Did Bad Bankruptcy Laws Doom Circuit City?

Did flawed changes to Chapter 11 bankruptcy laws make it harder to companies to reorganize and survive?

That will be the topic of a hearing next week by the House Subcommittee on Commercial and Administrative Law titled “Circuit City unplugged: Why did Chapter 11 fail to save 34,000 jobs?”

Circuit City, the nation’s second largest electronics and a one-time innovator of Big Box sales regimes, filed for bankruptcy last November after years of management missteps. In January, it announced it was liquidating because it couldn’t find a buyer. Some 34,000 workers are being fired as the store chain sells off its inventory and shutters 567 stores.

The committee is looking into whether changes to Chapter 11 bankruptcy laws in 2005 made it harder for Circuit City to survive because it did not give the chain enough time to sort out a rescue plan and structure a debt payment schedule.

Before 2005, companies filing for Chapter 11 had 60 days to decide whether it wanted to keep or reject a lease for properties. However, a bankruptcy judge had the power to extend the time for such decisions indefinitely. Under the new rules, a company has 120 days to make a lease decision but a judge can extend it for only 90 more days. The law may hurt retailers like Circuit City because it forces them to make lease decisions very quickly that can’t be changed later.

Other problems with the 2005 changes are that it requires bankrupt firms to pay security deposits and requires them to come up with a reorganization plans detailing how they will pay creditors within 18 months. Previously, the process could have gone along for years.

The 2005 changes were made in an entirely different economic climate are were tailored to help creditors. Back them, no one could have foreseen the economic catastrophe that would come in 2008 and 2009.

However, there shouldn’t be too much sympathy for Circuit City. Its decline began in the late 1990s and a series of bad management decisions, such as changing its product line, selling its credit card business and firing legions of experienced sales people, brought on the firm’s demise.