Merry-Go-Round, airlines show bankruptcy's flaws

The Economy

February 19, 1996|By Jay Hancock

THIS FRIDAY, A presidential commission will gather in the Thurgood Marshall Federal Judiciary Building on Capitol Hill to consider possible flaws in the bankruptcy system.

The commissioners could do worse than gaze Northeast, first toward Joppa and a grand, silent monument to creditor abuse, then to BWI Airport and a lesson in what some consider court-sponsored corporate welfare.

Merry-Go-Round Enterprises Inc., whose huge Joppa headquarters and warehouse once commanded a retail kingdom, held assets worth more than $200 million when it entered bankruptcy proceedings. Of that, $114 million was cash.

That was two years ago. Shielded in the castle of Chapter 11, Merry-Go-Round was supposed to husband its resources and eventually dole them fairly to the creditors clamoring outside the walls. Nobody counted on the treasure rusting in the keep.

The cash is gone. So are most of the rest of the assets. Creditors are in the lurch.

Two weeks ago Merry-Go-Round announced it would liquidate. The proceeds may not even pay its current bills, let alone the $213 million owed from before its bankruptcy filing.

Had the clothier been shut down and auctioned off two years ago, unsecured creditors would have received some 50 cents of each dollar owed, a look at the company's financial statements suggests. Now they'll receive a few pennies or nothing.

In 200 years, changing laws have gradually eroded creditors' rights. A good thing, mainly. The 16th-century pound-of-flesh remedy for default might upset the ACLU. Debtors' prison didn't do a lot for the debtor, the economy or society.

Modern bankruptcy law is supposed to balance creditors' rights with the desire to give debtors a new start, to preserve jobs, to avoid economic disorder.

And by letting companies recuperate instead of auctioning their property in a fire sale, creditors are supposed to make out better, too.

Creditors did not benefit from Merry-Go-Round's bankruptcy process. Who did?

Scores of lawyers, accountants and consultants dined on Merry-Go-Round for 25 months, billing more than $11 million in bankruptcy-related fees. Hired-gun "turnaround" managers pulled out more than $700,000.

Merry-Go-Round paid hundreds of thousands more in severance to the fired executives who steered it into trouble in the first place. Its chief executive since July, Richard Crystal, will get well over $2 million.

Customers scored, too, getting great deals at Merry-Go-Round's frequent clearance sales. The rest of the money went to workers' salaries, clothes-makers' bills and landlords' rents in a hard-fought attempt to fix the company.

Which money was spent wisely? Which was wasted? The Bankruptcy Review Commission gets to think about such things.

At the same time, the commission will hear gripes about a system that lets failed companies stay open, stiff creditors and swipe sales from upstanding, bill-paying rivals.

It's not like the retail trade hasn't been competitive enough recently. Ventilator hookups to zombie stores run by Merry-Go-Round, Today's Man, Phar-Mor, McCrory, Jamesway, Edison Brothers, Woodies and many more made it tougher.

"You have to understand that America is vastly overstored," said Kurt Barnard, president of Barnard's Retail Marketing Report. "A lot of these stores have no reason for being. The bankruptcy code was made with the purpose of preserving jobs. To the extent that it achieves that, it is useful. The question is, what happens as we go forward?"

The corporate undead haunt other industries, too.

Warren Buffett may be a billionaire, the world's best investor and the object of a cottage industry in unit trusts. But seven years ago he wasn't smart enough to figure out how the bankruptcy code would hurt USAir before he sank $358 million into the airline.

USAir hasn't sought bankruptcy protection itself. But that's no thanks to its numerous competitors who did and then shucked RTC debt, tore up labor contracts, sliced fares and grabbed USAir's customers. Continental, USAir's archfoe at BWI and along the coast, has been through bankruptcy twice in a decade.

Last year Mr. Buffett valued his USAir investment at about $90 million.

Much unhappiness with bankruptcy law centers on what Samuel Gerdano, executive director of the American Bankruptcy Institute, calls "the speed issue."

When companies spend years in Chapter 11 proceedings, assets tend to evaporate. Unpaid creditors suffer. Executive contracts become more generous. Industry competition becomes more distorted.

Plus, "the longer the case lingers, chances are the bigger the fees are going to be" for lawyers and other professionals, Mr. Gerdano said.

Nobody is suggesting that insolvent companies be instantly liquidated, that "do not resuscitate" orders be hung on the doorknob of every troubled firm.

Dr. Kevorkian hasn't joined the bankruptcy commission.

But many who favor bankruptcy change think like your health maintenance organization does. They'd like to improve the medicine, shorten the hospital stay and trim the doctors' bills.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.