Brian Davidoff, partner, Greenberg Glusker
Bankruptcy cases are getting shorter, says Brian Davidoff, a partner with Los Angeles law firm Greenberg Glusker Fields Claman & Machtinger LLP, who handled the bankruptcy case of Rhythm & Hues Studios Inc., the effects studio that worked on the Oscar-winning film "Life of Pi." The studio filed for bankruptcy protection on Feb. 11 and was sold to an affiliate of Prana Studios on March 29. The shorter-case trend is caused by both the high cost of continuing a bankruptcy proceeding and the desire to sell through the 363 bankruptcy sale process, which includes marketing, approval of an initial bidder, auction and sale approval, quickly. Some companies may start the restructuring process ahead of the filing, which could make the bankruptcy case move even more quickly, especially if the company has already begun the marketing process, Davidoff says.
Have the lengths of bankruptcy cases been decreasing?
It is something that I have been seeing over this most recent bankruptcy cycle. What might be the biggest issue is just the market dynamics. Many companies that go into a chapter in the middle market exit through a sale as opposed to a plan of reorganization. Because of the lack of liquidity, companies that are in a chapter don't have the capital to stay in a chapter for a long period of time. So you find that they end up getting sold quickly. They only have a short lifespan in the bankruptcy or else they're going to liquidate. There are accelerated sale processes in many cases. In the Rhythm & Hues bankruptcy case, it was six weeks. THQ Inc., a video game maker, also went through its chapter very quickly. Digital Domain Media Group Inc. went through even more quickly than Rhythm & Hues did.
Why are companies motivated to get through bankruptcy cases more quickly?
I think companies are getting out of bankruptcy more quickly so they can survive. With Rhythm & Hues, that company really had no assets. It had some computers and desks and chairs, and it had human capital - more than 1,000 employees - but it didn't have the traditional capital that a brick-and-mortar business had. So unless we sold the business, it was going to liquidate. I think it's a question of, "Can they survive, and how long can they survive before they liquidate?" The cost of staying in Chapter 11 is very expensive.
Are companies getting some restructuring done before they even file for bankruptcy?
You definitely try to restructure before filing, but every situation is unique. Companies that are better managed will probably plan better in advance of the filing, maybe even do some of the marketing before the filing, rather than just use the 363 process to effectuate that sale. But it often isn't the case, because companies are loath to file, so they don't do the planning. When a business is distressed, which happened in the Rhythm & Hues case, often the 363 bankruptcy sale creates a better opportunity for a higher price.
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