of answers to that.

One of which is that the ad hocs have no representative burden. They represent only themselves. They're not there for the entirety of the case. I've been in cases where ad hoc committees have disappeared after a few months because the members felt like they wanted to trade out and the rising price of the bonds meant that there was no longer any ad hocs. I don't think the other creditors of the court can take comfort that they're in it for the long haul or that they're calling balls and strikes on various issues. They're going to set out positions that


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favor them and sometimes favor themselves extremely, even if as part of that they're going to delay the case or impair other party's recoveries.

Also with the ad hocs, the ad hoc groups are typically unwilling to get restricted for lengthy periods of time. I have found even in cases where we represent official committees and there are one or more ad hoc committees that are there for months if not years. Those ad hoc committees, the members of the committees, the economic stakeholders, the funds are not restricted. They'll have advisers who are seeing nonpublic information but they can't really make decisions which is very different from the official committee. We have members who receive and review nonpublic information from the day they were appointed through the day that committees terminated on the effective date of the plan.

Even in some of the most complex cases, Lehman is an example where they were multiple ad hoc committees. It was the committee itself that ended up spending over a year with the debtors negotiating a plan of reorganization. During that time, the ad hoc committees had no visibility into what the proposals were, the counter proposals on that. It was all with the goal that we would reach an agreement with the debtors. The debtors would use the committee as a proxy or a surrogate for the various creditor groups. Then we would roll it out to the ad hoc committees. They would get restricted for a short period of time. In Lehman, it was as short as two weeks, which is kind of amazing given the size of the case.

With minor adjustments, the plan that we had negotiated with the debtors was the plan that got most creditor's approval. It shows the continuing role and in my view, necessity for a committee as a forum for trying to get these deals done in these complex cases. At the same time, there's been some developments with respect to the membership of the committee that raises some issues. I did a fair amount of committees where there were trade creditors on it. Winn-Dixie and A&P are examples of it. Winn-Dixie being a perfect example, where there were also add ad hoc committees of trade, of landlords, and of bondholders but it was again, the official committee that work with the debtors to put together a plan and then roll it out to those ad hocs.

You see very few trade creditors on committees these days because of the obvious reason. 503(b)(9) means that if the payable run has been reduced to within 20 days, you probably do not have many trade creditors with non-priority on secured claims when you start the case. The other issue is the level of fiduciary duties, the definition of how broad those duties are, and the impact it has on trading. As a result of that with respect for the debt for borrowed money, typically bonds, you're much more likely to see the indenture trustee sitting on


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the official committee than an underlying bondholder who may be unwilling to be restricted from trading for a period of time.

One thing I would like to see is I've seen a number of deals where both indenture trustees and the underlying bondholders have showed up willing to serve on creditor's committee and only the trustee was appointed because they represented the whole issue whereas the bondholder was only showing up with their limited claim. I'd like to see the economic stakeholder get on the committee.

Klee: Do you think an indenture trustee should be eligible to sit on a committee?

Dunne: Short answer is yes if what you're getting at is the fact that they have fiduciary duties that run to their own bondholders. Let me address that, because it's the double fiduciary duty conundrum. I think that once any party is appointed to the official creditors' committee, they have fiduciary duties to the general unsecured creditor class as a whole. They sit solely in that capacity as a member of the official creditors' committee. This means that outside the committee, they may be directed, for instance, to take a position that the committee opposes and indenture trustee could be directed by a majority of its bonds, for instance, to move for substantive consolidation. The creditors' committee may have decided no, and the indenture trustee would be free in its creditor committee capacity to vote against that motion because it's reviewing the facts with the different set of fiduciary duties.

I think that it's inappropriate and I haven't seen examples of this, is I don't think that a majority of the bondholders could direct the indenture trustee to take a position sitting on the creditors' committee. I don't think that they have the power to direct that because that's a completely different capacity.

Keach: One of the things I should've said is we're going to take all of these statements first and we'll do the Q&A at the end of the entire panel. Mr. Dunne if you can wrap up that'd be great. We'll get back to you, I'm sure.

Dunne: Yeah. Let me just hit one other point where I was talking about the evolution of the cases. The other thing that's happened since '78 has been the rise of second lien debt. I think that more often than not in the first decade or two after the Code was enacted, it was very often the intent and the reality that the Unsecured Creditors' Committee represented the residual economic stakeholders. You'd have an asset-based loan that almost by definition given the borrowing base formula left some value behind particularly concerned value or otherwise. With the rise of second lien debts and the cash flow loans done at the top of the capital structure, we're encountering more and more frequently capital structures where they're under secured, where there's no residual value


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for the unsecured creditor class and query what the role is of the official creditors' committee in that case.

On the one hand, it's fair for them to go and review to see if there's collateral leakage. Did the secured creditors actually perfect on everything? That should not be a particularly complicated exercise but many of us has suspected seeing a number of deals where it goes beyond that and that you basically have a creditors' committee that is funded by the estate that is not otherwise in the money and believes it has fiduciary duty. It does have fiduciary duties to creditors who are in the money. Does that lead the advisers to that creditors' committee to pursue causes of action that have remote chances of success? Because (a) their clients aren't paying for the fees and (b) they believe their fiduciary duties in some cases impel them to do that. Does that lead to longer cases and more expensive cases?

Keach: Thank you.

Male: Any answer?

Keach: No. We'll get to his answers later. Are you asking me a question?

Levin: You're supposed to give us the answers not the question.

Dunne: I think the answer is that I am not suggesting that there are insufficient tools in a judge's toolbox to deal with that. I think that there should be more scrutiny upon some of the actions of the creditor's committees particularly in those cases to discern whether it falls into the category I described. I believe that the courts have ample power to deal with that if it occurs.

Keach: Right. Thanks. Mr. Snyder, 5 minutes or so. Thanks.

Snyder: I'll beat that record.

Brandt: Turn on your mic.

Snyder: I'm William Snyder. I'm a principal with Deloitte and I co-lead the US practice with Sheila Smith. I do appreciate the opportunity to talk about governance issues related to CROs. I'm in the restructuring practice since 1989. I've held over 30 of these fiduciary-type positions and bankruptcy and 25 years ago, they weren't called CROs. That's a new age term. We were just the interim president or interim CFO. CRO is a new age term. I've also served as a trustee and examiner.


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In a debtor in possession is a proof in model. It served an industry very well. The board and management do possess a lot of institutional knowledge that's very, very useful in the restructuring process. Anybody who believes they can step into any company and within two to four weeks, figure everything out in that company and turn it around without assistance from management is probably delusional. There is a role for the debtor in possession and there are generally three scenarios your find out there. One scenario is a proverbial great management team, great board and you have a lousy balance sheet. Those are your prepacks and stuff like that. They're very rare and we call them Sasquatch because everybody wants one and they really don't exist very often.

The next scenario we have is they're equally as rare because when you have really bad management and a bad board. There have been bad stores and they're bad people. You end up with a trustee and that's rare too.

In the third scenario, it's much more common where you have a management team and board that sort of know how to run the company. They know how to run the company but they don't know how to run a restructuring. In that case, OJT is a very bad time to start learning how to do a restructure in the middle of filing. It's equivalent when airplanes get in trouble with two pilots. One pilot flies the airplane. The other pilot fixes the problem. If they both fly the airplane, they crash. If they both fix the problem, they crash. You got to have one person fixing the airplane, the other one flying it.

That defines the role of a CRO. CRO unlike other advisers in the estate or attorneys, they are actually appointed officer of the company. The CRO, I always almost insist, report to the board and like in Pilgrim's Pride the CEO and I were peers. We both reported aboard at the same time because management sometimes is hopelessly conflicted and so trying to report to them is an issue. The company has a lot of other C-level positions or chief operating officers, there's a chief financial officer, there's chief information officers. There is a role for a chief restructuring officer but you don't just keep it on staff. You have to bring them in when you need them. No one just walks around with a CRO in their back pocket.

[Laughter.]

A lot of people argue that advisers are good enough. It's good enough to be an adviser. Why do you have to be an officer? Well, let me tell the men, the fact that a CRO reports to the board can hire/fire and sign checks is not lost on management, and not sign checks. The fact that you have the power of the purse and the power to take their jobs away if they're negligent on what they're doing is not lost on management. It's an incredibly power tool. That is a definition of CRO. You hire, you fire, you can sign checks. That is very different from being an


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adviser because adviser, all you have is the power of your mouth and that's usually not very strong.

A CFO can also have a dual role in smaller companies where you also fill the role of a president or CEO at times. There are issues hiring CROs because the CRO is both an officer and he's a professional. He or she is a professional or both you carry. There have been a lot of commentators and of course, have commented that 327 and 363 are not ideal. Under 101 (14) on the disinterested test, if you've been an officer within two years, you can't be a CRO. Then under 363 you can side step the disinterested issue but then you also have the approval and reporting requirements. You end up with this kludge where you're sort of hired under 363 and you report under 327. It's not ideal and it's inconsistent. Nobody does it the same practice and all the circuits … no one does it the same way.

You end up with the Jay Alix protocol which was nothing more than a settlement. That's what it was. It was a settlement and become sort of the law of the land. You have to set up a wholly owned subsidiary and you stick to CRO down there. He hires his firm under 327. It's just a kludge and it just really doesn't work very well. It's awkward. I think it's an easy fix. There's a quick fix. All we have to do is amend 101(14) (b) to exclude the CRO service from the list of disinterested issues. I think that's a really quick fix. It would also acknowledge the CRO's role. It would solidify that position in which I think is a very critical part to bankruptcies. You see a lot more CROs than you see trustees, examiners and the like. I mean the CROs are very common term. It's a very useful. It turned out to be incredibly powerful tool in the restructuring process and unfortunately, it's a kludge. That's the end of my comments.

