TESTIMONY SUBMITTED TO THE AMERICAN BANKRUPTCY INSTITUTE
COMMISSION TO STUDY THE REFORM OF CHAPTER 11
Mark A. Gittelman, Esquire
Chief Practice Counsel – Asset Recovery
PNC Bank, National Association
November 1, 2013
My name is Mark Gittelman. I am the chief internal bankruptcy lawyer at PNC Bank, National
Association and have been employed in that, or a similar, capacity by PNC for 20 years. During
the course of my tenure at PNC, I have been involved, directly or indirectly, in thousands of
workout matters, many of them involving a bankruptcy filing by one or more obligors. In the
large majority of those matters, PNC has been in the role of senior secured creditor.
Prior to my time at PNC, I learned my craft at the Blank Rome law firm under the supervision of
such noted bankruptcy lawyers as Leon Forman, Ray Shapiro, Harvey Forman, Mort Newman
and Tom Biron. In addition to working as an associate for these practitioners, I honed my
knowledge of bankruptcy law, practice and creative thinking under each of them.
I would like to thank the Commission for this opportunity to share my personal experiences and
observations about the operations and current state of the Bankruptcy Code and current
bankruptcy/workout practices with them. While there are other lawyers who may be more
experienced in the court system or studied in the law than I am, I would like to share the
observations of a lawyer who is also steeped in a business setting and who sees these cases not
only as a lawyer but also with a direct business focus. That focus must also be taken into
account when considering changes to the law or court structure to encourage use of the overall
process. Unlike many other areas of the law, the business and financial focus has a significant
and direct impact on the operations of the bankruptcy process.
I should add that these views do not represent statements, positions or opinions of PNC Bank,
National Association or The PNC Financial Services Group, Inc. They are offered solely as my
own personal views and observations, as focused and shaped by my excellent team of
bankruptcy lawyers at PNC.
Finally, I would like to thank Judge Kevin Carey for inspiring and encouraging me to offer these
observations. Given the charge to this Commission, Judge Carey suggested to me that the
Commission would be very interested to hear the thoughts of a secured creditor from the
creditor’s (and not the creditors’ lawyer’s) point of view.
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The charge of the Commission is as follows:
In light of the expansion of the use of secured credit, the growth of distressed-debt markets
and other externalities that have affected the effectiveness of the current Bankruptcy Code,
the Commission will study and propose reforms to Chapter 11 and related statutory
provisions that will better balance the goals of effectuating the effective reorganization of
business debtors—with the attendant preservation and expansion of jobs—and the
maximization and realization of asset values for all creditors and stakeholders.
It is a true statement that secured credit now permeates many capital structures, especially among
distressed companies. In addition to seeking credit for normal working capital, borrowers obtain
syndicated secured financing (using one or more tranches), secured equipment financing, secured
real estate financing, secured derivative exposure, secured second lien or mezzanine financing,
focused factoring on selected receivables, securitized financing using a range of different
structures and financing vehicles, along with other very sophisticated financing methods. In fact,
it is not unusual to have more than one creditor holding collateral at the outset of a bankruptcy
case.
According to statistics released by the Commercial Finance Association, outstanding asset based
loans (to the riskiest customers), aggregated $325.9 Billion at the end of 2002 and $545 Billion
at the end of 2007. However, at the end of 2011, during an economic downturn, outstanding
asset based loans totaled only $69.5 Billion. All of that working capital formerly manifested as
asset based loans needed to be replaced from other sources – meaning that other forms of secured
debt were now appearing on leveraged balance sheets. These new creditors can be very
sophisticated and are often not regulated, meaning that the creditor can insist upon a much more
intrusive role (i.e., Board seats, option kickers, etc.) than traditional secured lenders.
When a borrower struggles with liquidity, the unregulated secured lender has far more
restructuring options than traditional workout/bankruptcy strategies. These secured creditors are
generally pushing for a swift resolution for a return on investment (or reduction in reserves), and
want to avoid a long and costly bankruptcy case. Traditional secured creditors have similar
desires, but may not want to be as intrusive in the debtor’s operations.
