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47–924 PDF 2009

CIRCUIT CITY UNPLUGGED: WHY DID 

CHAPTER 11 FAIL TO SAVE 34,000 JOBS? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 11, 2009 

Serial No. 111–6 

Printed for the use of the Committee on the Judiciary 

( 

Available via the World Wide Web: http://judiciary.house.gov 

(II) 

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO PIERLUISI, Puerto Rico 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

CHARLES A. GONZALEZ, Texas 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California 

DEBBIE WASSERMAN SCHULTZ, Florida 

DANIEL MAFFEI, New York 

[Vacant] 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM ROONEY, Florida 

GREGG HARPER, Mississippi 

PERRY APELBAUM, Staff Director and Chief Counsel 

SEAN MCLAUGHLIN, Minority Chief of Staff and General Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

STEVE COHEN, Tennessee, Chairman 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

DANIEL MAFFEI, New York 

ZOE LOFGREN, California 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

JOHN CONYERS, JR., Michigan 

TRENT FRANKS, Arizona 

JIM JORDAN, Ohio 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

HOWARD COBLE, North Carolina 

STEVE KING, Iowa 

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 

(III) 

C O N T E N T S 

MARCH 11, 2009 

Page 

OPENING STATEMENTS 

The Honorable Steve Cohen, a Representative in Congress from the State 

of Tennessee, and Chairman, Subcommittee on Commercial and Administrative Law ........................................................................................................... 1 

The Honorable Trent Franks, a Representative in Congress from the State 

of Arizona, and Ranking Member, Subcommittee on Commercial and Administrative Law .................................................................................................. 2 

The Honorable William D. Delahunt, a Representative in Congress from 

the State of Massachusetts, and Member, Subcommittee on Commercial 

and Administrative Law ...................................................................................... 4 

WITNESSES 

Mr. Harvey R. Miller, Weil, Gotshal & Manges, LLP 

Oral Testimony ..................................................................................................... 6 

Prepared Statement ............................................................................................. 10 

Mr. Richard M. Pachulski, Pachulski Stang Ziehl & Jones, LLP 

Oral Testimony ..................................................................................................... 25 

Prepared Statement ............................................................................................. 27 

Mr. Daniel B. Hurwitz, President and COO, Developers Diversified Realty 

Corporation, on behalf of International Council of Shopping Centers 

Oral Testimony ..................................................................................................... 41 

Prepared Statement ............................................................................................. 42 

Mr. Todd J. Zywicki, Professor, George Mason University School of Law 

Oral Testimony ..................................................................................................... 45 

Prepared Statement ............................................................................................. 47 

Mr. Isaac M. Pachulski, Strutman, Treister & Glatt, PC, on behalf of National 

Bankruptcy Conference 

Oral Testimony ..................................................................................................... 53 

Prepared Statement ............................................................................................. 56 

Mr. Jack F. Williams, American Bankruptcy Institute Resident Scholar, Georgia State University College of Law 

Oral Testimony ..................................................................................................... 92 

Prepared Statement ............................................................................................. 94 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, Chairman, Committee on the 

Judiciary, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 125

Letter dated March 11, 2009, from Mallory B. Duncan, Senior Vice President, 

General Counsel, the National Retail Federation ............................................. 126 

Response to Post-Hearing Questions from Harvey R. Miller, Weil, Gotshal 

& Manges, LLP .................................................................................................... 128 

Response to Post-Hearing Questions from Richard M. Pachulski, Pachulski 

Stang Ziehl & Jones, LLP ................................................................................... 135 

Page

IV 

Response to Post-Hearing Questions from Daniel B. Hurwitz, President and 

COO, Developers Diversified Realty Corporation .............................................. 143 

Response to Post-Hearing Questions from Todd J. Zywicki, Professor, George 

Mason University School of Law ........................................................................ 146 

Response to Post-Hearing Questions from Isaac M. Pachulski, Strutman, 

Treister & Glatt, PC ............................................................................................ 148 

Response to Post-Hearing Questions from Jack Williams, American Bankruptcy Institute Resident Scholar, Georgia State University College of Law . 184 

(1) 

CIRCUIT CITY UNPLUGGED: WHY DID 

CHAPTER 11 FAIL TO SAVE 34,000 JOBS? 

WEDNESDAY, MARCH 11, 2009 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:08 p.m., in room 

2141, Rayburn House Office Building, the Honorable Steve Cohen 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Cohen, Delahunt, Watt, Maffei, 

Lofgren, Johnson, Scott, Franks, Jordan, Coble, Issa, and Forbes. 

Staff present: Susan Jensen-Lachmann, Majority Counsel; Stewart Jeffries, Minority Counsel; and Adam Russell, Majority Professional Staff. 

Mr. COHEN. This hearing of the Committee on the Judiciary, 

Subcommittee on Commercial and Administrative Law will now 

come to order. 

Without objection, the Chair will be authorized to declare a recess of the hearing. 

I will now recognize myself for a short statement. 

We are in the midst of an economic maelstrom that is hurting 

virtually every sector of our Nation’s economy. From businesses to 

consumers, there is no one and nothing that hasn’t been touched 

by our economic crisis. 

While, in the past, this Subcommittee has concentrated solely on 

the impact of this crisis on the individual, it is important to examine the impact on businesses as well, which are also subject to the 

vagaries of the economic cycles and the bankruptcy process. 

When businesses encounter financial distress, they may file for 

bankruptcy relief under Chapter 11 as a last resort to remaining 

in business, a form of bankruptcy relief intended to give companies 

a temporary cooling-off period during which they can reorganize 

their financial affairs. 

Chapter 11, essentially, is like a hospital where sick businesses— 

under the careful scrutiny of a bankruptcy judge who wears white 

scrubs and a stethoscope, and creditors—are given a chance to rehabilitate themselves. 

By promoting reorganization, Chapter 11 is supposed to benefit 

everyone. Employees’ jobs should be, and, often, are preserved. 

Creditors have a greater chance of receiving payment, rather than 

liquidation value from a forced asset sale. And, vendors continue 

2 

to have the company as a future customer. So vendors benefit, 

creditors benefit, employees benefit, the economy benefits, and the 

community benefits from having this rehabilitated tax-revenue 

source. 

Clearly, Chapter 11 is not a panacea, but it is something that we 

need in our arsenal, to keep our economy moving. Just like sick individuals, some Chapter 11 businesses are too far gone too far for 

help, and they are beyond doctors’ help. 

The goal of Chapter 11 is to give businesses at least a fighting 

chance to reorganize so they can reenter the marketplace and save 

jobs. 

Some of us feel, however, that Chapter 11 is no longer working 

as Congress intended it to, especially in light of the 2005 amendments to the Bankruptcy Code. This concern may very well be illustrated by the recent Chapter 11 case filing of Circuit City. 

Before filing, Circuit City was one of the Nation’s largest retailers, with more than 700 store locations, and more than 34,000 employees. In less than 4 months after filing for Chapter 11, however, 

Circuit City closed all of its doors, and virtually all of its employees 

are now without jobs, jobless. 

What went wrong? Why didn’t Chapter 11 work to save this business? If Chapter 11 couldn’t save Circuit City, is it also failing to 

save other businesses? And with this economy, there are going to 

be a whole lot more Circuit Citys and businesses—not of that size, 

but of that size—and lesser and greater—who will need to be reorganized. And what will happen? And what should Congress do with 

this new economic plight and condition that didn’t exist in 2005. 

All of these are important questions we need to have answered. 

Accordingly, I look forward to receiving today’s testimony and 

learning more about how we can adjust our laws to affect outcomes 

reflective of 2009. 

I would now like to recognize my colleague, Mr. Franks, the distinguished Ranking Member of the Subcommittee, for his opening 

remarks. 

Mr. FRANKS. Well, thank you, Mr. Chairman. And thank you for 

calling this hearing on this, the Subcommittee’s first important 

hearing on the topic of bankruptcy. 

Over the last couple of years, bankruptcy has been one of our 

busiest areas. And, indeed, it has included three hearings on Chapter 11 bankruptcy alone. 

As our former colleague, and my esteemed predecessor, Chris 

Cannon, remarked last term, ‘‘Bankruptcy is so important, that the 

founding fathers explicitly listed it as one of the enumerated powers of the Congress, in Article 1, Section 8 of the Constitution.’’ 

Our current economic distress only serves to underscore further 

the importance of our bankruptcy laws. 

In 2005, Congress passed a major overhaul of the bankruptcy 

code, through the Bankruptcy Abuse, Prevention and Consumer 

Protection Act of 2005. Four years on, in our current economic environment, it is not surprising that the Committee is taking a look 

at the laws—Chapter 11 provisions—to see how they are working. 

We should all, however, be careful as we review this act. The 

2005 reform capped off years of debate on how to revise the bankruptcy code. And, as with many long-considered, major pieces of 

3 

legislation, the final product incorporated a self-reinforcing web of 

compromises made by all parties. 

In our hearings last term, and, now, again, this term, some of 

those parties have come back to us, trying to strike a new deal on 

part or some other parts of the act. 

That may be unsurprising, especially since political power at 

both ends of Pennsylvania Avenue have shifted from Republicans 

to Democrats. Nevertheless, partisan attempts to nibble at, or undermine, or begin to unravel, the 2005 reform, would be counterproductive and unfortunate. 

Today’s hearing, in fact, serves well to highlight the need for caution. The 2005 reform, for example, carefully struck a better balance in Chapter 11’s provision affecting relations between retail 

vendors and their mall and shopping-center landlords. 

Previously, it was too easy for vendors in Chapter 11 to squat in 

their already-leased space, holding landlords hostages, sometimes 

for years, as the vendors tried to work their way through Chapter 

11. This was particularly problematic in the case of anchor-store 

bankruptcies, like those involving large department stores. 

The excessive leniency toward vendors in the code’s prior provisions too often enabled ‘‘ghost stores’’ like those to convert their 

hosts into ‘‘ghost malls.’’ And, too often, it prevented vibrant, viable 

stores from coming into those malls and occupying space that they 

urgently needed. 

None of us, of course, wants Chapter 11 to force vendors into liquidation too fast. But at the same time, none of us should want 

Chapter 11 to allow anchor stores and other companies in bankruptcy to slowly bleed landowners and landlords dry. That would 

only kill the companies on which all retail vendors rely for space, 

and choke our economy in a time in which it is already struggling 

for breath. 

Accordingly, while some may partially ascribe Circuit City’s 

eventual liquidation to problems with retail leases, we should be 

careful not to overreact to that charge. We should be careful to explore all of the issues that affected Circuit City’s case, and consider 

whether they stem from problems inherent in the bankruptcy code, 

problems inherent to Circuit City, or—such as inadequate business 

model—or problems inherent in the current, highly unusual credit 

crisis. 

Circuit City’s liquidation will, of course, cost many jobs, as the 

title of this hearing suggests. But mistaken repeals of the 2005 reform could cost other jobs such as those held by Circuit City’s competitor, other vendors, suppliers, financiers and landlords. Those 

jobs could, in the end, number even more, although their loss may 

be even harder to trace through the system. 

This is a patter that we must be careful not to set in motion, 

whether in the electronic sector, the auto sector or the banking sector, or any other sector of our economy. 

And, Mr. Chairman, with that, I yield back my time. Thank you, 

sir. 

Mr. COHEN. I thank the gentleman for his statement. 

I now recognize Mr. Delahunt, the unofficial Vice Chairman of 

this Subcommittee, distinguished Member from—a former Attorney 

4 

General and a man of many trades. And, yes—I can’t go any further. 

Mr. DELAHUNT. Don’t stop there. 

I think it is wise if we go and listen to those who are testifying. 

I want to commend you, however, for these hearings. And I hope 

that you would consider having a series of hearings from the perspective of oversight, to determine how we got here. 

You know, I think that we have an obligation, as a Subcommittee, to examine the causes of these bankruptcies that are 

going to multiply. We have had a debate on the floor, led by the 

gentlelady from California, Ms. Lofgren, who is a Member of this 

Committee. 

I think it is important we really deeply delve into the causes. 

How did we get here? I suspect that there are—most of the reasons 

are outside of the Bankruptcy Code. But I think we have that obligation to make every effort that we can to avoid bankruptcy. 

With that, I yield back. 

Mr. COHEN. Thank you, sir. 

Are there other Members that wish to make an opening statement? 

I would like to now introduce the witnesses for today’s hearing. 

And make note that our first witness is not under the Witness Protection Program, but had difficulty with his flight, and was unable 

to be present—Mr. Miller, who I have not had the pleasure of 

meeting, but I have heard great statements about his knowledge of 

this issue—had a problem with his flight cancellation and inclement weather in New York City. 

It is unusual for a witness to participate telephonically, but we 

wanted him to do that. And with the indulgence of our Members, 

we will allow him to proceed in that fashion. 

I thank Mr. Franks for his cooperation to allow us to do that. 

And I think that is the reason for this large screen, here. 

The other witnesses we will have today—our first witness—do 

we have him as first? Mr. Pachulski is first. But I just wonder, is 

he going to be in front of a TV camera the whole time? Is he there 

now? 

Why don’t we go ahead and ask him to—we will have him first. 

But, in time, Mr. Richard Pachulski is an additional witness. He 

is a partner at Pachulski Stang Ziehl and Jones—extensive experience in business reorganizations, as well as debtor-creditor litigation—and, during the 1980’s, was a well-known Chapter 7 and 11 

trustee. He has represented numerous debtors and creditor committees, in both out-of-court workouts and in-court proceedings. 

Mr. Pachulski has been cited by several publications as a leader 

in the legal community. During 2007 and 2008, he represented 

debtors’ and creditors’ committees in numerous industries, though, 

primarily, in the real estate business and retail industry. 

A representative sampling of such matters include his current 

representation of the creditors committee of Circuit City and affiliates. 

Our first witness, who will precede Mr. Pachulski, because of the 

need to go to this extra-terrestrial type of video—or testimony—will 

be Harvey Miller. 

5 

Mr. Miller is in the business, finance and restructuring department of Weil, Gotshal & Manges? 

Mr. MILLER. Manges. 

Mr. COHEN. Manges—thank you. Where did that come from? 

He has played a leading role in many major business-organization cases, involving, among others, Lehman Brothers, Texaco, 

Donald Trump, Federated Department Stores, Macy’s, Chase Manhattan Mortgage and Realty Trust, Best Products Company, Continental Airlines and Eastern Airlines. 

Mr. Miller is a lecturer for the American Law Institute and 

American Bar Association, New York University Law Workshop on 

Bankruptcy and Reorganization, the New York State Bar Association, and various local bars and law schools. 

He co-authored numerous bankruptcy texts, is a contributing editor of Collier on Bankruptcy and a Federal attorney-fee awards reporter, an adjunct professor of law at NYU School of Law, and a 

lecturer at Columbia School of Law. 

Our third witness will be Mr. Daniel Hurwitz, who appears on 

behalf of the National Council of Shopping Centers. He is the 

former president and COO of Developers Diversified Realty. In 

May 2007, he previously served as senior executive vice president— 

chief investment officer since May 2005—and was executive vice 

president of DDR from June 1999 through April 2005. 

He was on the company’s board of directors from May 2002 to 

2004. He is responsible for Developers Diversified’s core-revenue 

departments, in addition to management of the various disciplines 

related to the day-to-day operations of the company. Moreover, he 

is a member of the company’s executive management and investment committees. 

Prior to joining Developers Diversified, he served as senior vice 

president and director of real estate and corporate development for 

Boscov’s Department Store, Inc. Prior to that, he served as development director for Shopco Group, a New York City based developer 

and acquirer of regional and super-regional shopping malls. 

He is a member of the ICSC board of trustees, co-chair of its 

open-air centers committee, and a proud alumnus of the Wharton 

School. 

Our fourth witness is Todd Zywicki. Professor Zywicki teaches in 

the areas of bankruptcy and contract law at George Mason University School of Law. Previously, he taught at Mississippi College 

School of Law, where he has held a faculty position since 1996— 

or he had held one. 

During 2003-2004 academic year, he served as director of the Office of Policy Planning at the Federal Trade Commission. Professor 

Zywicki is the author of more than 30 articles in leading law reviews—economics journals. 

And our fifth witness is Isaac Pachulski, who appears on behalf 

of the National Bankruptcy Conference. Currently, he is a senior 

shareholder of Stutman Treister & Glatt professional corporation 

and specializes in corporate reorganization and solvency in bankruptcy law. 

He has been with the firm since 1974, and became a shareholder 

in 1980. He is the NBC’s co-vice chair of the Chapter 11 committee, 

and a member of the executive committee. He is also a member of 

6 

the American College of Bankruptcy and the International Insolvency Institute. 

In his more than three decades of practice as an insolvency attorney, Mr. Pachulski has represented both debtors and creditors, as 

well as other parties and interest in major reorganization cases 

around the country. 

He has been a lecturer on topics such as appellate practice, intellectual property licenses, security interests, and bankruptcy. 

And our final witness will be Mr. Jack Williams, who appears on 

behalf of the American Bankruptcy Institute. Professor Williams 

serves as the American Bankruptcy Institute residential scholar. 

As such, he assists the ABI with its educational programming and 

its role as the authoritative source of bankruptcy information for 

the Congress, media and the public. 

He teaches at Georgia State College of Law, where he instructs 

on a broad array of courses. He also teaches at the New York Law 

School Masters Program in Taxation, the NYU School of Law Continuing Professional Education Program for the IRS, and the Federal Law Enforcement Training Center. 

I want to thank all of our witnesses for participating in today’s 

hearing. Without objection, your written statements will be placed 

in the record. And we would ask you limit your oral remarks to 5 

minutes. 

There are systems in front of all of you, except for Mr. Harvey 

Miller, who has no buzzer in front of him. But we will let you know 

when the lights would have changed, if you would have been 

present. 