Keach: Thank you. Mr. Williamson.

Williamson: Thank you, Mr. Chairman. Having sat in the chairman's chair, albeit in a different context, I will follow the examples set by my two colleagues on the panel and be very brief. For those of you who weren't at the NCBJ panel earlier today which ended up focusing on fees, fee examiners and the likes. I would commend it because I think it is going to save us a lot of time because the folks there talked eloquently and perceptively about those issues. It was also noted at the panel earlier today that today is an anniversary. Actually to be precise, it's a birthday and of course, the birthday being for the new US Trustee Guidelines. I may be the only person in the room who remembers this time period. For another reason, another anniversary which is about 16 years ago precisely the National Bankruptcy Review Commission submitted its 1200, that's not a typo, 1200-page report to the Chief Justice of the United States, the Congress and the President.

That really leads me to the substance of my very brief remarks. The comments I want to share are not about substance, not about 101(14) or 503(b) as such but


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the Commission's mission. This Commission's mission as it perceives itself. If its goal is to recommend legislation, that's fine but as I suggested in my written comments, I think that may be a very frustrating if not futile endeavor because the fact remains that this Congress and the next Congress and the next Congress are, I want to be kind, highly unlikely to pass any legislation. The dysfunction that plagues our Congress today …

Brandt: You're qualifying that just as a bankruptcy or in general?

Williamson: Both. But I think, Bill, the dysfunction with respect to bankruptcy law is even more pronounced. We could spend hours talking about why that is the case but I think that is the case. There's not going to be any legislation however wise your recommendations. There's not likely to be. What is your audience? I think your audience ought to be the courts, the US Trustee System, anyone that deals with the system as we know it, a sound Chapter 11 system. Your audience ought to be the public as well because after 2008 I think the public's awareness of corporate health, corporate failure and corporate re-organization is higher now that it's ever been.

I do think the Chapter 11 system is fundamentally sound. I do think it can be improved. I think it's important for the public, your ultimate audience, to know that the people who are invested in the Chapter 11 system whether it's CROs, lawyers, judges, US Trustees are the same people that want to make it even better, even more transparent, even more effective. That message doesn't just apply to fee review or the need for examiners. It applies across the board. I think that this Commission can do a great public service when it compiles and promulgates its report by being that broad. Not Congress, but as broad as the public interest itself.

Keach: Thank you. I know we have a number of questions. Don, do you want to start?

Bernstein: I guess I have one question for each of you, different questions. Do you mind? Can I do that?

Keach: Sure.

Bernstein: The question I have for Brady is going to be a compound question on a topic that you just discussed. Are you suggesting that the Commission should be focusing on how within the current system we can make the improvements as opposed to new legislation? Is that what you're saying?

Williamson: I'm saying don't forget the former in search of the latter. In other words, look on your mission in broad terms. I think that the people on this Commission are known not only in their profession but known outside the profession and


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communicating your recommendations to the academy, again, to the courts to the Rules Committee have to be a lot more satisfying and productive than directing it to Congress and not just because Sam, in every other sentence reminds us that ABI doesn't lobby.

Bernstein: Okay. Now, this is actually the question for Dennis but it actually is relevant to your materials also, Brady. The question for Dennis is what's your view of committees where you've got multiple constituencies and multiple debtors? Should there be single committees constituting all of those groups or multiple committees? If you have single committees, how do you address the issue of fiduciary duties and the way it relates to Brady's presentation is that Brady has material about the cost of Chapter 11 and how does the composition of the committee and whether it is a settlement form, affect the cost of Chapter 11?

Dunne: That's a good question. I'm going to use Lehman as an example to respond to that. In Lehman, there were multiple request to have official Unsecured Creditors' Committees appointed at various of the Lehman subsidiary entities as well as at the parent entity. We operated as one committee that had fiduciary duties to all of them. The answer is what you're alluded to the concern by some of the ad hoc groups was, "Okay, but then you can't an effective advocate for anyone of us because you have fiduciary duties to everyone." We decided that we could weigh in on a number of issues but it wasn't going to be with extreme positions of advocacy for any one ad hoc group.

What we did was we try to be umpires on these things. We tried to call balls and strikes looking at the facts and the law, and hope this really was aspirational at the time. That when we work with the debtors that the parties that were in the various ad hoc committees were not going to choose litigation over a settlement that was premised on reasonable probability weighted outcomes.

That's succeeded in Lehman but it was uncertain there for a while whether people were going to choose the litigation path. I think that's a testament to we got the balls and strikes right. Lehman was so massive that I think that nobody wanted to wait around for the years to figure out where that litigation would occur. Let's assume that that's not how it played out which is part your question. I think that if you had formed multiple official committees of unsecured creditors at each levels, you would've almost guaranteed a lengthier, more expensive and litigious case. Why? Each of those committees would've had fiduciary duties only to those entities and not to a broader set of creditors that had issues on different sides of intercompany claims, on whether value was really at the parent or the sub, or substantive consolidation. Those fiduciary duties makes it more likely that somebody would've felt compelled to litigate those issues.


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Bernstein: Okay. You know what I'm going to recede on the third question because I know others have questions.

Keach: Al.

Togut: Dennis, how do you feel about the idea of having a single committee rather than a UCC, recognizing that in a modern corporation often times the unsecured creditors are out of the money? If you had one committee that's got unsecured creditors, bondholders, secured creditors that acts as the negotiating unit, how do you feel about that?

Keach: You mean committee composed of parties with different priority?

Togut: Right. It's no longer UCC. It's a committee.

Dunne: If I'm representing a secured creditor, I may like it but I'm not sure. It depends on the facts. I'm not sure that that works because (a) are you positing a world where that committee has no fiduciary duties because if so, who does it have the duties to I'm struggling with. You can see situations where without a clear sense of who you're acting for … secured creditors who may believe that the only ones in the money will be using their seats to that committee to make sure the committee does nothing. That could be the right or wrong answer based on the facts of any particular case but I think you'd want an official committee with some clearer mandate and some set of duties.

Keach: Bettina.

Whyte: Dennis, one of my greatest concerns is when you get an unsecured creditor committee and you talked a little bit about this today. Half of the time, there aren't unsecured creditors with normal sense that we use to think of them, trade creditors and people who really wanted the organization to continue. Also if they are, many times their claims are traded to someone else. How do you handle that when you really have no committee left?

Dunne: There's a couple of responses to that. I think the technical one is that, I find it's been a rare case where I lose a committee member during the case because of the restrictions that come with service on a creditor's committee. They can't trade. Sometimes it happens because you can set up a trading firewall with the US Trustee's blessing. You go to court and get that order entered but even there it's been the rare one when I've lost a committee member. I think the question goes to the broader unsecured creditor body where the creditors who hold the debt at the beginning of the case may not be the same universe of creditors that hold it at the end.


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I think that that's an issue for … that's why I'm trouble by the ad hocs for instance because they could be populated by parties that came in that don't understand the value of the enterprise of making a particular bet on litigation outcomes and not on preserving value and jobs and community. They're perfectly within their rights to do that because they have no fiduciary duties and that's their ad hoc. I think that the committee then becomes a counterweight to it and I hope has served helpful roles in cases where they oppose the ad hocs on those types of … or more precisely have agreed with the debtor on a particular outcome because our fiduciary duties should kind of … we overlap on outcomes most of the time.

Snyder: What do you do though when somebody trades out of their position? They have no economic value in the outcome and the only reason they stay on the committee is to get the indemnification? And that happens.

Whyte: Yes, it does.

Dunne: You're talking about boards or … ?

Snyder: That's happens a lot.

Dunne: I actually haven't seen it . We have by laws.

Dunne: Right, it's fine. We typically deal with that in the bylaws for the committee's meeting. I haven't seen that because it says basically you have to report to the committee council what you're holdings are and if they decrease by an agreed upon percentage. Typically 75%, it could be as high as 50%, you have to alert the committee council and many of the bylaws provide for their resignation if they fall below a certain amount.

Keach: I'm going to get back to the question, Mr. Dunne. I have a question for you Mr. Snyder. [00:32:00] We talked about preserving the debtor in possession model and we're rightfully proud of the debtor in possession model. The rest of the world seems to be trying to get there but there are some who actually say that we have actually abandoned it because of the prevalence of CROs. In fact a phrase I've heard and actually repeated is that the CRO is the trustee picked by the secured debt before the case starts. How do you reconcile the prevalence at CROs but if we want them report directly to the board and in some cases report directly to the secured creditor? How do you reconcile that role with the maintenance of a real debtor in possession framework?

Snyder: Well, in my history and our practice, the CRO always reports to the board, something like a mandate in our firm because you would never report to the bank as a secured creditor. You're reporting to the board and that's where you


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take your direction from, but that creates a symbiotic relationship with the rest of the management because you do have somebody that's very skilled in a restructuring practice that can guide that management team to maximize value. Many times that means shutting down half of the company or firing all their friends. There's a natural tension there. Some tensions and bankruptcy are good. That's a good natural tension where you've got a professional in there that's very skilled in the practice driving the management team, assisting them to come up with something that maximizes value even it means them losing their jobs.

