The Bankruptcy Lawyer with a Wide Agenda

Jack Butler strives to restructure companies as quickly as possible to erase the pain, chaos and turmoil says Bernard Simon

Jack Butler prefers not to be described as a bankruptcy lawyer, although he has made his name helping companies to navigate the US bankruptcy code – including Delphi, the biggest manufacturer ever to file for Chapter 11 of the code.

Rather, the 49-year-old joint head of corporate restructuring at Skadden, Arps, Slate, Meagher & Flom thinks of himself as a turnround manager or even a social engineer.

“Fundamentally, a bankruptcy court is a court that administers claims held by lots of people who have interests in getting some sort of financial return,” Mr Butler says. “On the other hand, it is a process that fundamentally affects people’s lives. Whether it’s pensions or collective bargaining agreements or broken industries, the court’s decisions impact on hundreds of thousands if not millions of people every day.”

The truth of that statement – and the considerable challenges it implies – are evident in Mr. Butler’s latest assignment as lead counsel to Delphi, North America’s biggest automotive parts supplier. Delphi filed for protection from its creditors under Chapter 11 of the bankruptcy code in October.

Its chief executive, Steve Miller, won applause from business and set off alarm bells in labour circles with a warning that Delphi’s filing marked a flashpoint between workers and retirees because “young people increasingly resent having their wages reduced and taxed away to support social programmes for their grandparents’ income and healthcare concerns”.

When Delphi announced a third-quarter loss of $788m yesterday, Mr. Miller said the big loss showed the urgency of a restructuring to bring down labour and other costs.

Mr. Butler grew up just a few miles from the farm that is now Delphi’s head office in the Detroit suburb of Troy. His boyhood home was even closer to what is now the headquarters of Kmart, the big retail group that Mr. Butler shepherded through a Chapter 11 restructuring in 2002 and 2003.

Mr. Miller hired Skadden Arps less than two weeks after taking the reins at Delphi in early July. Mr. Butler says he told Mr. Miller right away: “It is important that you think about this as us adopting the company. This becomes sort of a second family.” As he sees it, restructuring lawyers are the last generalists in the legal profession.

Ward Mooney, president of Fleet Retail Finance, an asset-based lender to the retail sector, a unit of FleetBoston Financial, says Mr. Butler’s strength is that “he analyses the situation not only from the company’s perspective but from the perspective of the enormous number of constituencies that one has to deal with in a bankruptcy”.

According to Mr. Mooney, who also chairs the Turnaround Management Association, an international group that describes itself as “dedicated to corporate renewal”, Mr. Butler “thinks through every issue, anticipates situations before they develop and is rarely surprised by anything”. Delphi’s restructuring is testing those skills to the limit.

Chapter 11 provides legal breathing room from creditors, to allow a company to restructure and continue as a going concern, rather than force it into liquidation. Delphi employs more than 180,000 people at 200 factories and technical centres and 42 joint ventures around the world. It has demanded deep cuts in wages and benefits from its 33,000 blue-collar workers in the US. Many of Delphi’s 44 US factories are likely to be closed or sold, with much of their production moving to countries with lower labour costs.

It has threatened to ask the bankruptcy court to tear up existing labour contracts if unions fail to agree on new terms by mid-December. Chapter 11 allows the court to review a company’s labour contracts as part of an overall restructuring to improve the business’s viability. Besides its big workforce, Delphi deals with close to 4,000 suppliers. In many cases, it relies on a single supplier for crucial parts. Any interruption in supplies could imperil Delphi’s customers, especially its former parent General Motors, which still makes up close to half of the parts maker’s revenues.

Mr. Butler has tried to cover all the bases. Delphi fielded close to 10,000 phone calls from worried suppliers in the first week after entering Chapter 11.

Among the dozens of motions submitted to the court immediately after Delphi filed for protection, the company won approval to deal with what Mr. Butler calls “rogue” suppliers who, in his words, “put a gun to your head and say: ‘I don’t care what everybody else is doing. Do this for me, or I will shut down your plant.’” Mr. Butler says: “We foresaw that possibility.” Indeed, a few suppliers have threatened to withhold components unless Delphi pays in advance. Delphi’s response has been to meet the demands so that production is not disrupted but then ask the court to impose penalties on the supplier for violating its contract. He acknowledges that “we can always do a better job of communicating expectations, communicating timelines and trying to make it very clear that those of us who are involved at the very senior levels of the organisation understand the turmoil and pain and chaos that this kind of a process is going to cause”.

He has been a sharp critic of US bankruptcy law reforms that took effect last month, which impose numerous new obligations on corporate and personal debtors. While the Supreme Court has taken the view that the top priority of corporate reorganisations is to rehabilitate businesses and protect jobs, Mr. Butler says that “since 1978, there has been a chipping away of that philosophy by special interest amendments”.

He cites a provision in the latest law, inserted after lobbying by landlords, that requires companies in Chapter 11 to decide within seven months whether to accept or reject their property leases. “Very few retail cases can reorganise in the same year that they file,” he says.

Similarly, he takes a dim view of a provision ending a company’s right to file a reorganisation plan after 18 months in Chapter 11. The measure is designed to speed up corporate restructurings. If Enron, the failed energy group and another of Mr. Butler’s clients, had been forced to stick to that deadline, it would have delivered far less value to creditors, Mr. Butler says. “Less debtor-friendly is a buzzword that really means less opportunities to reorganise, more liquidations, and less returns to creditors”.

Mr. Butler adds that only once in his 25 years as lead counsel has a restructuring taken longer than 18 months. The reorganisation of Kmart, the biggest retailer to file for Chapter 11, was completed in 15 months. US Airways’ first restructuring, for which Mr. Butler was also lead counsel, took seven months. “Doing things quickly as opposed to spending years doing it is something of a trademark of mine,” he says. He aims to bring the many complex pieces of the Delphi puzzle together by early 2007.

By then, Delphi’s management, creditors, workers, and suppliers will be in a better position to judge whether Mr. Butler has earned the $835 an hour that Skadden Arps charges for his services.