In October 2020, Akorn Operating Company LLC announced its emergence from Chapter 11 bankruptcy as the beginning of “an exciting new chapter.”
Less than three years later, the generic US drugmaker ran out of money and laid everyone off. Akorn is back in bankruptcy court — this time to be sold for parts.
It’s one of 12 firms this year to seek bankruptcy protection for a second or even third time after initial attempts at court-supervised rehabilitation failed. So-called Chapter 22 filings — industry slang for repeat bankruptcies — are piling up at the fastest rate since the Great Recession, according to BankruptcyData.
The trend is both a sign of how fragile the US economy has become and a failure of the bankruptcy system, considered among the best in the world. Its focus on rehabilitating troubled companies rather than quickly winding them down saves thousands of jobs each year — but it assumes that pausing debt collection, tearing up costly contracts and forcing losses on creditors is more than just a way to delay inevitable liquidation.
“Judges aren’t thrilled to see a debtor come back, nobody wants it to happen,” said Lindsey Simon, a law professor at the University of Georgia who studies bankruptcies. “It means bankruptcy failed.”
The 11 repeat bankruptcies filed through April already tops the tally for all of 2021 or 2022 and the spate of Chapter 22 filings through the first four months of the year has been eclipsed only once since 2000, according to BankruptcyData.
David’s Bridal LLC, the biggest wedding retailer in the US, and Catalina Marketing — maker of well-known coupons — discount retailer Tuesday Morning, telecommunications company Avaya and data firm Inap — all fell back into bankruptcy this year. Home security and alarm company Monitronics International Inc. plans to file a second bankruptcy by mid-May, after an earlier Chapter 11 in 2019.
Such relapses follow common threads. Sometimes a company did not get enough debt off its balance sheet the first time. Or it didn’t shed unprofitable parts of the business when it had the chance, dooming its prospects when interest rates rose, or inflation forced costs higher.
David’s Bridal slashed about $450 million of debt from its balance sheet during a late 2018 bankruptcy. But it failed to reject burdensome leases and close underperforming stores.
Filing for bankruptcy during peak bridal season tarnished its image among spouses-to-be, according to court papers. Plus, David’s was hampered by the pandemic, which upended the wedding industry.
Now, less than five years later, David’s has embarked on a last-ditch sale effort, but will disappear for good if no buyer emerges.
Situations like David’s are embarrassing for restructuring advisers and judges because bankruptcy exit plans can only win approval if the court concludes a restructuring plan has a better chance of succeeding than failing. There’s a debate among bankruptcy specialists about whether Chapter 22 is merely an unfortunate but necessary extension of a government safety net — or a sign Chapter 11 is too forgiving to large companies and needs to be stricter.
“I don’t want the decision makers of the company going forward to ever forget that for them to survive as an entity, somebody paid a price,” David R. Jones, chief bankruptcy judge in Houston, said in an interview. “You don’t magically write off debts. There’s a cost.”
When a repeat bankruptcy filing lands on his desk, Jones spends considerable time analyzing what went wrong, he said. He sees reorganization as “extremely fragile,” and something that should not be abused. Chapter 11 bankruptcy imposes costs on society, he said: shareholders get wiped out, and small businesses lose receivables, for example.
Not all legal specialists view Chapter 22 as a failure of the bankruptcy system. Even if a Chapter 11 doesn’t work out, creditors can often recover more if a company stays in business longer.
Ed Altman, a New York University finance professor and inventor of a popular default prediction metric, the Z-score, said firms too often leave Chapter 11 “looking like a failing company” when it would be better for creditors to get paid in a liquidation. A second bankruptcy is a sign the first was a waste of capital, Altman said.
“Those resources are plowed into a company that will eventually fail when they could have been invested in more productive enterprises,” he said.
By Jeremy Hill and Jonathan Randles / Bloomberg