The CRO can do that. I think a management team on its own is not going to come to that conclusion. I've had many, many cases in my life where at the very end of the case went up firing half the management or most of them or all of them. They would've highly likely not gone down that road. I think the CRO provides that balance of understanding how it gets through a case and I think most CROs are very adept at understanding absolute priority role and how it goes in.

Most CROs do not take sides. They're not advocates. They're not advocates for the bank or anybody else. Those are fair fights that happen in a bankruptcy and everybody's jocking for position. The CRO's role is to maximize the value of the pie and also be an honest broker amongst the parties going back and forth. The CROs, I think, a very skilled CRO rarely would ever take a position on one creditor or over another. That's what the attorneys are for.

Keach: Mr. White and then we'll get back to Ms. Whyte and then Mr. Butler.

White: Let me ask a question with regard in staying on the issue of the role of the CRO and to whom they appoint except switch it a little bit. Who usually selects the CRO, the security creditor or truly independent board? Who selects the CRO in most cases?

Snyder: Normally, number one, nobody wants to hire one. I've never had a management team in 25 years that would call me up and say, "Come, whack me over the head because I don't know what I'm doing." That's never going to happen. No one's ever going to call for that help. It's somebody in the capital structure forces the issue and it's usually the fulcrum capital. It's somebody that's money to lose, the people that have had the most money to lose are the ones that say, and they're usually in the position of default or forbearance. They're the ones that advance the names and they'll say, "Hey, here's three firms or four firms. You interview them or pick one you want."

That list sometimes because a black list. Sometimes it's not always good to be on the list because that the last person they're going to hire. It's always promoted by somebody in the capital structure that's usually in the fulcrum. They'll put the


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list forward and then you go and you do the beauty pageant with the board. Then the board picks you. That's how it's done.

Whyte: I'm going to add to that a little bit, if you don't mind William. I think one of the things that one of the things that I have found very often after you get on the blacklist, and it is a blacklist very often, is that the debtor's attorneys may have more influence because they can influence the board as to who is chosen. I think from that perspective, secured creditors have of course the list that gets proposed but I also think the debtor's attorneys play a large role in helping direct or consider who gets chosen. I think one of the comments you made about the CRO is … first of all, I agree with your statements but the CRO versus when we used to be named interim CEOs. I think there's a huge difference with that. I'm curious about your perspective because I think CROs are not advocates per se, they're honest brokers as you said. I think that can be different when you are appointed interim CEO.

Snyder: Well, there's interim CEO and especially with smaller companies, it's very common to wear both hats. Even as a CEO, you're an advocate for the estate. That's the only person you're advocating for. You make that estate as big as it can because it's usually the pie's never big enough to feed everybody. The CRO's job is try to get that pie as big as they can, as fast as they can so that the constituencies can sort out where it's going to be divided.

The CEO in a smaller company, remember the CEO then is providing guidance to the management team on how they're going to run the company and how they're going to making hard decisions, guiding them to tactical decisions every day but I don't really see that wearing the CEO hat does not change the fiduciary responsibility of the CRO. I don't see that. You just happen to have two hats on but a CRO, I do not see that wearing one hat being the CRO or CEO combined really changes the outcome. I've done both and I've always would make the same decision.

Keach: All right. Mr. Butler and then Mr. Baker.

Butler: Mr. Snyder, I want to put some meat on the bones in your proposal because it seems to me that it's sort of an innovative. I wanted to ask you two or three questions. I think you're going to have short answers. Is it your intention that if a 101(14) (b) was amended that all applications would come under 327?

Snyder: Yes. Absolutely.

Butler: Second question, do you think that your proposal is too narrow in the sense that occasionally there's not just a CRO, from that organization, there may be two or three officers appointed. There may be a CRO and a CFO, a CRO and a treasurer,


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a CRO and a controller, are you intending to have this protection only for the CRO?

Snyder: That's actually good point. No, it would be anybody who's serving in that firm, interim management capacity because you're absolutely right. You may actually have an interim CFO for some period of time. I think I overlooked that. I know you're absolutely correct. I was trying to come with a simple solution because they're the best, right. I overlooked that. No, it'd be any of those interim positions.

Butler: And they my last question, would you agree that that the reporting requirement where they get this special treatment, the reporting requirement would need to be to the board of directors not to any third party, not to any other party in the case. The reporting relationship would need to be to the board of directors.

Snyder: I think a CRO should always report to the board under every circumstance.

Butler: The last piece, to get this special protection, would you concede that there should be built into the statute a disclosure requirement that would require that in applying for this exemption, if you would, or could qualify into this, that they would have to be disclosure made publicly about how the selection process worked for that CRO so that they was a public disclosure of how the CRO came to be appointed.

Snyder: I'd say that would be fine. I don't see any problem in that at all.

Butler: Thank you.

Keach: Jan.

Baker: Two questions, first for Mr. Williamson, you have obviously unique perspective on this process. I took to heart your exhortation to the Commission and warning that legislative success might not be the touchstone of the Commission's success. Agreeing with that, are there any specific recommendations you would make to the Commission as to what it should do in addition to specific legislative recommendations?

Williamson: First, Jan, let me note the discussion here about multiple committees is a perfect example of how a Commission report and a Commission recommendations can help improve the process however you come out without worrying about legislation. To get to your question precisely, I think that the Commission itself or through ABI needs to give very serious thought to what it does on the day it releases its report. The week after it releases its report and for the next 12 or 18 months to make sure that the Commission's recommendations are discussed


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debated, supported, criticized because as I said, I think it's essential the public, writ large capital P, understand that the people invested in the system are willing to help improve it.

Baker: Thank you and my second question …

Williamson: By the way, you could reduce that to two words, public relations, but I think this is simply common sense, you've invested an incredible amount of time, talent and resources. Don't just stop.

Baker: Thank you. My second question is to Mr. Dunne and relates to your discussion of the rise of the ad hoc committee. You will remember at an earlier time in the history of bankruptcy when it was fairly common for ad hoc committees to go in and file substantial contribution applications. Those really are dead now to all intents and purposes, I believe. In fact, some commentators have identified the rise of ad hocs and the fact that payment of their fees has become an indispensable part of securing agreement of the major constituencies to a plan for the increase in cost. Do you see that as an inevitable development? Is there any opportunity to avoid the payment of what are in effect multiple committee fees as a result of the rise of the ad hoc committee structure?

Dunne: That's a good question. I think that it's certainly true that to the extent that an ad hoc committee at the end of the day is part of a global settlement. It's highly likely that their fees are going to be negotiated and some or all of them paid as part of that. On the one hand, that's no different than a number of the stipulations that have come forward with one off landlords during a case where you work out some amended lease term and the landlord's counsel's fees are paid as part of that as well. The real question is whether there's abuse within that.

It goes back to the question that you were asking Mr. Williamson. I don't think that there is a legislative fix to this. I think there are sufficient kind of weapons and protections that exist already for review of the reasonableness of some of these fees. It really goes ultimately to in any particular case, what is the role of the ad hoc committee and how are they functioning? To the extent that you had an ad hoc committee that comes in around the time that you're negotiating a plan of your organization, rolls up their sleeves, get restricted and you work out a deal, it's probably that's on the easy side of the spectrum to say that those fees may be justified to the extent they provided that value.

We've all been around in deals where the ad hoc committees have not actually engaged in a meaningful way for years, in some cases, while their professionals are there looking at information that's nonpublic but they don't have restricted clients to discuss those with. They don't really have a portfolio and should the


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fees in those cases be compensable? I think that that's where the courts in the parties should look more closely on.

Keach: Mr. Levin then Mr. Brandt, and then Mr. Sprayregen. Thanks.

Levin: I have a follow up question for Mr. Williamson. You said it will be a good thing if the public understands --I'm going to try to quote you but it will be close -- that the people who work within the system are committed to improving it. Today's hearing is about governance and therefore it is about the people who work within the system. The testimony from your two colleagues there, make really good cases for why the CRO role should be preserved and why the committee role should be preserved. Mr. McDow whom we're going to hear from soon is going to make a very good case with solid reasoning and thinking behind it as to why the US Trustee System, at least parts of it should be preserved as it is. Do you think we create a credibility problem in persuading the public that the people who are committed, who work in the system are committed to improving it when everybody who works in the system says,I've got a good role and it shouldn't be changed.

Keach: My part works.

Williamson: Well, you could say that 8 out of 10 parts work or 9 out of 10 parts work but that still leaves one part that doesn't work. I hope the Commission report will be frank enough based on a consensus to recognized those parts that could be improved. Notwithstanding the presence of Al and Bob at the head of the table here, it all comes down to who pays. At least since the Adelphia case …

Levin: It's not just who pays but who receives.

Williamson Absolutely but it's also a question of perception because who pays and who receives takes part in a context which is paid for ultimately, by the taxpayer, judges, clerks, the entire system is a public system, Rich, not in arbitration.

Levin: No but aren't the fees going to system … don't they see the amount necessary to support it? I haven't look at the statistics recently. I know the US Trustee System is, shall we say, overfunded. I'm not sure about the court system as well.

Williamson: I'll defer to Mr. White on this but my recollection is that during the most recent fiscal unpleasantness that the fees from the bankruptcy system even funded the US Supreme Court for a period of several weeks.

Keach: We were more than happy to help.

Williamson: I'm sure the chief justice appreciates that.ABI Chapter 11 Commission Field Hearing, 11-01-20... (Completed 11/07/13)

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White: I'll stipulate that the US Trustee System is a real bargain.

[Laughter]

Togut: And worth it too. Bankruptcy is the only profit center of the government.

