Document Type


Publication Date

Spring 2010


For many entrepreneurs, bankruptcy is the unfortunate end of what began as a business dream. The birth of a business is an exciting time for the entrepreneur, but its death is often a painful process—both for the company's owners and its creditors. Those businesses that choose not to reorganize close their doors forever. However, reorganization can often salvage a business enterprise that is a good one but is impaired by debt, crisis, or simple bad luck.

The goals of the reorganization process are clear—the idea is to produce a viable business enterprise but one not necessarily owned by the original owners. In the process of preserving the business as a going concern, the creditors are typically paid off—at least in part—frequently converting debts owed to the creditors into an ownership stake in the company or its successor. In principle, the idea behind the restructuring is to treat similarly situated unsecured creditors equally. Treating all similarly situation creditors equally prevents one creditor acting as a holdout to get a better deal or rushing to the courthouse to get liens on any unsecured assets. The bankruptcy court acts as the strong arm to force creditors to act in an organized fashion toward a goal which is supposedly in their best interest because it maximizes the value of the debtor’s estate.

The Eddie Bauer case represents a case of a failed reorganization, where a company, Spiegel Catalog, filed for protection under chapter 11 of the Bankruptcy Code and underwent reorganization. Spiegel sold off some businesses for cash, and transferred the remaining businesses, which included Eddie Bauer, to a holding company. The new holding company was saddled with an unsustainable level of debt given a change in economic circumstances, and ultimately it failed. Eddie Bauer had its roots in the world of mountaineering, but in Spiegel's reorganization, the management failed to take account the most fundamental rule of the mountain: the most dangerous part of the climb is the descent.

Eddie Bauer’s bankruptcy is an example of where the bankruptcy court departed from the principle of treating the creditors equally in order to salvage the going concern. While the business was ultimately preserved in a Bankruptcy Code Section 363 sale, many of the creditors were treated unequally, through “roll up” debtor in possession financing and administrative priority given to "critical vendor" creditors. The other creditors, some of them secured creditors, were left behind with few assets to fund payment of their claims.