Restructure This! Podcast Ep. 2
Building a Bankruptcy Juggernaut
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We speak with James (“Jamie”) H. M. Sprayregen, partner at Kirkland & Ellis LLP and founder of the firm’s powerhouse bankruptcy restructuring practice. Few know the story of how Jamie built the practice from humble beginnings starting in 1990. In a frank interview, Jamie describes the vision he had three decades ago, the challenges he encountered along the way and the banner chapter 11 cases—Zenith Electronics, United Airlines—that he believes helped to shape the then-emerging brand of this premier practice.
Guest:
Jamie is partner in the Chicago and New York offices of Kirkland & Ellis. Under Jamie’s leadership, the Restructuring Group has represented debtors and creditors in some of the most complex Chapter 11 filings in recent history, including Energy Future Holdings Corp., Seadrill Limited, Caesars Entertainment Operating Co. Inc, Toys “R” Us, Inc., Trans World Airlines, Inc., and Conseco, Inc. In October 2013, Jamie was inducted into the Turnaround Management Association (TMA) Turnaround, Restructuring and Distressed Investing Industry Hall of Fame. From 2013 to 2015, Jamie was appointed to serve a two year term as the President of INSOL International, the world’s leading international insolvency association. Jamie is a Fellow in the American College of Bankruptcy.
Transcript:
Justin Bernbrock:
Greetings. Welcome to Restructure This!, the Sheppard Mullin podcast devoted to corporate restructuring, where we discuss complex Chapter 11 practice, out-of-court restructurings and workouts, as well as other topics related to financial distress. I'm your host, Justin Bernbrock. Let's restructure this.
Justin Bernbrock:
On today's installment of Restructure This!, we welcome James H.M. Sprayregen or Jamie, of Kirkland & Ellis. Jamie is the founder of Kirkland & Ellis's worldwide restructuring group, starting from the group's inception in 1990. Jamie shares with us how he built the group, including the initial cases that the group worked on and his time at Goldman Sachs, as well as when he returned to Kirkland in 2008. It's a great interview and we learn a lot about Jamie's experience and time at Kirkland. As always, stay tuned after the interview for a quick rundown of current restructuring news and notable stories.
Justin Bernbrock:
We're joined today by James Sprayregen, partner in the restructuring practice at Kirkland & Ellis. Jamie, thanks so much for doing this. Really appreciate your being on and talking with us.
James H.M. Sprayregen:
My pleasure.
Justin Bernbrock:
So Jamie, obviously you've been a restructuring lawyer for a long time, as I'm sure most folks know. But, we were really interested in learning during this time together really what you focused on while building far and away the greatest restructuring practice in the world. I can say that having been a member of that restructuring practice for many years, which was very formative for me. And I'm very grateful for that time and being able to work with you and others at Kirkland, I think is an experience that is unmatched. So how did it all start? Where did you start after graduating from our collective alma mater, the University of Illinois College of Law?
James H.M. Sprayregen:
Yeah, so I appreciate the kind words. So I graduated from the University of Illinois College of Law in 1985. Graduated undergrad in '82 from Michigan. I was a summer clerk in '84 at Lord Bissell & Brook, which has since merged with another firm and is now Locke Lord. And I had rotated as a summer associate through a number of groups, including the bankruptcy group. And I came out of law school and went to Lord Bissell & Brook. I'd actually had a visiting professor teach me bankruptcy law at Illinois, visiting professor from DePaul Law School, who shortly thereafter actually became a bankruptcy judge, Bob Ginsberg, and he was a very good professor. I remember I had him not just for bankruptcy law, but for ethics also. But in any event, I came out and went to Lord Bissell & Brook in 1985.
James H.M. Sprayregen:
I asked to go into the real estate group and they said, "Fine," except that real estate wasn't too busy at the time. So until real estate got busy, [they asked,] would I mind hanging out in what was then called the bankruptcy group? We've gotten fancy. We call them restructuring groups now. But, would I mind being in the bankruptcy group until I could get into the real estate group when it got busier? So I did that in 1985 and never did actually get into a real estate group, but ended up very much like the bankruptcy practice. And I stayed at Lord Bissell & Brook from 1985 to 1989 when my entire group left and went to what was then called Rudnick & Wolfe, which is now DLA. And I was a fourth year associate, so I wasn't an important part of the deal, but they asked me to come with them.
