Thursday, November 22, 2012

Twinkies and the Law

 A lot of blather is going around the internet about what caused Hostess to fail.  But there are a few things being said that betray a serious lack of knowledge of bankruptcy law.  Don't feel bad.  Most lawyers know next to nothing about bankruptcy law and most laypeople who haven't filed know even less.

So here's the deal.  When a corporation files for bankruptcy it can file under either Chapter 11 for a reorganization or under Chapter 7 for a liquidation of assets.  Chapter 11 filings are chosen by those businesses whose leaders think they can rescue the company if the company can get some breathing space with its creditors and be relieved of onerous contracts that limit its future operations. An example of the kind of contract that might be voided is a supply contract where the price of the supplies was above market price, or a labor union contract. Debts already incurred would go into a separate pile for consideration.  They might be eventually paid off at less than a 100cents on the dollar.
 A lot of airlines have filed chapter 11 and come out of it still flying.  When a company is in chapter 11, virtually every financial aspect of how the company operates is subject to review and approval of the bankruptcy court, including executive salaries.  Hostess was already in chapter 11.  It's threat to the unions was NOT that it would file for bankruptcy, it was already in chapter 11 reorganization bankruptcy.  It's threat was to convert its chapter 11 bankruptcy to a chapter 7, liquidation, meaning it would go out of business.  Also, by virtue of the fact that it was in bankruptcy, executive salaries would have been submitted to the bankruptcy court and approved by it.  Those who claim that the managers were simply trying to loot the company would have more credibility if they had made those claims to a bankruptcy judge who would have had full power to stop any such looting.  In fact, that is one of a bankruptcy judge's jobs-- to prevent looting of corporate assets.  Any corporate assets distributed to individuals in the 90 days before the bankruptcy filing can be recovered almost automatically, and any distributed in the year prior to filing can be recovered if there is evidence that there was not fair compensation paid.  The claim that this company was being looted WHILE in bankruptcy looks mighty suspicious only because it is precisely the job of the bankruptcy judge to keep that from happening.

Another issue is the ability of the unions to look at the books.  Since the company was in bankruptcy already, a perusal of the reorganization plan would have given a lot of information to the unions.  But even more important the National Labor Relations Board, which regulates collective bargaining with private companies requires that companies which plead poverty in collective bargaining negotiations open their books to the unions affected.  So, assuming the unions have some knowledge of the NLRA, the books were opened to them.  The teamsters accepted some pretty deep cuts to keep the company in business, the Bakers did not.  The bakers had a second chance when the judge postponed ruling on the motion to convert the bankruptcy to chapter 7 in order to have the parties go back to mediation.  The bakers again rejected any offer made to them.  The only rational conclusion is that they preferred unemployment to wage cuts.  Since Hostess had already filed in bankruptcy court to shut down the company, they had to know that Hostess was not bluffing.

They can say whatever they want but it is clear that they chose unemployment benefits over working.  They must have known after the court put off its decision on the conversion, that Hostess was serious about shutting down.  And they must have known that the court would approve the shut down if they did not take the contract that was offered to them.  They were given an opportunity to show the court that the company could still be viable if they were given what the union wanted in a contract.  Apparently the court didn't buy it.

While I am sorry that another American icon has bitten the dust, I can't say that I will miss them, really. I have never been a frequent purchaser of hostess products.  Like Polaroid and other iconic brands, they didn't keep up with the market and they have bitten the dust.  That is as it should be.

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