1. BANKRUPTCY Ken Bakondi Kara Brausen

2. Bankruptcy  Defined  History  Statistics  Chapter 11  Chapter 7  Questions?

3. Bankruptcy Defined  Financial Distress – When cash flows are not sufficient to meet current obligations  Bankrupt – When a petition is filed with one of nearly 300 Federal Bankruptcy Courts  Provides Protection from Creditors  Discharge of Debts

4. History of Bankruptcy Legislation  1789 – U.S Constitution  1800 – First U.S. Bankruptcy Law  1898 - Nelson Act  1938 - Chandler Act  1978 - Bankruptcy Reform Act  1984 – Bankruptcy Amendment Act  1986 – Chapter 12 "family farmer/fisherman"  2005 – Consumer Protection Act

5. Bankruptcy Reform Act of 1978  Eliminated even numbered chapters  Chapters 1,3,5 – General bankruptcy provisions  Chapter 7 – Personal and Business Liquidation  Chapter 9 – Municipalities (Orange County)  Chapter 11 – Business Reorganizations  Chapter 13 – Personal with Income  Chapter 15 – Trustees for Administration  Chapter 12 – Family owned farms (1986)

6. Consumer Protection Act 2005  Extended time between discharges  Denial of discharge if the debtor received a Chapter 7 or 11 discharge in a case filed within 8 years of the filing of the pending case  Chapter 13 instead of Chapter 7  Production of tax returns and other documents  Audits  Credit counseling and debtor education

7. Bankruptcy Statistics

8. Total U.S. Business Filings

9. Bankruptcy Statistics

10.  Total Assets in all Publicly Traded Company Filings between 2001 and 2007?  $1,023,100,000,000  Total Assets 2 largest filings of 2008?  $1,018,976,000,000  2008 Total $1.16 Trillion

11. Largest U.S. Filings CompanyDateTotal Assets Pre-bankruptcy Lehman Brothers Holdings, Inc.9/15/2008$691,063,000,000 Washington Mutual9/26/2008$327,913,000,000 Worldcom, Inc.7/21/2002$103,914,000,000 Enron Corp.12/02/2001$65,503,000,000 Conseco Inc.12/17/2002$61,392,000,000 Chrysler4/30/2009$39,300,000,000 Thornburg Mortgage5/01/2009$36,521,000,000 Pacific Gas and Electric Co.4/6/2001$36,152,000,000 Texaco4/12/1987$34,940,000,000 Financial Corp. of America9/9/1988$33,864,000,000

12. General Motors, Corp.  http://finance.yahoo.com/q/bs?s=GM&annual http://finance.yahoo.com/q/bs?s=GM&annual

13. CHAPTER 11: REORGANIZATION “intensive care”

14. Chapter 11: Key Process Features  Voluntary petition  Involuntary petition  Automatic stay  Exclusivity period  Debtor-in-Possession financing  Absolute priority rule

15. Chapter 11 Process 1. File petition of relief 2. Submit schedule of assets & liabilities 3. Bar date 4. Reorganization plan & disclosure statement 5. Hearing on reorganization plan 6. Vote on plan 7. Confirmation hearing 8. Set effective plan date & distribution schedule

16. Common Pool  When individual creditors have the incentive to foreclose on the venture even though it is worth more as a going concern. Example: Firm’s Going Concern Value = $3,000,000 BV of Debt Owed = $4,000,000 Assets Liquidation Value = $2,000,000 Return as a Going Concern =.75 per $1 of loan Return if Liquidated =.50/$1 loaned

17. Holdout Problem  When one or more of the creditors refuse to agree to reorganization terms because of the potential for larger individual recovery.

18. Cram-down  Bankruptcy court accepts a reorganization plan for all creditors including dissenting creditor classes.  Groups:  Employees  Consumers  Federal/State/Local tax collection agencies  Secured Creditors  General Creditor Claims  Preferred Stockholders  Common Stockholders

19. Cram-down Scenario Proposed Plan:  Employees Compensation Owed up to $2,000  ConsumersCompensation Owed up to $900  Federal/State/Local TaxesPayment Plan Structured  Secured CreditorsCollateral $, 2 yr pmt plan  General Creditor Claims$1000, remaining 5 yr pmt plan  Preferred StockholdersIssued New Shares of Stock  Common StockholdersIssued New Shares of Stock

20. Chapter 11 – Success/Failure

21. CHAPTER 7: LIQUIDATION “death”

22. Chapter 7 Liquidation  Accounts for 65% of all business bankruptcies filed  90% of Chapter11’s end this way  85%+ of all business bankruptcies result in liquidation

23. Chapter 7 Liquidation  Liquidation value of assets today exceeds going concern value  Substantial doubt firm will continue as a going concern  Prevents management from transferring assets  Owners want out

24. Chapter 7: Liquidation Distribution of assets based on absolute priority rule 1) Administrative Costs 2) Wages/Unpaid Employee Benefits 3) Consumer Claims 4) Taxes

25. Chapter 7: Liquidation 5) Secured Creditors 6) Unfunded Pension Liability 7) Unsecured Creditors 8) Preferred Stockholders 9) Common Stockholders

26. Questions?