James H.M. Sprayregen:
In fact, I remember it because they asked me to come with them and said, "Take your time to make a decision." But this was like five o'clock in the afternoon and they said, 'Well, we're leaving in the morning, so make sure you let us know." And by the morning I said I'd go with them. So I went to Rudnick & Wolfe. And within a few months of getting over there, I actually got a call from a headhunter asking me to go in house at Continental Bank, which doesn't exist anymore unfortunately. And I didn't really have an interest in being in house, but ultimately the guy talked me into going to meet with the general council of Continental Bank. Because, at the time I thought it was not a bad opportunity to meet a general counsel, but I said, "I doubt this job's for me." Went and met with him. Job wasn't for me, we both agreed on that.
James H.M. Sprayregen:
But in the world of serendipity, a few weeks later, he was meeting with a senior partner from Kirkland, who was bemoaning that he couldn't find good young associates. And the general counsel said, "Well, I met with this guy that wasn't for me, but maybe he's for you." And that's how I ended up getting the call from Kirkland. At the time I had only been at DLA for three months and I said, "I can't leave another law firm and be at three different law firms in three months. That doesn't seem like it would look good." So ultimately, lucky for me, Kirkland was persistent. And about 18 months after I got to what was then Rudnick & Wolfe, now DLA, I left and went to Kirkland in 1990. So, that's how I got to Kirkland.
Justin Bernbrock:
Do I remember correctly, Jamie, that you somewhat famously have the Kirkland rejection letter from when you applied while still a law student?
James H.M. Sprayregen:
Yeah. I forgot about that. Yeah. I did try to go to Kirkland out of law school and I signed up for interviews and I did one of those on-campus interviews and did not get a call back. And I have the letter, the one that starts with, “Unfortunately”. And if you ever come to my office, that'd be the first thing you see when you walk in my office: that framed rejection letter from Kirkland from 1984.
Justin Bernbrock:
The irony of that is almost too much to bear.
James H.M. Sprayregen:
There are people who look at it and say, "You got to get over that." And I said, "I'm not over that," but that's okay.
Justin Bernbrock:
It all worked out, I think, in the end. So in 1990, are you the only bankruptcy lawyer? Are there others at the firm then? How was the initial staffing or grouping of bankruptcy lawyers at Kirkland?
James H.M. Sprayregen:
Well, pre-1990, Kirkland had made a couple of halting efforts to try to build a bankruptcy group; it really hadn't worked out. And when I got there, there was a little bit of a, I don't know that I call it a “group”, but a collection of four, five, or six people who were doing some forms of restructuring or bankruptcy. Really it was more litigators doing bankruptcy litigation than anything, but there wasn't really a group. And there was even a discussion about some ambiguity about whether we were part of the litigation group or the corporate group. So it was a kind of a mishmash of a very tiny group...
Justin Bernbrock:
Got it.
James H.M. Sprayregen:
... or a non-group as the case may be.
Justin Bernbrock:
And so you're then a fourth year associate, fifth year associate. How did you start to get some real notoriety in the restructuring space or in the restructuring market? Was there an initial deal, initial case that you worked on in those early years?
James H.M. Sprayregen:
Yeah, I remember it pretty well because when Kirkland was asking me to come over, it was on the basis that the work was overwhelming and it was bursting at the seams with need for additional young and mid-level associates, which sounded pretty attractive. And I remember getting to Kirkland and coming in on the first day and going into my office. And in those days, the only thing on the desk was not a computer, but a telephone. And I dropped my lunch bag and I got there and I waited for the work to pour in, and waited the entire day and not one person came to see me and no work came in. And at the end of the day, I went home and said to my wife, "Wow. They said they were so busy, and nothing happened, but let's try again tomorrow." So same thing the next day, same thing the day after that.
James H.M. Sprayregen:
And it was a little bit strange. In retrospect, it turned out some of the senior people had gotten pulled away and were out of town and busy on stuff. But, by my fourth or fifth day of sitting in my office with a telephone and a bag lunch on my desk and no work to do, I thought maybe I better start walking the halls and introducing myself to people and seeing if they had any work for me to do. And it actually turned out there on the corporate side of the house, they were in the process of buying a company out of a 363 auction, that is called Healey Marine. I might not have the first name right, but it's definitely something Marine. It's a marine company in Connecticut. And I ended up getting involved in that and helping out. And I would say in retrospect, I'm not sure how they were doing that without having a bankruptcy lawyer involved. But, it was good I got involved in that.
James H.M. Sprayregen:
And then I met a lot of Kirkland lawyers through that and met some other people. And then their phones started ringing a little bit internally with people saying, "Hey, I hear you know a little bit about how to buy companies out of bankruptcy," or there was this bankruptcy problem or that bankruptcy problem. And while Kirkland had no bankruptcy brand and visibility or the bankruptcy stage at the time, obviously the Kirkland brand was a great law firm brand and great client base. And so it did enable me not only to meet a lot of Kirkland clients, but met a lot of lawyers and principals on the other side of the table over the next few years. And some of those became clients. And I'm actually happy and proud to say that a number of the clients came from either professionals or principals I met on the other side of the table from some pretty early deals.