Further, secured lenders have no clear expectations on case outcomes when bankruptcy is
involved, unless an articulated reorganization plan or sale is in place. Venue, judge choice, local
rules and practices, and even long ago prior experiences and lore built over time may color these
expectations. So, when it is not clear that a quick resolution is easily obtainable via Chapter 11,
the workout is often run through some other reorganization means, such as a receivership, an
Assignment for the Benefit of Creditors or some consensual out-of-court process instead, mainly
for cost, certainty of result or efficiency reasons. Finally, as secured lenders have more roles in a
borrower’s capital structure, a distressed or illiquid borrower does not often have the capital or
cash flow to withstand a long case, making expediency an overriding factor ahead of a more
reasoned outcome.
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Consequently, Chapter 11 is no longer being used for true reorganizations in the manner it was
envisioned when originally enacted. Now, the “normal” Chapter 11 leads either to a fairly quick
363 sale or to a forced or orderly liquidation of assets, even though some courts do not recognize
this methodology as proper in completing a liquidation of the estate and distribution of proceeds.
Even General Motors was up and running as a new entity within weeks of its initial petition date,
via an orchestrated 363 sale. It would appear that the time of the two-to-three year
reorganization case has passed.
However, in my view, the growth of secured debt and heightened sophistication of creditors in
the capital structure does not lead to the conclusion that changes in the Bankruptcy Code are
needed to accommodate or offset these new facets of commercial finance and workout. In fact,
the growth of the role of the sophisticated investor in each capital structure could be considered
to be a benefit to the overall reorganization process, if the process can be accessed and used
properly.
Thomas Jefferson wrote (as these words appear on the walls of the Jefferson Memorial):
I am not an advocate for frequent changes in laws in constitutions, but laws and
institutions must go hand in hand with the progress of the human mind. As that becomes
more developed, more enlightened, as new discoveries are made, new truths discovered and
manners and opinions change, with the change of circumstances, institutions must advance
also to keep pace with the times. . .
My view is that the reorganization process, not the governing law, must be modified to account
for the more sophisticated investor and the needier borrower to provide a swifter and more
efficient resolution to a prospective reorganization.
One of the things I have learned as an in-house lawyer at a financial institution is that a designed
process gains its highest and best use when it is transparent, accessible and relatively efficient,
with a level of certainty of result. When a process and its outcome appear to be inconsistent,
unintelligible, opaque or overly expensive or long, the process is ignored when other alternatives
are available, or only used with the understanding that the process itself will include these
painful characteristics (notwithstanding the outcome). My view is that creditors and debtors are
now avoiding the bankruptcy reorganization process specifically for those reasons. Unless the
process provides some level of certainty in result (i.e., a liquidation or a quick sale, when the
buyer insists on the protection of a Section 363(m) sale order), other reorganization means are
being explored.
And while other reorganization means certainly provide a healthy and competitive
counterbalance to the bankruptcy process (and their use should be encouraged), modifications to
the current bankruptcy process will only aid the overall ability of distressed debtors to obtain a
“fresh start”.
Accordingly, my recommendations to this Commission are to consider changes to the Chapter 11
reorganization administrative process, not to the underlying governing law. Specifically,
changes to the court system, to the Committee process, to the initial stages of the case and to the
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fee structure in each case, as detailed below, will encourage more transparency, consistency and
efficiency in reorganization cases. These changes should encourage greater use of the system.
The immediate goal of these recommendations is to create more consistency and transparency in
procedures and practices to encourage use of the bankruptcy process. Many of the
recommendations are aimed at the structure of the court and committee system, to emphasize the
strengths of the bankruptcy professionals working in the system itself and to give a level of
continuity and consistent expectations to debtors, creditors, equity holders and their respective
lawyers who opt to use the process. Once the system has clearer processes, access points and
expected outcomes and the costs and time constraints have expectation horizons, then all parties
can gain greater confidence in the system itself.
To the extent that the Code itself is deficient in some way, given new types of creditors and
debtors, I am confident that Bankruptcy Judges and other professionals will craft opinions to use
the current legal structure to account for those deficiencies, rather than advocating for wholesale
changes to the Code itself. New and untested laws and procedures will only further undermine
debtor and creditor confidence in the system, while no serious dysfunction in the Code exists.
RECOMMENDATION 1: New Court Structure
Currently, our Bankruptcy Judges are drawn from all practices, some primarily consumer, some
primarily commercial and some having practiced in both areas. However, as the courts are
structured, these professionals hear cases from both the commercial and consumer sides of the
law, notwithstanding their practice expertise. Observationally, there does not appear to be any
standard for the assignment of cases based on experience or expertise, such that a judge, who is
traditionally trained in consumer protection (or consumer collection) could be hearing an
adversary proceeding regarding interest rate derivatives while a judge, who is traditionally
known as a commercial bankruptcy expert, potentially with no experience in the Chapter 13
arena, could primarily hear Chapter 13 confirmation cases. My recommendation is to create a
clear separation between commercial cases and consumer cases to capitalize on the particular
proficiencies of the judges sitting in that Bankruptcy district.