When the light turns yellow, it means you have a minute left. 

Then, you need to hurry your remarks or stretch them out, if you 

are close to the end. And when it gets to red, you are finished. 

After each witness has presented his testimony, Subcommittee 

Members will be—after each witness has presented his or her testimony, at the end of the panel—Subcommittee Members are free to 

ask questions, subject to the 5-minute limit. 

And, now, if we can go to the video screen, we would like Mr. 

Miller to start his 5-minute remarks. And we thank you for making 

yourself available through this unusual process. 

Mr. Miller, are you there? 

TESTIMONY OF HARVEY R. MILLER, 

WEIL, GOTSHAL & MANGES, LLP 

Mr. MILLER. Thank you, Mr. Chairman. 

I deeply appreciate the opportunity to participate in this hearing 

telephonically. And I apologize for my inability to get to Washington this morning. 

It has been almost 30 years since the bankruptcy code now in effect, became effective. And in that 30-year period, we have had 

seismic changes in the way financial markets operate, and the way 

business is conducted, which is very different from the environment 

which existed in 1978, when the Bankruptcy Reform Act was 

passed. 

Among those changes has been the changes in creditor constituencies. At the time that the bankruptcy code was enacted, those 

changes—the code addressed itself to constituencies primarily 

7 

made up of unsecured creditors; generally, in most cases, with a 

large trade-creditor community, particularly in the retail area, 

where supply has made up a good portion of the creditor constituency. 

Today, we find, in our cases, that the major creditors are secured 

creditors. And that has changed the dynamic of reorganization very 

significantly. In addition, there has been a change in the business 

practice for retailers, in particular, where suppliers are generally 

offshore, and their transactions are accomplished through lettersof-credit transactions. And, essentially, that becomes secured financing. 

So the vendor-supplier community is not really the major force 

in retailing anymore. And that was the group of creditors that were 

very interested in seeing the retail organizations survive, because 

they wanted a customer in the future. 

In addition to a major change in retailing—is back in 1990 and 

1991 and 1992, when Federated Department Stores and R.H. Macy 

went into bankruptcy code, and other retailers—in those cases, 

generally the merchandise inventory was not subject to liens and 

encumbrances, and the retailer would tell its lender that, ‘‘We cannot give you a lien on the inventory, because, if we do that, we will 

not be able to get credit from our suppliers.’’ 

With the change in the business practice of suppliers coming offshore, that argument no longer was accepted by lenders. And the 

consequence is most merchandise inventories are liened in favor of 

a secured creditor, a bank syndicate. 

That bank syndicate, today, has a different view of rehabilitation 

and reorganization, because banking relationships are no longer 

what they were in 1978 and 1979. A secured lender looks at the 

merchandise inventory and sees it as being a liquid asset that is 

easily convertible into cash. 

Because of the changes in the 2005 amendments to the bankruptcy code, which put a 210-day cap on the ability to assume or 

reject an unexpired lease of non-residential real property, the retail-store locations, the secured lender is always thinking about, ‘‘If 

this case is going to convert into a liquidation, I have to have sufficient time to have that inventory liquidated so that I can realize 

the outstanding amounts on my loans.’’ 

That has been a dramatic change in retailing. And, basically, 

within a period sometimes no more than 60 days, the retailer really 

had to demonstrate refinancing of the existing secured debt or a 

plan of reorganization, which it can’t really do in 60 days. The result is that the debtor is forced to start the liquidation process. 

I know the process was somewhat different in Circuit City, because of the nature of its own business. But that is a dramatic 

change. 

The other big change which I would think the Committee ought 

to take into account is, in 1978, everybody agreed that rehabilitation and reorganization was a desired objective—that there was a 

virtue to reorganization. 

As the code was being applied over the years, starting in 1979, 

there was a second principle which became evident, which was the 

maximization of creditor recoveries. 

8 

Now, those two objectives may be in competition with each other 

and, sometimes, upset the balance of the administration of a Chapter 11 case. 

At this point in time, the goal of rehabilitation and reorganization is—does not appear to be the primary goal. As you look at 

Chapter 11 cases—and, particularly, since 2005 amendments— 

more and more of those cases are turning into liquidation cases because, one, debtor-in-possession financing is very hard to get in the 

current credit crunch. 

Two, most of the assets are liened-up, and it is virtually impossible to prime a secured creditors. So the only source of debtor-inpossession financing turns out to be the existing secured creditor. 

And, generally, those are the defensive—debtor-in-possession 

financings—but they carry with them very coercive provisions. 

They impose upon the debtor in possession dates, as to which a 

plan of reorganization must be filed. Very often, they give consent 

rights to the secured creditors. 

What has happened is the balancing of equities before—the balancing of interests that was incorporated into the 1978 Bankruptcy 

Reform Act is no longer in place. The balance has been skewed 

very much in favor of the creditors, so that rehabilitation turns out 

not to be the primary objective of a Chapter 11 case. 

Chapter 11, in effect, has become a process for the sterilization 

of liquidation sales to buyers for liquidation of the assets. And very 

few of these cases currently are turning out to be rehabilitation reorganization. 

As a consequence of that, there are a great deal of jobs that are 

being lost. And the 34,000 jobs of Circuit City is compounded by— 

I am told that, over the last year, we have eliminated approximately 240,000 jobs in the retail sector. The retail sector is the employer of last resort. 

I am also told that there are only about 479,000 jobs left in retailing. If you read the papers today, you will see retailing is going 

to have a pretty bad 2009. 

The question is: How can we rehabilitate and reorganize these 

companies? We have to deal with the issue that debtor-in-possession financing, under this Code, is generally not available. 

Can there be some provisions that are put into an amendment 

to the code, that will make debtor-in-possession financing more accessible, even if it may cause secured creditors to have to wait a 

longer period of time to get recoveries? Are we going to reinstate 

the objective of rehabilitation and reorganization, rather than liquidation of assets in Chapter 11? 

These are among the problems that are occurring now. And one 

more, which I will add in the last minute, I think, is that—— 

Mr. COHEN. Thank you, sir. I have been—— 

I think we are beyond the last minute, so if you can close—— 

Mr. MILLER. I will close with this statement—— 

Mr. COHEN. Thank you. 

Mr. MILLER [continuing]. If I may, Mr. Chairman. 

Claims trading has also become a big problem in Chapter 11 

cases. In 1991, when the rules of bankruptcy procedure were 

amended to allow, basically, free trading of claims against the debtor, a whole market opened up. 

9 

Now, buyers of claims buy them in at a substantial discount. 

Their entry fee is much lower. Their objectives are much different. 

They have a much shorter horizon. They are particularly concerned 

about expeditious recoveries and big recoveries. Their objective is 

not so much the rehabilitation of the debtor. This has changed the 

dynamic. 

So, finally, my last sentence, sir, would be: The dynamic that was 

contemplated in 1978 is not the dynamic that is playing in Chapter 

11 today. With all of the restrictions which were imposed in the 

2005 amendment—they have had the effect of stopping the rehabilitation process, and leading cases, more often, into the sale of assets. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Miller follows:] 

10 

PREPARED STATEMENT OF HARVEY R. MILLER


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Mr. COHEN. Thank you, sir. And I appreciate your making yourself available through the telephonic communication. If you can 

stay with us, we are going to have the other witnesses testify. And 

then we will, at some point—I think we have to go have votes, and 

return. And if you could stay with us for questions, that would be 

great. 

Mr. MILLER. I would be happy to, sir. 

Mr. COHEN. Thank you. 

I would now like to recognize Mr. Richard Pachulski, for his 

statement. 

TESTIMONY OF RICHARD M. PACHULSKI, 

PACHULSKI STANG ZIEHL & JONES, LLP 

Mr. RICHARD PACHULSKI. Mr. Chairman and Members of the 

House Subcommittee, I first want to thank each of you for the opportunity for me to participate in this hearing, and to present my 

personal views regarding the factors that led to the liquidation of 

Circuit City, and the loss of over 34,000 jobs. 

While I am presently lead counsel to the creditors—to the Circuit 

City Creditors’ Committee—all positions I present here are my own 

personal views, and not of the Creditors’ Committee, or any client 

of the firm of which I am a law partner. 

In my almost 30 years as a restructuring attorney, with this 

being the fourth recessionary cycle that I have been a witness to, 

in that professional career, in no prior recessionary cycle have I 

seen such hopelessness in reorganizing financially troubled companies, particularly in the retail industry. 

As presented in my written testimony, while I could come up 

with many factors that ultimately led to Circuit City’s liquidation, 

three factors are the most dominant: First, the general downturn 

of the United States economy; second, the unbelievable tight credit 

market, with specific emphasis on the lack of virtually any debtorin-possession financing; and, third, Section 503(b)(9) of the bankruptcy code. 

For a simple background, as of mid-2008, Circuit City operated 

712 superstores and nine outlet stores, providing over 40,000 jobs. 

In addition, Circuit City also operated under a Canadian subsidiary known as InterTAN, with 700 retail stores and dealer outlets in Canada. 

As of calendar year 2007, Circuit City represented 8.1 percent of 

the United States’ consumer-electronics retail market. And during 

Circuit City’s fiscal year ending February 29, 2008, Circuit City 

had sales of approximately $11.7 billion. 

I now would like to spend a moment discussing each of the three 

factors that I previously alluded to, that contributed to Circuit 

City’s liquidation. 

As to the effect of the economic downturn on Circuit City, as with 

so many retailers in 2008, Circuit City suffered a significant decrease in customer traffic. Simply put, as consumers were limited 

in their borrowing from credit cards and equity loans, household 

and consumer-electronic products suffered a dramatic reduction in 

sales. For instance, it certainly didn’t help that 75 percent of Circuit City sales were generated through credit card purchases. 

26 

The next issue that so dramatically constrained Circuit City’s 

ability to reorganize and to avoid liquidation and the loss of jobs 

was its relationship with its pre-Chapter 11 bank group. In fact, 

just weeks before the case commenced, the bank group reduced Circuit City’s borrowing availability by over $50 million. 

Upon filing Circuit City’s Chapter 11 petition, the bang group 

provided what it termed as ‘‘DIP financing.’’ But when all was said 

and done, the bank group effectively gave back to Circuit City the 

$50 million it took away pre-petition, at a remarkable cost. 

In evaluating the bank group’s DIP-financing package, for essen- tially $50 million in available credit, Circuit City had to pay $30 

million in fees, had to consent to a forced timeline for the sale of 

the business, cram down immunity and the ability to call a default 

at almost any time, once the Christmas season ended. The very 

banking institutions that have received substantial bailout money 

effectively squeezed Circuit City to liquidation. 

If the economy and the bank group’s DIP financing did not destroy any chance of Circuit City having sufficient time to achieve 

an internal reorganization by downsizing or selling Circuit City’s 

businesses, bankruptcy code Section 503(b)(9) was the final death 

knell. 

What Section 503(b)(9) provided upon its enactment in 2005 was 

that goods received by a debtor within 20 days before the date of 

the commencement of the Chapter 11 case would be provided administrative-claim status. In order to confirm a plan of reorganization, administrative claims must be paid in full on the effective 

date of a plan of reorganization. 

Accordingly, certain pre-position trade claims were elevated from 

unsecured-creditor status to administrative-claim status upon the 

enactment of Section 503(b)(9). 

In the case of Circuit City—filed Section 503(b)(9) claims of ap- proximately $359 million. Circuit City’s management estimates 

those claims will be allowed in an amount in excess of $215 million. 

In the event allowed Section 503(b)(9) claims were, for example, 

$215 million, at least that amount would have to have been available on the effective date of any Circuit City plan of reorganization, 

to pay Section 503(b)(9) claims, instead of those monies being used 

for distribution to similarly situated creditors who gave trade credit 

more than 20 days before the petition date for needed capital expenditures, labor upgrades and other necessary costs to effectuate 

a successful reorganization. 

In conclusion, while Circuit City may have been bigger than any 

other retailer to have been forced to liquidate in 2008, the major 

factors that caused the liquidation are presently inherent in all retail bankruptcies: A difficult economy; risk-averse lenders, facing 

their own financial struggles; and Section 503(b)(9) claims, making 

virtually any Chapter 11 more problematic. 

Again, I thank the Subcommittee for the opportunity to present 

my personal views regarding Circuit City’s liquidation, and the 

likely causes of future retail-company liquidations, unless the economy corrects itself and other measures are taken by Congress to 

correct the increasingly difficult environment to restructure financially challenged retail businesses. 

Thank you, again. 

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[The prepared statement of Mr. Richard Pachulski follows:] 

PREPARED STATEMENT OF RICHARD M. PACHULSKI


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Mr. COHEN. Thank you, Mr. Pachulski. 

And, now, I recognize Mr. Hurwitz, for his testimony. 

TESTIMONY OF DANIEL B. HURWITZ, PRESIDENT AND COO, 

DEVELOPERS DIVERSIFIED REALTY CORPORATION, ON BEHALF OF INTERNATIONAL COUNCIL OF SHOPPING CENTERS 

Mr. HURWITZ. Good afternoon, Mr. Chairman, and Ranking 

Member Franks. 

My name is Daniel Hurwitz, and I am president and Chief Operating Officer of Developers Diversified Realty Corporation. I am 

pleased to testify today on behalf of the International Council of 

Shopping Centers. 

I have a unique perspective on the topic of the effect of Chapter 

11 bankruptcy laws in the Circuit City bankruptcy filing, as my 

company was the largest landlord of Circuit City, with 50 leases, 

$38 million in unsecured claims, and as a member of the Creditors’ 

Committee in that case. 

I look forward to sharing our direct experience with the Subcommittee. 

Mr. Chairman, Circuit City’s liquidation can be directly traced to 

three principal factors: The company’s poor financial results; its inability to obtain realistic credit terms from trade vendors; and the 

devastating reality that the U.S. financial markets are mired in 

such profound turmoil that financing is nearly impossible to secure. 

From our vantage point, Developers Diversified witnessed firsthand the collapse of this once-respected American brand. While the 

failure of Circuit City is a loss on many levels, to suggest that the 

company liquidated because of the current Chapter 11 process, or 

the deadline to assume or reject its leases, overlooks the complex 

set of factors which actually led to the company’s demise. 

First, the 210-day period to assume or reject leases is only a 

deadline if the landlords will not agree to an extension. The vast 

majority of Circuit City landlords, led by my company, would have 

granted an extension, as was done in recent bankruptcy cases filed 

by Hancock Fabrics, Linens-N-Things and Movie Gallery. 

Circuit City entered bankruptcy with a post-petition lending facility that required the company to file a plan of reorganization, or 

close on a sale transaction, by January 31, 2009, less than 90 days 

after the filing date. 

The post-petition loan that Circuit City obtained from its lenders 

provided the company with a mere $50 million in additional liquidity at a cost of $30 million in fees. 

In light of the company’s dismal post-bankruptcy sales results, 

its lenders were unwilling to extend the deadlines imposed by the 

lending facility, without clear support and participation from Circuit City’s suppliers, which it simply could not achieve. 

Based on this recent experience, what lessons can we learn about 

retail bankruptcies in the current economic environment? 

First, we are experiencing an unparalleled business cycle that is 

testing even the best retail operators. Bank credit continues to 

tighten, debtor-in-possession financing has become specifically onerous, and trade vendors are reluctant to extend credit, except on 

the most egregious of terms. Without access to credit, even the best 

retailers will not be able to survive. 

42 

Second, the current retail liquidations have little to do with the 

Chapter 11 process. This is particularly true as to the lease assumption-or-rejection deadline of 210 days. 

It is telling that, when the attorney for Circuit City explained to 

the bankruptcy court the reason why Circuit City was forced to liquidate, he never mentioned the 210-day deadline as a cause. 

In fact, he specifically told the court that the reason for the liquidation was, in his words, ‘‘Due to the fact that financing in this 

market is extremely difficult.’’ This is the hard truth, and it in no 

way implicated shopping-center landlords or the current Chapter 

11 process. 

Third, a retail bankruptcy can have serious negative effects on 

the shopping centers and on other retailers. The 2005 amendments 

that created more certainty for shopping-center owners now provides an important firewall which prevents the failure of one retailer from cascading to other businesses. 

It would be unwise to revert to a standard which gives tenants 

an unlimited amount of time to make decisions about assuming or 

rejecting a shopping-center lease, and therefore places the other 

tenants, and its employees within the shopping center at risk. 

My experience with the retail bankruptcies in recent years 

proves that the 210-day period has not been a factor in the fate of 

retailers who file for Chapter 11 protection. The catalyst for recent 

job losses and business liquidations is the poor economy and the 

lack of credit from vendors and lenders. 

In conclusion, Mr. Chairman, the relationship between a tenant 

and a landlord is one of partnership. We share customers, invest 

side-by-side, and work in the communities we serve together. We 

need each other to exist, and our interests are aligned. 

While some may paint a picture to the contrary, let there be no 

mistake that landlords thrive with healthy tenants, and tenants 

thrive with successful landlords. 

There is no incentive for landlords to put additional stress on 

tenants having operating difficulty. The 210-day provision ensures 

that all interested parties come together in a timely manner to listen, and be heard, in the best interest of the operating company 

and its employees. 

It is an honor to testify before you today, and I look forward to 

answering any questions you or other Members of the Subcommittee may have. Thank you, sir. 

[The prepared statement of Mr. Hurwitz follows:] 

PREPARED STATEMENT OF DANIEL B. HURWITZ

Good morning, Mr. Chairman and Ranking Member Franks, my name is Daniel 

Hurwitz and I am President and COO of Developers Diversified Realty Corporation. 