Justin Bernbrock:
So in your mind, when was the turning point? I have an idea, especially given the United Airlines case and GGP. But do those cases serve as sort of a turning point, or significant benchmark, for when the Kirkland restructuring brand was really, the flag was planted?
James H.M. Sprayregen:
Well, I don't know if I could date things to a turning point, but I started in 1990. By sometime in the mid-‘90s, having the opportunity to pitch some debtor cases, nothing huge, but even those, we lost almost all of them mostly because we only had five, six, seven people, and we didn't really have any senior bankruptcy people. And the comments were, "We'd love to hire you, but can't take the risk. Got to go with brand A or brand B. But keep at it." And I felt like I was banging my head against a cement wall, and for a while not much happened. And then a little bit of dust started coming out of the cement and along with the blood from my forehead. And finally there were a couple of breakthroughs.
James H.M. Sprayregen:
But, before GGP and before United, in the mid to late ‘90s was a company called Zenith Electronics, and Zenith Electronics was the biggest TV maker in the United States for many decades and the last domestic producer of TVs. And they had some incredibly important patents, too, including the high definition patents that are in use today, but they weren't doing well. And I actually remember getting hired on that because I was interviewed against definitely a couple of brand A firms. And in, again, the world of luck and serendipity, and maybe making your own luck, as it happened, the general counsel of that company was married to the general counsel of another company that happened to be a Kirkland client, who I had had some, not a huge amount but, they had some problem that I had helped them out with. And the general counsel of the other company said to her husband at Zenith, "This seems like a good young guy. Maybe you want to give him a try." And that, I think, helped me get hired and Kirkland get hired at Zenith. And that case ended up being a true prepackaged plan, which is still unusual, but it took about three, four years to get done.
James H.M. Sprayregen:
And that I wouldn't say put us on the map, but I think that started putting us on the map. And then pretty shortly thereafter, United came along and we actually filed United in Conseco, which was, at the time, a pretty big insurance company case, about a $60 billion in debt in insurance company case. We filed United and Conseco in the same week in December of 2002. I would say that got a lot of attention. And those were two pretty big cases that went on for quite a while and involved players from all over the country. We got pretty firmly on the map at that point in time, if we hadn't been on any map before then.
Justin Bernbrock:
That's fascinating. There's, I think, some lore out there about how the United pitch went down, but I'd love to hear your firsthand take on that pitch, in particular.
James H.M. Sprayregen:
Yeah, that was another interesting one. We pitched against, again, the top players; that was obviously going to be a plum assignment. And part of the potential for the United bankruptcy at the time was fear of liability from the tragic deaths that occurred in the Twin Towers. And so the pitches were actually in 2001, about a year and a half before the bankruptcy. And shortly thereafter, Congress passed a law absolving the private sector from liability for the 9/11 terrorist attacks. So that actually was taken off the table as a potential driver of the filing. But the pitches nonetheless were, I think it was October of 2001. And I remember going into the pitch and we had a very thin pitch book, but we had a theory of the case, which ended up being exactly what we executed over a four year period, where we had a theory of what needed to be done, which we articulated.
James H.M. Sprayregen:
And I remember the legal team from United came into the room, having just visited, I guess, two other firms, and threw their pitch books literally right on the table. And they were about five times as thick as our pitch book, which sort of rattled us a little bit before we even got started. But we did our pitch and I do remember at the end of the pitch, they asked what I thought it would cost to execute on the strategy we articulated. I hadn't given it a huge amount of thought, but I said, "I think it's probably a multi-year bankruptcy case, and I think it'll probably cost about a hundred million in legal fees for us, not for everybody else." And I remember walking out of there and one of the other Kirkland lawyers said to me, "How could you quote that amount of money?" I said, "Well, because that's what I thought it would cost." And then the response was, "Yeah, but who was going to hire us if that's what it's going the cost?"
James H.M. Sprayregen:
Luckily we still got hired. Might not have been the smartest thing, but it was the honest response. And ironically, I remember, I think the final fee application of the case, the bill came in at like $99.6. There had been some pre-petition fees too, but it was pretty spot on. But, it might have been a little reckless to be that front and center on what it would cost.
Justin Bernbrock:
Yeah, I think in today's market, that would be a very challenging question to answer in a pitch. But nonetheless, it all proved out, as you said.
