Whether a victim of a Y2K problem, or a perpetrator, the common denominator will be LIABILITY. Each Y2K "incident" will cause some economic damage and, inevitably, someone will owe money to someone else -- in some cases, lots of money. No kidding.
So why is bankruptcy a solution to the Y2K problem? Bankruptcy is all about managing LIABILITY, regardless of the source or nature of the claims. As a legal system, it has proven flexible enough to accommodate other "mass" claims. It offers a centralized means for marshalling limited assets and allocating them among competing claims, while preserving the value of an ongoing business enterprise. The bankruptcy process is well-equipped to sort out the mess between "Y2K creditors," i.e., the victims, and "Y2K debtors," i.e., the perpetrators. In this respect, bankruptcy is likely to be a solution for dealing with the tidal wave of LIABILITY resulting from the Y2K problem as it rolls through our highly computerized society.
To illustrate the application of bankruptcy concepts to the Y2K problem, consider the following example: A leading manufacturer of "point of sale" checkout systems has installed its registers in supermarkets and department stores nationwide. The older versions of the system cannot read the "00" on customers' credit cards with expiration dates beginning in the year 2000. As a result, all such credit cards are being automatically rejected. Angry and frustrated customers immediately take their business elsewhere. The supermarkets and department stores experience swift and dramatic losses. The manufacturer is quickly subject to hundreds of lawsuits in state and federal courts all around the country alleging untold millions of dollars of economic damages. The alleged damages far exceed the manufacturer's net worth. Notwithstanding the Y2K problems with its older systems, the manufacturer still has a viable business because it has corrected the Y2K problem in its newer systems. Rather than defend each lawsuit, the manufacturer files a bankruptcy case under chapter 11 to attempt to save its remaining business. How can bankruptcy solve this Y2K problem?
Stop Y2K Lawsuits. The filing of the bankruptcy case acts as an automatic stay against the commencement or continuation of any litigation or any other act to enforce a pre-bankruptcy claim. As such, all of the hundreds of Y2K lawsuits are immediately stayed. The manufacturer need not expend the substantial legal fees or management resources required to defend each Y2K lawsuit around the country. All of the Y2K claims are considered unsecured claims which must now be asserted in the bankruptcy court.
Continue Ongoing Business. Instead of simply liquidating to pay its creditors, the manufacturer can continue to operate its remaining business under the protection of the bankruptcy court. It can attempt to sell its newer, Y2K-compliant systems in the marketplace. This has the obvious benefits of not only preserving the going concern value of its ongoing business for the benefit of the Y2K creditors (who may ultimately receive a greater distribution under a reorganization than a liquidation), but also of preserving jobs and functioning as a member of the economic community which continues to pay taxes, consume goods and services, etc.
Marshall Assets to Pay Y2K Claims. Rather than dealing with each Y2K claim on an individual basis, bankruptcy allows the Y2K liability to be dealt with on a global basis. This will involve a rational marshalling of assets available to pay Y2K claims. Depending on the circumstances, this may require liquidating or refinancing certain individual assets to free up cash. A decision would be made about continuing the business on a stand-alone basis or selling it as a going concern. Other possible assets available to pay Y2K claims may include claims against the manufacturer's software vendor and any rights to collect under the manufacturer's insurance policies, to the extent coverage may exist.
Settlements of Y2K Claims. When there simply is not enough value in the available assets to satisfy claims in full, there will be a settlement of the Y2K claims -- either voluntarily or involuntarily. Ideally, after informed negotiations, the Y2K creditors will agree to a reasonable settlement of their claims based on the value of the manufacturer's assets available to them as a class (after deductions for any secured or priority claims). If a consensual settlement cannot be reached, bankruptcy provides for a non-consensual settlement, or "cramdown," by which a plan of reorganization can be confirmed over the objection of a dissenting class of creditors. (There are strict statutory requirements for invoking a "cramdown" which will result in, among other things, the interests of the manufacturer's current stockholders being wiped out.) Either way, the manufacturer's Y2K liability will ultimately be fixed in an amount certain.
Stop Successor Liability. Fundamental to any bankruptcy reorganization involving an ongoing business is insulating its future operations from successor liability for pre-bankruptcy claims. The simple economic rationale is that creditors benefit more from preserving the going concern value of a business than losing it in a liquidation. Whether the manufacturer reorganizes its business on a stand-alone basis or sells it as a going concern, its value is maximized if future earnings are unencumbered by unstructured or unlimited successor liability for the Y2K claims. Bankruptcy provides a legal mechanism for shielding future operations from such successor liability. Between the usual bankruptcy discharge and a possible supplemental "channeling injunction," the assets available to satisfy the Y2K claims would be clearly defined without subjecting future operations or earnings to unstructured successor liability.
Fairness for Y2K Creditors. As a solution, is bankruptcy "fair" for the Y2K creditors? It depends (of course) on how "fairness" is defined. If "fairness" requires having legitimate Y2K claims paid in full on a relatively prompt basis, then bankruptcy will likely not offer a "fair" solution. Regrettably, such a "fair" solution is unlikely in the real world because the magnitude of the Y2K problem is simply far greater than the ability of those responsible to make recompense and the legal system simply does not operate that quickly. This fact of life is among the reasons why some respected economists predict that the Y2K problem may cause a global recession, or worse. If, however, "fairness" is defined as making the best of a bad situation, then bankruptcy offers a "fair" solution. It provides for equality of treatment to all similarly situated Y2K creditors and maximizes distribution of available assets using liquidation value as a benchmark (i.e., the Y2K creditors get more through a reorganization than a liquidation).
By the year 2001, the extent of the Y2K problem will probably be known. Regardless of its ultimate magnitude, the Y2K problem is likely to precipitate a wave of business failures for which bankruptcy is uniquely designed to accommodate. Welcome to the 21st century.