Summer Reading: The Detroit Bankruptcy, and Some Answers to Our Questions

While the Detroit bankruptcy hearings will not be televised, Detroit’s bankruptcy has replaced the George Zimmerman and Jodie Arias trials in the news cycle.  Detroit is suddenly the focal point for nationwide discourse — the crisis de jour, so to speak.

While the country has seen a lot of major bankruptcy filings, none have involved a major city.   While bankruptcy lawyers will point out that Detroit’s bankruptcy is very different from a large business bankruptcy like American Airlines, the comparison is inescapable.  As two new publications demonstrate, the differences between a city’s decline into financial turmoil and a major company’s may not be that dramatic.

Douglas P. Bartner’s and Susan A. Fennessey’s recently released Financially Distressed Companies Answer Book (Practising Law

Stephanie Wickouski is a New York bankruptcy lawyer. A partner with the NY office of Bryan Cave LLP, she has practiced bankruptcy law for more than 30 years.

Institute 2013), offers some interesting, if not startling, insight into the recent financial decline of major companies such as American Airlines.  The book begins with a thought-provoking question: How do you know that a company is headed toward bankruptcy? A liquidity crisis is a sign, the authors state.  This is the first of many answers in this book that, while seemingly simplistic, are profoundly important. It’s refreshing to see answers stated in such a straightforward way.

The authors then develop this idea (“it’s the cash flow, stupid” – my words, not theirs) by unrolling a number of financial metrics that could signal distress weeks, if not months or years, before a bankruptcy.  This analysis is not only useful to management, but also to creditors and bondholders and their professionals in identifying companies headed toward a default.

Bartner and Fennessey demystify the bankruptcy process in a succinct, readable “Q & A” style and in an outline format.  The authors have a knack for presenting some of the most nuanced and sophisticated questions typically posed by clients and non-bankruptcy professionals encountering a chapter 11 case for this first time – and answering those questions clearly and simply, which maintaining accuracy.  The authors tackle all manner of questions, from the complex legal (“How would a debtor terminate a single-employer pension plan through a distress termination?”) to the practical (“Why would someone buy distressed debt?).

The need for clear and simple answers where questions of financial distress are concerned can hardly be debated.  In reading the Bartner – Fennessey book, I found myself asking coming back to the simple question and answer posed in their introduction: “What are some of the warning signs of financial distress?”

Did Detroit not notice it was running out of cash? How many years has it seen this coming? Why didn’t it do something sooner? Who is to blame for this? I found myself asking all the same questions that creditors and employees ask in the face of a large company’s chapter 11 filing.  As the entire country could be affected by a major city filing a case under chapter 9 (the analog of chapter 11 for municipalities), many of us are asking these same questions.

All bankruptcies have three basic components: (1) causes, (2) legal process, and (3) business solutions and exit strategies. While Bartner and Fennessey thoroughly cover the causes and the process, they leave it to others to cover business solutions and exit strategies.

As with any large bankruptcy filing, commentators are already stepping in with their solutions for Detroit. Noah Rayman in his article “Surprising Solutions for a Bankrupt City” (Nation, July 20, 2013) offers his own answers to Detroit’s financial crisis.  He offers solutions straight out of the private sector.  Some of his innovative answers including selling commercials or even selling the entire city. He cites Los Vegas’s making itself a welcoming home to Internet superpower Zappos as an example of attracting private investment into an ailing city.

With the oppressive heat keeping most of us indoors these days, these are great summer reads:

It remains to be seen what path the Detroit bankruptcy will ultimately take. But, as my summer reading choices demonstrate, there will no lack of solid answers and inventive solutions along the way.

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