James H.M. Sprayregen:
I will say the CEO, after the case was over, got asked a lot of questions about the cost of the case, and wasn't it outrageous the amount of the legal fees? And a very supportive client, and we had gotten a pretty good result. And I remember him saying publicly, he says, "Look, we cut $7 billion annually in expenses. If I have to pay a hundred million to get that done, it seems like a pretty good investment to me."
Justin Bernbrock:
So that was 2001. And then you filed United and Conseco, as you mentioned, in December 2002. How large was the group? How many lawyers at that point? And were they all true bankruptcy lawyers or a mix? How was the bench then?
James H.M. Sprayregen:
We were growing, but sort of in fits and starts. And by the time we got to United, it was probably in the twenties, but pre-United, it was barely double digits. We did use a lot of the resources of the firm in terms of litigators and corporate and tax, et cetera, which we do today also. But, it was a resource-constrained, pretty small group.
Justin Bernbrock:
Which is in itself—and anyone who has been through a Chapter 11 filing on the debtor side knows—that it is incredibly time and work intensive. And to do it with a small group makes it that much more impressive and interesting. It sounds like a lot of sleepless nights.
James H.M. Sprayregen:
There were a lot of long hours. And in those days, even in the United days, which was early 2000s, everything was paper. And we literally had to stuff envelopes to send out certificates of service and pleadings and all of that. So it wasn't just the day to day legal work. It was, in retrospect and compared to today, an amazingly inefficient use of a decent amount of time doing tasks that don't exist anymore today.
Justin Bernbrock:
Right. So after that case and Conseco, and as you said those together really put the group on the map, where did it go from there? What was the trajectory of the practice group following those cases?
James H.M. Sprayregen:
Well, I laid out a business plan internally actually pretty early on by the mid-‘90s, which was a little bit cheeky and again, in retrospect, I'm sure more senior people read it and laughed. I articulated a plan and a desire to have “the best bankruptcy group in the world.” And I said, "not just the US." I thought we could do it in the world the way we were going and the firm was developing. And I laid out some reasons why I thought we could do that: just the client-base at Kirkland, lack of conflicts with entities that would keep us out of, for the most part, the debtor side of the business—it's probably 80ish percent of our practice, maybe more, 85 percent. So I wrote that every year in our self-review memos. Hadn't gotten too far after a few years on that, but, I started putting building blocks in place.
James H.M. Sprayregen:
We, Kirkland, opened an office in New York because it happened to be the same year I arrived: 1990. And we did hire just a few bankruptcy lawyers in New York by the mid-‘90s, maybe even earlier than that. And there was a decent amount of turnover. But by the late-‘90s we had the makings of a small group in New York, and we'd actually hired a small group in London and were starting international restructuring expansion also. I'd always had a large interest in international—just as a personal interest, but also as a business interest. And so we were kind of developing the infrastructure and the ecosystem to be able to do more work. But we're not a build-it-and-they-will-come firm, so we weren't just hiring people and hoping the work would come in. It was, I would say, the hiring lagged the business substantially for quite a while.
James H.M. Sprayregen:
But, the brand did grow and we had some successes in cases, including United and Conseco. And that, I do think, helped take away the commentary that we have been getting previously from some folks where we tried to get hired and the answer would be, "Love to hire you, but we can't take the risk on you.” I think the risk got taken away due to other people having taken a risk on us and then having worked out. And then our contact base and our reputation did grow to a sufficient extent that we started getting hired in some other situations.
Justin Bernbrock:
When did the private equity base practice, when did you connect that significant, call it, just wealth of potential representations, occur to you or dawn on you that you could internally serve the private equity relationships for distressed portfolio companies? Because I think a lot of folks look at the Kirkland practice today and attribute its significant expansion in both numbers and revenue and prominence to that key private equity relationship.
James H.M. Sprayregen:
So I'll actually give a lot of credit to the giant of the legal profession at Kirkland, Jack Levin, who I would say is the “Harvey Miller of private equity,” who built Kirkland's private equity group in the late ‘80s, maybe early ‘80s even, and the ‘90s. And it was actually, he was a senior member of the management committee, too, and he was one who had a vision that we ought to have a bankruptcy group because there's going to be ups and downs in the economy, and when there's downs there'd be work to do with his private equity clients. So that was a little bit the thesis of trying to build a bankruptcy group, and when around the time that I actually got hired in 1990, that didn't really play out much during most of the ‘90s. Here and there in dribs and drabs. But, the private equity group did keep growing and the thesis that there are ups and downs in the economy and, when there's downs we can help the portfolio companies of some of our private equity clients handle their problems, that did obviously play out in spades.
