Trump and the Bankruptcies

January 26, 2016

There’s been some talk—not enough, in my humble opinion—about the Trump bankruptcies. Here are some basic facts.

First, bankruptcy laws are federal, and they’re found in Title 11 of the United States Code. The title includes nine chapters: 1, 3, 5, 7, 9, 11, 12, 13, and 15. One through five apply to all bankruptcy filings.

Chapter 7 is a traditional or straight bankruptcy. The debtor gives up non-exempt property, if there is any, in return for which debts go away. It’s for poor people and corporations with no future prospects.

Chapter 9 is for municipalities. They’re uncommon, albeit less uncommon than they used to be, and my good friend and former partner Lowell Rothschild handled one of the first cases under the Bankruptcy Reform Act of 1978.

Chapters 12, 13, and 15 deal with, respectively, family farmers and fishermen, individuals with regular income, and cases involving multi-national issues. Chapter 13 cases are very common, and with bankruptcy law changes pushed forward by the credit card industry, a Chapter 13 case is the only option for most individuals who face a financial crisis. Chapter 12 cases get filed from tiem to time, and Chapter 15 cases are very rare.

That leaves Chapter 11, aka reorganization. Chapter 11 bankruptcies can be filed by individuals or business entities, but are most common among corporations. (The filing party is the debtor, except in involuntary filings by creditors. They’re rare!) A filing stays all action by creditors, giving the debtor breathing room—think time—to figure out  what the future will look like.

The Chapter 11 process is complicated in most cases and every case has its own special degree of “specialness,” but the common element in every case successful case is a plan of reorganization, a document which gets sent out to everyone who holds a claim or interest in the debtor. A disclosure statement goes with the plan, people vote, and the Bankruptcy Court confirms the plan, or not.

So back to the Donald. PolitiFact writers Lauren Carroll and Clayton Youngerman wrote Fact-checking claims about Donald Trump’s four bankruptcies, back in September 2015, when Carly Fiorina was all over the bankruptcies in a debate. (Ms. Fiorina may not be the best messenger, given her less than successful five-and-one-half years as the Chief Executive Officer of Hewlett-Packard.) The Politifact piece quotes the Donald thusly, mostly:

“Hundreds of companies” have filed for bankruptcy, Trump said earlier in the debate. “I used the law four times and made a tremendous thing. I’m in business. I did a very good job.”

True? Not true? Well, for starters, “hundreds” is way low, but I suspect regular / regular-big entities don’t catch the Donald’s notice. In fact, thousands of Chapter 11 petition gets filed every year. True it is, though, that many large corporations reorganize their affairs by using a Chapter 11 filing.

Very good job? Not so much. Ending up in a Chapter proceeding does not reflect success. In many cases the filing is unavoidable, and due to circumstances beyond the control of the owners / managers. (In Trump-land these people are … losers!) A successful Chapter 11 reorganization provides a fresh start, and a chance to save jobs, pay creditors, and add value to the economy. That’s a good thing, but the notion that ending up in a Chapter 11 case is consistent with “I did a very good job” is odd.

So, how did things turn out with the four Trump bankruptcies? Three of the four bankruptcies involved gaming in Atlantic City. The filings occurred in 1991, 2004, and 2009. (Another bankruptcy was filed in 2014, involving an Atlantic City casino with Trump in its name, with which Mr. Trump is no longer involved.) Mr. Trump no longer owns the Plaza Hotel in New York, which was the subject of the 2004 bankruptcy and if I understand his position correctly, he has no interest in any of the very few remaining Atlantic City casinos.

Mr. Trump’s business failures may or may not have been due to his own actions. (His “spare no expense” building style and his use of debt begs the question: does he do budgets, or just wing it?) That said, there’s no way to square “I did a very good job” with running four companies into Chapter 11 cases in 18 years. No way!


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