Four (or Five) Easy Lessons From Enron

At the time that Enron filed for bankruptcy, it had substantial assets, thousands of creditors, an opaque capital structure, and more than a whiff of fraud. By the traditional account, Enron is a prototypical example of a firm with problems that a law of corporate reorganizations is designed to solve. Like the 19th century receiverships of the great railroads, the reorganization of Enron could have allowed creditors and others to negotiate with each other and find a way to preserve the value of the firm as a going concern at the same time misdeeds are uncovered and losses are allocated among the different players. Negotiations aimed at preserving Enron's value as a going concern never took place, however. As is increasingly the case in large Chapter 11s, Enron's assets were sold quickly, most within a few weeks or months of the filing. The decision as to how to deploy Enron's assets lay not in the court but in the new owners. After selling the assets, the bankruptcy court quickly turned to what courts do best - sorting out complex and perhaps conflicting legal entitlements. This pattern of a prompt sale followed by litigation over the distribution of the proceeds reflects a dramatic change in large firm bankruptcy practice. It suggests that we should no longer think of Chapter 11 as a collective forum in which the interested parties gather to bargain over the fate of the firm.