I am pleased to testify today on behalf the International Council of Shopping Centers. Founded in 1957, ICSC is the premier global trade association for the shopping 

center industry. Its more than 70,000 members in over 90 countries include shopping center owners, developers, investors, lenders, retailers and other professionals 

as well as academics and public officials. I have a unique perspective on the topic 

of the effect of Chapter 11 bankruptcy laws in the Circuit City bankruptcy filing 

as my company was the largest shopping center landlord of Circuit City and we 

were members of the Creditors Committee in that case. I look forward to sharing 

our direct experience with the Subcommittee. I will also discuss more generally the 

perspective of shopping centers on the current round of retail bankruptcy filings. I 

have several attachments to my statement and I would ask that they be included 

in the record. 

43 

THE CIRCUIT CITY BANKRUPTCY

Mr. Chairman, Circuit City’s liquidation can be directly traced to three principal 

factors: the company’s poor financial results, its inability to obtain realistic credit 

terms from trade vendors, and the devastating reality that the US financial markets 

were mired in such profound and unprecedented turmoil that financing—both debtor-in-possession and exit financing—was impossible to secure. Indeed, from our vantage point, Developers Diversified witnessed firsthand the collapse of this once respected and iconic American brand. I feel we are uniquely qualified to speak to the 

factors which led to that collapse. 

DDR was Circuit City’s largest landlord, with approximately 50 leases and at least $38 million in potential unsecured claims. DDR’s business representatives had 

met with Circuit City’s management prior to the bankruptcy filing and assured 

them that DDR stood ready to assist with what was then an out-of-court restructuring plan. 

As it does in any bankruptcy case where it has a significant number of leases and 

potential exposure, DDR actively participated in Circuit City’s bankruptcy proceedings. From the outset, our goal—for broader purposes as well as admittedly selfinterested ones—was to see Circuit City survive. In fact, DDR proactively expressed 

a desire to extend the deadline to assume or reject leases. Further, along with other 

shopping center landlords, DDR agreed not to immediately press for post-petition 

rent in the amount of $25 million. DDR played a significant role in Circuit City’s 

efforts to reorganize, not only in its capacity as Circuit City’s largest landlord, but 

also as a vice chair of the Official Committee of Unsecured Creditors. 

At their first joint meeting in Washington in November 2008, we advised the 

other members of the Creditors’ Committee, as well as Circuit City’s management 

and retained professionals, that DDR would proactively seek to extend the 210-day 

period to assume or reject DDR’s leases, even though the actual deadline was not 

until June 2009. DDR further proposed that it would advocate for extensions from 

other landlords. We repeated this proposal to counsel for the Committee and Circuit 

City on several occasions during the first two months of the case. In each instance, 

the company responded that its critical issues with other stakeholders took priority 

and would have to be resolved before it could turn to the extensions of time to assume or reject its leases. 

Eventually, these other issues—financing, trade credit and business results—overwhelmed and ultimately capsized the company, mooting any discussion of lease assumption deadlines. 

While the imminent absence of Circuit City as a fixture on the American retail 

landscape, coupled with the resulting loss of 34,000 jobs, is an undeniable tragedy, 

to suggest that the company was forced out of business because of Chapter 11 or 

the deadline to assume or reject its leases wildly misses the point and overlooks a 

complex set of factors which actually led to the company’s demise. 

First, the 210-day period to assume or reject leases is only a deadline if the landlords will not agree to an extension. As I stated, the vast majority of Circuit City’s 

landlords, led by DDR, would have granted an extension, as they had done in the 

recent retail bankruptcy cases filed by Hancock Fabrics, Linens ’n Things and Movie 

Gallery. 

In Circuit City’s case, as we have seen, the deadline was irrelevant. Even without 

landlord consent, the 210-day period would not expire until June 2009 and the liquidation of the company is already nearly complete as of early March. 

We do not deny for a moment that amended Section 365(d)(4) has changed the 

dynamic of retail bankruptcy cases. However, without sufficient liquidity to make 

post-bankruptcy payments to vendors, landlords, utility providers, and employees, 

a retailer simply cannot reorganize. 

The Subcommittee should note that the last reorganization of a significant postamendment retail bankruptcy was Goody’s, a regional department store which 

emerged from bankruptcy in October 2008, only to file a second Chapter 11 bankruptcy case less than four months later, citing restrictive financial covenants and 

lack of liquidity due to its exit financing which essentially ended the possibility of 

reorganization. Goody’s is presently liquidating through its second case. 

We have also seen first-hand that some lenders refuse to permit the use and disposition of their collateral, or to extend additional financing, unless they have confidence in a debtor’s ability to reorganize effectively without diminution in the value 

of their collateral. Not surprisingly, lenders have little incentive to participate in a 

reorganization process that will not result in a repayment of their indebtedness, 

which in most cases includes significant pre-petition borrowings. 

The debtor-in-possession financing product has significantly—and negatively—altered the course of recent retail bankruptcies and this is a fundamental cause of 

44 

Circuit City’s liquidation. Lenders are generally willing to provide only enough financing to position a debtor for a liquidation in the first few months of the case, 

and then impose restrictive conditions in post-petition financing agreements that either direct an immediate liquidation of the company, or include covenants or borrowing reserve rights that effectively allow the lender to ‘‘pull the plug’’ on the retailer only a few months into the case. Few debtors can survive these conditions. 

In fact, no recent significant retail debtor has. 

Circuit City entered bankruptcy in November 2008, with a post-petition lending 

facility that required the company to file of a plan of reorganization or close on a 

sale transaction by January 31, 2009, less than 90 days after the filing date. The 

post-petition loan that Circuit City obtained from its lenders provided the company 

with a mere $50 million in additional liquidity at a cost of $30 million in fees. In 

light of the company’s poor post-bankruptcy performance, its lenders were unwilling 

to extend the deadlines imposed by the post-petition lending facility (not the landlords’ deadlines) without clear support and participation from Circuit City’s suppliers, which it simply was not able to muster. In addition to this formal post-petition financing, the Subcommittee should be aware that Circuit City essentially borrowed $25 million dollars from its landlords, without paying interest, fees or providing any collateral. Circuit City took the position that it would not pay landlords 

post-petition rent (‘‘stub rent’’) due from the date it filed for bankruptcy on November 10, 2008, until the end of the month. 

LESSONS FROM RECENT RETAIL BANKRUPTCY CASES

So, after these recent experiences, what lessons can be learned about retail bankruptcies in the current economic conditions? 

First, we are experiencing a catastrophically difficult business environment that 

will challenge even the best-run retailers. Bank credit has tightened generally; 

bankruptcy debtor in possession (‘‘DIP’’) lending has specifically tightened and trade 

vendors are reluctant to provide credit, except on the most onerous of terms. Consumer spending and confidence are at all-time lows and unemployment has reached 

levels not seen since the early 1980s. This is a perfect storm. Reduced consumer 

spending reduces retailer profits, which in turn makes lenders reluctant to lend. 

Without access to credit, even otherwise well-run retail operations may not be able 

to survive. 

Second, the current retail liquidations have little to do with the Chapter 11 process. This is particularly true as to the lease assumption or rejection deadline of 210 

days enacted in 2005. When retailers have asked for extensions, shopping owner 

owners have overwhelmingly granted those extensions. In fact, in the Circuit City 

case, landlords agreed not to pursue post-petition or stub rent in an effort to provide 

additional liquidity to the company. It is telling that when the attorney for Circuit 

City explained to the bankruptcy court in Richmond, Virginia, on January 16, 2009, 

the reason why Circuit City was forced to liquidate, he never mentioned the 210- 

day deadline as a cause. In fact, he specifically told the court that the reason for 

the liquidation was, in his words, due to ‘‘the fact that financing in this market is 

extremely difficult.’’ This is the hard truth, and it in no way implicates shopping 

center landlords or Chapter 11. 

It is clear that what is pushing retailers into liquidation relates to credit availability and vendor willingness to ship consumer products on reasonable terms. 

Nothing in the bankruptcy law can change this unfortunate reality. 

Third, a retail bankruptcy can have serious negative effects on shopping centers 

and on other retailers. The 2005 amendments that created more certainty for shopping center owners now provide an important ‘‘firewall’’ which prevents the failure 

of one retailer from cascading to other businesses. Under the prior law, lingering 

uncertainty caused neighboring stores to suffer from reduced traffic and sales while 

potential new tenants were reluctant to rent space in a shopping center with an uncertain future. Also the bankrupt retailer has an unfair competitive advantage over 

other retailers in the same center. It would be unwise, to say the least, to revert 

to a bankruptcy standard which gives tenants an unlimited amount of time to make 

decisions about assuming or rejecting a shopping center lease. Such a change would 

do nothing to make vendors ship products on friendly terms. The only effect is to 

put others at risk. 

CONCLUSION

In conclusion, Mr. Chairman, my experience with multiple retail bankruptcies in 

recent years plainly shows that the 210-day period for assuming or rejecting leases 

has not been a factor in the fate of retailers who file Chapter 11. The cause of recent 

job losses and business liquidations is quite simply the poor economy and tight credVerDate Aug 31 2005 11:58 Jun 02, 2009 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6621 H:\WORK\COMM\031109\47924.000 HJUD1 PsN: 47924
45 

it. Troubled retailers will only be able to reorganize successfully when these negative market conditions change. No reform of Chapter 11 would have induced trade 

creditors in Korea to ship consumer electronics to Circuit City. No reform of Chapter 

11 would have lessened tight lending standards. 

I want to finish my remarks by restating the obvious fact that the success of shopping center landlords depends on having tenants who pay rent. Shopping center 

owners have a vested interest in the financial success of the retail sector. Especially 

now, as the landlord conduct in the Circuit City case shows, landlords are taking 

extraordinary steps in order to assist our retail tenants. As I said earlier, we agreed 

not to immediately press for payment of post-petition ‘‘stub’’ rent amounting to $25 

million. Shopping center owners want retailers to succeed. But repealing or revising 

the 210-day deadline will not help struggling retailers; it will only harm other retailers and shopping center owners. 

I look forward to answering any questions you or other Members of the Subcommittee may have. 

Mr. COHEN. You are welcome. Thank you, Mr. Hurwitz. 

And, now, Professor Zywicki, if you would, proceed with your testimony. 

TESTIMONY OF TODD J. ZYWICKI, PROFESSOR, 

GEORGE MASON UNIVERSITY SCHOOL OF LAW 

Mr. ZYWICKI. Thank you, Mr. Chairman. It is a pleasure to be 

here. 

When BAPCPA was being considered, I testified a number of 

times before this Subcommittee, and did a number of staff briefings. And right now, I am writing a book on BAPCPA. So what I 

am going to try to do today is remind this Subcommittee of why 

BAPCPA is written the way it is, and the goals that it was trying 

to accomplish. 

But, first, let us keep in mind: The purpose of Chapter 11 is to 

allow financially-distressed firms to reorganize. It is not to try to 

save companies that are economically failed, or prop up companies 

whose time has passed. 

This country used to have a lot of jobs in the typewriter-manufacturing industry, and the makers of typewriter accessories. But, 

obviously, we don’t make typewriters anymore. Jobs were destroyed 

in the typewriter industry. But it is difficult to say that we should 

have tried to save the typewriter industry at all costs. 

The goal is to try to efficiently distinguish between companies 

that should be reorganized, versus those companies whose time has 

passed. 

The second thing to keep in mind is there are multiple constituencies in a bankruptcy case. BAPCPA was, quite plainly, a response to the need to rebalance a system that had gotten out of 

whack. 

The system designed by 1978 was a system that was overly tilted 

toward debtor, and created undue hardships on a lot of other constituencies in the bankruptcy process. BAPCPA was a very well 

calibrated process to try to bring that system back into balance, 

and to try to restore some balance. 

So let us familiarize ourselves to remember why it is that 

BAPCPA does what it does. First, consider the issue of leases in 

the 210-day deadline. Let me illustrate this by a story that draws 

on my own experience. 

I live out in Northern Virginia, by Seven Corners. There is a 

strip mall in Seven Corners. There was a Montgomery Ward’s in 

46 

that strip mall. In 1997, Montgomery Ward’s filed bankruptcy. It 

was a terrible, dingy store. Nonetheless, for 2 years, Montgomery 

Ward’s sat in that strip mall, trying to reorganize. Finally, in 1999, 

Montgomery Ward’s came out of bankruptcy. Soon thereafter, everybody realized that they should have been put to sleep, and not 

wasted 2 years. 

As soon as they—while Montgomery Ward’s was in bankruptcy, 

foot traffic through the mall just plummeted. It was a terrible 

store. Nobody wanted to shop there. The store became shabby. And 

it took down other stores with it. 

Right next store to it was a PetSmart. The PetSmart finally had 

to close its door for, like, 6 to 9 months, because Montgomery 

Ward’s wasn’t generating enough foot traffic. Restaurants in the 

shopping mall were injured by the fact that the Montgomery 

Ward’s, which was the anchor tenant in the mall, was not bringing 

in traffic. 

Finally, we got rid of that terrible Montgomery Ward’s. Soon 

thereafter, a Target store came in. The Target store is booming. I 

can say, as a consumer, I am much more happy with the Target 

store there. The PetSmart is reopening. The other stores in the 

strip mall are booming. 

The point, here, is that by trying to save that Montgomery 

Ward’s by that long, drawn-out process of 2 years, we tried to save 

a store that couldn’t be saved. And we put off the entry of a new 

Target; a growing store with better jobs, that was creating benefits 

for the other stores in the strip mall, the restaurants, and everything else. 

That is what the 210-day deadline was designed to do—is to 

bring about a more swift reconciliation of these situations, like 

Montgomery Ward’s, so that we wouldn’t have stores sitting there 

for 2 years, bringing down all the other stores in the strip mall, 

with it. 

What about the administrative priority for vendors? The reason 

why we put in the—why the 20-day administrative priority for vendors was put in—was because, in fact, it was not the case that, 

prior to BAPCPA—that vendor claims were treated as unsecured 

claims. 

In fact, what was happening is that courts, on an ad hoc, caseby-case basis, were turning some of these unsecured claims into 

what were called critical-vendor claims. 

If you take Kmart, for instance, Kmart had $300 million in critical-vendor claims. Twenty-two hundred, out of 4,000, vendors were 

called critical-vendor claims. Who are critical vendors? Well, I will 

tell you what, it wasn’t the small businesses who didn’t have the 

political clout and couldn’t hire the lawyers to get themselves on 

that magic list of being a critical vendor. 

All that 503(b)(9) does is rationalize and equalize what had been 

this ad hoc, and, really, unfair process of how people were being 

converted into critical vendors. As Kmart illustrates, $300 million 

in critical vendors, in that case, is about what we see as administrative priorities in the current case. 

Third, there is concerns about the expedited speed by which 

bankruptcy cases are supposed to proceed, such as reducing the 

time for exclusivity, and other checkmarks that try to make the 

47 

bankruptcy case move along faster. That was to deal with a particular problem, especially in a lot of cases, which is cases that 

would just sit in the bankruptcy courts, and do nothing, much to 

the frustration of creditors, landlords, and everybody else. The only jobs those cases were saving were the jobs of the $700- 

an-hour lawyers who were continuing to administer those cases, 

and milk those cases, for months or years on end, until those cases 

were finally put out of their misery. 

What are those cases trying to do? They are trying to reduce the 

cost of dealing with those cases. 

Real administrative cases and bankruptcy cases, today—talking 

about lawyers’ fees and bankers’ fees—can be tens or hundreds of 

millions of dollars. The process that BAPCPA tried to set up was 

to try to push more of that into the pre-filing period, to make the 

parties pay for it, rather than dumping these things in bankruptcy, 

and, thereby, rolling up tens or hundreds of million dollars of lawyers’ fees, and to try to bring a faster reconciliation of these cases. 

The question we have to ask in a case like Circuit City, then, is: Is it really worth burning through $40 million or $50 million of attorneys’ fees to get to the point where we knew we were going to 

get with Circuit City, a company that was failed; a company that 

couldn’t get debtor-in-possession financing; a company whose time 

had passed? 

Thank you. 

[The prepared statement of Mr. Zywicki follows:] 

PREPARED STATEMENT OF TODD J. ZYWICKI

It is my pleasure to testify today on the subject of ‘‘Circuit City Unplugged: Why 

Did Chapter 11 Fail To Save 34,000 Jobs?’’ The American economy faces a major 

recession and there are clear signs of major struggles ahead for the retail industry. 

Several major retailers have filed bankruptcy in recent months and continued sluggish spending and access to credit by consumers augurs further struggles ahead for 

the retail sector of the economy. Some commentators have expressed concern that 

a disproportionate number of retail bankruptcies have ended up in liquidation rather than successful reorganization and have argued that several Bankruptcy Code 

amendments enacted as part of the Bankruptcy Abuse Prevention and Consumer 

Protection Act of 2005 (‘‘BAPCPA’’) as creating pressures for economically inefficient 

liquidations. 

It is possible that BAPCPA has at the margin helped to contribute to some of 

these liquidations. But it is far from clear that this is the case, as there are numerous other factors in the current that likely have contributed substantially to the liquidation of these firms. Moreover, to the extent that BAPCPA’s amendments have 

arguably contributed to the problem, repealing the relevant provisions will create 

new problems of their own, such that the costs of their repeal might likely exceed 

the benefits. In fact, by bringing about a swift and decisive resolution of a failing 

company’s prospects, thereby clearing the field for more vibrant competitors to grow, 

BAPCPA’s impact in many cases is unquestionably productive. The amendments in 

BAPCPA were enacted to address particular problems under the pre-BAPCPA 

scheme and repealing those amendments would simply resuscitate those problems. 

Thus before taking this step, Congress should consider whether the benefits of their 

repeal exceed the costs. 

