IS THIS THE REAL PURPOSE OF THE BANKRUPTCY LAWS?

Insolvency is not a necessary condition for bankruptcy. Moreover a firm may petition the court for protection under Chapter 11 even though it is not insolvent. If the business can demonstrate real financial trouble, the court will generally not dismiss the petition. In recent years, Chapter 11 has been looked upon as a safe harbor for gaining time to restructure the business and to head off more serious financial problems. For example, when Johns Manville filed a petition under Chapter 11, it was a profitable, financially sound company. Yet it faced numerous lawsuits for damages resulting from asbestos products it sold. Reorganization helped Johns Manville deal with its financial problems. [emphasis added]*

Over the years, the filing of a voluntary Chapter 11 bankruptcy petition has become a tool that companies sometimes use to settle significant financial problems. Just as Johns Manville reorganized to settle the claims of asbestos victims, A. H. Robins followed a similar path to resolve thousands of lawsuits stemming from injuries resulting from the Dalkon Shield intrauterine device. The Wilson Foods Corporation managed to reduce union wages by filing under Chapter 11, as did Continental Airlines Corporation.

Not surprisingly, seeking protection under Chapter 11 to force a bargained resolution of a financial difficulty is a controversial legal maneuver. Creditors and claimants often argue that this procedure is used to avoid responsibility. Companies counter that bankruptcy can become the only realistic means of achieving any settlement.

Should companies be allowed to use the provisions of Chapter 11 in this manner?