James H.M. Sprayregen:
I do think there's maybe a little bit of misconception, because it did turn out that a decent number of our engagements of portfolio companies of private equity firms were private equity firms that were not clients of Kirkland & Ellis. And a number of people thought those private equity shops were clients of Kirkland & Ellis because many, if not most of them, over time did become clients of ours. But a decent amount of the business came in off the street that was unrelated to an existing base of clients, but it was a mix of both. And just saw that it was an expanding business and that was going to be a growing business, and it's a putting-capital-at-risk business. And when you do that, every once in a while there's going to be things that go bump in the night that need help from restructuring folks.
Justin Bernbrock:
And from at least my own personal experience, it has worked out quite well for the firm and for the practice. So Jamie, you took a hiatus, you may call it, to go to Goldman Sachs. Can you talk a little bit about what the practice was, what the group looked like kind of leading up to that, and your decision to go to Goldman and then ultimately your return to the firm?
James H.M. Sprayregen:
Yeah, sure. So I went to Goldman Sachs in mid-2006. I hadn't been looking to leave Kirkland at all. In fact, I was very happy there. The bankruptcy group was going gangbusters. I think … I had become a new member of the management committee a few years before that and all was good. And without getting into too much detail, Goldman was not a client. I didn't know that many people there. I knew a few people. But, I got a call to go and talk to them, and I actually didn't know it was about potentially going over there. But I went because I figured it's always good to meet people. And that began a fairly long discussion that probably took a year-ish where I didn't think I was going to leave Kirkland. But ultimately there came a point in time; it was actually right about when we were getting the United case done.
James H.M. Sprayregen:
There were four other big cases right at the same time that were all ending. So, if I can remember them all it was United, there was Conseco, there was Fleming, there was NRG, there was one other big case—I can't remember which it was. And it just was a confluence of events. And I thought at one point change is good and do something else. And I can't say it was incredibly intensive career planning, but it was in terms of just doing a change after 16 years as a lawyer. In any event, I went over there, and I have nothing but great things to say about Goldman and had a great experience there. I was there from ‘06 to ‘08, almost three years. But if you think about that time period, I saw an incredible business cycle in that timeframe because the economy was incredibly healthy when I went over there and it did nothing but go up and up for the first maybe year-ish I was there.
James H.M. Sprayregen:
And then for the next, almost two years, it did nothing but collapse. And so in about a three-year timeframe, a little bit less, I think I saw what might have been a 20-year business cycle. But I will say what I went over there to do, the world changed at the end of ‘08, and it was going to be much harder to do that. And I did see a huge bankruptcy boom coming due to the Great Financial Crisis, and I personally didn't want to miss it. And I had stayed in good touch and good relations and good contacts with Kirkland. And at that moment in time, late ‘08, there was, for any senior lawyer with bankruptcy restructuring experience, the phones were ringing off the hook for a whole bunch of law firms and investment banking firms and consulting firms trying to find talent because there was a predicted multi-year boom and defaults, et cetera.
James H.M. Sprayregen:
In any event, I did get a number of other potential opportunities. But I say I flirted, I didn't date, with a few other opportunities. But, ultimately when I decided what I wanted to do, it wasn't going to be possible to do it at Goldman anymore, or at least for some period of time, and I didn't know how long because of the financial crisis and a lot of conflict issues. I ended up going back to Kirkland at the end of 2008; I remember December 9th, 2008, because I remember I finished up at Goldman at about noon and I got in the cab and drove up to Midtown from Goldman's downtown offices, and started at Kirkland like 45 minutes later. I think I might have had a sandwich in between. And I have, as I said, nothing but great things to say about Goldman, about my experience there. I met an incredible number of people that I'm just still in contact with today.
James H.M. Sprayregen:
I learned a tremendous amount, and I now call that my sabbatical. But, I'm glad I left Kirkland. I'm glad I went to Goldman. And I'm glad I left Goldman. And I'm glad I went back to Kirkland. So there is a lot of serendipity there and I don't necessarily recommend that lack of planning to people. It wasn't all that planned out, but it worked out okay.
Justin Bernbrock:
That's really interesting to hear. When you came back to the firm, did you have a sense for the trajectory you wanted the group to follow, or was it more you wanted to be pulling an oar in the rowboat?