A number of state and municipal court systems have addressed these same issues by establishing
“Commercial Court” systems, so that the judges sitting on these courts have significant
commercial experience to adjudicate complex commercial cases. Two such examples exist in
Philadelphia County, PA and Orange County, FL, making those jurisdictions (and venue
choices) more palatable to parties seeking to resolve a commercial dispute.
Under this new structure, each Bankruptcy district could be similarly bifurcated to create a
commercial bankruptcy court and a consumer bankruptcy court. Jurisdiction would be
determined by the type of case filed – an individual case would fit into the consumer court
jurisdiction unless a sole proprietorship were involved and non-individual debtors would be
placed in the commercial court system. While the initial filing issues and time periods in the
Code and Rules for administering and completing a case need not change, specific consumer and
commercial rules reflective of the inherent differences in the cases could be established.
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RECOMMENDATION 2: Creation of a Mega-Court for Large and Complex Bankruptcy Cases
In addition to the bifurcation of commercial court and consumer courts, the court system needs to
recognize, formally, the need for courts specifically designated to handle the most difficult and
complex cases. That recognition informally exists now, as the largest cases tend to file in New
York or Wilmington and occasionally stretch the rules of jurisdiction and venue to be accepted
there. The Bankruptcy system should establish specifically trained courts to process these
difficult cases, and allow for jurisdiction in such courts for all of these cases. The prospect of the
next “General Motors” or “Worldcom” case being heard by a court primarily hearing consumer
cases in a jurisdiction with a low volume of commercial cases, is a daunting one for all potential
parties.
As to size or complexity of the case to fit within this new court’s jurisdiction and the location of
these “mega-courts”, I would leave both decisions to the Commission’s deliberations. But it
does appear somewhat clear that there are already ad hoc “mega-courts” in New York,
Wilmington, Chicago, and perhaps Dallas and Los Angeles. Those are logical and well-located
venues for these types of cases.
RECOMMENDATION 3: Bankruptcy Judges Should Rotate Among Jurisdictions
As an employee in a large company with a growing footprint, I have observed that the most
efficient way to effect standardization and uniformity among various markets is to rotate superior
performers with organizational knowledge to different cities or markets, to share expertise and to
conform practices across the entire system. I have also learned that a Pittsburgh workout is very
different from a New Jersey workout or a Raleigh workout or an Orlando workout, as each
region has different business practices, economic conditions, and frankly, social expectations of
the parties.
However, the Bankruptcy court system need not be so regionally idiosyncratic. The first day
practices, expectations on use of cash collateral, expectations on plan confirmation, etc. in a
Chapter 11 case in Orlando should be the exact same in Raleigh, Pittsburgh or Newark and the
filings and expected outcomes should be similarly uniform, to discourage forum shopping and to
promote confidence in the system by all parties. Rotation of judges among different cities or
districts, even within the same circuit, would be an efficient method of accomplishing this goal.
RECOMMENDATION 4: The Selection Process for Estate Professionals and Their Fee
Structures Should be Transparent and Uniform
One of the most frequent concerns that I hear about the bankruptcy process from both creditors
and debtors is the potential for large and unabated professional fees, especially those of attorneys
and other financial professionals. We all know that law firm rates are high and increasing.
Further, even while fee applications for professionals retained under Section 327 of the Code are
reviewed, as dictated by the Code, the rate structures and actions taken by some professionals
can damage ongoing revenues for a struggling debtor and potentially render a case
administratively insolvent.
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Along the lines of predictability and transparency, I believe that the issue of professional fees
must be addressed to entice increased use of the process.
Law firms and other professionals are always willing to discuss appropriate fee adjustments and
arrangements for long time clients. When entering into these arrangements with established
clients, many firms consider alternative fee arrangements (“AFA’s”) to address continuing and
similar engagements, which promote uniformity and predictability of cost to the client, along
with efficiency of the actions of professionals. In my experience, debtors and creditor
committees do not readily explore the use of AFA’s on an ongoing basis as their cases are “one
off” events, so there is no “long term” basis for the relationship. However, the US Trustee’s
office could impose rate and AFA arrangements for firms seeking to represent committees (and
perhaps debtors) as a condition for eligibility or approval (along with a mandated and complete
disclosure of disinterestedness) under Section 327 of the Code.