Keach: Go ahead, Brady and Bill Brandt has a question.

Williamson: You know this notion of public understanding or public perception is like the holy grail, it will never be found. It will never be achieved. The fact is I think the Commission has an opportunity to improve public perception, public appreciation for a process that is fundamentally sound, saves jobs, and in the end helps the American economy build based on failure. General Motors being a perfect but by no means the only example.

Levin: So what's good for the General Motors is good for the country?

Williamson: Well, it turned out to be that way.

Keach: With that Mr. Brandt. You have a question?

Brandt: It's for Mr. Williamson as well. I mean there's a number of people in the room who have a subset of having been politically active in having a sense of the Hill. Several of them around the Commission and it's rare that we get someone with your experience who comes into the room. I think the general sense is I talk to people in the industry that they all anticipate. They all think that Congress is waiting with baited breath for the latest of our proposals and wants to deal with bankruptcy. I would ask you as much as an educational tool but also because of your experience to wax a bit as to why your original forecast of nothing like that had happened for the next two or three Congresses is in fact the case.

Williamson: Actually, Bill, when I said the next two or three Congresses is probably an understatement. There was a period of time in the 1990s both before the '94 legislation and before the National Bankruptcy Review Commission that insolvency mainly surrounding consumer bankruptcy became a partisan issue. Again, we can talk forever about why that happened, how that happened but it became a very divisive … what's the best way to say this. It was not an issue on which people came together.

Until the 2005 legislation which happened because you have the Congress of one party and the president of another. The odds I would've said the same thing until you had those three coming together. The legislation that ultimately became the 2005 act was vetoed once, was stopped by one house of Congress of the other at least four times. That was when you had a far less divisive situation than you


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have today. That's why I urge again that the Commission think very broadly in terms of its audience.

Keach: Although as Dodd-Frank has proven that you could even really conservative people to love bankruptcy if the alternative is perceived to be really much worse so maybe that's our challenge. We just need to find something much, much worse.

Williamson: Bob, other than asking to revisit 2008, I'd hope we don't any of that.

Keach: Yeah. Well, Mr. Sprayregen has a question.

Brandt: Well, one quick follow-up for Brady though. One of the issues that we often get questions about and you have some unique perspective on, is whether it will be easy in the near future, the far future to make article I judges into article III judges so I'm going to dump that hot potato on you and ask you for your general thoughts on the matter.

Williamson: Well, actually the person to answer that question most directly is probably Rich Levin given his history. [Laughter] That was a bridge too far in 1977. I can't imagine that being even imaginable …

Brandt: I think you've described it appropriately.

Levin: … well, I agree with that. Just a clarification as it is often described as making the bankruptcy judges article III judges. That is not what we attempted in '77 and it would clearly not work. What would have to happen is the creation of a new court to which the president with the advice and consent of the senate would make recommendations. You cannot fold the existing bankruptcy judges into an article III court. That's a short hand we used but understand, we're not talking about necessarily the same people. Some of them might get appointed but not necessarily.

Keach: Okay. Jamie, I know you've waited patiently.

Sprayregen: I was going to ask the Article III questions so I'll skip that. Dennis the question for you on a lot of committees these days, the official committees end up having small bondholders on it instead of the large holders because of the unwillingness to become restricted. We end up sometimes on a company side thinking that we don't really have the right people to negotiate with. You represent a lot of committees. I'm just wondering whether my observation's correct and if not, what is your observation on that? Do you have suggestion on a way to handle the restricted problem and the difficulties negotiating with the bondholder constituents as a result of that?


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Dunne: Yeah, Jamie, that's a good question. You're right that that's a fact pattern that appears commonly. I've actually seen a couple of cases we had where the smallest bondholder didn't get on the committee I think for that reason. There was a larger group of bondholders that were organizing outside of the official committee and they were doing so because they didn't want to be saddled with the fiduciary duties and the trading restrictions that come with service on an official committee. That begs the question, how does the official committee function effectively to bring the parties together towards a deal? I touched on one of them before, which is basically, we will go off and do the work as advisers and make recommendations to the creditors that are on the committee and hopefully you get that right and can sell it later.

There's another part to that which is that the committee can have and does and their advisers certainly do have discussions with those larger holders that are not sitting on the committee, to get a sense of what their views are on the case, what their views are on some of the legal issues and you put that in the mix. Hopefully, you have a sense, before you roll something out to them what might be acceptable or not. In terms of restriction, there was a time -- this was 10 or 15 years ago -- where there wasn't a per se ban on trading while you were on a creditor's committee. It was thought of in terms of mirroring a public board, if you will. That there would be a period of time taken after a disclosure statement's filed or other key information out there, that you may be able to have a window of trading. That's changed.

Now the US Trustee's pretty clear that when you sit on the creditor's committee, no trading for the period of time you're on the committee, unless you can set up an ethical firewall. That makes sense for the larger institutions, Fidelity, Vanguard and the larger mutual funds can certainly set that up. For a number of the middle size or smaller size funds, they can't set up those ethical firewalls. That would one thing to consider.

Keach: All right. We've got time for two more questions, short questions and short answers. Mr. Butler and then Mr. White, go ahead.

Butler: I have two questions for Dennis …

Keach: Then it'd have to be even shorter and faster.

Butler: Yeah, it'd be shorter and faster. They'll be quick questions. Dennis, for every Dennis Dunne committee where people are mostly reasonable and where people don't end up … I said mostly, mostly reasonable. There are people who will talk about committees that are abusive. Their first response is to serve discovery and interrogatories and a lawsuit that pursue claims that are remotely remote, particularly they'll lower the money that they are in. Much of the


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testimony the Commission's received have been proposals, not surprisingly from people higher in the priority chain, talking about how we should bring this in. Perhaps making fees contingent or changing how you pay people. How do you address the issue of trying to get … is there any way to address trying to get committees to behave more responsibly the way some do as oppose to many who are arguably do not?

Dunne: On the way down here, I was actually thinking, should I recommend that there would be a change to the statute that would say something along the lines that there's a presumption, that they'll be an official committee of unsecured creditors but it's rebuttable. It's rebuttable in the case when it's clearly that they're out of the money and they're not going to serve the purposes that they were designed to serve by the nature of the economic reality is facing that company.

Keach: Precisely the way equity committees are now.

Dunne: That would be the way, without the presumption … I'd start with the presumption that you do. Then you realize that that in terms of what that means in reality is that you're moving forward a number of fights to the beginning of the case in terms of valuation and whether they're in the money or not from an unsecured creditor perspective. Even if they're clearly not in the money, as I mentioned before, there are legitimate tasks for an Unsecured Creditor's Committee to do which is to affirm that the secured creditors actually have valid enforceable perfected liens on their collateral and there's no seepage of value from what reports to be secured down to the unsecured. What we're really talking about is in those situations when they begin to act to extract value from unsecured creditors by taking flyers on litigation, by creating a specter of delay that forces the first lien or second lien creditors to pay to avoid that risk of delay.

Where I came out was that there's tools in the toolbox to deal with that. That's where I think part of what that Brady Williamson was saying. Part of this is sensitizing, I think the courts, the US Trustees and the judges to this reality and that what you describe is vexatious litigation. There should be consequences for that and it would be very helpful if that was identified in some cases sooner rather than later.

Butler: My quick question for Mr. Williamson. Brady, you talked about public perception and the importance of trying to address that. Could you just talk about that in a context of, let's just pick Lehman because I wasn't directly involved in that so I can talk about the fact. I think it was a remarkable case and a remarkable service to the global community. I happen to personally believe from a professional perspective.


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Keach: A remarkable result.

Butler: That without what Judge Peck and the professionals in that case did in setting the rules and trying to figure out what to do with derivatives in this global economy. There would have been a meltdown. That cost a lot of money right. People measure the fees in the billions. There's been lots of bad publicity on that. I personally believe that 20 years from now, academics will be writing about what Lehman contributed. In your point that we talked about public perception, how do we address the public perception that there was waste in Lehman given … how do you do that? I just want to understand how do you think about those things?

Williamson: Well, a lot depends on the metric you use because I agree with you completely on the result in that case. The value brought to the case by professionals and whether final feel totals … it was funny how you forget these numbers, was 1.6 billion or something a little south of 1.6 billion. It was a bargain. In fact, Judge Peck in that case found an interesting way to express the bargain by talking about the total amount of administrative expenses, all in, as a percentage of the distributions. One of the public education problems we have and I think it exists in American. I think it exists in Patriot Coal. I think it's going to exist in Detroit, is explaining the value and distinguishing as I know Bob is trying to do, in American between the professional fees to run an airline and the professional fees to run a coal company from the direct literal expense of Chapter 11.

Now, I don't expect that any of the co-chairs or members are going to get invited to appear on Meet the Press or Morning Joe. I do think by talking about value and return in Lehman, you just have to keep at it. I mean politicians for all their flaws, the best of them stick to a single message and almost never tire of repeating it. Sooner and later the message gets across. One final point, not quite what you asked about, is that your context for this report is not General Motors. That was a success. Not Lehman so much, that was stunning success. But what's the target? What's the context going to be next June?

It may be Detroit. It may be Alabama. What the public is going to look at your product, is through the eyes of whatever economic problems exists and at the moment, hard to pick up a newspaper without reading about what's going on today, next week in Detroit. People then see that questions about pensions, retirees whether they have to sell the art collection to fund a plan if there is a plan, indeed if there is a bankruptcy. All of that provides a context for your report. Again, I hope that with ABI's help, you're able to come up with a plan to disseminate your recommendations.

