Moderator: Welcome to today's Law Week Viewpoint discussion with Philip Anker and Duane Morse. Phil and Duane, thank you for joining us. Aren't officers and directors supposed to operate a business for the benefit of its shareholders? Why do they owe any duty to creditors?

Philip Anker and Duane Morse: Under U.S. law, creditors are entitled to be paid in full before shareholders can receive anything. As long as a business is able to pay all of its debts in full, the risks and rewards of management decisions belong exclusively to the shareholders, and the officers and directors must operate the business for the shareholders’ benefit. If the business becomes unable to pay its debts in full, however, management decisions affect how much the creditors recover on their claims against the business. In that situation, the officers and directors have a duty to operate the business in a way that maximizes its ability to pay creditors.

Take yesterday's enormous bankruptcy filing by Conseco as an example. At one point, its stock was trading at around $58 per share. It is now trading at 5 cents per share. The market doesn't appear to believe there is anything for the shareholders. If that's right, the company's officers and directors need to focus their efforts on preserving value for the creditors.

Moderator: Assuming there is a conflict between the interests of shareholders and creditors, or between different categories of shareholders or creditors, how do the officers and directors decide what to do?

Philip Anker and Duane Morse: It’s not an easy decision. Stated generally, their obligation is to act in a way that is likely to maximize the value of the business without exposing any group to undue risk of losing value compared to the status quo. Applying this general principle requires the officers and directors to put aside their personal interests and the interests of the shareholders they represent and to exercise their good faith business judgment about the risks and rewards of each alternative available to the business. It means being realistic about which categories of claims or interests are in the money and which are not, and about which strategies are feasible and which are simply pie-in-the-sky. In short, it means doing the right thing.

In some situations -- Conseco may be an example -- it's pretty clear who is in the money and who is not. Other cases present closer questions.

Chicago, Ill.: I have been asked to join the board of a troubled technology venture. I am concerned that no matter what I do, there will be substantial personal liability for me. And would it be wrong to accept the position knowling that (likely) I will be pushing for liquidation?

Philip Anker and Duane Morse: Once you join a board, you have to do what you believe is in the best interests of the company and the relevant constituencies. You should inform yourself as much as possible about the company's financial and business circumstances before joining. But, no, there is nothing "wrong" with joining a board if you believe the right thing for the company and its creditors may be to liquidate.

Lawsuits against directors and officers are becoming more common. And if the company is liquidated, and shareholders get nothing, they may well be disgruntled. Many companies maintain directors and officers liability insurance. You may want to confirm the company has such insurance and check on dollar limits, deductibles, and exclusions. And you want to make sure the premiums have been paid and when the policy will expire.

Charlottesville, Va.: I understand that Chapter 11 is usually used for large companies; is reorganization a reasonable prospect for smaller firms with liquidity problems who need "breathing room" from creditors? What particular characteristics in the capital structure would make a Chapter 11 filing appealing to a smaller company, and what factors would mitigate against a Chapter 11 case? Would the line of business make a difference?

Philip Anker and Duane Morse: In a Chapter 11, unlike a Chapter 7 case, management can stay in place. There is no reason a small business cannot reorganize in Chapter 11. Indeed, the Bankruptcy Code has special rules that can facilitate small bankruptcy reorganizations.

Does the company generate operating profits? Is it cash flow positive? Bankruptcy doesn't print money. If the company has too much debt on its books, or has some losing operations, bankruptcy can help. But there needs to be a core business that, at least over time, can be cash-flow positive.

Alexandria, Va.: Chapter 7 debtor files and then because all property in extremely hot real estate market values go sky-high trustee and special counsel (creditor counsel) start filing suits that debtor has to defend. This is done to run up hundreds of thousands of dollars in legal fees. Almost four years and debtor wins the cases. But this keeps debtor in a debt prison. All post-petition income paid mortgages, taxes, insurance and other bills so creditors could be paid in full. Trustee and special counsel have made false statements and presented false documents to court. What should I do?

Philip Anker and Duane Morse: Bankruptcy judges care a lot if any party, including a trustee, has made false statements. So, if you can prove what you say, you may have recourse. I suggest you consult an experienced bankruptcy lawyer to discuss the situation.

Bunkerhill, W.Va.: I am considering filing for personal bankruptcy Chapter 7, but I recently started a business (sports agent). I have no clients, nor any projected income right now. Can I file for personal bankruptcy with a small business existing with no genereated income or certainty of income in the future? Final question: Is it correct that I must show that my intake is not enough for the outgoing monthly bills?