James H.M. Sprayregen:
I had a sense, but it was a scary time in the world, December of ‘08. I mean, there were fears of a multi-year recession, maybe even depression. And Lehman had the Lehman situation coming and I actually don't remember whether it was right before or right after that. I think it was right before that. It was a difficult time for a lot of people, so I had a lot of thoughts in my head. Although I have to say, when I walked into Kirkland in the afternoon of December ‘09, I didn't have one penny of business, so I didn't know what was going to happen. But, the good news is, when I left, there was a developing crew of really impressive talent. And over three years that talent had further developed and become more senior. And it was sort of “plug and play” as to how good a group it was and how good many of the people were. And that made it a lot easier. And I actually do remember within an hour or so of getting over to Kirkland, a phone call came in, actually it was Reader's Digest, and we pitched for that and got it that afternoon, and started working again a few hours after leaving Goldman.
Justin Bernbrock:
That's remarkable. Do you recall how big the group was then? And just to kind of go back a little bit—from my perspective, the growth in the Kirkland restructuring practice has always been organic. You started with young lawyers and brought them up. As the practice has matured there hasn't been any bolt-on acquisitions of restructuring groups from other law firms. It's generally been organic. Is that right?
James H.M. Sprayregen:
Yeah, there haven't been any large acquisitions. We did hire five lawyers in the Los Angeles office at one point. And that was the largest we ever did. I think it was three partners and two associates, but I don't think we even hired two people at once other than that. But yes, it was 99% organic growth. And by the time I had left in ‘06, we'd expanded also to Munich, having a restructuring practice. And when I came back, we probably all were 50ish, maybe, depending on how you count it. There were some people that dabbled in other areas, but 50ish lawyers. And as I said, a bunch of superstar talent, like Edward Sassower, Paul Basta, Josh Sussberg, Anup Sathy, and a whole number of others that had been developing. And some people had come over while I had been gone, which was great for the firm.
Justin Bernbrock:
Got it. And not long after that, actually in 2012, it was when I joined…
James H.M. Sprayregen:
You too.
Justin Bernbrock:
Yeah. Not quite as significant as Sussberg or Sassower or Sathy though. Just to stick in the-
James H.M. Sprayregen:
Everybody's significant.
Justin Bernbrock:
So since you came back to the firm in ‘08, up and through really the last year or so the group it's almost, I mean, tripled in size, right? Because the group now has 130, 140 bankruptcy lawyers, that right?
James H.M. Sprayregen:
It's more like 220.
Justin Bernbrock:
Even more.
James H.M. Sprayregen:
Worldwide, maybe 230. Yeah, we did, at the urging of a number of folks, particularly Edward Sassower, opened the spigots on hiring. I would say it also became a little bit easier to attract talent and we'd had early on a lot of trouble getting anyone out of the summer associate program to join the restructuring group. I think Ross Kwasteniet was our first summer associate who came into the group. But over time we did start growing that and we made a concerted effort of hiring. And again, we still weren’t “built it and they will come.” But with a lot of discussions and some bit of trepidation, we collectively felt we were holding back the growth of the group by lacking sufficient bandwidth to take on business that we thought would come our way if we had the bandwidth. And so it was a little bit of the chicken and the egg, but we made the leap and did all that.
James H.M. Sprayregen:
And for example, when COVID hit in March of ‘20, the numbers you're citing might have been about right then. And even then I think we were probably 180, 190 maybe. And having that bandwidth available to be able to handle the tsunami of work that happened during COVID was a strategic asset that had been multiple years in the planning. Obviously we didn't wish or know that COVID was going to hit, but there was some thought that, as we said, cycles go up and down, and that there was going to be a cycle one way or the other.
Justin Bernbrock:
I'm curious, Jamie, to get your sense. I've got a personal theory that, just based on the sort of economic activity globally recently, most notable is the access to capital at really low interest rates. And you've got debtors borrowing their way out of problems, which—again, this is just my personal theory—is setting up a scenario where the downturn, or the down cycles, are—they're deeper valleys than had been in the past because of the leverage that the companies are taking on and owners are levering up companies to purchase them. I don't know if you've got any thoughts on whether future restructuring cycles will be, call them, the penetration, will be deeper on account of that borrowing or they'll be episodic based on whatever the driver is.
James H.M. Sprayregen:
Yeah, so I'm getting a little long in the tooth now. So I've been through a decent number of cycles. I mean, I could start with the 1989 real estate crash and the Asia crash of the late ‘90s and the tech crash of the early 2000s and then the great financial crisis and then the COVID crisis. And I'm probably missing a recession and turndown somewhere in there, too. It does seem like the severity of these crises has—and the speed at which they hit has—increased. But, also the speed at which they exit the crisis also seems to have increased. I mentioned thinking that 2008 there was going to be a massive multi-year bankruptcy boom. That only lasted a couple years. And this time the COVID recession lasted about two and a half quarters. And I think a bunch of that's attributable to the willingness of governments to get involved, and that lessens the pain and increases the liquidity and makes all of us in the restructuring profession…there’s less need for us.
