By Stefan Fatsis Visions of pizza parlors danced in the heads
of the managers at Pantera's, a small Midwest restaurant chain that
borrowed $65 million during the easy-money '80s to buy much larger
Pizza Inn Inc.
But first they overvalued and then mismanaged the Dallas-based
chain of 600 restaurants. Morale deteriorated, training evaporated,
employees quit, franchisers pulled out.
In October 1989, 2 1/2 years after the leveraged buyout, Pizza
Inn couldn't pay debts and sought protection from creditors under
Chapter 11 of the federal bankruptcy code. New management was
appointed and creditors were paid. About 150 restaurants closed,
but today Pizza Inn survives.
``I was amazed at the opportunity this provides a company to
save the baby and not liquidate the whole thing,'' company President
Jeff Rogers said. ``The bankruptcy gave us a clean start.''
Pizza Inn is a parable for the 1980s, in which wide-eyed
managements exploited loose credit to expand via LBOs financed by
high-risk junk bonds. The moral is found in the company's recovery
under America's benevolent bankruptcy code.
The term bankruptcy is derived from the Italian ``banca rotta,''
which means broken bench. In medieval times, if a trader couldn't
pay creditors, they smashed his trading bench. For centuries in
Britain, debtors went to prison.
But U.S. bankruptcy law was designed to allow companies to rise
from the ashes of collapse. The belief that failure is a forgivable
outgrowth of entrepreneurship is considered uniquely American.
The 1990s are putting that notion to test. An ailing real
estate market, LBO debts, tightening bank credit, increased foreign
competition and new legal tactics are straining the nation's
bankruptcy system as never before.
Federal statistics show more than 725,000 business and personal
bankruptcies were filed in the year ended June 30, double the 1981
figure. Ten of the 25 biggest bankruptcies in history have occurred
in the last 18 months, Beard Group Inc., a Washington research firm,
reports. Dun & Bradstreet Corp. says 55,000 businesses failed in
the first 11 months of 1990 - 165 a day.
``We just ran out of space in our file room in Phoenix for
1990,'' said Kevin O'Brien, clerk for Arizona's two bankruptcy
courts. ``If nothing happens soon we won't have anywhere to put
Arizona is inundated with bankruptcies stemming from the
collapse of the real estate and savings & loan industries. Annual
filings have more than quadrupled since 1980, to a projected 18,500
in 1990. The state's five judges handled 216 Chapter 11 cases
apiece in 1989, three times the natonal norm.
In New York, hand-written signs point to rooms containing the
files of big-name bankruptcies such as Eastern Airlines, Drexel
Burnham Lambert, Lomas Financial and Ames Department Stores. Boxes
of documents are stacked in hallways.
Bankruptcy, ironically, has spawned a vibrant industry.
Corporate debt restructuring is one of the few growth areas at Wall
Street investment houses. ``Workout'' firms help companies repackage
debt to delay payments without declaring Chapter 11.
Businesses even have sprung up to help manage the regulatory and
paperwork maze. Finding opportunity i others' misfortune,
speculators invest and trade in the debt of distressed companies.
Law firms are bulking up what 10 years ago was a necessary but
unglamorous area. Many specialists in the field say bankruptcy law
is to the 1990s what mergers and acquisitions law was to the 1980s.
``It's a hot area because of economic necessity,'' said Alan
Miller, a partner at the New York law firm of Weil, Gotschal &
Manges, which has the nation's largest bankruptcy group.
The first permanent federal bankruptcy law was enacted in 1898,
but was based on the British model under which creditors forced
companies into liquidation to collect debts. …