Doomsday appears to be at hand. Short-term loans are overdue and have already been extended. Covenants in bank agreements setting ratios of debts to equity have been breached. Compensating balances have not been maintained. Credit has virtually dried up. Finally, letters, visitors and telephone calls demand payment. – Bankruptcy Law Manual by B Weintraub and A N Resnick, describing the conditions that drive a company to file for protection under Chapter XI of the US Federal Bankruptcy Code. So it must have been at Continental Information Systems on the cold January eve of its Friday the 13th bankruptcy filing. With hope dwindling like (and along with) the residual value of its portfolio, the lessor apparently came to the conclusion suggested by distinguished barrister Weintraub and his academic sidekick Resnick, whose chair at the Hofstra University School of Law bears none other than Weintraub’s name and endowment. When surrounded by creditors massing like peasants around Dr Frankenstein’s hilltop Schloss, a debtor like CIS should take heart, Bankruptcy Law Manual advises. For, the citadel of despair may be stormed by the utilization of the reorganization process afforded by the Code. The debtor should also, presumably, take telephone in hand and seek counsel from one of the distinguished firms that chases not ambulances but armoured cars. And this is just what CIS did, hiring the very New York City bankruptcy law firm – Levin & Weintraub & Crames – that bears not only a good and familiar middle name, but also a reputation as one of the finest of its ilk. The relief undoubtedly felt by CIS’ beleaguered leader, Harry Goetzmann Jr, having retained the Mouthpiece Tabernacle Choir, may not be shared by the company’s legion of creditors, nor its vast army of lessees, however. Individuals and entities dealing with a busted flush, even one that has opted for Chapter XI protection rather than liquidation, may well find themselves in the hands of L&W&C or such. These Torquemadas of torts are paid to savage their client’s adversaries as cruelly as partner Weintraub and professor Resnick have the English language. Enterprises whose financial affairs are intertwined with CIS’ tangled skein must act with force and haste. The law, in its attempt to rehabilitate errant enterprises like CIS, gives bankruptcy petitioners extraordinary powers. Debtors can decidedly dent the balance sheets of outsiders whose only crime was trust. If the debtor is deemed a scalawag, as OPM Leasing was, the Court will empower a trustee to carry on the grim work – and also delve into any capers cut by the bankrupt company’s former managers. Lenders, who got into the CIS mess with their eyes as wide open as their wallets, have already sent their own lawyers to the US Bankruptcy Court for the Southern District of New York. So, too, have the wise lessors that traded machines and leases with CIS; they know full well that they have little time and great wads of money to lose. A frequent mistake made by lessees is confusing a lessor’s size with its health. When CIS hit the skids, it was the second largest independent in the business. OPM, which collapsed after being looted by its owners, was also one of the heavyweights. Itel was the industry’s biggest concern when it filed for protection from its creditors in 1981, and its major worry immediately thereafter. By contrast, Comdisco, which is currently the largest independent computer lessor, is unbelievably strong. So, too, are many companies that are considerably smaller. If girth is no indication of a lessor’s ultimate solvency, one might ask, what is? The answer is so simple that it approaches a tautology. If a lessor is solvent, and in the past has always been solvent, chances are it will be solvent in the future. The catch is that the prospective lessee cannot easily get the goods on a lessor. And because lessors’ financial statements are difficult to interpret – and lessors’ representations about their wealth are optimistic whether justified or not – the user strategy that is so easy to articulate is nearly
impossible to carry out. Nor does it have any bearing on deals done through a lease broker or a lessor that sells the deal off to another party. The user’s best hope lies in a sound contract. Incidentally, lessors that encourage a user in this direction are the very ones that the lessee can trust. What good leasing practice boils down to is not the elimination but the reduction of risk. In computer leasing, the lessee can’t expect a reasonable balance between risk and reward. The computer leasing trade is rife with leases that arise as byproducts of financing schemes that are, to say the least, imaginative. The lessee in such a deal becomes an unwitting gambler, saving a pittance while risking large sums. If the scheme works longer than the lease, the lessee is unquestionably ahead of the game. If it doesn’t, the lessee will be provided with an unexpected education accompanied by a large bill for tuition. The severity of the problems faced by CIS’ lenders and lessees will become evident as the case moves forward. CIS filed claiming a positive net worth. The company’s tangible net worth is positive, too. However, the actual value that will be realised as assets are sold off is very hard to predict this early in the game. There have been some allegations of misconduct on the part of CIS, but its filing for Chapter XI protection was the result of business problems, not looting, as was the case at OPM. CIS had been struggling for some time. By contrast, Itel, was startled from its dreamy sleep and chased to court by howling packs of lawyers and accountants. Despite the absence of a dramatic crash, the prognosis for CIS isn’t very good. While Chapter XI of the Bankruptcy Code’s goal is the rehabilitation of fallen firms, not one computer leasing company that sought protection ever emerged. Itel, though once again solvent and still a lessor, is a transportation equipment financier, not a computer company. And that’s about as close an any computer lessor has ever come to surviving bankruptcy. There are several factors that militate against CIS’ eventual emergence… although it may survive as an aircraft lessor. Dispensable First, CIS is dispensable: the computer products and services it provides are indistinguishable from those offered by dozens, nay, hundreds of competitors. Second, its assets are evanescent: as the legal luminaries argue over just whose bull has been gored, the residual value of its portfolio will zoom towards zilch. Third, its customers will have no loyalty: why should they? Fourth, its management, however well-intentioned, is not gifted: CIS made plenty of mistakes for a long time before throwing in the Chapter XI towel; it didn’t suffer a single, improbable blow. Fifth, a significant portion of its talent pool is running away: those who live by commissions die by commissions. And so on, and so forth. So if CIS makes it, it will have defied the odds. In the past, chairman Goetzmann has done exactly this. Which is why we still hold out some hope, however feeble, that CIS will emerge from Chapter XI… rehabilitated but probably not reformed. (C) 1989 Technology News of America
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