AFA arrangements take many forms and professional firms are creative to explore new methods
for each set of circumstances. There are many articles and reports covering this topic generally.
However, I believe that each court or US Trustee’s office could set a rate or fixed fee schedule
for firms to be approved as a committee professional (which may be a sliding scale, based on the
size and complexity of a case) and the firm to be appointed must agree to the schedule to gain
approval of the Trustee’s office to be eligible for appointment. This type of arrangement sets
forth the expectations of the estate and of the firm up front, avoids runaway fees or unusually
high rate structures.
RECOMMENDATION 5: Promote Transparency in the Process by Enforcing Filing of
Required Schedules and Operating Reports
The Code and Rules require that the debtor file its Schedules and Statement of Affairs and
ongoing operating reports on a periodic basis. The initial Schedules are to be filed shortly after
commencement of the case. The information in those Schedules allows analysis by creditors and
other parties in interest to determine their roles in the case and how they will react to the debtor’s
actions.
These filings do not always occur timely. Ultimately, if not filed, the case may be dismissed on
motion of the US Trustee, but the process can take time and the debtor is often granted
extensions of time to file this information, even while it may be working toward a sale of all of
its assets or fighting for use of its cash collateral. Consequently, the other parties in interest are
forced to address these issues “blindfolded”.
Again, along the theme of transparency, the filing of these Schedules must be strictly enforced,
both in time and in content. Debtors should be prepared for their bankruptcy filings, both in
terms of first day filings and in terms of providing information to other parties for the prompt
movement of the case. If the debtor cannot comply, then the case should be dismissed until the
proper papers are ready to be filed, notwithstanding the consequences to the debtor or assets of
the estate. An expectation of full disclosure by the debtor to all parties will certainly provide
additional comfort to parties seeking to use the bankruptcy process.
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RECOMMENDATION 6: Uniformity in First Day Motions and Initial Movement of the Case
The first few weeks of a bankruptcy case can be filled with confusion and urgency, as a debtorin-possession establishes its operations during the case. However, some of that confusion may
be alleviated by requiring uniform first day motions (in both format and content). For example,
while most debtors file motions to employ counsel and pay payroll, many debtors omit filing a
motion to use or convert bank accounts, meaning that monies may be tied up administratively
until the motion is filed and heard. Further, the initial cash collateral or DIP financing motion
and order can take many forms, depending on district or practice, requiring immediate review
and response, especially for those motions that seek to go beyond reasonable grounds.
Again, to encourage uniformity and transparency, the spate of first day actions by a debtor
should be fully required by the Bankruptcy Rules and the forms should be uniform across each
District. In addition to filing the initial petition, its schedules and a motion to employ counsel,
each operating debtor must file a motion to pay payroll (both pre-petition and post-petition); each
debtor must seek to establish new (or convert existing) deposit accounts and cash management
systems; and each debtor must employ certain professionals (many of whom were retained prepetition). Finally, if the debtor seeks to use its cash collateral or borrow funds (for the initial
pleadings only), the debtor can file short motions and orders in a uniform, prescribed format for
that purpose, along set guidelines with set expectations of what to request and what will
minimally be granted. After the initial tumult of a new case subsides, the current Rules and other
local requirements can remain in effect, depending on the circumstances of the debtor.
This transparency in the beginning of the case should encourage a more efficient set up of the
case and more usage of the process overall. Further, such uniformity would allow the parties to
focus more on the substance of reorganization, as opposed to the current confusion of
administration.
In summary, based on my experiences in a large financial institution, handling a high volume of
bankruptcy cases across the country, I would recommend employing a strategy of transparency
and established expectations to encourage greater use of the bankruptcy process. In my view, the
current reluctance to use the process stems from the concerns over uneven or inconsistent
treatment from case to case and district to district, coupled with the increased sophistication of
secured creditors seeking swift and cost effective resolutions. There are currently very qualified
professionals who are the shepherds of the process in place and the current Bankruptcy Code and
related law and rules are strong and fair. Once the administrative portion of the process becomes
uniform and transparent, those parties currently avoiding the system for fear of the unknown
may, instead, embrace the strengths of the system, rather than seek alternative paths.
Thank you.
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