Macroeconomic Conditions and Chapter 11 

The overarching purpose of Chapter 11 reorganization is to distinguish between 

firms that are economically failed and those that are in financial distress. An economically-failed firm is one that is essentially better-off dead than alive—shut down 

operations and reallocate the financial, human, and physical capital of the enterprise elsewhere in the economy. A firm in financial distress is one that simply needs 

to reallocate its capital structure in order to be a prosperous enterprise. Chapter 11 

exists to reorganize firms in financial distress but not those that are economicallyfailed. There is reason to believe that some of the retailers that have liquidated in 

recent months are economically-failed firms, rather than merely financially-disVerDate Aug 31 2005 11:58 Jun 02, 2009 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 H:\WORK\COMM\031109\47924.000 HJUD1 PsN: 47924
48 

1 As a personal illustration, during the past two years or so I have purchased a laptop, headphones, and record album converter from on-line sellers, a high-definition television from Costco, 

and portable dvd player from Target. In none of those situations did I go to a traditional seller 

of electronics goods such as Circuit City or Best Buy. 

tressed. Hence, efforts to reorganize and save those companies would likely be economically inefficient. 

The economy in general and the retail sector specifically are currently going 

through some very difficult times. Unemployment is rising and consumer spending 

and borrowing is falling. The result has been widespread difficulties for the retail 

sector. 

But these difficulties are not uniform. There are areas of the retail economy that 

are doing fine or even prospering—most notably discount stores such as Wal-Mart, 

BJ’s Wholesale, Ross’s, TJ Maxx, and Big Lots, which have reported rising sales and 

profits, sometimes reversing struggles during the recent economic boom years. Highend stores such as Saks and Nordstrom, by contrast, have suffered badly in the economic downturn. Going forward we can also expect the Circuit City’s of the world 

to be faced with increasingly strong competition from on-line sellers such as Amazon 

or eBay, which can sell the same products more cheaply and conveniently than traditional bricks-and-mortar sellers, and especially as financially-strapped consumers 

shop more aggressively for lower prices.1

As part of the economic slowdown, therefore, we can expect to see the process of 

‘‘creative destruction’’ at work in the economy—certain sectors of the retail industry 

will suffer while others prosper. Sellers of expensive discretionary items—such as 

big-screen televisions, high-end electronics, consumer durables, and automobiles— 

will likely feel the pinch especially strongly in a slowing economy. Thus, it is to be 

expected that there will be some business casualties as consumers tighten their 

belts—and those casualties probably will be stores such as Circuit City, Sharper 

Image, and other purveyors of higher-end discretionary consumer and electronic 

goods. Other retailers, such as Linens ’n Things’ were consistently losing money for 

many years before entering bankruptcy, a decline frequently exacerbated by subpar 

ownership or management. 

Circuit City was not immune to these trends. Reports indicate that its year-toyear foot traffic plummeted by double-digit amounts and its downward spiral was 

exacerbated by poor management, as exemplified by the short-sighted decision to 

fire several thousand of its most experienced and highly-paid hourly workers and 

replace them with inexperienced substitutes. Vendors also lost confidence in Circuit 

City’s reliability and became reluctant to provide inventory. Consumers have scaled 

back spending and found credit card credit drying up, a particularly damaging hit 

to Circuit City which makes most of its sales on credit cards. None of these problems can be attributed to BAPCPA. 

Bankruptcy cannot and should not be used to save economically failed enterprises 

plagued by a bad business plan, poor ownership, or a fundamental inability to compete in a changing marketplace. Chapter 11 can help financially-troubled but fundamentally-valuable firms live to fight another day. Chapter 11 cannot reverse the 

creative destruction of the competitive marketplace or force consumers to buy goods 

and services that they don’t want. In such situations, the purpose of the bankruptcy 

system is to clear-out failed enterprises to allow new firms to expand to fill the void. 

Not every firm is worth saving and saving weak firms ties up physical, financial, 

and human capital that could be better deployed elsewhere in the economy. The 

manufacture of typewriters and typewriter accessories was once a huge industry in 

the United States but their disappearance isn’t the fault of Chapter 11. 

Moreover, some experts have suggested that the bankruptcies and liquidations we 

are seeing now may be consistent with a long-overdue shake-out in the retail industry. Like many other areas of the economy, many retailers may have been kept alive 

artificially by access to cheap credit that delayed their inevitable day of reckoning. 

These companies may not have been economically viable for some time but only collapsed when their access to cheap credit dried up. Consumer spending was also artificially inflated by easy access to credit. 

In short, some of the liquidations that we see today may be a necessary macroeconomic adjustment to a leaner economic time where certain retailers will shrink 

or even disappear while others expand to take their place. It is not obvious, for instance, that Circuit City would have successfully reorganized in a market with 

fierce competition and sagging consumer demand. Thus, liquidation of some retailers may be a necessary medicine as the economy returns to a less-overheated state. 

49 

2Testimony of Professor Barry E. Adler, Hearing on Lehman Brothers, Sharper Image, 

Bennigan’s, and Beyond: Is Chapter 11 Bankruptcy Working?, House of Representatives Committee on the Judiciary, Subcommittee on Commercial and Administrative Law (Sept. 25, 2008). 3 Circuit City’s Chief Executive Officer Philip Schoonover was paid $8.52 million in fiscal 2006, 

more than double that earned by Best Buy’s CEO, even as Circuit City was sliding toward bankruptcy. See Mark Clothier, Circuit City to Fire 3,400, Hire Less Costly Workers, http:// 

www.bloomberg.com/apps/news?pid=20601087&sid=aw.zhHEzMpZU&refer=home (March 28, 

2007). 4 Barry E. Adler, Bankruptcy Primitives, 12 ABI L. REV. 219, 226–33 (2004). 5Todd J. Zywicki, The Past, Present, and Future of Bankruptcy Law in America, 101 MICH. 

L. REV. 2016 (2003). 6Lynn LoPucki, The Nature of the Bankrupt Firms: A Response to Baird and Rasmussen’s The 

End of Bankruptcy, 56 STANFORD L. REV. 645 (2003). 

NON-BAPCPA BANKRUPTCY-RELATED FACTORS EXPLAINING LIQUIDATIONS

There are also other factors in the economy today that may explain a trend toward liquidation independent of BAPCPA’s changes in the law. 

First, many scholars have documented that over the past several years, the practice of Chapter 11 has changed dramatically away from the traditional focus on 

court-supervised reorganization in Chapter 11 to a secured-creditor driven system 

that results much more often in liquidation. 

As Professor Barry Adler noted in his testimony before this Committee in September 2008, during the past decade there has been a sea change in the nature of 

Chapter 11 practice ‘‘as debtor control of bankruptcy has given way to creditor dominance.’’ 2 When a firm enters bankruptcy today more or all of its assets are already 

pledged to one or a number of secured creditors. As a result, when bankruptcy is 

filed the debtor quickly loses control over the case. Shareholders are routinely wiped 

out and incumbent managers usually lose their jobs. These two constituencies (along 

with workers) typically are the strongest advocates for reorganization even if reorganization would be inefficient—the fact that they are typically sidelined in the bankruptcy process today both weakens internal political forces advocating reorganization as well as reflecting the reality of modern Chapter 11 practice.3 Secured creditors, by contrast, will often prefer a swift liquidation of the debtor (or sale as a 

going-concern) to the uncertainty and delay of an extended Chapter 11 process. In 

fact, the gradual move toward greater control of the Chapter 11 process by secured 

creditors has better-aligned the incentives of secured creditors with the needs of the 

bankruptcy case as secured creditors now have proper incentives to push for efficient resolution of financial distress instead of inefficient liquidation or reorganization.4 In the modern era of swift and competitive global capital flows investors will 

not tolerate bankruptcy laws and practice that impose undue delay, risk, and uncertainty.5

As a result of these new realities of the bankruptcy landscape there has been a 

growing trend toward liquidation in large Chapter 11 cases wholly independent of 

(and predating) BAPCPA’s enactment. Professor Adler quotes the findings of Professor Lynn LoPucki, who finds that ‘‘41 firms that filed bankruptcy as public companies each with assets exceeding approximately $218 million liquidated in 2002, 

although no more than 8 such firms did so in any year prior to 1999.’’ 6 Thus, it 

is likely that many of the retailers that have liquidated in recent months would 

have liquidated regardless of BAPCPA, especially those firms encumbered by high 

levels of secured debt. 

Second, more specifically to the current environment, the continued problems in 

credit markets has reportedly made debtor-in-possession financing much less available than in the past. Major DIP lenders have scaled back their operations and 

lending volume. DIP lending is less-available and has a greater number of strings 

and restrictions attached to it. For instance, it appears that one major reason—if 

not the major reason—for Circuit City’s liquidation was its difficulty in acquiring 

DIP financing. Although it is possible that some of the problems in DIP financing 

markets are caused in parts by BAPCPA’s amendments, this is by no means obvious. Major providers of DIP financing have either disappeared completely or scaled 

back operations. It seems much more plausible that the paucity of DIP financing 

reflects the same stresses exhibited in all other credit markets today rather than 

some unintended consequence of BAPCPA. 

THE POSSIBLE IMPACT OF BAPCPA

Macroeconomic conditions and non-BAPCPA related bankruptcy forces thus may 

provide much of the explanation for the recent tendency toward liquidation in retail 

bankruptcy filings. Concern nevertheless has been expressed that various provisions 

of BAPCPA have resulted in a growing tendency toward liquidation rather than reVerDate Aug 31 2005 11:58 Jun 02, 2009 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 H:\WORK\COMM\031109\47924.000 HJUD1 PsN: 47924
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7 Anchor tenants are often even given below-market rental rates in acknowledgement of the 

external benefits that they provide for other stores. 

organization. Although this argument is possible in theory, it seems doubtful that 

this factor is especially important when compared to the two factors previously discussed. Moreover, several of those amendments were enacted to address particular 

chronic problems in the bankruptcy system; thus, even if their repeal or substantial 

amendment might marginally improve the prospects for reorganization, the costs associated with this course of action might exceed the benefits from marginally increasing the prospects for reorganization. 

There are several provisions in BAPCPA that might potentially create a stronger 

dynamic toward liquidation in cases involving retailers, most notably provisions related to the decision whether to assume or reject a lease of real property and increased protection for vendors that ship goods to the debtor in the period immediately preceding bankruptcy and employees of the debtor. Both of these provisions 

may arguably increase the likelihood of liquidation in any given case, but may be 

justified by other offsetting policy concerns. 

Expedited Period for Assumption or Rejection of Leases 

BAPCPA amended section 365(d) of the Code to limit the time during which a 

debtor-lessee must decide whether to assume or reject an unexpired lease of nonresidential real property. Prior to BAPCPA, the deadline for this decision was nominally fixed, but a Bankruptcy Judge could and routinely did grant an open-ended 

extension of time to the debtor up to the time of plan confirmation, a process that 

could take months or even years to resolve. This extended deliberation period certainly provided the debtor with substantial leisure and leeway to decide whether to 

liquidate or reorganize. 

But this luxurious time for the debtor to make up its mind came at a substantial 

cost to commercial landlords and other shopping-mall tenants who were forced to 

bear much of the cost and uncertainty during that period with minimal offsetting 

benefit. To ameliorate the potential harm to these parties BAPCPA provided for 

much tighter time-limits for a debtor to decide whether to assume or reject these 

leases: an initial period of 120 days from the order for relief (the date of the bankruptcy petition in a voluntary case) that the court can extend for cause for an additional 90 days. Any extension beyond this 210 day period requires the consent of 

the lessor. 

The problem with the pre-BAPCPA regime can be illustrated by an example that 

draws on my own experience. I live in Falls Church, Virginia, near an area known 

as Seven Corners that is populated by several large strip malls. The anchor tenant 

in one such mall was a Montgomery Ward store.7 In 1997 Montgomery Ward filed 

for bankruptcy after having been routed by competition from department stores 

such as Target and Wal-Mart, big box specialty stores such as Home Depot, and a 

host of other rivals from on-line sellers to specialized boutiques. In fact, Montgomery 

Ward was just one of several old-line mid-sized department stores that expired during this time, including venerable chains such as Ames (2002), Bradlees (2001), 

Caldor (1999), Jamesway (1995), Woolco (1994), and numerous other national, regional, and local department stores that could no longer compete. Many other failing 

department stores were gobbled up by stronger rivals through mergers. Although 

many at the time predicted Montgomery Ward’s eventual demise, they nonetheless 

launched an extended Chapter 11 reorganization, finally emerging in 1999 having 

closed many but not all of its outlets. The extended bankruptcy period did nothing 

to fundamentally rectify Ward’s weak competitive position or draw consumers back 

into the store, and eventually Ward liquidated. 

This extended, drawn-out reorganization process certainly gave Ward ample time 

to decide whether to reorganize—a decision that almost immediately was revealed 

to be incorrect in the end. More importantly for current purposes, however, the 

delay and uncertainty of the process itself proved very harmful to consumers, the 

landlord, other tenants of the strip mall, and perhaps even the local government. 

During this period the store grew shabby and Ward’s reorganization efforts failed 

to reverse its decline in popularity among consumers. Ward failed to draw the foottraffic to the mall that is expected of an anchor tenant by the landlord and other 

smaller businesses and restaurants in the mall, not to mention the sales and property taxes for the local government. In fact, the Petsmart next door to the Ward 

store eventually suspended operations for a several-month period because of a lack 

of customers. Eventually Ward finally succumbed to economic reality and was replaced by a Target outlet. The Target has thrived and has buoyed its co-tenants in 

the mall. I can vouch from personal experience that consumers have been overjoyed 

by the conversion. 

51 

8See Testimony of Lawrence C. Gottlieb, The Disappearance of Retail Reorganization in the 

Post-BAPCPA Era, House of Representatives Committee on the Judiciary, Subcommittee on 

Commercial and Administrative Law (Sept. 25, 2008). 

Under the BAPCPA regime, it is plausible that rather than being given two years 

to try to reorganize, Montgomery Ward may have been liquidated earlier and the 

store near my house shuttered. It is worth noting that in hindsight it would have 

been better for everyone if Ward had been shuttered earlier, allowing Target to 

move in. But more importantly, the extended delay and uncertainty itself about 

Ward’s future delayed the entrance of a highly-successful Target store, causing 

harm to consumers, the landlord, vendors, and the small businesses and restaurants 

in the mall suffered mightily from the uncertainty and delay over Ward’s future. 

The demise of Ward and renaissance of Target brought with it many better jobs in 

a growing enterprise, not to mention the jobs created for the vendors supplying the 

prosperous Target rather than the weakling Montgomery Wards and the job-creation brought to the other stores in the strip mall. 

As this anecdote illustrates, there may be costs to a bankruptcy regime that 

brings about a swifter resolution of bankruptcy cases, including the possibility that 

this may lead to the liquidation of some firms that might otherwise have reorganized successfully. But this delay and uncertainty often has a cost to consumers, 

landlords, other tenants, vendors, and even local governments. There is harm from 

being too accommodating of delay as well as being insufficiently patient. One cannot 

say with certainty that 210 days is the exact right time period for these decisions, 

but it is evident that a much longer period of time will have substantial costs as 

well. Professor Adler stated the point well, this provision (and others in BAPCPA 

that expedited the resolution of bankruptcy cases), ‘‘reflect the belief that if a debtor 

cannot be reorganized quickly, there may be no viable business to save.’’ 

Finally, it should be noted that the BAPCPA amendments permit an extension 

of the 210 day period with the consent of the landlord. Thus, where a landlord and 

co-tenants would be benefitted from an effort at reorganization, there are procedures 

in place to make this possible, so there should be minimal concern about inefficient 

liquidation where external costs to the landlord and co-tenants are absent. If the 

retailer is obviously viable and will make more-valuable use of the premises than 

other possible tenants, the landlord would be expected accommodate a reasonable 

extension of time if necessary. A landlord confronted with the choice between a 

weak Montgomery Ward store or a prosperous Target store will find the decision 

an easy one—a decision that will benefit workers, vendors, and the economy as well. 

A landlord in the current environment, by contrast, will be unlikely to evict a bankrupt tenant if there is no substitute tenant available. 

Moreover, many cases of financial distress are gradual, not immediate. As a result, debtors can and do plan their bankruptcy filings in advance of filing, and many 

cases are even ‘‘pre-packaged.’’ Thus, 210 days is only the period of time for the 

debtor to make a decision after filing but is not the limit of planning when financial 

distress is gradual. Many big cases will have extensive pre-bankruptcy planning and 

there is no reason why the debtor could not open negotiations with a landlord for 

a consensual extension of time before the debtor even files for bankruptcy. 

Increased Administrative Priority for Certain Pre-Petition Claimants 

Critics of BAPCPA have pointed to a second factor that has been argued to undermine efforts to reorganize in Chapter 11, provisions that increased protection for 

certain categories of pre-petition claimants by providing them with administrative 

priority or enlarging existing administrative priority provisions. By increasing the 

amount of claims against the debtor that are subject to an administrative priority 

claim, these priority claims leave fewer assets available to pay other creditors and 

post-petition operating expenses. Moreover, the fact that a greater percentage of 

post-petition resources are being diverted to pay unproductive prepetition claims 

may make potential DIP lenders more reluctant to lend to finance the Chapter 11 

effort. 

Two basic amendments in BAPCPA have been singled out as unwisely increasing 

administrative priority for pre-petition against the debtor, thereby diverting assets 

to payment of pre-petition claims that otherwise could be used to fund reorganization efforts.8 It should be noted at the outset that the theoretical logic of this argument is open to question—it is not clear why the relative priority of claims against 

a financially-troubled debtor should matter to its ability to reorganize. Nonetheless, 

there is a perception that increasing the size of administrative claims ties the hands 

of debtors, limiting their flexibility to reorganize. 