James H.M. Sprayregen:
But, I do agree; I mean, companies have found ways tom call it, “kick the can and lever up significantly.” And so I'm not a believer that the cycle has been beat out of the system. I don't wish ill on America or ill on anyone, but there'll be another round. And notwithstanding the world and the U.S. is awash in liquidity right now, there's an old saying: that there's plenty of liquidity until there isn't. So predicting when liquidity is going to end is not a game I play, but unfortunately that will happen at some point. And how bad it'll be and what the trigger is, don't know, and how long it'll last. But, we'll be here to help.
Justin Bernbrock:
That I'm certain of. The complex Chapter 11 practice that you've developed over these years, Jamie, has evolved significantly. And it was interesting; I was even thinking, as you were speaking about how long a case like United was, which is obviously a huge case with lots and lots of issues, but cases even during the most recent—I'm calling it, the COVID cycle—seem to be much shorter in duration. Neiman Marcus comes to mind; I know that Kirkland was involved as lead debtors’ counsel, and we here at Sheppard were also involved.
Justin Bernbrock:
I am curious to get your thoughts on is bankruptcy reform. We've heard a lot coming out of Washington about reforms that are necessary in the bankruptcy process. Do you have anything specific or in particular to share on some of the proposals, not only including venue, restrictions on third-party releases, other proposals that have been put forward to curb what some view as abusing the bankruptcy system?
James H.M. Sprayregen:
Yeah, let me comment; it'll probably be a little bit more general. But first of all, how often laws actually get passed is distinct from proposed is a much different thing. It's like the old joke about economists who correctly predicted nine out of the last five recessions. So there's a lot of bills pending over the years that just never passed. So that's another area I would not hazard a prediction on whether something gets passed or not. I always say, “Washington is an island surrounded by a sea of reality.” But if you step back maybe to a 100,000 feet, or maybe it's even 500,000 feet, you look at the bankruptcy statute we have now. And over the course of American history we actually have in our constitution that we're supposed to have a uniform bankruptcy law, which is one of the only, I think the only, constitution in the world that has that.
James H.M. Sprayregen:
And we didn't get around to passing an actual permanent bankruptcy law until 1898. We had something before then. And for some reason, mostly because of recessions, we passed a bunch more bankruptcy laws, always on the eighths since then—in 1938 and then 1978. But the 1978 code happened after about 15 years of debate. And there's been a lot of debate over the 1978 code and hundreds of amendments over the years. But if you step back, the 1978 code was a fundamental compromise of changing from an automatic appointment of a trustee for large companies to the debtor-in-possession structure. And there was a fundamental discomfort with leaving the board and management in control of a company that resulted in a Chapter 11 filing. And almost all of the discussions you hear about amending the bankruptcy code emanate from that fundamental tension that exists today. And the whole growth of the CRO industry and independent directors and consulting firms are part of the, what I call the, extra-statutory ecosystem that's been and built up because of a never-ending discomfort with our debtor-in-possession system, even though it has been said it's the least worst, probably, alternative of all. But it's not a free lunch, and—it's not—I can't think of a better way to do it.
James H.M. Sprayregen:
But, because of the discomfort with it, you end up with a lot of scar tissue that gets built up around it. And then there's criticism of the scar tissue, even going as far as some people saying we should go back to the trustee system. But if you read the legislative history for why we put in the debtor-in-possession system in 1978, it's because the previous system was worse. It was not maximizing value. It wasn't helping to recover the most for creditors. It was not preserving jobs. It wasn't incentivizing companies to be proactive in addressing their issues. And yeah, our current system definitely has some warts, and I'm always happy to debate people on changes here and there to make it better. But I do think people need to take into account that this is like a movie, not a snapshot, how we got to where we are, how it used to be and how that wasn't so hot, and how it's actually pretty good right now, even though it's not perfect.
Justin Bernbrock:
You mentioned something—and I appreciate that view on the current system—you mentioned something a moment ago that conjured for me the comparison to systems in place in other parts of the world and how increasingly global the economy is, the Thomas Friedman book, “The World Is Flat,” which is probably 20 years old at this point, but how globalized the economy is. You served as the president of INSOL for a while. Do you have thoughts on how to make cross-border restructuring more successful to the extent that it needs to be? Can you think of specific instances recently where it's actually been proven to work well? I have in mind a certain Chinese real estate company that is making news, and very curious to see how that situation pans out.
