Bankruptcy Judge Arthur Gonzalez is meeting Ackordscentralen Nyheter in the faculty library of New York University School of Law.
The Bankruptcy Judge Who Managed to Bring Order Within the Chaos
During his 16 years as a bankruptcy judge Arthur Gonzalez was in charge of three of America's most high-profile insolvencies. The work with Enron, WorldCom and Chrysler taught him how to work quickly and efficiently to stop assets from dwindling. After retiring from his practice recently, he now teaches law students who get to learn from his valuable experiences.
Just returned from Dubai, Arthur Gonzalez, 65, is meeting us in the faculty library of New York University School of Law. It is here, among books and students, that he feels most at home.
His career as a teacher began in the late 1960's, before he started a four-year legal education in the evenings.
After finishing his studies, in the early 1980´s, he worked as a federal government attorney and later on he did three years in private practice. 1995 he was appointed federal bankruptcy judge – a coveted assignment that lasts for 14 years.
”When my term was completed, I was appointed to another 14-year term, with the right to retire at 65. And that was what I chose to do in March this year”, says Arthur Gonzalez as he sits down in a big black leather chair.
His desire to teach was so strong that he chose to leave his job in the bankruptcy court in Manhattan so that he could teach young law students about his experiences.
Although he doesn’t want to call himself an expert on company reorganizations, that is just what he is. It was because of his expertise that he was invited to Dubai to participate in a panel discussion on how the UAE can change their laws on corporate failures.
As a professor in law school, there is much less daily pressure, says Arthur Gonzalez, who nowadays has spare time as opposed to the 24-hour shifts that he sometimes did as a bankruptcy judge.
One of his first big cases came up in late 2001. Energy giant Enron became insolvent after insider trading and fraud. Scandals surrounding the company grew and it eventually sought the protection of the U.S. Bankruptcy Code, known as Chapter 11.
American companies are able to seek protection from the bankruptcy law under three principles: Place of assets, geographical location or state of incorporation.
However, a company that has subsidiaries in a specific state can try to apply there as well. That was the case with Enron, which had a subsidiary in New York.
Along with Delaware, where most U.S. companies are registered, New York City is considered to have the best expertise for business reconstructions and bankruptcies. Most big corporations have therefore decided to file for bankruptcy protection here.
”I would estimate that more than three-quarters of all the largest companies that seek bankruptcy protection do so in New York or Delaware”, says Gonzalez.
According to the Chapter 11, no trustee is appointed in the beginning of a reorganization, and often never, although in some circumstances a trustee may be appointed.
During the bankruptcy process of Enron, there was a person given a scrutiny role who dedicated almost two years to give a full report. Meanwhile, Enron changed its management, which Mr Gonzalez appreciated since the new people could look at the company with fresh eyes.
When Enron filed for bankruptcy protection it had 60 billion dollars in debt and the process took two and a half years.
”It was an extremely complex case and the hardest thing I ever worked on. But despite the liquidation of the company, we managed to save as much money as possible”, says Arthur Gonzalez, who estimates that an average creditor got back 54 cents on the dollar. Some creditors were able to get back as much as about 93 cents on a dollar, thanks to a guarantee from the parent company.
Was rehabilitation ever a choice in the Enron case?
”Initially it was looked at but quickly the parties realized that the company's reputation was too bad for it to survive as an ongoing enitity”.
Eight months into the process of Enron’s bankruptcy, the telecom company WorldCom followed. Arthur Gonzalez was asked to take responsibility of Worldcom when it filed for bankruptcy. At that time WorldCom had 106 billion dollars in debt. Unlike Enron, WorldCom managed to undergo a rehabilitaion in 15 months and Mr Gonzalez calls the process a success.
”The financial outcome for the creditors was lower, an average 25 cents on a dollar, but the vast majority of the employees were allowed to keep their jobs when the company was renamed MCI. And two years later the telecom company Verizon purchased the reorganized company”.
Arthur Gonzalez says that as a bankruptcy judge, his most important job is to create an open atmosphere where everyone involved can work quickly to reach an agreement or, if agreement is not reached, the court can make the necessary determinations, before dwindling assets run out completely. This was especially important during the process of automaker Chrysler, which filed for Chapter 11 in late April 2009.
”Chrysler's weakness, among otehr things, regarding the crisis that began in 2008 was that they didn’t have a bestseller that was energy efficient to compete with other automakers. It was the similar for General Motors that ended up in having to file for bankruptcy protection as well.”
While Chrysler was a subject of Chapter 11, the U.S. government pumped in money to keep the car industry on its feet when it couldn’t receive loans from former financial lenders. Chrysler's goal was always to be sold to another car manufacturer and Fiat was found to be have persented the ”highest and best” bid.
In contrast to a Swedish bankruptcy judge, who does not handle a bankruptcy to the same extent and where it’s rather a trustee who approves a sale, Arthur Gonzalez role was extremely important to the deal with Fiat.
June 1 2009, one month after Chrysler filed for bankruptcy protection, Arthur Gonzalez approved the sale to Fiat. But some noteholders protested, and within ten days, the case reached the Supreme Court, which allowed the sale to proceed.
”It took 42 days after the case landed on my desk until the sale went through, which is incredibly fast. But it was also necessary because the money ran out from the company. They had an estimated loss of 100 million dollar daily of going concern value when it was at its worst.”
What was your opinion regarding the government efforts to try to support Chrysler?
”I don’t give a personal opinion about it. As a bankruptcy judge it didn’t matter whether it was the government or a financial institution that lent money while the company was having struggles.“
Is it possible to improve the rules within Chapter 11?
”Of course many rules can be adjusted. I wish that the fees for small and medium enterprises were lowered. In proportion to their cash flow the charges represents a higher percentage than for large businesses and therefore it becomes a greater burden.”
Arthur Gonzalez says that the most expensive cost for companies seeking bankruptcy protection is their appearance in court, and if this has to be repeated because of appeals the cost increases. This cost is even more burdensome for small companies, who do not have as much of a budget for legal expenses.
”Enron had attorney and court costs for 1 billion dollars and needed the best expertise. But even if it was very much money the creditors got back more than 22 billion dollars”, Gonzalez explains and a vague but proud smile appears on his lips.
“A bankruptcy judge is a judicial officer of the U.S. district court who is appointed by the majority of judges of the U.S. court of appeals to exercise jurisdiction over bankruptcy matters. The number of bankruptcy judges is determined by Congress. Bankruptcy judges are appointed for 14-year terms.”
Source: United States Courts, www.uscourts.gov