Keach: Thank you. Mr. White, last question and then we got to go to the next panel.


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White: Quick multipart question to anyone who cares to answer with regard on the line of the compensation questions that were asked. Why do Unsecured Creditors' Committee so rarely object to the professional fees of debtor's counsel and professionals or to executive bonuses of management? Second part because I don't want to pass Brady's comment that today is the effective date of the US Trustee fee guidelines, what do you think is the best measure of success to determine what is effective fee review. Is it merely reducing fees or is it something else? To anyone who wants to answer either questions.

Dunne: On the first question, I think it's a function of the reality that we're working with the debtors to get to a position where we're not objecting to the employee incentive plan also with respect to their retention applications and their fee applications. We've negotiated the fees at the front end particularly with respect to the financial advisers, and I haven't been in the case where we haven't lowered them. We've witnessed the work as we go forward with it in the various work streams and the parties and we review it for that purpose.

We haven't been in cases where we've requested reductions and we've negotiated those. I have been at odds with the debtors. I mean Jamie and I had one in A&P where we couldn't get to an agreement on an employee incentive plan. We file the objection and the court decided that. I think the goal of the whole system is to breed consensus and to allow us to have a kind of a negotiating dynamic so that we don't always litigate everything. I think that more than not we succeed on that.

Snyder: I think on the fee issue is I don't think a great objective is to lower the fees because they should've been incurred in the first place. The better outcome is to have a process from the beginning of the case that everybody sticks to this. Remember going in college that the teacher nailed you at the first week. Okay, they're actually reading their homework and they never read it again. That's sort of like what you're doing is that you set up a process from the beginning. Everybody knows people are watching it so you don't have to get to the end of a case and start whacking people because the problem never occurs in the first place.

Keach: I have noticed that billing judgment goes up with scrutiny. Thanks. We do have to leave it there and we're not going to take a break or anything. We're just going right to the next panel. I want to thank you very much.

[Applause]

Keach: Mr. Gittelman, Professor Lawton and Mr. McDow can come forward.


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Keach: Well, thank you. We'll go ahead and get started and somehow, I'm sure we'll steal you an extra 10 minutes. The same rules will apply. We'll take all of the opening statements, if you can keep them to 5 minutes or so. That's great. We have read all the papers and then we'll do Q&A to the entire panel. While we just start with you Mr. McDow and we'll just proceed from my left to my right with the statements. Thank you.

McDow: Thank you. I appreciate the opportunity to be here and I appreciate you inviting an old retired US Trustee to share some of my thoughts on corporate governance. For 18 of the best years of my legal career, I was with US Trustee for region 4. It was a privilege and an honor of serving in that capacity. We had a unique role and we have a unique role as an administrator and enforcement watchdog of the bankruptcy system. The US Trustee's public interests perspective differs from the perspective of debtors or creditors. It is precisely because US Trustee as an independent party with no economic interests, it allows it to protect the interests of those people not in the courtroom and to protect the integrity of the system.

Many people will press you for change but you have to think about what's good about the system and what's good about the changes made in 1978. Particularly, I would urge you to be careful not to go back to things … put things back the way they were. My first four recommendations can be summarized into just one. The current method of appointing trustees and examiners is better than the alternatives and should not be changed. The separation of the court's judiciary role from the administrative functions should continue.

When Congress enacted the 1978 Act it recognized there's a public interest in the proper administration of bankruptcy. Congress further recognized that the combined administrative and judicial functions created and institutional bias such that the bankruptcy judges felt personally responsible for the success or failure of the case and this lead to the appearance of bias.

Some of you respond but saying, "Well this isn't 1978, a lot changed since then." The bankruptcy practice has a more important part of the legal system today that it was back then. Then it was run by a few people. It was easy to call them a bankruptcy ring. Today, almost every major firm has a bankruptcy department. For decades, bankruptcy's gotten the best and the brightest of financial and legal talent and that practice is much more sophisticated. The bankruptcy bench is strong and well respected. The reason for this change in part is because Congress in 1978 wisely separated the administrative function of the bankruptcy court from the judicial function. This allowed the judges to devote their time to the legal issues of the case and allowed the US Trustee to carry out the administrative functions.


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One of the things that we do is … an earlier question talked about appointment of Chapter 11 trustees. When I was a US Trustee for region 4, I took seriously the duty to consult with parties in interest before making a trustee or examiner appointment and included not just seeking suggested names but also inquiring about the qualities that the trustees would need for the case. Sometimes these very parties that I was consulting with were also going to be litigating with the trustees so you have to factor that into the mix.

Another challenge of the consultation process is to make sure that people understand it. To understand that it's an open process. It's a broad process and they should not be limited about the preconceived notions of how the United States Trustee will make the selection. I've heard complaints sometimes we're willing to go outside the panel and outside the district. Sometimes the courts don't like that but I think it's important that we make a broad search for the best person to field that case.

There's a significant amount of due diligence involved in that and vetting the candidates. I think it can only be done, and I know that when I interviewed trustee candidates, we did it in private so they could be candid. One advantage of having the US Trustee make the appointment of trustees is so you have a more independent trustee and is not directly to beholden to any particular creditor because there's no single interest in creditor interests in bankruptcy. There's a multiplicity of interest and the duty of the US Trustee is to choose a candidate that can balance those interests and applies fiduciary duty to advance interests for the entire estate, for the entire creditor body and not any particular interests. It's easier and can be more independent if they're appointed by the US Trustee.

Now, one of the questions was about the trustee versus the CRO and versus the creditor's committee. Each of those has a function in the process. I think the important thing is to keep people in the proper lanes and so that you have trustees performing trustee duties. You have CROs performing CRO duties and you have creditors' committee doing creditor committees duties. When you take another party and put them into performing the duties of the trustee, it usually can lead to disaster or at least it creeps in on the system and makes it less a good system. I think that bankruptcy would benefit from more trustee appointments particularly in those case that it's going to be liquidation cases. Many in the system including judges and attorneys have an irrational resistance to trustee appointments in Chapter 11.

There's no cure for this, I don't think but I think one thing that would help is to make it clear that the burden of proof is the preponderance of the evidence and not clear and convincing because this burden of proof is based on that false


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assumption that appointment of a trustee is a drastic a remedy and can be wrong. The other thing I'll just mention briefly. You should resist the efforts to create a court appointed alternative other than a trustee. I think when do that it leads to disaster.

In conclusion, I would like to say that I focused on the role of the US Trustee and the trustee appointments but I want to reemphasize the importance of having a US Trustee watchdog in the process. I'm always aware that some believe that only judges and the parties with a financial interest should be involved in the case but I think experience is shown that independent US Trustee is necessary. Any significant recalibration of the ballots present in the current system whether by further entrenching current management, allowing creditors more control or restoring case administrative duties to the judge, in my view, would be a giant step backwards toward the flawed system we had before 1978. I appreciate your time and look forward to your questions later.

Keach: Mr. McDow, thank you. Professor Lawton.

Lawton: Yes, thank you. I would like to thank you for giving me the opportunity to come here today to talk about my research. It's in process, so one of the things I'd like to hear from you if possible, is what areas you'd like data on with regards to small business debtors. Right now, it's a large empirical study pre and post BAPCPA Chapter 11 cases from 2004 and 2007. With the testimony I gave to you is related to the 2007 data which has also been coded and analyzed at this point, still in process with 2007. What I wanted to show and I think you all have a copy it's basically all the tables that I have so I'll point out a few things here.

Let's start with what we know so far. What we know is that Chapter 11 small business debtors do very poorly in Chapter 11. We know that. We've suspected that for a long time but this data shows it is well. We also know however that Congress was right about that fact. The 1994 commission was right about that. They mentioned this is a problem. The problem however is the solutions that have been proposed. I have two basic recommendations here. Recommendation one is if you decide to that you want to have sort of separate track, I suppose, inside Chapter 11 for small business debtors that you really simplify that definition. The definition is very complicated, I think, needlessly so.

The second thing is the 300-day plan proposal deadline and the 45-day plan confirmation deadline. I think what the data shows is that they were solutions in search of a problem, that we really didn't have much of a problem there to begin with. Just as a starting point, let me show you the first couple pages on this shows you that there are very strong predictors of plan confirmation rates. I used plan confirmation rates as a very simple metric for success. One is official creditor committee formation. Now, official creditor committees are formed in


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only about 18% of the cases. It's a minority of the cases. The other is liability size. Liability size doesn't really matter if you test it. If you see the next two tables here, it doesn't matter if you take off contingent unliquidated debt or you include it.

What I did then was I put those two things together and I tested it and found that if you look at creditor committee formation and liability size, just total liabilities as scheduled, what you find is there's a statistically significant difference in plan confirmation rates. Why not have the definition be that instead of adding and subtracting affiliate insider debt, figuring out whether somebody's in the primary activity as the business of owning and operating real property which I still don't exactly know what that means to be honest. Now, the other piece of this, are the deadlines. If you flip forward into the data tables themselves, what you'll find, and professor and now Senator Warren, and professor Westbrook found this in their data from 1994 and 2002, is that cases were being disposed of pretty quickly in bankruptcy pre-BAPCPA.

The first table here shows you that about 61% of Chapter 11 debtors of my sample were disposed of, meaning plan was confirmed, case was converted or case was dismissed within 345 days of the order for relief. That's pretty quick. Now, you might say well that's somewhat unfair because it includes both small and large debtors. If you look at table 3 and 4, and you look at row 6 there of column D, what you'll see is that at 345 days in my sample only 47% of the debtors are small business debtors. You compare that to the overall sample where about 62% were small business debtors. What you see is that the small business debtors were actually being disposed of quicker pre-BAPCPA than the large debtors. That makes some sense as well because large debtors have higher confirmation rates, takes longer to confirmation.

