In 1996 Perelman put the company in Chapter 11 and tried to merge it with Toy Biz, a highly profitable toy company. Rancor was so intense, various parties would sometimes negotiate from different board rooms. In late 1997 a fed-up judge created a mechanism that left Toy Biz the owner of an almost defunct company. Perelman lost his equity interest, and Icahn's bonds were wiped out. More broadly, Icahn's Marvel misadventure illustrates how the level of play has escalated over the past decade.
Sharp elbows are the norm in bankruptcy court.
Take United Companies, a home equity lender that went into bankruptcy in March 1999. Matlin held half the subordinated debt, and Farallon Partners, a San Francisco-based hedge fund, owned the bank debt. Farallon negotiated a tidy recovery for the bank debt, but, under the plan, Matlin's investment would have evaporated. Matlin vowed to block the deal until he got a cut of the action. Even those investors who don't want equity must be willing to commit intense efforts to squeezing whatever value they can out of the troubled securities they own.