The first is the addition of section 503(b)(9) to the Code, which creates a new administrative claim for goods actually received by the debtor within the 20 days prior 

52 

to the Chapter 11 filing. For a retailer with rapid inventory turnover, this may create a substantial administrative priority claim, arguably making reorganization 

more difficult. Moreover, this administrative priority claim status may have the unintended consequence of encouraging liquidation in another way: vendors are a constituency in bankruptcy that tends to favor reorganization because this maintains 

a market for their products. By reducing the value of their unsecured claims in 

bankruptcy, however, this may reduce their voice and clout in the reorganization 

process. Thus, while this increased priority helps them in the short run it ironically 

might create offsetting harm in the long-run by increasing the probability of liquidation. 

But the impact of this change in the law may be overstated. Under pre-BAPCPA 

law these claims were nominally treated as general unsecured claims. But, in practice, in many retailer cases bankruptcy courts would grant administrative priority 

for pre-petition goods to many vendors as so-called ‘‘critical vendors’’ that were 

thought especially necessary for the debtor’s successful reorganization. It was commonly argued, and accepted by most bankruptcy judges, that the likelihood of administrative priority for goods shipped in the pre-bankruptcy period was necessary 

to provide assurance to induce vendors who might otherwise be unwilling to ship 

to a struggling debtor because of fear of non-payment. Or the vendors might be willing do so only if the debtor paid C.O.D., which would likely exacerbate the problems 

of a cash-starved firm already on the verge of bankruptcy. If the vendors would not 

ship goods, the debtor would be unable to stock its shelves, thereby disappointing 

customers and bringing on a death-spiral into bankruptcy. Thus, it was thought necessary to assure vendors that it was safe to ship goods on credit to the struggling 

debtor in the period preceding bankruptcy. 

In the Kmart bankruptcy case, for instance, 2330 of 4000 vendors were classified 

as ‘‘critical vendors’’ who were to be paid in full under the plan, thereby consuming 

$300 million of Kmart’s $2 billion DIP financing. Although Kmart’s particular proposal was eventually struck down by the Seventh Circuit, it illustrates the scope 

and ubiquity of these critical vendor payment proposals. Entitlement to this preferred status, however, was wholly discretionary by the court, allowing some wellconnected and influential vendors to achieve critical vendor status while others were 

left out in the cold. Moreover, there were no set guidelines on how far back these 

unpaid bills could reach or the amount that could be treated as critical vendors. 

One evident purpose of section 503(b)(9) was to rationalize this previously ad hoc 

‘‘critical vendor’’ analysis by replacing it with a statutory scheme that would serve 

the same function but without the apparent arbitrariness and unfairness of the discretionary ‘‘critical vendor’’ regime and to limit the scope of these claims. Thus, section 503(b)(9) may not have created a major increase in overall administrative 

claims against the estate when compared to the actual pre-BAPCPA practice. It also 

makes the rules more reliable and predictable for vendors. Section 503(b)(9) recognizes the need for the functions previously played by critical vendor orders; eliminating it would either lead to the resuscitation of the ad hoc critical vendor analysis 

or bring about the very results that doctrine was intended to avoid. 

The second set of potentially-problematic amendments in BAPCPA is changes to 

sections 507(a)(4) and (a)(5), which increased the aggregate monetary limits on employee wage and pension benefit priority claims. Formerly, the aggregate amount 

that an employee could assert as a priority wage or pension benefit claims was limited to $4,925 in wages and pension benefits earned within 90 days prior to filing. 

BAPCPA increases the aggregate cap to $10,950 for wages and pension benefits 

earned within 180 days prior to filing. Unlike the argued explanation of the increased priority for venders, however, there is no obvious economic justification for 

this increased priority for employee wages, unless it is thought that many employees would quit their jobs because of a fear of bankruptcy if refused this heightened 

priority extended for six months prior to the filing rather than just three months. 

This seems doubtful and, in fact, this priority is usually justified on grounds of ‘‘fairness,’’ rather than economics. By tying-up more assets to pay pre-petition claims, 

however, it tends to reduce the prospects for a successful reorganization and thus 

may not only bring about liquidation but in so doing create job losses for precisely 

those who it is intended to benefit. 

Summary on BAPCPA’s Impact 

Thus, even if certain provisions of BAPCPA are criticized as potentially encouraging liquidation instead of reorganization, at least some of these criticisms are 

mitigated or even outweighed by offsetting concerns. With respect to the stricter 

deadlines for deciding whether to assume or reject leases of non-residential real 

property, the purpose of BAPCPA’s amendments were to protect landlords and cotenants from the delay and uncertainty caused when a firm files for bankruptcy, esVerDate Aug 31 2005 11:58 Jun 02, 2009 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 H:\WORK\COMM\031109\47924.000 HJUD1 PsN: 47924
53 

pecially a bankruptcy involving an anchor tenant. Although there are economic costs 

from forcing an unduly-swift decision on the debtor there are costs to many other 

parties from extended delay of the process. Moreover, BAPCPA does include a safety 

valve by making it possible to extend the 210-day deadline with the consent of the 

landlord. 

With respect to increased administrative priority for vendors for pre-petition shipments of goods, the primary effect of section 503(b)(9) was to rationalize the ad hoc 

system of ‘‘critical vendor’’ orders that had grown up in recent years in acknowledgement of the need to provide assurances to vendors to continue to supply goods on 

credit to struggling retailers. 

In contrast to these provisions for which there are offsetting policy goals that may 

justify them, sections 507(a)(4) and (a)(5) increase the administrative priority for 

pre-petition wages and pension benefits. There is no obvious bankruptcy policy purpose furthered by these priorities and thus they contribute to the potential for liquidation with no offsetting economic benefit. 

CONCLUSION

As the economy dips deeper into recession it is evident that the near-future will 

present difficult challenges for the retail industry. In recent times several major retailers have filed bankruptcy and it is foreseeable that more will before the recession is done. Many of these cases will result in liquidation, perhaps more commonly 

than a decade or two ago. It is tempting to blame BAPCPA’s amendments for this 

trend. 

In reality, however, it is not so easy to point to BAPCPA as a scapegoat. General 

macroeconomic conditions, higher credit costs, and reduced consumer spending 

would likely have driven many of these retailers out of business regardless. Moreover, prior to BAPCPA there was a distinct trend toward liquidation in large Chapter 11 cases. These trends have been exacerbated in the recent downturn by a restricted access to DIP financing. 

To the extent that BAPCPA has also accelerated this trend, its influence is likely 

small. Moreover, where BAPCPA potentially has had an impact that impact is mitigated if not offset by other benefits that arise from its reforms. Perhaps the only 

BAPCPA amendment that has increased the trend toward liquidation with no obvious offsetting benefits is the enhanced administrative expense claim for wages and 

benefits added by BAPCPA. 

Mr. COHEN. Thank you, Professor. 

And, now, I am going to presume it is Pachulski, the younger, 

right? 

You are recognized, sir, to testify. 

TESTIMONY OF ISAAC M. PACHULSKI, STRUTMAN, TREISTER & 

GLATT, PC, ON BEHALF OF NATIONAL BANKRUPTCY CONFERENCE 

Mr. ISAAC PACHULSKI. Thank you. 

On behalf of the National Bankruptcy Conference, I would like 

to thank the Subcommittee for the opportunity to testify about the 

adverse impact of the 2005 amendments on the reorganization of 

debtors under Chapter 11. 

Basically, the 2005 amendments worked some very major, substantive changes in provisions of the bankruptcy code that affect 

the ability of debtors, in particular, retailers, to reorganize. Those 

provisions provided special and preferential and enhanced treatment for vendors of goods—not vendors of services, just vendors of 

goods—for landlords, but not any other party to an executory contract with a debtor, and to utilities. 

The impact of these amendments, and their adverse impact, is 

most pronounced in the case of retailers. And that is something 

that should give us cause for pause, when we realize that, in the 

last 12 months, we have seen Chapter 11 filings by retailers who, 

54 

in the aggregate, operated at over 6,000 locations, and had over 

200,000 employees—something that is unprecedented in my experience, and that of everyone else here. 

Now, we have to start with the basic premise that companies file 

for Chapter 11 relief because they have liquidity problems. They 

don’t have enough cash. 

The 2005 amendments, in the case of retailers, poured oil on this 

fire, by creating a new, unprecedented priority for vendor claims. 

Previously, unsecured, pre-petition vendor claims could be modified 

like every other claim—like tort claims, like contract claims, like 

vendors of services. 

The 2005 amendments created an administrative priority claim 

for these pre-petition claims, which means they have to be paid in 

full, and in cash, in order for the company to emerge from Chapter 

11. In the case of a large retailer, this increases the exit fee to get 

out of Chapter 11 by hundreds of millions of dollars. 

And in the economy where we are repeatedly told that there is 

no financing, what this means is that, unless you can cannibalize 

operations, defer deferred maintenance some more, and take money 

away from operating changes, you can’t comply and you can’t come 

out of Chapter 11. 

And this problem is exacerbated by the new reclamation provisions, which were previously—the right of reclamation was limited 

to goods delivered 10 days before the Chapter 11 filing. They are 

now expanded to goods delivered within 45 days, which increases 

both the amount of these claims and the cost of resolving these reclamation claims. 

To a lesser extent, the amendments to Section 366, which basically give a utility the right to demand a cash deposit or a deposit 

of cash equivalents, also impose additional liquidity constraints at 

the outset of a Chapter 11 case, at the very time that the debtor 

is having trouble getting debtor-in-possession financing. 

Imagine a debtor with hundreds of locations, each one with multiple utilities. The utilities now have a right to demand cash deposits. The only thing you can argue about is the amount. And, by the 

way, when you are arguing about the amount, the court is not allowed to consider whether the debtor had a good payment record, 

and is not allowed to consider whether the utility ever obtained a 

security deposit before. This is simply too narrow a standard. 

The 2005 amendments also changed the rules governing one type 

of the executory contract, commercial real estate leases, in a way 

that had a material adverse impact on Chapter 11. But to put this 

in context, there are two things that I would request the Subcommittee to keep in mind, because they are important. 

First, the basic rule in Chapter 11 that applies to every executory contract, except a commercial real property lease, is that the 

debtor has until confirmation of a Chapter 11 plan to decide whether to assume or reject the contract. But the court can terminate it 

for cause. It is not in the sole and unbridled discretion of the debtor. The party can tell the court, ‘‘This contract has to be addressed 

sooner.’’ 

In the case of landlords, a different rule was adopted—basically, 

a landlord-veto rule, which is that, unless the landlord agrees, once 

210 days expires from the filing of the Chapter 11 case, if the debtVerDate Aug 31 2005 11:58 Jun 02, 2009 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6601 H:\WORK\COMM\031109\47924.000 HJUD1 PsN: 47924
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or doesn’t assume the lease, it is deemed rejected, and the debtor 

has to vacate the premises immediately. 

This is unrealistic, especially for a seasonal business, like a retailer. And we will get into that in a moment. But the other point 

to remember is that the landlords have already gotten a different 

protection through earlier amendments, which is that from the beginning of a Chapter 11 case until the lease is assumed or rejected, 

the debtor has to perform all obligations arising after the Chapter 

11 filing. The landlord has to be paid on a current basis. 

Now, the effect of the amendment is this: Consider the fact that 

we all know that the retailers’ best and most profitable quarter is 

the last quarter of the year. If a debtor files a Chapter 11 case, and 

it is a retailer, and it files before the end of May, it will have to 

decide whether to assume or reject its leases before it even knows 

the results of the holiday season, before it has any kind of a realistic opportunity to determine whether particular locations work or 

don’t work. And, remember, this decision is supposed to be made 

on an informed basis, for every location, location by location. 

Yet, we now require the debtor to make all of those decisions 

within 7 months, unless the landlord agrees otherwise, which gives 

the landlord something that no other party in a Chapter 11 case 

who is a party to an executory contract, has—a veto. 

In addition, this creates an impetus for secured lenders to push 

for liquidation. Because if you are a lender with a lien on inventory, you know that if the inventory is not liquidated in place, if 

you have to move it and sell it at a warehouse, you will get substantially less. So what you have in the back of your mind is: You 

have got a 210-day limit. And if the liquidation is going to occur, 

it better occur before then. 

You can’t work with a debtor any more for a year or a year and 

a half, as long as you keep paying rent on the lease, and know 

that, if you have to liquidate, you can do it orderly and in place. 

You have to press the debtor for an early liquidation and for 

early decisions, which is a perverse and, I think, unintended result 

of the 2005 amendment. 

So, again, we would like to thank the Subcommittee for considering this. We realize you are being asked to revisit issues that 

may have been considered in 2005, but I don’t think that anybody 

expected that we would see this many retailers with this many employees crashing or going into Chapter 11 in so short a period of 

time. Thank you. 

[The prepared statement of Mr. Isaac Pachulski follows:] 

56 

PREPARED STATEMENT OF ISAAC M. PACHULSKI


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Mr. COHEN. Thank you, sir. We appreciate your testimony. 

And, now, Professor Williams, if you would, conclude our testimony. 

TESTIMONY OF JACK F. WILLIAMS, AMERICAN BANKRUPTCY 

INSTITUTE RESIDENT SCHOLAR, GEORGIA STATE UNIVERSITY COLLEGE OF LAW 

Mr. WILLIAMS. Thank you very much. 

Mr. Chairman and Members of the Subcommittee, I want to 

thank you for the opportunity to visit with you today over a number of the issues that are percolating in retail bankruptcy. 

I want to begin with this simple observation: 2008 was a very 

bad year for bankruptcy. During that time period, we witnesses 1.1 

million bankruptcy filings. And it is not going to get any better for 

2009. At the American Bankruptcy Institute, we are estimating 

that at least 1.4 million bankruptcy filings will be made in 2009. 

We also anticipate an increase in business bankruptcy filings of approximately 40 percent. 

Retail bankruptcies are not faring any better, as well. Eight 

major retailers have already filed bankruptcy petitions for this 

year, following the 27 major retailer bankruptcy filings in 2008. 

The 2008 total was the most since the 32 retailers that filed in calendar year 2001. 

Of these 27 retailers that filed in 2008, 37 percent of those filed 

in the fourth quarter of that year, during the Christmas season, 

which is highly unusual. As Mr. Pachulski has pointed out, the 

Christmas season, or the fourth quarter of the calendar year, in 

many retail sub-sectors, will generate 50 percent or more of that 

year’s revenue. 

The present market and lending environment is also important 

to consider to provide what I think is the contextual space of which 

to look at three tension points that we are focusing on today. 

For retailers, the top-line numbers, revenues, are way down; the 

profit margins are way down. Businesses are reducing their prices 

to draw customers into the facility. Consumer spending and credit 

are down, with consumer savings increasing, and increasing at an 

increasing rate. Now, that is good for consumers with debt, but not 

so good for a weak economy that is driven by consumer demand. 

Vendors are aggressive managing their credits. They are reducing credit turns. They are pulling back in volume shipments. Vendors are no longer serving as short-term banks for the retailers. 

Banks are simply not making loans. They are not lending beyond 

what it may take for a quick sale, or to liquidate the business, unless the business has very good cash flows and a good brand. 

And, in short, in retail, what we have seen is we have hit a liquidity wall. There are no financial buyers to speak of because of 

the scarcity of available capital. 

The present bankruptcy strategy is to find a strategic buyer 

quickly, because your creditors are giving you very little time, or, 

simply, to liquidate the business and shut it down. 

Now, the 2005 amendments to the bankruptcy code created a 

Chapter 11 for good times, not a Chapter 11 that is most effective 

for financially bad times. This Subcommittee should consider adVerDate Aug 31 2005 11:58 Jun 02, 2009 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6601 H:\WORK\COMM\031109\47924.000 HJUD1 PsN: 47924
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dressing some of the structural flaws in the bankruptcy code that 

were infused through the 2005 amendment. 

A major thrust of the drafters of Chapter 11 of the Bankruptcy 

Reform Act of 1978 was to develop a flexible, adaptive and transparent system that was business-plan agnostic. 

Our original Chapter-11 design permitted a debtor a broad range 

of discretion, consistent with the exercise of sound business judgment, and the best interest of the bankruptcy estate, to develop a 

business plan with the greatest chances of success. 

If anything, recent amendments to Chapter 11 of the bankruptcy 

code have failed to serve the law’s original purposes and policy 

goals. The points for consideration have been discussed by my panelists. 

And I will just add a few observations to that: The consideration 

for removing the administrative priority for goods sold to the debtor within 20 days, and returning that pre-petition claim back to the 

prior practice of either establishing a reclamation claim, or living 

with a general unsecured claim is precisely the type of thing we 

need when we are looking at the serious crunch on liquidity for a 

business. 

The 503(b)(9) claim is, in itself, an anomaly. It is a distortion of 

the priority-and-distributions theme that is in the bankruptcy code. 

Consideration of relaxing the deadline by which commercial real 

property leases must be either assumed or rejected—again, the 

prior practice was not unbridled discretion on the part of the debtor-in-possession; yet, a third-party neutral, the bankruptcy court— 

and any determination had to be not only consistent with the 

sound business judgment of the debtor, but also with the best interest of the estate. 

And, finally, consideration of relaxing the deadline for the period 

of exclusivity—that time period in which the debtor has the sole 

authority and power to propose a plan of reorganization. I believe 

that also would be consistent with infusing sufficient judicial discretion so that each case can be adapted. The system, itself, can be 

flexible, and we provide the greatest chance of success within— 

well, what is consistent with the best interest of the estate. 

I want to thank you very much for the opportunity to share some 

thoughts on the issues raised by retail bankruptcies. I appreciate 

it. 

[The prepared statement of Mr. Williams follows:] 

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Mr. COHEN. Thank you, Mr. Williams. I appreciate your testimony. 

We have got—those buzzers didn’t mean somebody else went into 

bankruptcy. It probably happened, but it meant we need to vote. 

We have got 11 minutes. 

Well, I think we have got time—if I could do my questioning, if 

the panel doesn’t mind, then we can leave 6 minutes, and we will 

have time to go. So if we can start with the questioning. And I will 

start and recognize myself. 