What was happening with those small business debtors, 71% of the debtors that were in Chapter 11 on day 345, 71% proposed a plan, 43% confirmed a plan. That confirmation rate actually is a confirmation rate for the whole sample. It's about 26%. It's significantly improved when they stayed in. It looked like from that data, and this was 2004, that cases were moving out of the system pretty fast. The cases that were staying in the system of small business cases were actually proposing a confirming plans and that judges were doing this pretty well without the 300-day deadline.

The last thing, because I know I'm running out of time here is the 45-day deadline. That's got to go. Because if you look at the last table here, this table 8. In my sample, I had 799 cases and within the first 45 days if you look there were 113 small business debtors that confirmed a plan in my sample, only one did it within 45 days of plan proposal, which means that the debtor's counsel are going


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to have to be moving routinely for extensions of that 45-day period. I'll stop now because looks like I've run out of time. I look forward to your questions and any data that you would like analyzed. I'd like to know what you would like about small business debtors.

Keach: Thank you. Actually, you were remarkably efficient. We'll get back to you. We do appreciate the work you've already done todate. Thank you very much. Mr. Gittelman.

Gittelman: Great. Thank you. My name is Mark Gittelman. I'm the chief internal bankruptcy lawyer of PNC bank. I've been employed there for the past 20 years. I come to you today to talk to you from the role as senior secured creditor as in many of the cases that I've been handling for PNC which number into thousands all across the country. We've been in that role. I'd like to thank the Commission and ABI for this opportunity to share my personal experiences and observations about the bankruptcy Code and current bankruptcy practice. I should add though that these views do not represent the statements, positions or opinions of PNC Bank or PNC Financial Services group. They're offered solely as my own personal views and observations as focused by my excellent team of lawyers at PNC.

Bankruptcy is a specialty practice and unlike other areas of the law, changing business and financial considerations have a significant and direct impact on the process and the outcome. New types of secured credit, mainly to provide liquidity now permeate many capital structures. It is not unusual to have more than one creditor holding blanket liens outside of a bankruptcy case. These new creditors are often very sophisticated and often not regulated meaning the creditor can insist upon a more intrusive role than traditional secure creditors. These new secured creditors also generally push for a swift resolution, for a return on investment or reduction reserves. They want to avoid a long and costly bankruptcy case.

However, secured lenders have no consistent expectations on paths to case outcomes when bankruptcy is involved. Venue, judge choice, local rules, practices, and even [inaudible 01:21:16] experiences and sometimes even lore may color those expectations. When a quick resolution does not seem available via Chapter 11, the workouts often run through some other means mainly for cost to certainty of result or efficiency purposes. As a result Chapter 11 is no longer being widely used for reorganizations in the manner originally envisioned. Now, the normal Chapter 11 either leads to a 363 sale or liquidation of assets. My views that creditors and debtors are now avoiding this bankruptcy process because it is not transparent or efficient as it could be.

Unless the process provides some level of certainty of result by which I don't mean a value outcome but rather a clear process path to an outcome. Other


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reorganization means will be explored. My recommendations to the Commission are considered changes to the Chapter 11 process, not to the underlying governing law. I have six recommendations to share.

The first is a different court structure. We have now, judges that have primarily the consumer background and some of that of a commercial background. The proposal is to bifurcate the bankruptcy court system into a consumer court and a commercial court where consumer judges would handle consumer cases, commercial judges commercial cases. This is not a unique concept. Many jurisdictions throughout the country have already enacted this type of court, Philadelphia, Pennsylvania, Orange County, Florida are two examples of courts that are already setup with similar structures.

Second recommendation, would be to create a mega court for large and complex bankruptcy cases. We spent a lot of time talking about the very large famous cases: Lehman, General Motors Detroit. We don't spend as much time, I think, thinking about what I would call the middle market cases. Companies with $50 million dollars of sales that don't have many locations, that don't need to make a lot of choices on assumption, rejection. That have somewhat of a clear path but maybe not an entirely clearly path where reorganization for a year or two years in bankruptcy may not be such a bad thing. We have to make sure that the rules that are used in bankruptcy in the way courts look at these cases are designed for the type of case.

While we have a lot of middle market cases that I think are now avoiding bankruptcy, and very large cases that either have no choice or use bankruptcy, I think we can honor that bifurcation and say, here's a court that will handle very large cases with rules and set up an organization for those large cases. Then the local courts can handle what I would call the middle market cases, the small cases, the SARE cases. We don't need that many. In fact, we're almost really are already there. Large cases filing in New York and Wilmington. We set up mega courts in a couple of locations throughout the country and that's where these large cases could file.

Third, bankruptcy judges rotating among jurisdictions. I've learned because I handle cases all across the country, that a Pittsburgh workout is very different from a New Jersey workout, or a Raleigh workout or an Orlando workout, or a Philadelphia workout. Each region has its own business practices, economic conditions and frankly social expectations of the parties. However, the bankruptcy court need not be so regionally idiosyncratic. First day practices, expectations and use for cash collateral and expectations on plan confirmation in Orlando should be exactly the same in Raleigh, Pittsburgh, Newark, Philadelphia. The filings and expected outcomes should be similar and uniform to discourage


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forum shopping and promote confidence in the system for all parties. Rotation of judges would be one way to establish that goal.

Number four, selection process for estate professionals and fee structures should be transparent and uniform. We've already had some discussion about that today. Let me summarize by saying that the business world is now getting away from the billable hour for professionals. The business world is looking for other ways to hire professionals: fixed fees, flat rates, different fee arrangements. Those are things that the bankruptcy court should be considering as well when hiring professionals. Not suggesting a particular way, but it's something that this Commission should be looking at so that there's an expectation of uniformity in what the estate will pay and what the estate will expect out of the professionals that are hired.

The last recommendations sort of go hand in hand. One talks about enforcing, filing of required schedules and operating reports so that all the other parties in the case are not blind for the early part of the case. The last recommendation goes toward uniformity and first day motions. One of the things I find is that when debtors file bankruptcy, they do file their petition, their motion to employ counsel. Usually the motion to pay prepetition payroll although not always but they do forget certain things. mainly for example, their motion to use prepetition bank accounts so what banks may do is freeze the accounts administratively till the court tells them what to do with the money.

It causes disruption in the case. It causes disruption in the cash flow and may cause the end of the case if it's not handled appropriately. The recommendation is to have a full set of required motions to be filed with the first day petition and heard immediately so that the set up, whether it be for use of cash collateral for that interim stage before you get to the final hearing, or the bank accounts, or the employment of professionals, all that is set up in the early part of the case so the debtor can get through the first 2-3 weeks of the case with minimal interruption to get to the real work of reorganizing the debtor. I'd like to thank the Commission for their time. I look forward to your questions.

Keach: Thanks. Mr. Togut, I know have some questions.

Togut: I do.

Keach: And Mr. Bernstein, do you have a question?

Bernstein: I got one.

Togut: Mr. McDow, you talked about more liberal use of trustees and I'm on the panel and have been since 1980. The worse cases that I've ever been appointed to are


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Chapter 11 cases where there was insufficient creditor interest to form a committee. The debtor just ran the case until at some point the judge had enough or the US Trustee moves for Chapter 11 trustee or whatever. By the time I've come in at least to those cases, two things have happened. One is a lot of valuable assets were dissipated and the second is I look back at the case and said, "Oh, my God. If I had been in here earlier, I could've done some very positive things." Talking only about those kinds of cases where there's insufficient creditor interests to form a committee, is it you view that a trustee ought to come in as soon as that determination is made?

McDow: No, I don't think you ought to have a trustee in every case that doesn't have a committee, but a lot of those cases that you talk about its very obvious earlier in the case what is going to happen and when it becomes obvious, it's going to be followed by a liquidation. I think there's probably a time you need to move for a trustee earlier in the case because as you say, we've all seen the cases like you've described where by the time the trustee gets there, everything's already been ruined. There's no possibility making recovery, where if a trustee was appointed earlier in the case, it would be more beneficial.

Togut: Okay. Then for Ms. Lawton, I've a few for you.

Keach: A few.

Togut: A few.

Keach: Okay, go ahead.

Togut: I think I could ask a few. Is it your view that BAPCPA had a negative effect on midsize debtor's ability to restructure?

Lawton: I have to say I can't answer that right now. The reason I can't answer it is because I have the 2007 data. I'm just in the middle of analyzing and coding it right now. One of the things I want to look at is whether to improve plan confirmation rates and other kinds of things but I can't give you definitive answer at this point.

Togut: Okay.

Lawton: May be in six months.

Togut: Okay. It would be …

Keach: We'll be back.


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Togut: Yes, it would be very helpful to know that. Second question for you is there is a sense that the modern day midsize debtor's management is very reluctant about filing for Chapter 11 because of a fear that that's the death knell of their ability to run the company. By that I mean the company is now in play and there'd be liquidated or they'll be replaced in some other fashion. Does your data suggest anything to support that?

Lawton: No, it doesn't because I haven't looked at that yet. I have a lot of data and the problem of course is compiling all of that information so not yet. It's possible I could look at that, I haven't done so yet so I can't answer that question either for you.

Togut: Okay. Those were the easy ones so I'll stop.

