By filing for Chapter 11 bankruptcy to better deal with the landslide of asbestos claims it faces, chemical-maker W. R. Grace & Co. yesterday joined the ever-expanding coterie of companies that use bankruptcy more as a corporate strategy than a financial maneuver, industry experts say.
Bankruptcy filings once tainted a company's reputation and served notice of an imminent demise.
Then liberalized rules formulated by Congress in 1978 made it easier for companies to file for protection from creditors, causing such filings to multiply as these corporations tried to right themselves financially.
But what the drafters of those rules couldn't foresee is how bankruptcy filings would be used to give a company's management room to maneuver.
"The stigma is now clearly gone as far as large corporations filing for relief under Chapter 11; that's not new news," said Mark C. Ellenberg, a veteran bankruptcy lawyer who helped represent victims injured by the Dalkon Shield birth-control device in a famous court case nearly two decades ago. "What it made possible was ... the strategic uses of Chapter 11 [in the running of the company]. And that's not all bad."
Chapter 11 bankruptcy protection allows a company to put legal and financial claims against it on hold until its leadership can formulate a recovery plan and put it in place. But that's a controversial step, since past debts or legal judgments are very often partially - sometimes completely - swept away.
Stockholders in a company are often wiped out, too, since any court-approved restructuring of a firm's secured debts and other liabilities must be settled first, leaving little or nothing for the shareholders.
And yet, in some cases, the bankruptcy laws have ended up protecting those a company victimized, says Ellenberg, a partner the Washington office of the New York law firm Cadwalader, Wickersham & Taft.
In the case of the Dalkon Shield intrauterine device, millions were marketed from 1972 to 1974 by A. H. Robins Co. of Richmond, Va. The device allegedly caused all sorts of medical complications in the women who used it. Many suffered scarring injuries, were rendered infertile, or were forced to undergo hysterectomies.
The family that ran Robins wanted to stay in control of the company, and offered to put a percentage of their profits into a fund to compensate the victims - a proposition with risk, since profits weren't guaranteed to materialize, Ellenberg recalls. But through the Robins bankruptcy case, the family was forced to sell the firm to American Home Products Corp.
The upshot: $2.3 billion went into a trust fund for the victims, and American Home shares worth $900 million were swapped for the stock held by Robins shareholders.
The high-dollar trust fund wasn't the only bankruptcy benefit. Initially, there were only 10,000 claimants. But by grouping victims together in a pool - in which each wasn't required to have her own attorney - initial payments ranging from $125 to $2 million-plus went out to 170,000 people, Ellenberg said. About 300,000 people eventually made initial claims.
And yet, as corporations deploy increasingly liberal strategies involving the bankruptcy codes, consumers may well find that relief from their burdens is increasingly hard to get.
Due in part to lobbying by banks and credit-card issuers, Congress is attempting to pass legislation that will make it tougher for consumers to have their debt loads lightened by filing for bankruptcy - an irony that's causing angst among consumers and some bankruptcy lawyers, since liberal credit-approval policies helped bulk up those big balances in the first place.
"I think this is Congress very clearly serving the needs of businesses, since I'm not sure how it serves the needs of consumers," said David A. Rodgers, a partner in the law firm of Rodgers & Dickerson in Lutherville.
How the Grace bankruptcy case will play out remains to be seen.
Wire services contributed to this article.