James H.M. Sprayregen:
Yeah, I mean, I'd say a couple things. Obviously I was—when I said our Chapter 11 system may be the least worst—I was going to quote a guy I quote a lot, Winston Churchill, where he said about democracy, “It's the worst form of government…except for all the others.” And maybe you could say that about our debtor-in-possession system. But in the world of “if imitation is the sincerest form of flattery,” around the world you have had a number of countries adopt, not in whole, but large parts of our Chapter 11 system and imitate it. And seeing that, there's a lot of good that does come out of it. Now, having said that, I don't think most people in the world realize that the country with, at least the words on the page, with a system most similar to Chapter 11 happens to be China. And they put in their new code about 10 years ago.
James H.M. Sprayregen:
But it's also a great illustration of, “the words on the page matter,” but bankruptcy and one of, to me, one of the fascinating and enjoyable things out it and how you're always learning, is it really a conglomeration of not just legal factors, but sociopolitical, economic, cultural, as to how you treat failure or distress at least, or stress. And no matter what words you put on the page, every country has different views about that. And even if you have the exact same words on the page, it's going to be implemented and executed in a different way. So I actually kind of enjoy the semi chaos of the international restructuring world and think the world would be a much more boring place if we had some global insolvency system, which would be impossible to enforce anyway. And even if you did, it would just be different in every country because every country's different. So, I would not overly stress on that.
James H.M. Sprayregen:
What I would stress is, trying to make cross border restructuring as efficient as possible with court to court communications and professionals who are experienced across borders and those types of things, which I think can potentially maximize value for an international enterprise. And there, I think, is where a lot of good can be done.
Justin Bernbrock:
It would be interesting to see what plays out, particularly with this rather large Chinese company in the near future. Jamie, I really appreciate the time here today. I know we're getting short on time, and I do want to ask one final question, which is, we're going to try to develop this as a tradition on the podcast, but: If you were not a Kirkland restructuring partner and assuming no limitations, what would you do? What would you be if you weren't doing this?
James H.M. Sprayregen:
Well, when I was a senior in college and I had had two summers in a row with one of my best buddies—still a buddy today—a painting business. And by the end of each summer that we did it, our painting business was going great guns, painting houses. And I still wonder whether if I had just kept at that I might have been better than being a bankruptcy lawyer. So I don't know. That might have been a business I should have kept at.
Justin Bernbrock:
I suspect there are equity partners, shareholders that, or share partners, rather, at Kirkland & Ellis, who might disagree that that would've been better all around, but that's fascinating. And-
James H.M. Sprayregen:
Well, by the way, apropos to that, I would be remiss if we spent a lot of time talking about me and what I've been able to do at Kirkland—I couldn't have done a whit of, without the incredible support of Kirkland writ large, and all of the partners and associates in the restructuring group, and really all over the firm, who have just been incredible in collectively building things. And we now have just a team of superstar senior partners and at every level under that. And so you're talking to me about a lot of what I've done, but I'd like to take the “I” out of it. It's really been a collective experience with incredible work and performance and results by a large number of Kirkland lawyers.
Justin Bernbrock:
Well, having been among that number, I totally agree. It's a remarkable firm and a remarkable practice sort of up and down the chain. Well, Jamie, again, thank you very much for this. And I'm sure I could have gone on for another several hours, but time is money as-
James H.M. Sprayregen:
Hopefully we kept a few people awake for this.
Justin Bernbrock:
Yeah, indeed. All right, Jamie, thanks so much. Really appreciate it.
James H.M. Sprayregen:
Thank you.
Catherine Jun:
In current restructuring news, asbestos claimants filed two lawsuits in DBMP's Chapter 11 case this week. They included a derivative lawsuit against Saint-Gobain, its affiliates and directors and officers, which alleged violation of fiduciary duties to creditors when the company spun off a new corporate entity that took all of the asbestos claims and then filed the company for Chapter 11. The claimants also filed a suit alleging that this transaction constituted a fraudulent transfer and needed to be unwound. The two suits are the latest among similar challenges in mass tort bankruptcies to what has been called the “Texas-Two-Step” strategy. This Texas law allows the company to divide into two entities and isolate tort claims into one of those entities. Other companies that have similarly filed Chapter 11 using this strategy include Aldrich Pump, Bestwall and LTL Management, which is an affiliate of pharmaceutical Johnson and Johnson. DBMP filed for Chapter 11 in North Carolina in 2020, soon after its parent CertainTeed Corp. used the Texas law to split its assets and liabilities into CertainTeed LLC and DBMP.
Catherine Jun:
That's it for current news and notable stories. This is Restructure This! by Sheppard Mullin. See you next time.
Contact Information:
James H.M. Sprayregen’s website: https://www.kirkland.com/lawyers/s/sprayregen-james-hm-pc
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