Keach: Actually, let me follow up, professor, with you. I'm struck by the fact that the data you collected related the presence of a creditors' committee to success and it struck me that it's not so much that that relationship is causal but rather indicative, right?

Lawton: Yes.

Keach: … which is that when creditors are interested enough to form a creditors' committee, it's because there's actually some belief in the hope of a recovery. When they don't bother that a creditor vote early, right?

Lawton: Yes.

Keach: … and that there's little hope of a recovery. I assume, and this is where the question part comes in. I assume you're not advocating that more committees' equals more success but rather there's something about those cases in which there's a committee that is indicative of success, versus the ones where there isn't.

Lawton: Yes, I'm not advocating for more committees because in one of the articles, I made that exact point, which is this doesn't necessarily mean a causal relationship. It may simply mean ex-ante evaluation by the creditors if this is a case in which it's going to go. I take that point. I'm not advocating that. It might be a signal however, these are the cases we want to pay more attention to especially when you have no committee and you have a very small amount of liabilities because liability is also a fairly strong predictor or whether the case is going to go to plan confirmation or not go to plan confirmation.

Keach: One follow-up and then we'll get to Don's question. I was also struck actually about the relationship between your data on time in small business cases and


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very similar data in the ABI fee study in which professor Lubben, I think put to rest the myth that cases that are longer are necessarily more expensive. It seems to me your data says that cases that are longer are not necessarily drawn down by their own cause but in fact longer cases my lead to more confirmable cases and here I'm speculating from your data and part because there's time to fix problems that enable confirmation to occur. Would you agree some of your data is list indicative of that?

Lawton: Yes. It seems that what was happening was the courts were pretty good at getting rid of the cases and assessing those cases that just didn't have a good prospect and pitching them. Plan confirmation rates went up for these small business debtors, if they stayed in a little bit longer because plan confirmation does take some time. Yes, I agree with that that's necessarily the case that we want to get rid of the cases faster in fact because we may be getting rid of cases that have a greater prospect for reorganization.

Klee: I have a follow up for you too. I'd like that you did find your definition of success.

Lawton: I took a very simple metric here. I was not looking at whether other kinds of outcomes besides plan confirmation. That's all of this data is based on that. Now, I have data where I can go back and look at other kinds of things …

Klee: No, with respect, you have column 2, confirm or not confirm and then column 3, ultimate success or ultimate not success …

Lawton: Oh, I'm sorry.

Klee: I want you to differentiate between those please.

Lawton: Got you. Okay. I apologize. Yes, I looked at three things and the third is not on here. The first was the initial success was just plain old plan confirmation. Ultimate success which I did not look at for the data I gave in the study on time was did the plan … after the plan was confirmed, was the case dismissed or was it converted or did the debtor refile in the same district? That was ultimate success. In other words I looked at did they confirm a plan but then what happened to the plan over time? Because ultimately the question is whether the debtor was successful or was it a return debtor for example two years later or whether the plan just fell apart after confirmation. That's what the ultimate success rate figures are.

Keach: Well, I mean I guess this is kind of the point but it strikes that the time between confirmation and whatever the measurement of not ultimate success is relevant. I'm frankly of the view that if you can confirm a Chapter 11 and particularly, I work in the middle market a lot. If you can keep a factory alive for five more


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years and create a soft landing for the enterprise, that's a successful Chapter 11 even if it becomes a repeat seven filer five years later. I think we need to recognize as a value judgment inherent in picking what the trigger is for deciding that something is or is not successful later on.

Lawton: Agreed. Agreed.

Keach: I think your data is important and this is a comment not a question but I'll move to Don's question, in part because it seems to me one of the things an efficient and effective Chapter 11 system should do regardless of debtor size is identify that cases with some leniency because of the concept of the judgment, identify the cases early on that are not keepers for lack of a better word and once you filtered those cases and dealt with them in a variety of ways, 363 sales, conversions, otherwise. Then provide a system that allows for effective reorganization of the keepers. It strikes me that your study's on time in that respect are important. We'll be interested in completion of your work and some of the feedback. Don you have questions.

Bernstein: Yeah, I guess it's relevant both to professor Lawton's work and to Mr. Gittelman's comments. As we talk about this small business cases and then some of the other hearings, some of the witnesses have felt that the system is broken because there's almost too much infrastructure in a typical Chapter 11 case to do an effective job. Actually the point that Bob made of deciding whether or not the business is a keeper, because there are too many levers that can be pulled to prevent that decision from being made.

Very often these cases are administratively insolvent and it's a decision between the entrepreneur and the secured creditor as to whether more value's going to be realized by keeping the business going. The entrepreneur may want to keep it going. The secured creditor may not want to keep in going and then there's a tug of war that takes time. The question is and may be for Mr. Gittelman, can you see a more efficient process for determining who the keepers are and who they aren't? Who should be making that decision? From an empirical point of view, is there any way Professor Lawton, of looking at the current system and identifying structures that actually enhance the decision-making of what the keepers are and which ones they aren't?

Gittelman: Let me answer it this way. I think the rules that surround the bankruptcy case --whether it's the period of time to assume contracts or whatever the rules are -- rules that are now one-size fits all. The same rules apply in Lehman as they apply in the small pharmacy case Newark. We all look at the big Lehman case because it's the most important case but we forget about the small pharmacy case. If we could bifurcate the rules in such a way that it gives a small company a chance within certain timeframes without so many levers to kill it, whether it's a


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significant amount of time of bankruptcy, amount of time before a judge actually grants relief, if it's deserving of relief, those types of things.

It makes the choice of whether it's a keeper or not a lot faster. My own view is that the determination of whether a company's a keeper and that's actually made before they file. What I'm seeing now is companies that file generally file without any cash. I think the Code was written with the expectation that there was equity for unsecureds. There was some cash in the system so the company could file, use the case, get use of cash collateral even if the secured creditor didn't like that and push the case along for a little bit. That's not the way it's happening today. Companies are filing with no cash, with no plan and no chance to get to a reorganization. In part, I think you have to make it palatable for secured creditors to allow companies to file and work through a Chapter 11 so that the choices made earlier on. I think you have to make the rules not one-size fits all.

Keach: Just evolve on that one before you get to your follow up, how would you make it more palatable to the secureds in that case because in the over secured case, we talked about multiple levels of secured debt. One of the problems the reasons those cases are DOA, it's hard to finance a case that's completely over leveraged. One of the ways you could do that, one of the ways that's been suggested was that we do that is to protect the liquidation value of the secured creditor but not the going concerned value or to more liberally allow the surcharge of existing liens in order to fund the reorganization case. It seems to me you just suggested that some of these cases are keepers, they're just over leveraged and we need to find a way to finance them to move them forward. How would we go about doing that in the over leveraged case?

Gittelman: Again, my comments were not toward a value outcome. They were toward a process outcome. The suggestion is if the process is clear and transparent so that the debtor and the secured creditor have a sense of what are the administrative expenses are going to be, what's the timeframe to get the confirmation. What's going to be needed to confirmation and that's there's not idiosyncrasies among the districts so that the case is filed in Raleigh. It's going to get the same treatment as it's filed in Orlando, as in Philadelphia, as in Newark. It gives secure creditors and debtors more confidence in the system to know if I filed a case, I'll be in bankruptcy here and may be then put more money into the system to know that it can get through reorganization.

I think the big fear on debtors and creditors parts is I filed the case, you're asking me to lend more money into an over leveraged debtor so that it works its way around. Here's the problem that comes out. How long is that going to take and how much is that going to cost? If debtors and creditors had a better sense of


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that, in terms of time and cost, they might take a flyer on it, put more into the system.

Keach: Thank you. Mr. White, go ahead.

White: Very quick question for Professor Lawton. I think your statement that policy changes ought to be data driven is a very good one often forgotten. Question, what kind of obstacles do you encounter when collecting data that would inform better policies so for example, would data tagging bankruptcy filing schedules and statements of financial affairs for example make it easier to analyze the kind of data that you believe need to be analyzed to come up with policy options.

Lawton: It wouldn't hurt. One of the problems I had was the bankruptcy judges were very generous and gave me PACER waivers. We had to do this in '94 judicial districts and we constructed the entire data set of 2004 cases which over 10,000 and same with 2007. Part of the problem is getting access to the cases themselves and you're doing it individual districts. That's one issue. Once you're inside and you do the random sample, it would be helpful if you had I suppose that you're suggesting some sort of folder file, I suppose of some sort that has sort basic documents in it to do the research. Is that what your idea?

White: And extract the data out of it.

Lawton: Yeah, that would help because now it's basically pull up the docket, find the documents, go into the document itself and pull all that data down out of that document. It's very labor-intensive, yes.

Keach: All right. Actually Mr. Klee, then Mr. Brandt, then Mr. Butler. Thank you.

Klee: Yes, I have a question about the US Trustee System. Have you compared the efficiency of the US Trustee System with the state administrator system in Alabama and North Carolina?

McDow: I have not but I have an opinion about it.

Klee: What's your opinion?

McDow: My opinion that we are able to be more independent of the judges and I think it leads to a better system having the division between working out of the Justice department as opposed to working out of the courts, I think it allows us to be more independent and allows us to do a better job.

Klee: What do you base that opinion?


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McDow: Just probably like everybody else, just what I've thought over the years. I haven't been extensively in North Carolina. When I was in private practice, I was there a little bit of time. I'm not knocking their system in Alabama and North Carolina. I just think institutionally that US Trustee program's better. It's just a prejudice I guess.

Klee: Have you compared the cost of the two systems?