Philip Anker and Duane Morse: You can file a personal Chapter 7. You need to list your business as an asset in the schedules you will be required to file with the bankruptcy court. You should consult with a bankruptcy attorney whether you can "exempt" the business -- under applicable law, an individual debtor can claim certain assets as exempt and, if so, they are not available for creditors.

No, you need not have a monthly operating loss to file for Chapter 7. But if you are generating a lot of cash, a trustee may question whether the business has real value and challenge your exemption of it.

Moderator: How do the interests of creditors and shareholders conflict in a restructuring situation?

Philip Anker and Duane Morse: A restructuring situation ordinarily arises because a business can’t pay its debts in full when due. In this situation, creditors have an interest in receiving as much cash as possible as soon as possible. And because creditors can’t recover more than the amount they’re owed even if the business works its way out of its financial problems, they have little incentive to forgo immediate cash distributions in order to provide working capital for a turnaround plan. By contrast, shareholders receive all of the upside once debts are paid in full, so they have an interest in maximizing the long-term value of the business even if this means creditors have to wait years to be paid. In effect, shareholders would prefer to bet the creditors’ money on a turnaround strategy that will benefit the shareholders if it succeeds and will cost the shareholders nothing if it fails.

Dublin, Ohio: I am having my life savings stolen by a predatory lender. I didn't even know about this, but it's big business. I had perfect credit and an unscrupulous mortgage lender sent me to a sub-primed loan serviced by ... If you look on the Web site ripoffreports.com, you will find 300 people's horror stories. Once they get your loan, they create problems so that your credit is ruined, you can't refinance and get away from them, and then they take you home for a large profit. All these people can't be wrong, and they are not deadbeats. I used to be a productive middle class citizen until I was thrown to these wolves. I am asking for help from everyone in the government and so far it's not working.

Philip Anker and Duane Morse: You may want to consult with a lawyer. If your case has merits, a lawyer may be willing to handle it on a contingent fee basis.

Moderator: What options are available to a business experiencing financial trouble?

Philip Anker and Duane Morse: Generally speaking, a business in financial trouble has three options: (1) identify and fix the problems that are the source of the financial trouble; (2) sell the business as a going concern; or (3) shut down the business and liquidate its assets. Option one may involve a restructuring of debt and equity as part of the solution to the financial problems. Options two and three are followed by distribution of the proceeds of sale or liquidation to creditors and shareholders in order of priority.

Moderator: Shouldn't a troubled business try to work its way out of financial difficulty before considering extraordinary steps such as a debt restructuring, sale or bankruptcy?

Philip Anker and Duane Morse: Not always. Simply continuing a financially troubled business without addressing the underlying problems is almost always a mistake. A successful turnaround improves the value of the business, but turnaround efforts cost money, frequently fail and can leave creditors worse off than in an early sale or liquidation. Officers and directors have to be realistic about what can be accomplished given the size and nature of the problems and the amount of time and funding available to deal with them. If a turnaround strategy has little chance of succeeding, officers and directors need to recognize that fact and pursue the alternative strategy that will realize the most value for the stakeholders. This is what we mean by doing the right thing in an insolvency situation.

Moreover, time is often not on the side of a troubled business. We often see cases where management does not consider a restructuring or workout or bankruptcy until the business has burned through a lot of cash. Waiting too long reduces a company's flexibility and may eliminate options that would otherwise be available. In addition, the results often would have been much better had management addressed the problem earlier.

Rixeyville, Va.: Concerning United Airlines: If the employees own 55 percent of the company, how can the other 45 percent declare bankruptcy?

Philip Anker and Duane Morse: Under applicable law, the board of directors of the company must authorize the bankruptcy filing. The board need not obtain a vote of the shareholders.

Moreover, in deciding whether to file, assuming the company is insolvent, the board has to act in the best interests of the creditors. Depending on the circumstances, filing for bankruptcy may be the best way to maximize value for the benefit of all stakeholders. Shareholders are below creditors in the basic hierarchy of payment rights. If there is not enough value to pay creditors in full, the board's primary duty is to the creditors, not to the shareholders.

Moderator: How do secured creditors and preferred shareholders fit into the picture? Do they present additional conflict issues?

Philip Anker and Duane Morse: Secured creditors and preferred shareholders complicate the picture. Secured creditors have the right to be paid first from the proceeds of their collateral. In many restructuring situations, substantially all of the property of the business is subject to liens of secured creditors. If the value of the collateral is less than the amount owed to the secured creditors, there’s nothing left over for the unsecured creditors. In such a situation, the unsecured creditors have an interest in delaying the secured creditors’ recovery so that the collateral can be used in a turnaround attempt that would benefit the unsecured creditors if successful. Preferred shareholders are like creditors in the sense that have the right to be paid ahead of common shareholders and can’t recover more than the liquidation value of their shares. As a result, preferred shareholders have an incentive to use assets allocated to higher-priority creditors in order to fund a restructuring plan that could create value for themselves. It’s a hierarchy of interests, with each class attempting to create or preserve value for itself without risking or giving away value to the classes below it in the hierarchy.

