Q&A with: Bankruptcy attorney Dan Sklar

Bankruptcy, once a way to rescue an ailing company, has changed, according Daniel W. Sklar, a bankruptcy attorney with Nixon and Peabody LLP. Sklar, who has specialized in bankruptcy law for more than 25 years, has been involved in bankruptcies as varied as those of BankEast, the former bank holding company that folded in the early ‘90s, to the present-day proceedings involving Foss Manufacturing. During his career, he has represented parties involved in large Chapter 11 cases around the country as well as internationally.

Q. How long have you been practicing bankruptcy law?

A. Since 1980. There was a new bankruptcy code that just came into effect. Everybody was learning. Even though I was a youngster there wasn’t anyone who knew more about it than I did.

Q. What were the major changes back then?

A. Changing bankruptcy referees to bankruptcy judges. Creating bankruptcy trustees. The judges were there to settle the dispute, not to administer the case. The changes reflect the changed philosophy. It used to be kind of a backroom, smoky, shady kind of dealing going on.

Q. Did that law make it easier to declare bankruptcy?

A. Yeah. You didn’t have to establish that you were unable to pay your debts. In October (2005), that changed somewhat but basically you can still pretty much file for any reason — you think you are unable to pay your debts someday.

Q. What attracted you to this practice?

A. I was going to BU at nights, and in my old firm [Sheehan Phinney Bass + Green] we were required to do a nine-month litigation rotation. I asked whether I could work with the bankruptcy partner because of my business school background. That partner [Lee Mercer] was supposed to go to the first national seminar on the new bankruptcy code, but he couldn’t make it, so he sent me. And then in 1980 he left to be Warren Rudman’s legislative aide. At that time, we were representing about $5 million in claims in various bankruptcies and he left it on my desk. I haven’t finished yet.

Q. What’s the point of filing for bankruptcy protection?

A. Judge Bentley, he used to talk about how bankruptcy court was an emergency room. You have to stop the bleeding and stabilize the company, and then you have to try to figure out how to bring it back to health. You have to negotiate a plan of reorganization with all the different creditors groups, raising some new capital, maybe changing some of the ownership, the management. The whole theory behind Chapter 11 is that the company as a going concern is worth more than if you rip it apart and liquidate it. So when you fix whatever mistakes that caused the bleeding and get it back into the black, you feel like you accomplished something: saved [local] jobs, preserved the customer for vendors and suppliers. That doesn’t happen that much any more.

Q. You almost say this as a bad thing. Is that the way you view it?

A. I don’t think it is a bad thing, but you don’t really need most of Chapter 11 to do it. I was involved in a case a few months ago and the creditors got paid 100 percent. There was nothing the matter with that. But that is not usually what happens. What happens now, in the bigger cases, you have bondholders and institutional lenders who don’t care about the future of the business. They just want to get the maximum amount of money now they could possibly get. It’s just a buy low, sell high proposition for them.

Q. You think the court is being used these days just to sell companies?

A. It is. The code doesn’t prohibit it and does tend to maximize to some extent the going concern value of the enterprise. The creditors do better than they would do with a piecemeal liquidation, but it’s kind of a mechanical process. There is no creativity to it.

Q. I noticed there is a big effort in covering the executives’ liability in case they are sued by stockholders. You have cases where people who drove the company to bankruptcy get sued by their stockholders, but they get their stockholders to pay.

A. It is getting extremely litigious, because the creditors get very little, if anything, and the stockholders obviously get nothing. They start looking around at who they can sue, and if the officers and directors have insurance they can be a target of this litigation. “You should have borrowed more. You borrowed too much. You should have shut down sooner. You shouldn’t have shut down so soon.” Whatever you did you can find some expert to testify that it was wrong.

So if you want to keep any management team in place you have to have insurance and they have to be indemnified or nobody is going to take that job. You are not going to put personal assets at risk. Most of the time the assets don’t amount to much, but the cost of defending them is horrific.

Q. Let’s talk about the recent change in bankruptcy law.

A. Once you get into a Chapter 11 individually – which you may have to do if you earn too much to file Chapter 7 — based on your earning power and the requirements for a plan confirmation, you may in essence have to work for your creditors for five years. It’s basically indentured servitude.

Q. Has that actually happened?

A. There are some cases challenging the constitutionality of that provision. Nobody even thought about it in the months leading up to the passage of the law.

Q. There were supposedly going to be fewer people filing under Chapter 7.

A. That’s not how it’s working.

What they set out to do was really to prevent high-income individuals filing Chapter 7. Take someone who is making $250,000 a year and has a five-year-old car and lives in an apartment. What do they have to lose? Nobody going to touch the car or take the furniture, so they can wipe out the debt and keep the income.

The major change is your income is means-tested, depending on where you live in the country. For example in New Hampshire, a family of four, if their income is over, I think it is $83,000, generally speaking they can’t file Chapter 7. You have to file Chapter 13 and pay your creditors some percentage of your obligations.

Q. There are not many people earning over $83,000 a year filing bankruptcy.

A. Exactly.

Q. It’s funny, but we are talking about how corporations can use the bankruptcy system to get their assets sold.

A. All abuse stuff focuses on consumer debt. For example, if you are businessperson, and you had a lot of bank debt and how you have a $250,000 income and you live in an apartment and you have $5,000 worth of credit card debt and $200,000 worth of business debt, you can file Chapter 7.

Q. What is the sense of fairness in that?

A. They don’t want to prevent or chill entrepreneurship and risk-taking for people who want to start business, but if you want to go running through the mall with your Visa card and run up a lot of debt — that’s a different story, a different lobby, a different industry.