Mr. Miller, are you still with us? Mr. Miller? 

Mr. MILLER. Yes, sir. 

Mr. COHEN. Thank you. I didn’t know if you had taken a siesta 

or not. 

If Circuit City had filed before the 2005 amendments went into 

effect, would it have been able to successfully reorganize? 

Mr. MILLER. That, sir, is a difficult question. Let me make this 

comment—— 

Mr. COHEN. That is why I asked you. 

Mr. MILLER. Here, you have a situation in the environment, 

where, in 1978, when the code was adopted, it contained many provisions which were intended to induce debtors to go into Chapter 

11 before it became too late, when there was nothing left to reorganize. 

In Chapter Three of the bankruptcy code, you have these administrative provisions like the automatic stay, the ability to sell lease 

property, use collateral security, and, 364, to allow DIP financing. 

The issue which arose even before 2005, and from 2003 to 2008, 

was that bankruptcy had become an unattractive thing for a company to reorganize in. It became the last possible resort. And the 

2005 amendments made it even worse. 

So companies stayed out of Chapter 11, and they tried to survive 

outside of Chapter 11. With all their secured debt, going into Chapter 11, very often, meant they were going to end up in liquidation 

anyway. So the issue would have been: When would Circuit City 

have made the decision to go into bankruptcy, when it had the resources to survive in a bankruptcy? 

The bankruptcy code was intended to give a debtor a reasonable 

opportunity for the courts to determine, for the creditors to determine, whether there was a possibility of reorganization. And that 

depends on when you go in. 

Unfortunately, because of all the clawbacks, i.e. special interest 

amendments, starting with the amendments in 1984, and many of 

them in favor of the real estate lobby, bankruptcy reorganization 

became less and less attractive. 

In the case of Circuit City, because of the liens on the inventory, 

the seasonal nature of retailing, the decision would have been a decision that would have had to be made by that corporation, at a 

point in time when it had more resources and more ability to survive a Chapter 11. In large fashion, that would have been dependent upon the ability to get the DIP financing, which is critical. 

Now, Professor Zywicki referred to the Montgomery Ward store. 

That is one store out of—I think Montgomery Ward had at least 

200 or 300 department stores. It employed thousands and thouVerDate Aug 31 2005 11:58 Jun 02, 2009 Jkt 000000 PO 00000 Frm 00109 Fmt 6633 Sfmt 6601 H:\WORK\COMM\031109\47924.000 HJUD1 PsN: 47924
106 

sands of people. It was being financed by the General Electric Company. 

The effort that was being made in Montgomery Ward saved jobs 

for a long time. It was not a futile effort. The company actually did 

come out of one Chapter 11. 

So the decision to file or not to file is a very critical one, based 

upon the ability—could you survive? As the environment of Chapter 11 has become more hostile, and the balance which Professor 

Zywicki referred to—the balance between the debtors’ protections 

and the creditors’ rights, which was affected in 1978, long after 

1984, became skewed in favor of creditors. So that affects the decision-making. 

I think if Circuit City had filed much earlier, it would have had 

a much better chance of survival. I don’t think, with very rare exceptions, there has been a successful retail reorganization, since 

the beginning of 2008. 

Essentially, every retail chain that has gone in, starting, I think, 

with Sharper Image, in February of 2008, has ended up in a liquidation, with the possible exception of Boscov’s, where the family 

bought the company out. 

Mr. COHEN. So, Mister—— 

Mr. MILLER. So that decision has to be dependent upon: ‘‘What 

resources do we have? What kind of financing do we have?’’ 

You have to recognize companies don’t go into Chapter 11 because they are financially vibrant. They need time to get back to 

financial vibrance, if we are going to have a reorganization policy 

in our law. 

Mr. COHEN. We are about to run out of time here, and have to 

go vote. 

Let me ask you this quickly, if you can: This economy we are in, 

particularly in regard to Chapter 11—are the 2005 amendments effectively hurting our country’s ability to keep people employed, in 

jobs, and get out of this recession? 

Mr. MILLER. In my opinion, Mr. Chairman, absolutely. It has just 

skewed the balance so much in favor of the secured creditors, that 

no company—I will tell you very frankly: CEOs will say to me, ‘‘I 

don’t want to be seen with you, and I am not going into bankruptcy. I can’t survive in the environment of bankruptcy.’’ 

So these companies wait too long. There is not enough asset 

left—free assets—with which to reorganize. This is exactly what 

Congress was looking at in 1975, 1976 and 1977—‘‘How do we get 

companies to file before it is too late?’’ And we have taken away 

those protections. 

Mr. COHEN. Thank you, sir. My time has expired, and we have 

5 minutes and 30 seconds to get to the floor. 

If you and the other witnesses would remain available for questions when we return from voting, which should be approximately, 

maybe, 25 minutes—and, in the intermittent 25 minutes, if the five 

panelists would come up with a model bill, we would appreciate it. 

We are in recess. 

[Recess.] 

Mr. COHEN. We don’t have any Republican Members here yet, 

and they are next in line for questioning. I think we should wait 

until at least one of them returns. 

107 

Mr. Franks was making a statement, a 1-minute, and he didn’t 

know when he was going to get a chance to make that 1-minute. 

And he said it might affect an election in South America. I would 

be very interested in hearing his 1-minute. 

And, then, Mr. Issa was going to be back shortly. So we will wait 

for Mr. Issa and let him have questions first. 

Meanwhile, have you got your bill together? 

Done? Good. Good. 

Mr. Miller, are you there? 

Mr. MILLER. Yes, sir. 

Mr. COHEN. Thank you, sir. We will get going in a few minutes. 

Thank you. 

We are back and convened for questions. 

And I now would like to recognize the honorable gentleman from 

Southern California, Mr. Issa, for his 5 minutes of questions. 

Mr. ISSA. Thank you, Mr. Chairman. 

I must first say that I am not without some conflict as to Circuit 

City. They were a customer of mine from the mid 1980’s. And my 

former company enjoyed hundreds of millions of dollars in business 

with them, and—right up until the very end. 

Having said that, it also allows me to see that the very end had 

been inevitable for a very long time. And to that end, I have a couple of questions, because this is more about bankruptcy than about 

anything else. 

But I want to, first, say one more thing, which is: I don’t think 

there was any saving of Circuit City. I don’t think any shrewd investor would have saved a substantial portion of it, given their 

holdings, the indivisibility and the historic level of traffic. 

So having said that, I would like to go to a round of questioning 

that is more real estate appropriate. 

Mr. Hurwitz, now, you are the largest owner, I understand, or 

one of the largest owners of the real estate from Circuit City. Is 

that correct? 

Mr. HURWITZ. That is correct, sir. 

Mr. ISSA. In order to understand the bankruptcy and the conversations that have been made here, I want to phrase a couple of 

questions. First of all, would you have been helped or hurt from a 

more protracted Chapter 11 period for Circuit City, in your opinion? 

Mr. HURWITZ. We would have been significantly hurt by a more 

protracted bankruptcy proceeding for Circuit City, primarily because everyone knew, as you just mentioned, sir, that Circuit City 

was not going to survive. And it would have been death by a thousand cuts for us to sit through a process whereby people were pursuing, really, a folly for trying to prop up a company that had 

failed. 

And in so doing, it would have significantly hurt the value of our 

shopping centers, and significantly impacted negatively the business viability of the tenants that are in our shopping centers that 

didn’t have any direction on what was going to ultimately happen 

to that box. 

So it makes leasing vacant space very, very difficult. And it 

doesn’t drive any business to the shopping center when you are a 

108 

failed retailer, like Circuit City was, or is. And so a protracted 

process would have been very damaging to our company. 

Mr. ISSA. Well and to that extent, my understanding is when Circuit City made the decision quite a few years ago to give up white 

goods—washers, dryers, refrigerators and the like—that drove a lot 

of traffic through the stores—that impacted the traffic not just to 

Circuit City, but to the entire centers that you owned that they 

were in. Isn’t that correct? 

Mr. HURWITZ. That is correct, sir. 

And if you look at the difference, for example, in our shopping 

centers, between a Best Buy that has white goods, and a Circuit 

City that didn’t, the difference in volume per square foot in Best 

Buy was double that of Circuit City. And a lot of that had to do 

with the mix of the merchandise. 

Mr. ISSA. Now, because we are talking bankruptcy, and I want 

to understand this, you have had many years in real estate as a 

head of a REIT and so on. My understanding—you have seen it before the 2005 changes, and after. 

Tell us what you think is the single biggest difference for you, 

as the holder of an asset which they get to keep if they want, they 

get to get rid of, if they want, in Chapter 11, and you have no 

choice but to wait for their ultimate end of lease. How was it different before and after 2005, for you? 

Mr. HURWITZ. Well, the biggest difference between before and 

after 2005 is the fact that we have, as landlords, a seat at the 

table, and we are engaged in conversation with retailers far in advance of a bankruptcy filing. 

For really the first time, with the 2005 amendments, we are able 

to engage our retailers, listen to what they have to say. They have 

to listen to what we have to say. And more importantly, the retailer is being forced to plan much more in advance. 

One of the things that people, I think, have to remember is that 

bankruptcy is a process. It is not an event. You don’t wake up one 

morning and decide to file bankruptcy. We were having conversations with Circuit City 18 months before they decided to file. And 

we had conversations with Circuit City right on through the process. 

Had we not had a seat at the table, which was afforded to us by 

the 2005 amendments, we would not have been in that position, 

and really would not have been able and willing to help Circuit 

City, even though they were beyond hope at that point. 

Mr. ISSA. Well, Mr. Zywicki, how do you feel? Because this is an 

area that some would like to reverse—that this, before and after 

2005, would impact other similar landlords and creditors. 

Mr. ZYWICKI. I think that Mr. Hurwitz hits the nail on the head, 

which is that 210 days is just the outer limits. Most bankruptcies 

are gradual. You engage in a lot of planning before that. 

And as I mentioned earlier, one of the whole purposes of the 

2005 amendments was to increase the amount of planning that 

goes into bankruptcy. I mean, we have to keep in mind that bankruptcy is not a cheap process. They are going to come up with— 

lawyers are going to charge over $1 billion in the Lehman Brothers’ 

bankruptcy—$1 billion for lawyers and bankers, right? 

109 

When these cases go into bankruptcy, we are talking about tens 

or hundreds of millions of dollars of lawyers and accountants and 

bankers. And what the 2005 amendments were trying to do, as Mr. 

Hurwitz said, was not just have these things go into bankruptcy, 

and let everything go all over the place, and let the chips fall where 

they may, but to negotiate things ahead of time. 

As you said, there is plenty of time in most of these situations, 

when a debtor knows they are going to have to file bankruptcy. 

They can negotiate things out ahead of time and, thereby, reduce 

the amount of disruption and uncertainty when they actually do 

file bankruptcy. 

So I think that once you take that into account, it makes for a 

much smoother and more predictable process in the same way that 

increasing the administrative claims for vendors gets rid of the uncertainty and—of the critical-vendor process, which was just, you 

know, catch as catch can—whether of not you could get on the critical-vendor list—not saving any money. All you were doing was just 

making it a completely chaotic and unpredictable process. For now, 

at least you know what the rules are. 

I can understand why they had a critical-vendor list, which was 

to try to get vendors to deal with a retailer that was in trouble. 

That is why they invented the doctorate. All 503(b)(9) did was 

make it better and make it more predictable, I think. And I think, 

if we get rid of 503(b)(9), then we are going to go right back into 

that world of whether or not you can engage in critical-vendor 

transactions, and whether Kmart was correctly decided, and all 

those different sorts of questions. 

Mr. ISSA. Thank you. 

And thank you for your indulgence, Mr. Chairman. 

Mr. COHEN. Thank you, sir. I appreciate it. 

Now, I would like to recognize the Ranking Member, and, possibly, the savior of South America, Mr. Franks. 

Mr. FRANKS. Well, thank you, Mr. Chairman. I hope I can be as 

effective here, and we can save Western civilization, here, if we 

work at it. 

Mr. Chairman, I know that, oftentimes, you know, our economy 

is—the conservatives make the argument that the free markets are 

critical to its survival. And I think there is some consensus in that 

regard. 

But I think that we forget that there is an even more important 

element than competition in our economy, to hone it and to make 

it efficient and effective, and that is the word ‘‘trust.’’ That, when 

people make agreements with other entities within the society, that 

it is important to keep their promises. Otherwise the investor or 

those who are willing to go out and put themselves at risk to try 

to make a productive element of our economy—are less willing to 

do so. 

So I think that is an important premise to be laid. And I hope 

that that is a central consideration in the discussion today. 

With that, I thought the Chairman asked a very pertinent and 

intelligent question to Mr. Miller, which, essentially asked, you 

know, ‘‘What would have happened, had the 2005 amendments to 

the bankruptcy—Chapter 11 code—what would have happened to 

Circuit City, had those things not been in place?’’ 

110 

Mr. Zywicki, with your permission, could you give me some perspective of what you think? Would Circuit City have done better if 

we hadn’t changed the code in 2005? 

Mr. ZYWICKI. The end result would have been the same. I think 

it is almost certainly—it would have been the same. It would have 

just been a much more expensive, painful process that would have 

injured a lot of other people. 

I think Mr. Hurwitz said it perfectly. The uncertainty that it 

would create while we sat around and watched the downward spiral of Circuit City, and the damage it would do to vendors, to other 

tenants, to landlords, to employees—would have really been, I 

think, a real shame. 

And I think the writing was on the wall. I think it was inevitable. In this economy, it is just not a great economy to be in the 

business of selling big-screen TVs on credit. I think we have lived 

through the experience of people buying big-screen TVs they 

couldn’t afford. And I don’t think that is what the near future looks 

like. 

The economy is bad. What we know is a lot of businesses were 

propped up by cheap access to credit, who probably should have 

disappeared a few years ago. Consumers were living beyond their 

means, buying discretionary, high-end electronic goods they 

couldn’t afford. They had incompetent management—by all indications, just terrible business decisions. Bankruptcy can’t fix incompetent management. 

There were changes in the market, as we talked about. Foot traffic was going down precipitously. And there is no reason to think 

that was going to be reversed, when you look at the rise of online 

selling. And consumers are going to become much more price-conscious. If they are going to buy electronic goods, more and more, 

it is going to be online. 

A lack of vendor confidence, and the final bottom line that we 

talk about was just a lack of available DIP credit. The reason why 

the terms were so onerous was because the lenders are in trouble. 

Circuit City was in trouble. 

And, yes, they are—by all indications, there is a reduction in DIP 

lending out there. The reduction in DIP lending, though, is just because of the problems in the credit markets. 

So I think it was inevitable. It was just a matter of whether or 

not we were going to allow—keep this company on life support for 

a year or two, and allow it to pull down everybody else with it— 

or whether or not we were going to do what we did. 

And, Mr. Hurwitz, I am sure, would vouch that if Circuit City 

was a company worth saving, they would be more than happy to 

negotiate an extension of the deadline, if they think that that is the 

best tenants for their particular location, in any given mall. That 

is an option. It is not 210 days. It is 210-day, unless they agree to 

an extension. 

So I think this was probably the right thing at the right time. 

Mr. FRANKS. Well, thank you, Mr. Chairman. 

Not to belabor the point, but when business entities make an 

agreement with each other, you know, the end result, hopefully, is 

productivity. And it is so easy for us to forget—and especially in 

the challenging times that we face—that the monetary system is 

111 

merely to facilitate that productivity; and, that, in the absence of 

creating a system that ultimately results in the best productivity 

possible, we are getting less than the best that we can out of the 

economy. 

So, with that in mind, I just think that the person who has kept 

their part of the bargain in any agreement—that there should be, 

you know, a tendency to favor them in the bankruptcy proceedings. 

And there is a balance, and I don’t know where it is sometimes, 

but the bottom line is, if we miss that, then we undermine our entire system. 

So with that, I am going to ask a last question to Mr. Zywicki. 

You note the downturn in the Chapter 11 organizations began 

before the 2005 Bankruptcy Act. Do you think that if we repeal 

those today, that that downturn would be reversed? And, perhaps, 

I would pass that along to Mr. Hurwitz, if he is inclined, as well. 

Mr. ZYWICKI. I can’t see that it could possibly make any difference, because there are—what it does is it expedites the process. 

What it does is it helps resolve companies that are likely to fail. 

But I can’t see that it could have any impact on companies that are 

likely to reorganize. What we save in the process is a couple tens 

or hundreds of millions of dollars of lawyers’ fees, but—and maybe 

those are the jobs that we are trying to preserve, here. 

But I think that, in the end—I just don’t think that the amendments can be said to have had any real impact in this case or the 

other case. 

Mr. HURWITZ. I agree. I think that the amendments are helpful 

in the sense and, in fact, I know that this won’t be a popular comment, but I think that the 210 days, in a tougher economy, should 

be shorter, not longer, because I think you need to bring people to 

the table. 

You don’t have the luxury of time. You are sitting with your vendors, and their clock is ticking. You are sitting with the landlords, 

your clock is ticking. Certainly, the employees have a right to know 

what their future is going to be. And we know there is no real capital out there to keep this business afloat. 

Now, there are a lot of ways that we can address that issue, if 

we believe in the business plan. See, at the end of the day, this is 

a retail business. And the consumer votes every day with its dollar. 

And the American people are smart. And they voted this company 

out of business a long, long time ago—long before they even entered into bankruptcy, quite frankly. 

So I think that the 2005 amendments would not have been—if 

they were not there, would not have been able to save any of the 

tenants, quite frankly, that we are currently looking at now, that 

are liquidating. 

Mr. FRANKS. Well, thank you, Mr. Chairman. 

Thank you, gentlemen. 

Thank you for allowing me to save South America. I appreciate 

it. 

Mr. COHEN. You are welcome. Thank you. Thank you, Mr. 