Moderator: Are there at times differences between the interests of different types of unsecured creditors?

Philip Anker and Duane Morse: Yes. Trade creditors (e.g., suppliers) have an interest in seeing the business survive so that they have an ongoing customer, even if they are not going to collect anything on the amounts owed to them for past goods and services. Bondholders have no such interest. As a result, they sometimes are more willing to see the company liquidated.

Moderator: What role do creditors play in the restructuring process?

Philip Anker and Duane Morse: Bank lenders and informal committees of bondholders frequently are key participants in the restructuring process. Banks tend to be more proactive because they receive periodic financial reports and interact with borrowers on a daily basis. By contrast, discussions with bondholders often are initiated by the business. Regardless of who initiates it, however, the restructuring process amounts to an ongoing negotiation between the business and its major creditor constituencies. The goal is to achieve a consensual restructuring that allows the business to survive and prosper without going through a bankruptcy. In order to do that, it’s important to involve representatives of all the major groups.

Moderator: Suppose an officer in a company believes the business is in financial trouble and needs outside help, but the CEO refuses to acknolwedge the problem. What should the officer do?

Philip Anker and Duane Morse: Unfortunately, this situation is not uncommon. The first person to realize that a business has financial problems it can’t handle on its own generally is the chief financial officer or the general counsel. CEOs sometimes resist acknowledging either the problem or the need for outside help. When that happens, the actions of the CFO or GC need to be driven by the realities of the situation, including the urgency of the problem and the personalities involved. If the business truly cannot solve its problems without expert advice, that fact eventually will become apparent to everyone. And, as noted earlier, moving quickly is very important. It's a lot easier to restructure a company when it has a fair amount of cash on hand than after it has burnt through all that cash or taken on more debt. Delay narrows the range of options available to the business when it does hire restructuring advisors. And during any period of delay, the company may be required to sign waivers of rights in order to get bank or other lenders to forbear from exercising their rights; these waivers may make it more difficult for the company to restructure once the company hires professional advisors.

Moderator: Please explain the roles of lawyers, financial advisors and accountants in a restructuring situation.

Philip Anker and Duane Morse: Lawyers analyze the legal positions of the business and its creditors to identify strengths, weaknesses and opportunities for applying negotiating leverage. They also participate in restructuring negotiations and document any agreements that are reached. And since restructuring negotiations typically are conducted against the background of possible bankruptcy, the lawyers typically engage in contingency planning and preparation of documents to initiate a bankruptcy case if that becomes necessary.

Financial advisors help the businesss to determine the level of debt it can support and to evaluate the financial aspects of available alternatives. They also participate in restructuring negotiations and in bankruptcy contingency planning, including helping to formulate restructuring plans, preparing financial models and presentations for creditors, and negotiating with potential bankruptcy lenders. And they, or investment bankers, often play a key role in marketing the business or parts of it, if the company seeks to sell some or all of its operations.

Accountants assist the business in collecting and presenting financial information for purposes of responding to creditor requests, supporting the lawyers and financial advisor, and, if necessary, complying with bankruptcy reporting requirements.

Moderator: Suppose the board of directors of a company is dominated by shareholders. If the interests of the shareholders conflict with those of the creditors, how can the board act?

Philip Anker and Duane Morse: The directors who are shareholders or their representatives need to follow the same approach as independent directors: look objectively at the options available to the business, evaluate the advantages and disadvantages of each, and choose the one that, in their business judgment, offers the best combination of risk and reward for the parties in interest. In practice, this often means determining which constituencies have a realistic prospect of receiving distributions and acting in the best interests of those whose recovery is at risk.

Where boards have, at least arguably, not been realistic and kept companies going that were in deep financial distress, litigation has often ensued against the directors.

Philip Anker and Duane Morse: We very much enjoyed discussing these timely issues today. We'd be happy to continue the discussion. Feel free to contact either or both of us.

Duane Morse. duane.morse@wilmer.com -- 703-251-9740.

Phil Anker. philip.anker@wilmer.com -- 202-663-6613.

Moderator: Our thanks to Philip Anker, Duane Morse, Wilmer, Cutler & Pickering and all who participated.