Bankruptcy: A Stakeholder Analysis

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INTRODUCTION

During 2008 and 2009, both economic recession and the cumulative effects of ineffective strategies combined to produce a record number of bankruptcies among American firms (Bullock, 2009). During the past 12 months, corporate Chapter 11 (reorganization) and Chapter 7 (liquidation) bankruptcy filings numbered 11,785 and 819,362 respectively. When compared to 2007-2008 data, this represents (1) a 69.1 percent increase in bankruptcy reorganizations; and (2) a 46.3 percent increase in bankruptcy liquidations (Anonymous, 2009a). Even geographical regions in the United States not commonly associated with automotive production or financial services have experienced frequent visitation by the grim reaper of bankruptcy. For example, during the first 6 months of 2009, bankruptcy filings in the state of Arizona were 86.3 percent higher than for a comparable period in 2008 (Gately, 2009). Additionally, the specter of repetitive bankruptcy filings by corporations has also made its ghostly presence felt. Altman (1993) has labeled these repetitive bankruptcies as Chapter 22, 33, and 44 filings (i.e., double, triple, and quadruple Chapter 11 filings). These types of repetitive bankruptcies have steadily increased over the past 20 years (Altman, 1993; Jakab, 2009). Some experts have predicted that the forthcoming General Motors' (GM) Chapter 11 bankruptcy reorganization may be hampered by insufficient financial/competitive resources. Thus, GM may become an unfortunate member of the Chapter 22 or 33 fraternity (Jakab, 2009).

High profile American bankruptcies have also given rise to increased (a) financial peril for stockholders, secured creditors, bond holders, unions and business partners; (b) intervention into the bankruptcy process by the federal government; and (c) constitutional questions concerning the role of bankruptcy law, the courts and government in the corporate insolvency process (In re Chrysler, 2009; Crittenden & Fitzpatrick, 2009; Crittenden & Hilsenrath, 2009; Hagerty & Lublin, 2009; King & Stoll, 2009; Stoll, 2009a; Boudette, Bennett, & Kellogg, 2009; Haggerty, Simon, & Paletta, 2008; Davis & Hilsenrath, 2008).

Traditionally, the bankruptcy literature has focused on enumerating the strategies and legal remedies that can be used by troubled firms for purposes of initiating financial turnarounds and corporate reorganizations (Hofer & Schendel, 1978; Clarkson, Miller, Jentz, & Cross, 2004). Given the massive economic consequences of recent corporate failures, this paper seeks to extend this traditional literature by analyzing (1) the unprecedented role of governmental involvement in corporate bankruptcies; and (2) the legal rights and managerial remedies afforded to key organizational stakeholders in the bankruptcy process. This new analytical approach will be accomplished through the development and use of the BARONS paradigm.

THE EVOLUTION OF BANKRUPTCY LAW IN THE UNITED STATES

Antecedents from The Ancient World

The historical roots of bankruptcy can be traced to ancient Roman and Biblical origins. The term "bankruptcy" itself originates from Roman law and commercial practice. In both ancient Rome and medieval Italy, tradesmen would often conduct business in a public place from a strategically located banca or bench. When these tradesmen failed to honor or pay creditor claims, Roman/Italian authorities would have the tradesman's bench broken up (i.e.: rupta) thereby terminating their ability to engage in commercial activities (Treiman, 1938). The Christian Bible also contains references to debt relief. Moses actively counseled the Israelites that "At the end of every seven-year period you shall have a relaxation of debts which shall be observed as follows. Every creditor shall relax his claim on what he has loaned his neighbor; he must not press his neighbor, his kinsman, because a relaxation in honor of the Lord has been proclaimed (Deuteronomy, 1957: 232). …