McDow: No, I haven't.

Klee: Okay. Thank you.

Togut I have a follow up on that.

Keach: Go ahead and then Bill and then …

Levin: If you have to argue the other side, what you say in favor of the administrator system?

McDow: That we can all just get along.

[Laughter]

Keach: I think that says a lot actually. Mr. Brandt, go ahead.

Brandt: I just have a quick question for Mr. Gittelman and then Mr. McDow. Mr. Gittelman, you were talking about process and one of the things that strikes when you talk about that is you run through the litany of first day orders which all of us routinely know get granted. Use of debtor's cash fee, the cash counts, cash management system, first year of the paid payroll. If we're trying to save some money, if we're trying to get it from the process, why not just change the codes so that stuff get approved, you don't have to have motions? I mean it struck some of us up here that frankly going through the exercise in the same case, in the same motions in every case and every jurisdiction regardless of the mega or small proposition. There's just a bunch of stuff that's become the accepted practice. As you see it from the secured lenders would it make the process easier for you?

Gittelman: Actually, my comment on that is more of a bank as depository than a secured lender. It is not unusual in my practice that when the bank is serving solely as depository with no creditor role in the case and the debtor files bankruptcy. The bank freezes the bank accounts at least in the Chapter 11 context so that we're not paying prepetition claims and at the same time, preserving the cash for the


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estate. We wait for the court to tell us when we postage claims, sometimes prepetition claims get paid.

To add that as a normal process in the Code would work just fine but what we find is many times when the case is filed debtors counsel forgets to file these or waits to file them or the judge takes their time to hear them or decide them and while they are deciding and granted pretty much routinely. That delay causes havoc in the case. Whether that's automatically part of the Code so that it happens immediately or it happens on a case by case basis but it's part of the initial first day spate of orders, I have no objection to that.

Brandt: Mr. McDow, I worked on this analogy for years and I don't have a better way to state it but let me phrase it this way. I love the Chicago Cubs but they are living proof that the meek shall not inherit the earth. Try as they might, you could question their management and when the management is questioned, they replace the manager. One of the problems I've always had and I'm a great defender of the US Trustee System as you know, I was the primary author of the 110 4(b) election processes.

There are some businesses where somewhere between dropping the nuclear bomb of asking for a trustee, which requires a finding of mismanagement or ethical behavior or something maleficence, and just firing the manager, and getting the board to get a new one seems to be somewhat sensible. I see all of these artifices such as the CRO and the designated party, I was one of the very first persons in Gaslight to be named the responsible party. I actually framed the order and gave it my mother on Mother's Day because I had a federal order that said I was responsible person which we always

[Laughter]… but somewhere between all that we've done to work around this …

Male: She still doesn't believe it.

Brandt: Yeah, she still doesn't believe it. You're right. I'm living proof to the contrary. She has it. Somewhere within the US Trustee System, if the board as Mr. Snyder was talking about earlier, just decides for whatever reason, we'd like to change management, much like the Cubs need to do about every third day. Does that have to be the nuclear bomb of a trustee which would send the message to all of the vendors, the employees and others in the jurisdiction that something may be far more intrinsically wrong with this business than just it's time to switch management.

McDow: For the Cubs, they ought to just get some new players, but when you get down to that, I think actually there's nothing in the Code to keep somebody in the normal course from changing management, but the problem you have in


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bankruptcy is in most of these cases, the board of directors reports to the shareholders who are out of the money and so whose backing the corporation then? What's the fundamental of the corporate governance when the shareholders, when the board of directors representing the shareholders is out of the money? They become a fiduciary for the creditors but what does that mean? There's no smooth way to do it but if they could just get a new manager, there would be no problem with that, but the premise to your question is that having a trustee is a drastic remedy. I think that's something that this Commission should look at, is we need to change that perception. All the chapter 7 cases have a trustee and nobody considers that drastic. All the 13 trustee …

Brandt: Well, they consider chapter 7 case as drastic in themselves. I mean I think it's very much what Brady was saying that there's an expectation issue and you don't agree that putting a Chapter 11 trustee at the head of an organization doesn't send a pejorative message as to how the organization's has been run to the greater public?

McDow: It sends a message because that's what we expect it to be. It's a perception. Perceptions can be changed and should be changed.

Keach: Let me just follow up on that and we'll get to the Jack's question because the historical experience at least was that when we had a chapter where if you chose it, that a trustee was appointed automatically, nobody used that chapter. I mean it died of disuse. You've got that experience. On top of which we now have 20 or 30 years of people trying to figure out ways even when they want to change management not to have that change be to appoint a trustee. We've gone from interim CEOs to CROs to examiners with expanded powers. We've all been as creative as we could be to find ways to do this without appointing trustee. I guess go to the basic question is, what is it you think people are afraid of and why do you think that fear is irrational?

Levin: Bob, I might add that whenever a non-sophisticated ask me about a case, they always say who is the trustee or what is the trustee going to do in this case even though there is no trustee.

Keach: Yeah, I don't mean that to suggest that I've made a judgment but it's evolved this experience where people are trying to avoid this remedy so the question, what is it that you perceive the fear to be and why is that fear not rational?

McDow: Well, first of all I don't think there needs to be a trustee in every case. I think only those cases in which grounds exist for the appointment for trustee should there be one. I don't think it should be every case but I think some of the irrational fear is, I mean different people have different interests in the case that changes. If you're the creditors' committee has a different expectation of their


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role once a trustee comes on board, the debtor's attorneys are worried about it because they're going to be displaced. I think people have a built in interest in keeping that debtor in possession, besides the interests of the creditors, besides the interests of the estate. I think that drives a lot of these decisions. When you call it a drastic remedy, it just plays into that same idea.

Keach: Mr. Butler and then Mr. Baker.

Butler: Okay. I have a quick question for each of you. Mr. McDow, of all your recommendations, the one that I continue to struggle with is the concept that if the evidentiary record is weighted such that 49.9% of the evidence goes against appointing a trustee, do you think there should be trustee? I mean that's where the preponderance of evidence standard says. It just has to be a skosh more … for something as significant as displacing management and the board of directors, do you think a skosh more is enough?

McDow: I do. I mean think of all the other things that happen in bankruptcy that abide by preponderance of the evidence. Where did that come from to begin with? It is a drastic remedy. There's nothing in the Code that says that. If look at the cases holding that it's a preponderance of the evidence, it's the same thing in 523 used to be considered a drastic remedy and you had to produce evidence by clear and convincing evidence, the Supreme Court struck that down and I think it's just a better remedy. You used the phrase 51 versus 49, with all due respect to the triers of fact I don't know anybody that can be that precise. What the preponderance of the evidence means, I mean it's a difficult job being a judge but I don't think they can't figure it out. I think it gets in the way when you say of all the things you can do, this one is a drastic remedy and you need clear and convincing evidence when you can establish the plan, you can establish the 363 sale, you can do all the other things in bankruptcy with a preponderance of the evidence. Why you have to have clear and convincing evidence for the appointment for trustee just seems to me off base.

Butler: I have a follow up question.

Keach: We've got a pretty hard stop in like 2 minutes but Jan's been waiting so Mr. Baker and Don, and frankly, if people need to leave to catch a plane including Commissioners they can go ahead and do so.

Baker: Just a quick question to Mr. Gittelman. We've heard cogent comments I think regarding the roles of CROs and trustees from the viewpoint of the secured lender. Do you have an opinion with respect to how the trustee and CRO roles play out typically? Are they too prevalent, not frequent enough, about right?


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Gittelman: Let me add this way. Let's bifurcate them because the trustee is somewhat more of an extreme remedy. The CRO less so, and may be more needed on a more regular basis. When a company struggles and clearly can't figure out how to fix itself, it needs to hire an expert to assist. The secured creditor encourages and may be sometimes more than encourages the debtor to hire a CRO, and I just want to make a comment to what was said in the last session. The secured creditor does not pick the CRO. The secured creditor doesn't expect to report from the CRO. The CROs clearly hired by the debtor, reports to the board and advises the board.

There's a tricky line because CROs work on both sides of the fence from case to case but they're generally very good at keeping that line. I think CROs and the use of FAs in bankruptcy cases is appropriate, in the smaller cases maybe it's not enough.

The use of a trustee I look as a really extreme remedy. While we're talking about 51-49, we're talking about 51-49 over some pretty egregious conduct. We're talking about fraud or willful misconduct. I actually think it's appropriate and maybe a little bit more because the proof level for willful misconduct is tough. Sometimes you can't get there but may be a couple more trustees in cases where there's misconduct would be a better outcome.

Keach: Okay. Thanks. Mr. Bernstein, you have the last question.

Bernstein: It's just a brief one and it follows up on Mr. Gittelman's comments and Mr. McDow's comments. One of the problems with our Chapter 11 process is tactical litigation. One of the great things to litigate over is governance. The question of a trustee, dangling that out there by reducing the standard, wouldn't that make a litigation magnet? And in every case some constituency is going to try to displace management and then at the beginning of the case, rather than trying to figure out how to solve the company's problems, you're fighting for potentially months because there's going to discovery on just the questions you're talking about over the question of should there be a trustee?

McDow: A number of jurisdictions already follow the preponderance of the evidence standard. The professor might know that the numbers and all but I don't know that litigation is any more prevalent in those jurisdictions and in the jurisdictions that have the higher standard. I haven't seen it. I don't know of any difference.

Keach: With that, I want to thank our panelist both this panel and the prior panel. Thank you all for your attention. Thank you.


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