What's Wrong with This Picture?

Polaroid retirees had feared the results of a sale to OEP, and that fear was justified. After June 28, the company's cash balance plan was terminated and handed over to the federal Pension Benefit Guarantee Corp., meaning many retirees had their pension payments slashed. Employees on long-term disability received letters informing them that they would not be hired by the new company and that their benefits were being terminated. Indeed, the Massachusetts attorney general's office had difficulty convincing OEP, as owner of the new Polaroid, to sponsor the retirees' supplemental Medicare plan, even though that sponsorship costs nothing except time spent keeping the books.

An appeal has been filed in the U.S. District Court in Delaware by shareholder representative Morgan. (Shareholders never received official status in court, because the judge ruled Polaroid's assets were insufficient to pay them anything.) Several retirees and shareholders have requested that the judge appoint an independent examiner to investigate their claims that Polaroid engineered the bankruptcy filing in bad faith.

Retirees retain the right to sue the company's directors' and officers' insurance policy to cover claims. But Derek Jarrett, a former Polaroid corporate vice president of international operations and now a member of the 2,600-member Polaroid Retirees Association, says retirees are resigned to ending up with nothing, even though the fight continues. "The attitude of the retirees is simple," he says. "We've lost our ESOP shares, health benefits, life insurance, but we are going to get these people that robbed us of the respect for the company that we felt part of."

While most issues still in the appeals process relate to pro-debtor rulings in the bankruptcy court, a number of questions about the bankruptcy process itself will go unanswered. They include: How can a debtor's sealed financial documents and valuations be verified when contested? What checks can prevent the debtor — sometimes more interested in controlling the process than in winning top dollar — from abusing its authority to decide who gets access to proprietary information? Should judges place so much faith in asset sales as a way to maximize estate value? In short, how can the process, while granting corporate debtors protection from creditors, still hold those debtors to a high degree of public scrutiny and accountability?

As a private company now, Polaroid is no longer required to file financial reports with the government. But Jarrett and others from the once-great camera concern see a liquidation ahead. "OEP knows that it's worth so much more as a break-apart for them," he says. "People on the inside that I've talked to say the situation is very bad."

Former CFO O'Neill, while more optimistic, is hedging his bets. "They've got great assets and opportunities," he says. "They will either run it well and succeed, or run it poorly and fail."

Sadly, LoPucki's research indicates the odds are on failure. Of the companies that emerge reorganized in Delaware bankruptcy court, he reports, 54 percent fail within five years, either by refiling, distress-merging, or liquidating, compared with an 18 percent failure rate for all other district bankruptcy courts combined.

Kris Frieswick is a staff writer at CFO.

The Next Corporate-Reform Drive?

If bankruptcy reform catches on this year in Washington, D.C., Polaroid Corp. could well be the rallying cry.

Although Sen. Charles Grassley's bankruptcy bill died in Congress last fall, the Iowa Republican is expected to pursue legislation again this year. The bill focused mainly on consumer bankruptcies, but sought also to reduce the ability of companies to stay in the driver's seat, limiting the debtor's exclusive reorganization period to 18 months.

At least three government agencies are reported to be conducting investigations into the Polaroid case, which certainly contains fodder for legislative debate.

One congressman sure to be active in reforms is Massachusetts Democrat William Delahunt. At one point, the congressional delegation for Polaroid's home state wrote to buyer One Equity Partners, requesting that it retain the Polaroid pension plan. The letter went unanswered. Delahunt's own legislation last session, which also failed, would have required companies to file where they are headquartered. —K.F.

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