Franks. 

We will have a second round. 

Mr. Hurwitz, there have been companies that have gone into 

Chapter 11 in the past, prior to 2005, in particular, that have come 

112 

out of it strong, right? So would you have said that the voters— 

the consumers were the voters, and they voted them out of business then, and somehow they came back to life? They were resurrected? 

Because, you know, if—under the current law, a lot of those businesses that were brought back to health through Chapter 11, under 

this present 2005 amendments, they probably would have just been 

voted off the island. I think you represented Mr. Trump—or somebody did, here—and they would have been voted out of the—you 

know, not made the ground—or whatever that game show is. 

Mr. HURWITZ. I think, Mr. Chairman, the difference between 

those companies that survive and those companies that fail is if 

they have a reason to be. 

For example, prior to 2005, if you look at the Macy’s bankruptcy, 

clearly Macy’s had too much debt. They had over-leveraged the 

company. But they were outstanding merchants. They were outstanding merchants, and they ran a very, very good business, and 

were an important part of the American retail fabric. 

So when they went into bankruptcy, there was no question that 

the industry rallied to bring Macy’s out of bankruptcy, because 

they had a purpose. 

With due respect to Mr. Miller’s comments about Montgomery 

Ward, they came out and failed because they were lousy merchants. 

Mr. COHEN. Let me ask you this: How many leases did you have 

of Circuit City? 

Mr. HURWITZ. Fifty. 

Mr. COHEN. And how many of those did you lease to a new tenant within the next 6 months? 

Mr. HURWITZ. Well, we don’t have them back yet, sir, because 

they are still doing their liquidation. 

Mr. COHEN. Are they? 

Mr. HURWITZ. So the answer is zero. 

Mr. COHEN. Do you have any leases for when they finish their 

liquidations? 

Mr. HURWITZ. We have letters of intent that we are working on, 

but we have no executed leases right now in the—— 

Mr. COHEN. How many letters of intent do you have? 

Mr. HURWITZ. About six or seven of the 50. 

Mr. COHEN. So, at some point, you might have six or seven of— 

occupancies? 

Mr. HURWITZ. That is correct. 

Mr. COHEN. Might it had been better if Circuit City could have 

survived, or something similar to Circuit City, through Chapter 11? 

And, at least, while they might have been reorganizing and on life 

support—that you had at least had 50 tenants? 

Mr. HURWITZ. No, sir, because—— 

Mr. COHEN. You don’t think so? 

Mr. HURWITZ [continuing]. I think it would have—speaking to 

Professor Zywicki’s point, which—it just delays the inevitable. It 

was a poorly-run organization that had no reason to be. 

Mr. COHEN. And that may not be the best example. 

Mr. Pachulski, the younger—— 

Mr. RICHARD PACHULSKI. Thank you. 

113 

Mr. COHEN. You are welcome, sir. 

Do you believe there are businesses that went through a reorganization prior to 2005 in Chapter 11 that could not have—would 

not have survived under the laws—with the amendments of 2005? 

Mr. RICHARD PACHULSKI. Absolutely. Absolutely, Mr. Chairman. 

Mr. COHEN. What are the different provisions in the 2005 law 

that, looking at the economy in 2009, do you believe should be 

changed to keep American jobs? 

Mr. RICHARD PACHULSKI. Well, Mr. Chairman, just to give an example—and I do want to address something that Professor Zywicki 

said in response to your question. 

I actually did a survey within our firm of how many companies 

would likely have reorganized if 503(b)(9) did not exist after 2005, 

versus how many of them would have survived pre-2005. And just 

within our firm, there are seven companies that could not reorganize because their 503(b)(9) administrative claims were dramatically too high. It was impossible. 

And even if there was enough money to pay the 503(b)(9) claims, 

you couldn’t prove feasibility under a plan, because there was no 

money to pay for capital expenditures, labor upgrades or other necessary expenses. And my experience is probably no different than 

others. 

In fact, Mr. Chairman, what I find is troubling about Professor 

Zywicki’s testimony is I don’t believe the legislative history of Section 503(b)(9) actually addresses critical-vendor status. And the 

reason it doesn’t is it didn’t change it. 

So let me give you, Mr. Chairman, a piece of information that 

was absolutely public in the Circuit City case, because I actually 

know a lot about it, both publicly and not publicly. And I will provide the public information. 

But most of the vendors in that case—and I certainly understood 

it—not only wanted their Section 503(b)(9) claims, they wanted 

critical-vendor status. So not only did you have a $215 million 

problem or $350 million problem, you still had critical-vendor status. 

BAPCPA did not get rid of critical-vendor status. Cases today 

still have critical-vendor status. So this concept that somehow the 

2005 amendments had anything to do with that is, frankly, preposterous. And the concept—which, I must say, I take some offense— 

that somehow this was done to keep Circuit City alive to promote 

professional fees, your honor—I apologize—Mr. Chairman, nine out 

of 10 of our firm’s largest-fee cases in its 26-year history—nine out 

of 10 were liquidations. 

Professionals make more on liquidations. Our firm will make 

more on the Circuit City liquidation than it would have made on 

a reorganization. Those are facts. It will happen in Lehman Brothers. It happened in Enron. It will happen in other cases. 

But this concept that somehow 503(b)(9) settled the critical-vendor status isn’t the case whatsoever. And what you effectively did 

is took one group of unsecured creditors and preferred them over 

other groups. 

If someone provides services within 20 days, they are not given 

that status. If I give unsecured credit during the 20 days, a bank 

loan, they don’t get that same priority. One group of parties has 

114 

received the priority which helps certain vendors in certain cases, 

and hurts them in other cases. 

But the fact of the matter is, Mr. Chairman, there is no doubt 

that Section 503(b)(9) has had a detrimental effect on reorganizations, and will continue. I know there is a lot of histrionics about 

the 210-day period. And, frankly, in Circuit City, it was not an 

issue. It probably will be issues in other retailers. It was not in Circuit City because we never got far enough for that to be an issue, 

because the banks put the squeeze, because they knew a reorganization was impossible. 

And answering Mr. Miller—what Mr. Miller was asked—having 

lived it, while I don’t think Circuit City could have been reorganized as a whole, I think if there had been additionally time, potentially, there would have been pieces of it that actually would have 

survived. And I think the landlords and the vendors would have 

appreciated a going concern business, in all fairness. 

So the simple answer is yes, Mr. Chairman. In direct response 

to your question, the fact that—what may have made sense in 

2005, in a better economy absolutely does not make sense in today’s economy, particularly with Section 503(b)(9). It is death to retailers on Day One, just because certain vendors will get priority 

over other unsecured creditors. 

And the critical-vendor status is with us, will be with us forever. 

It is not gone, not withstanding what Professor Zywicki said. 

Mr. COHEN. With Mr. Franks’ indulgence, I want to follow up. 

One of the witnesses had some statistics—and I don’t recall 

which—in their testimony, as far as how many retail bankruptcies 

there have been—retailers. 

Who was that? Was that—Professor? 

Mr. WILLIAMS. Yes, I did have a number. 

Mr. COHEN. Yes. How many professional retail bankruptcies 

were there? 

Mr. WILLIAMS. Well, all I counted, at this point, were major retailers—— 

Mr. COHEN. All right. 

Mr. WILLIAMS [continuing]. That had filed. 

There are a lot of very small outfits with one, two, three, four 

stores that wouldn’t be in these numbers. For calendar year 2009, 

which is just a couple of months now, we have had eight major retailers that have filed for bankruptcy. 

And calendar year 2008, major retail filings were at 27. And that 

is the largest number since 2001, where we had 32 major retail 

bankruptcy filings. 

As I pointed out, of the 27 major retailers that filed in 2008, 30 

percent of the—37 percent of those filings took place in the fourth 

quarter of 2008, which is—that is the Christmas season, which is 

typically the quarter in which as much as 50 percent or more of 

revenues will be generated. That was an unusual number and an 

unusual time, that a retailer would file. 

Mr. COHEN. Do you expect more bankruptcies in the retail sector 

in this coming year? 

Mr. WILLIAMS. Absolutely. Our research at the ABI would support that we don’t see any turnaround in 2009, involving retail. 

Bankruptcy filings, themselves, are a lagging economic indicator. 

115 

Typically, the economy will begin to turn before the bankruptcy 

numbers start to flatten out. For retail bankruptcy, we estimate 

close to a 50 percent or more increase in bankruptcy filings. 

Mr. COHEN. And do you have any recommendations for this Subcommittee, on what this Subcommittee could suggest or propose in 

the way of changes to the bankruptcy law, to help the economy, 

based on the number of retail bankruptcies we foresee? 

Mr. WILLIAMS. Yes, I do. 

Again, I think a number of the panelists have pointed this out. 

The 2005 amendments made sense in a system or an economy that 

was good. But a bankruptcy system has to pass the test, both in 

good times and in bad times. We are in bad times. 

This is a weak economy, and consumer demand is down. The consumer interface is most directly with the retail sector, and we don’t 

expect an increase in revenue—an increase in margins or anything 

of that nature, in the short term. 

And what we are looking for—what I would suggest is taking a 

look at the 2005 amendments and, first, addressing the liquidity 

hit that the 503(b)(9) claims take, because cash is the lifeblood of 

any successful reorganization. 

So a revisiting of that, and simply taking us back to the pre-2005 

era, I think, would be a major step in preparing a system that, 

when the economy begins to turn, can provide the type of flexibility 

and adaptability that will allow a greater success as far as retailers 

are concerned—that keeps customers—that is, the retailer itself— 

in business. It keeps their vendors in business. It preserves an employer. It preserves a state and local tax base, as well as a tax base 

for Federal taxes as well. 

It can certainly be, with the changes that have been suggested 

here, an excellent system for addressing the needs that we are 

going to see, both in short and long term. 

And I think one other thing you have to keep in mind is that the 

2005 amendments created a bankruptcy code—a system, if you 

will—that is unpalatable for business, because of, among other 

things, a direct hit on cash, the concern about the limitation on 

lease extensions, the utilities issue that Mr. Pachulski pointed out, 

as well as the period of exclusivity and its limitations. 

Consequently, as Mr. Miller pointed out, businesses aren’t seeking bankruptcy relief at a time when we can make a better go of 

it. Bankruptcy is not only the—it is a last resort for a carcass, for 

a zombie business. And making bankruptcy unpalatable helps no 

one in that situation. 

Mr. COHEN. Thank you, sir. 

Mr. Hurwitz or Professor Zywicki, do either of you differ—not so 

much on the 210-day rule, but—and Mr. Zywicki is going to the 

buzzer quickly—he knows the answer—to what Professor Williams 

or Mr. Pachulski has said, other than the fact that lawyers 

shouldn’t go first? 

Not for Goody’s Family Clothing, Inc. 

Mr. ZYWICKI [continuing]. And on the business side. 

But at the same time, what we see are companies, like Wal-Mart, 

who have been struggling the past few years—really, they have 

been struggling—companies like Wal-Mart and that sort of thing 

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are going to be growing, just like Target grew to replace Montgomery Ward’s. 

So I think we need to be careful about thinking that the way we 

have things now is the only way to have it, when it has been sustained on cheap credit by both consumers and businesses. 

Mr. COHEN. And let me ask you this—and this is for the—Mr. 

Pachulski, Isaac Pachulski, did have some statements of some retailers in his testimony. 

I don’t know these retailers. But let me guess, Professor Zywicki, 

that K.B. Toys, Inc., Goody’s Family Clothing, Inc., Against All 

Odds USA, Inc., S&K Famous Brands, Inc., are not exactly 

Bergdorf’s. 

Mr. ZYWICKI. I have not studied—I don’t know whether they had 

management problems in those companies. I know a lot of them 

did. 

All I am saying is that, yes, we are going to have retailer casualties in the next few years. If we want to focus on a problem, let 

us focus on problems in the credit market. And, maybe, there are 

possibilities that DIP financing is not as available as it should be. 

But, I think, to sort of go off on this wild-goose chase that somehow the 2005 amendments are the problem here—I think is going 

to—is not going to make any difference at all in sorting out 

these—— 

Mr. COHEN. Thank you, sir. 

If the Ranking Member doesn’t mind, if somebody wants to make 

a comment, I would appreciate it. 

Mr. MILLER. Hi, Mr. Chairman. It is Harvey Miller. 

Mr. COHEN. Yes, sir. 

Mr. MILLER. May I say something? 

Mr. COHEN. Please. 

Mr. MILLER. References were made to the Macy’s case, and that 

Macy’s had great merchandising when it went into Chapter 11. 

Having represented Macy’s in that case, at the beginning of that 

case, that was not true at all. 

But the point I want to make is that neither Macy’s nor Federated department Stores were the two biggest retail department 

stores at that time—could have survived in a Chapter 11 with the 

2005 amendments. 

First, there was enormous opposition from landlords in those 

cases. The cases went well beyond 210 days. The amendments that 

were made in 2005 would have severely restricted the ability of either one of those chains to survive and come out of Chapter 11, employing thousands of people, and still be in business today, as a 

consolidated unit. 

In addition, the 503(b)(9) 20-day rule for goods—as other speakers have pointed out, has not solved the critical-vendor situation. 

A key to the critical-vendor situation is the debtor-in-possession 

saying to the vendor, ‘‘Yes, you are critical to me, but I am not 

going to make you a critical vendor unless you give me the best 

credit terms that I had before Chapter 11.’’ You don’t get that out 

of 503(b)(9). All 503(b)(9) does is give you an obstacle to confirmation. 

The same is true with Section 366, with the utility department. 

Here we are, a company which is cash-starved, that has to turn 

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around—and a retail chain normally has many utility companies it 

deals with, and has to place deposits all over the country, if it is 

a big retail chain, which takes away operating capital, in a situation where, for all kinds of reasons, we have a difficulty in getting 

debtor-in-possession financing. So it makes the ability to reorganize 

and rehabilitate a company very, very difficult. 

Unfortunately, I think we have a bad example with Circuit City, 

because, as a number of speakers have pointed out, because of its 

narrow product—merchandise-inventory line, and the changes that 

it made—it may have been preordained. 

But if you looked at Circuit City—and we are talking about landlords—long before it ever filed for Chapter 11, it had probably more 

than 200 non-productive, or closed stores. And, for years, it was 

paying rent on closed stores—many millions of dollars. 

Every effort that the company made at that time to get concessions from landlords fell on deaf ears. So this process before a filing, to smooth the way in, sometimes doesn’t work. 

If Circuit City had filed 3 years ago, with those 200-odd stores 

that were unproductive or closed, they could have rejected those 

leases. They could have organized around a core universe of stores. 

And, as Mr. Pachulski pointed out, there might have been a core 

company that came out, that had a basis for rehabilitation. 

Once we got into 2005, that became almost impossible, and we 

not only had to think in terms of the debtor, but the lender, who 

has the lien on the inventory, and what it is thinking about, and 

its desire to convert that inventory into proceeds of cash that will 

satisfy it. 

The other aspect of it is the prohibitive expense of debtor-in-possession financing—notwithstanding what Professor Zywicki says— 

sometimes it exceeds the legal fees. Also there has to be some examination, some review, as to how, in a society which is based 

upon credit—how are we to deal with failure—we have to have an 

escape valve when there is a downturn in the economy, where 

there are companies that need assistance and help, to rehabilitate. 

Either we have a goal of rehabilitation, or, as I think Professor 

Zywicki would like, a very speedy process, where all these companies get liquidated. That is the issue we have. Are we going to have 

a process that assists and supports rehabilitation, saves jobs, particularly in this kind of an economy, or are we going to have this 

process where, within 60 days, most of these cases—if it has any 

kind of liquid collateral—ends up with the secured creditor pushing 

the company into liquidation, sometimes, in coordination with the 

landlords. 

But I thank you, Mr. Chairman. 

Mr. COHEN. Thank you—appreciate your remarks. 

Now, I would like to yield to the Ranking Member, Mr. Franks. 

Mr. FRANKS. Well, thank you, Mr. Chairman. 

Professor Zywicki, with all due respect to your fellow panel members, your name has been taken in vain here, pretty profusely. And 

I wanted to give you a chance to respond in any direction you 

would like to, here to begin with. 

Mr. ZYWICKI. Well, thank you. Thanks for that opportunity. 

First, I just want to say I am not in favor of speedy liquidations 

in every case. What I am in favor of is a process that winnows comVerDate Aug 31 2005 11:58 Jun 02, 2009 Jkt 000000 PO 00000 Frm 00121 Fmt 6633 Sfmt 6601 H:\WORK\COMM\031109\47924.000 HJUD1 PsN: 47924
118 

panies that are in financial distress, and can be fixed and live to 

fight another day, from those that cannot. And with those that cannot, I think that those are ones that we should have a speedy liquidation so that we don’t have to bear the cost and delay and uncertainty associated with that. 

I believe that the code had been tilted too far in one direction 

prior to the 2005 amendments. Father Robert Drinan, for instance, 

when he was in Congress, voting on the 1978 act, referred to it at 

the time as, ‘‘the full-employment bill for lawyers.’’ And it was a 

litigation process that was very heavily tilted toward the debtor. 

And all the things we have talked about—the greater securedcreditor control—all those sorts of things were ad hoc attempts to 

try to rebalance it. The 2005 amendments, I think, were an effort 

to try to rebalance the statute to do it. 

Second, with respect to critical vendors and 503(b)(9), I acknowledge that there are still judges out there, and vendors, who want 

even more. And it would be good if the judges would tell them, 

‘‘No.’’ 503(b)(9), as I understand it, was an effort to try to get rid 

of all that critical-vendor rigmarole, and the unfair treatment that 

arose under it. 

And so maybe it didn’t. But the answer, I think, is to get out of 

the critical-vendor game at this point, because I think that what 

it was trying to do is, by and large, satisfied in a more fair and 

efficient way by 503(b)(9). 

