The Examiners: Linking Repeated Chapter 11 Filings Can Be a Stretch

When a company files for Chapter 11 protection a second, third or even fourth time, who’s to blame?

Repeat Chapter 11 filings are not uncommon. The reasons behind these events are almost as diverse as the companies themselves. Flawed capital structures, declining industries, economic downturns and product issues are just some of the issues that bring these companies back to the Chapter 11 process. And, yes sometimes repeat bankruptcies also emanate from bad decisions or broken business plans on the part of management teams and boards. There’s usually no shortage of responsibility or blame to go around. Repeat Chapter 11s are part of our capitalist economy and competitive environment. Some companies will fail more than once, often for very different reasons.

When we approach Chapter 11 reorganizations, we naturally place a priority on ensuring that the company is not only on strong financial footing, but that it has a fundamentally sound business strategy in place. The company has to demonstrate that it has effectively addressed the issues and has identified a clear runway for achieving success. A big part of this process includes an analysis of the company’s industry and the various macro-economic factors that may impact the turnaround plan. However, sometimes company fortunes and industry environments can change considerably over time. That’s why it can sometimes be a stretch to link a repeat bankruptcy filing with a Chapter 11 filing that occurred many years ago.

Just as there are many reasons for repeat Chapter 11s, there are also many factors that support successful post-bankruptcy companies. Sometimes these events are largely out of management’s control but are certainly in their favor. Factors such as a robust market or significant economic resurgence don’t hurt. Consider that according to the U.S. Department of Commerce’s Bureau of Economic Analysis, the U.S. auto industry only produced 10.4 million light vehicles in 2009—the height of the recession—fueling concern about the ability of some of the biggest players to emerge from bankruptcy. In 2013, the Commerce Department found that the industry produced more than 15 million light vehicles following several years of gains. Did better design, marketing and general business practices help? Sure they did. But it didn’t hurt that consumers came back to dealerships in droves as their confidence increased and they needed to replace older models.

The lesson is that when the boost from the broader economy is not present, it’s easy to criticize companies that fail more than once. Yet there are many factors that lead to Chapter 11s, and sometimes macro issues play a prominent role. Chapter 11 reorganizations are not a panacea for every distressed company, but when done right, they provide a path to recovery and growth. But hindsight is 20/20. Nothing is guaranteed, and there are always plenty of things that can go wrong.

Perry Mandarino is the U.S. Business Recovery Services leader for PricewaterhouseCoopers, based in New York. Follow him on Twitter at @Perrymandarino.