Mr. FRANKS. Well, thank you, sir. 

Mr. Hurwitz, other than, you know, the bankruptcy-law changes, 

do you think there are other things that government could do to 

implement—they could implement that would lead to more reorganizations, rather than liquidations? 

Mr. HURWITZ. I do. 

I think, particularly, in this environment—and I know this is 

something that you keep hearing from everybody that sits before 

you—but the availability of capital is key. 

I happen to agree, for example, with what Mr. Miller said, about 

Macy’s coming out of liquidation today, because they could never 

have gotten the capital to come out—I mean coming out of bankruptcy—they never would have gotten the capital to come out of 

bankruptcy today. 

In 2006, they would have. They would have come out of bankruptcy. They would have been just fine. In 2008, 2009, it is very 

doubtful, because of the lack of liquidity in the market. 

I think, as a practical matter, there does need to be a look—and 

I do agree—at some of the fees that are charged at these bankruptcy proceedings, because, at the end of the day, the employees 

and the operating company, and the debtor, is severely limited in 

what it could do, because of the enormous amount of fees that are 

paid to professionals throughout the entire process. 

But where we are today, and where we sit today, I think it is 

very tough to say who would or wouldn’t come out of bankruptcy, 

when there is no liquidity in the market. And there is no liquidity 

for the operator, and there is no liquidity for the vendor, either, because the vendor has lenders that are also putting the tight 

squeeze on the vendor. 

119 

So there really is no place to go, and we put ourselves, due to 

a lack of liquidity, in this box. 

Mr. FRANKS. Well, I think you make a lot of sense. 

If a lack of DIP financing was a main issue in the Circuit City 

case, are there things that government could do to free up that financing? And I will just throw this out to you, first, Mr. Hurwitz, 

and, then, Mr. Zywicki and anybody else who wants to take a shot 

at it. 

Should we make TARP funds available for something like that? 

Mr. HURWITZ. I don’t think we should. I don’t think we should, 

because, at the end of the day, when you look at who should or 

shouldn’t survive, it is an analysis of a business plan. 

It really could, and has been, in the past—and Montgomery 

Ward is a great example—throwing very, very good money after 

bad. And that business plan really should be made by the professionals who are closest to the industry; and that is, certainly, the 

vendors; the lenders who study retail on a day-to-day basis; the 

landlords who do business and see what the traffic counts are, and 

see what the sales volumes are, and see what the trends are in 

that retailer. 

And as a practical matter, I think it would force the government 

to be in a position where it has to make the judgment as to who 

is and who is not a good merchant. And I don’t think that is the 

business the government wants to be in. 

Mr. FRANKS. Well, some of us have been making that point for 

a long time. 

Mr. Zywicki? 

Mr. ZYWICKI. I would disagree a little bit, which is it seems to 

me that a reasonable case—I will let you decide whether you 

should do it—but a reasonable case could be made for something 

like making TARP funds available for DIP lending. 

And the logic is—we are on about the 14th iteration of explanations for what the TARP is supposed to do—but from what I recall, the initial explanation was to deal with liquidity problems in 

the banking sector, which is not, you know, propping up the zombie, dead banks, but, basically, to deal with the situation of liquidity problems, and allowing healthy banks to lend. 

And that is what is going on in the DIP market in the—or potentially could be going on in some of these cases. It is not what is 

going on in Circuit City. 

But take an example—in December, I wrote a column in the Wall 

Street Journal where I criticized the bailout of General Motors and 

called for—that Chapter 11 was the right way to resolve the General Motors bankruptcy. 

And their response was, ‘‘Well, there is no DIP funds out there.’’ 

And that could be true, but I think that illustrates the point, which 

is that if General Motors liquidated, it would be because they 

couldn’t get DIP financing. And the only reason they couldn’t get 

DIP financing would be because of a liquidity problem. 

Obviously, there is a healthy business there to be reorganized. So 

if you think of that stylized example, this is a situation where, 

clearly, a business that has core value could potentially fail because 

of lack of DIP lending. That is clearly—to my mind, at least, that 

is a liquidity problem that would be appropriate for something like 

120 

TARP funds, in some sort of way, to be used to help get us over 

that hump, if that makes sense. 

Mr. FRANKS. Thank you, Mr. Chairman. 

Mr. COHEN. Thank you. 

Mr. Zywicki, do you see any problems with the 2005 law at all? 

Mr. ZYWICKI. When it comes to this question, to the Chapter 11 

questions? Not that I can think of, from the standpoint that it 

was—again, it was an attempt to balance certain aspects of the 

system. 

So the issues we are talking about today, I am very satisfied 

with the balance that was struck on the issues that we have talked 

about today. 

I will confess: I haven’t thought that much about utility payments, for instance. So I would have to get back to you on the question—— 

Mr. COHEN. Has the system changed, though? I mean, hasn’t the 

system changed drastically in the last 4 years, with the number of 

creditors and debtors, and the amount of bankruptcies, and the 

threat to our economy? 

So, shouldn’t the balance, the fulcrum, have to move some to 

make it a balance? 

Mr. ZYWICKI. No. The law was rebalanced. And I believe that it 

moved the law in a productive direction. And so the economic circumstances have changed, but I think that the law is set up to deal 

with this particular situation. 

What we are dealing with are macroeconomic problems in an 

economy that has been afloat on cheap credit for too long. And trying to keep that rising tide of cheap credit alive, I don’t think 

makes any sense. 

And so I think, to the extent that the law helps us—that the law, 

in general, helps the situation that were—or it certainly doesn’t 

hurt the situation that we are in. 

So I would say no, with respect to the issues we have discussed. 

I think that the balance now is pretty much right. 

Mr. COHEN. Does anybody disagree with that thinking—that the 

change of circumstances moves the balance point? 

Mr. MILLER. Yes, sir—Harvey Miller, again. 

I would disagree with that contention. 

Professor Altman has recently—from the NYU Business School— 

recently issued a report on default rates. And he noted that, for 

2009, the consensus default rate for high-yield debt is going to be 

an average rate of 13.63 percent. That is a very high default rate, 

considering that in 2008, it was 4.6 percent. And in 2007, it was 

0.51 percent. 

We are going to see a lot of defaults in retailing, and in other 

industries, at the rate we are going. 

The lack of capital and the prohibitive cost of a DIP financing— 

just think of what other speakers have said about how much it cost 

Circuit City to get $100 million—or less than $100 million—of new 

money. 

There is a system today, in DIP financing, where the pre-Chapter 

11 secured creditor rolls up the old debt into a new DIP financing. 

And, then, all of the charges in connection with that DIP financing 

are taking on the whole debt. 

121 

So in the case of Circuit City—I may be off by some dollars— there was almost $900 million outstanding, pre-petition. Facially, 

there was $1.1 billion DIP financing. All the fees were based on 

$1,100,000,000, when there was only $100 million or less in new 

financing. 

So when you hear the fees that were—that had to be paid by Circuit City—the amount of new real money that it got was minimal. 

There was no chance for Circuit City to survive. 

If you have a credit-intensive society, as I said before, you have 

to have some means to deal with default. And the needle has to 

move when you are in an economy that is as bad as this economy. 

The 2005 amendments passed after a period of a robust economy, 

when the volume of Chapter 11 cases was declining every year. It 

may have been the fault of too much credit, which was, I think, 

sponsored, to a large extent, by financial institutions. But, now, we 

have moved into a different economy. We have to see what the Nation needs. 

Is there a virtue to rehabilitation and reorganization? If there is, 

the use of TARP funds to create a facility, where you could borrow 

money at reasonable rates and reasonable fees is necessary. The 

criteria for such financing would not be, ‘‘Is this going to be a successful Chapter 11?’’ but, ‘‘Is it a sound loan?’’ Will it give a debtor 

a reasonable opportunity to determine whether there is a core business there that can be reorganized, that can benefit the economy? 

We are going into a deep tailspin. I hope it is not going to be a 

period with a capital ‘‘D’’ in front of it, but there has to be some 

recognition that there are going to be a lot of businesses that are 

going to be in difficulty. They may be good businesses. 

Should they have a reasonable opportunity to try and reorganize? 

Should the Federal law help them in that respect? And I think, if 

we can find some way where a DIP facility can be arranged or— 

supported—I think the example that Professor Zywicki gave, in 

connection with General Motors, is a very good one. 

It would be not a question of underwriting the success of a reorganization, but giving the opportunity to all of the parties to determine, ‘‘Is there something here that should be reorganized?’’ You 

cannot make that determination in 60 days. That is one of the real 

difficulties we confront. 

I don’t know what we can do about the fees that are now being 

charged. I mean, banks and hedge funds and insurance companies 

who do DIP financing—they are charging, basically, 1,000 basis 

points above LIBOR, with a floor on LIBOR of 3 percent. 

So you are talking about 13 percent. When you factor in all of 

the charges and fees, in many of these cases, the interest rate is, 

effectively, 18 percent or 20 percent. 

Well, you can’t run a business on that basis. It is impossible. 

Meanwhile, those organizations, if they are banks—what are they 

paying for the cost of their money? Probably less than a half a 

point. The argument that they use in court is, ‘‘Well, that is market 

for a company that is risky.’’ 

Well, if you are in Chapter 11, you are automatically deemed to 

be a risk. But that situation substantially decreases the possibility 

of reorganization. And when you put on top of that the utility deposits, the 503(b)(9), the 210-day limitation, you are—you are makVerDate Aug 31 2005 11:58 Jun 02, 2009 Jkt 000000 PO 00000 Frm 00125 Fmt 6633 Sfmt 6601 H:\WORK\COMM\031109\47924.000 HJUD1 PsN: 47924
122 

ing it a situation in which the possibility of reorganization is slim 

and none. 

That is what we have to face up to. We have to face up to whether we want to have a Federal statute which is going to assist and 

enhance the ability to reorganize companies in a very bad economy. 

Thank you. 

Mr. COHEN. You are welcome. I appreciate it. 

And I would now like to yield to the Ranking Member. 

Mr. FRANKS. Well, Mr. Chairman, thank you. 

And I guess I would start out by saying the minority would stipulate that if a company’s in bankruptcy, that they, perhaps, could 

be considered a credit risk. 

But having said that, you know, landowners can go bankrupt, 

too. And if we institute greater flexibility for judges to decide when 

retail debtors must accept or reject their stores’ leases, won’t that, 

potentially, take us back to a time when we had, you know, the 

‘‘ghost’’ term—or ‘‘ghost tenants’’ that we have talked about? 

And what standards would we use to guide a judge’s discretion? 

And what would we insist upon to make sure landlords weren’t, 

again, treated unfairly by the code? I mean, how do we balance 

that? 

I mean, I would suggest that, you know, what we are trying to 

do, here, is to create both a desire and a fear on both sides to do 

anything but to analyze this situation very carefully, and to do as 

Mr. Zywicki said, and that is to ascertain which companies are viable and which are not. 

And those that are—to do everything possible to bring them back 

to sound operations; and those that are not viable, to do everything 

possible to minimize their damage, both to the creditors and to the 

economy at large. 

So, with that said, how would we guide the judges’ discretion if 

we gave them the flexibility to decide when the stores, and the 

landowners have to accept one another’s terms. 

Mr. Hurwitz, I will give you a shot at that. 

Mr. HURWITZ. Well, I am probably the least qualified person to 

answer that question, because, you know, we, as an industry, felt 

very victimized by judicial discretion in the past. And the 210-day 

amendment was done to try to give us some more room to be part 

of the process. 

But, again, I will defer to the more scholarly members of the 

panel. But I would add that I think anything that requires all the 

vested and interested parties to meet and discuss it, and sit down 

and talk about it, is the most important component you can have 

in a bankruptcy today. 

And anything that does not require that to happen, or excludes 

one of the major participants who have a vested interest in the outcome of the event, would be a mistake, and would be imprudent. 

Mr. FRANKS. Well, listen, Mr. Chairman—is there anyone else 

that wanted to take a shot at it? All right. 

Well, listen, I just wanted to thank the Chairman for his indulgence here. I would just, perhaps, just close on the thought that, 

ultimately, you know, bankruptcy is something that kind of has a 

connotation of a bad word to any one of us in business. And it is 

a heartbreak for anybody to have to face that. 

123 

And so there are no judgments on my part that would diminish 

anyone in the circumstance. But we do have to recognize that the 

Congress is not able to repeal the laws of mathematics here, 

though we try on a regular basis, and that reality always has to 

be remembered, and will have the last word. 

And so I think that it is important that we try to inject as much 

predictability into the system as possible. I believe that the amendments of 2005 helped the predictability element of it, and that we 

do everything that we can to create an environment where, as Mr. 

Hurwitz said—that everyone gets a chance to sit at the table, and 

to make their position known, and to make sure that we create, if 

at all possible, a win-win situation for everyone, and where everyone has some significant investment in the process of losing, as 

well. 

And with that, I thank the Chairman. 

I thank all of you. 

And I hope we can come up with the right answers, and not go 

backwards, instead of forward. Thank you. 

Mr. COHEN. I would like to thank all the witnesses for their testimony today. And I would like for them to know that since they 

started testifying, the Dow went up 60 points. Accordingly, if you 

will come back for the next 99 days—without objection, Members 

will have 5 legislative days to submit any additional written questions, which we will forward to the witnesses and ask they answer 

as promptly as they can, and be made part of the record. 

Also, without objection, the record will remain open for 5 legislative days for the submission of any other additional materials. 

I thank everyone for their time and patience. 

The witnesses, and, Mr. Miller, as witness, by telephone—I 

thank each one for their time and patience. 

This hearing of the Subcommittee on Commercial and Administrative Law is adjourned. 

[Whereupon, at 4:43 p.m., the Subcommittee was adjourned.] 

(125) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN, CHAIRMAN, COMMITTEE ON THE JUDI- CIARY, AND MEMBER, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

Last Sunday, Circuit City, one of the Nation’s largest retailers, finally shuttered 

its remaining stores and laid off approximately 34,000 employees. It did this notwithstanding the fact that the company had only recently filed for bankruptcy protection under Chapter 11, a form of bankruptcy relief originally enacted to help 

businesses reorganize their debts and retain jobs. 

Unfortunately, Circuit City’s demise in Chapter 11 is not unique. As we heard at 

a hearing held last September before this Subcommittee, recent experience suggests 

that Chapter 11 of the Bankruptcy Code may not working for our Nation’s companies. 

As many of you know, Chapter 11 was amended in several significant respects 

in 2005. I’d like to mention three aspects of Chapter 11 that we may want to revisit 

given the current economic climate. 

First, we should consider whether Chapter 11 needs a major overhaul to address 

developments that may have weakened its ability to promote successful reorganizations in the 21st Century. These developments include the growing trend for businesses to be highly leveraged and the increasing use of state law to make assets 

‘‘bankruptcy-remote,’’ both of which deprive debtors of essential funding sources. 

It is critical to our Nation’s economy and our workforce that we ensure that Chapter 11 works to save businesses and to save jobs, as it was originally intended to 

do. 

Second, we should consider whether the 2005 amendment imposing a hard and 

fast deadline by which retailers must decide to retain their leases is forcing businesses to liquidate rather than reorganize. 

The purpose of Chapter 11 is to give a debtor a financial breathing spell so that 

the company can assess its ability to reorganize and propose a plan for economic 

rehabilitation. 

Since the enactment of this amendment, however, very few retailers have successfully emerged from Chapter 11. 

One contributing cause appears to be that the deadline for retaining or rejecting 

a lease may not provide enough flexibility for companies to reorganize in light of 

their unique business cycles. And, this has, in turn, caused lenders to restrict credit 

access to Chapter 11 debtors. 

I must say that I am not surprised by the problems this provision has engendered. 

My colleagues on this side of the aisle and I repeatedly expressed serious concerns 

about this deadline over the seven years it was under consideration. 

As a representative from the AFL-CIO presciently testified in 2001 before this 

Subcommittee, this provision is ‘‘designed to encourage liquidation which will necessarily lead to job loss.’’ 

Third, we must also scrutinize whether the 2005 amendments impose too many 

cash demands on a business in financial distress. As a result of these amendments, 

a Chapter 11 debtor must be prepared to make various cash outlays. 

For example, the debtor must pay vendors in cash for inventory received prior to 

the filing of the bankruptcy case during a stated time period. 

In addition, the debtor must provide utility service providers with ‘‘adequate assurance of payment’’—in essence—a cash deposit. This requirement pertains even 

if the debtor never missed a single payment to the utility before filing for bankruptcy. 

For a debtor in financial distress, these additional cash demands may be the proverbial straw that breaks the camel’s back. 

126 

LETTER DATED MARCH 11, 2009, FROM MALLORY B. DUNCAN, SENIOR VICE

PRESIDENT, GENERAL COUNSEL, THE NATIONAL RETAIL FEDERATION


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RESPONSE TO POST-HEARING QUESTIONS FROM HARVEY R. MILLER, 

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RESPONSE TO POST-HEARING QUESTIONS FROM RICHARD M. PACHULSKI, 

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RESPONSE TO POST-HEARING QUESTIONS FROM DANIEL B. HURWITZ, 

PRESIDENT AND COO, DEVELOPERS DIVERSIFIED REALTY CORPORATION


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RESPONSE TO POST-HEARING QUESTIONS FROM TODD J. ZYWICKI, PROFESSOR, 

GEORGE MASON UNIVERSITY SCHOOL OF LAW


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RESPONSE TO POST-HEARING QUESTIONS FROM ISAAC M. PACHULSKI, 

STRUTMAN, TREISTER & GLATT, PC 


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RESPONSE TO POST-HEARING QUESTIONS FROM JACK F. WILLIAMS, AMERICAN BANKRUPTCY INSTITUTE RESIDENT SCHOLAR, GEORGIA STATE UNIVERSITY COLLEGE OF

LAW


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