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Chapter Two— W. T. Grant: The Social Construction of Bankruptcy
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Chapter XI and Beyond:
The Struggle Continues

Although there is general agreement that poor managerial decisions led to W. T. Grant's financial difficulties, evidence suggests that Grant's bankers were aware of those difficulties as they developed. Rodman alleged that Grant's banks continually took "action to assist in the concealment and suppression of the true facts regarding the financial condition and business of Grant" (Rodman, in Morgan v. Grant, 85). Furthermore, Mayer testified that none of Grant's bankers "express[ed] any concern about the quality of Grant's receivables, . . . the quality of management information or information systems at the Grant company, . . . internal controls at the Grant company, [or] . . . any phase of its operating other than the fact that it wasn't earning as much profit as it had in the past" (Mayer, in Morgan v. Grant, pt. 8, 27).

Because Grant's banks were involved in the firm's day-to-day decision-making processes, they must have been aware of the retailer's growing problems and poor managerial decisions. Several bank representatives sat on Grant's board of directors, including Peterkin, of Morgan Guaranty (Grant's lead bank), and Joseph W. Chinn, Jr., of Wilmington Trust Co. (Moody's Industrial Manual, 1974, 1331). In addition, both Peterkin and Chinn were members of Grant's audit committee, and Peterkin chaired that committee from 1969 until Grant's demise. The audit committee, which met at least once a year, received "accountants' audited statements" and would review "the balance sheet and the income statement on a line by line basis." Peterkin admitted that he periodically called Mayer to ask about the poor performance of several of Grant's stores. He further conceded to the court that "there were a lot of stores that were not meeting the 'target'" of sales and profitability (Peterkin, in Morgan v. Grant, 244–249, 336).

In addition to bank participation on Grant's audit committee, the bank advisory committee (composed of representatives from Morgan, Chase Manhattan, and Citibank) was kept abreast of developments with progress reports on the retailer. Peterkin testified that John Sundman (Grant's financial vice president) told him as early as 1972 that "there would come a point in time when Grant


would run out of money if it paid all of its bills" (Peterkin, in Morgan v. Grant, 60, 183). Schroeder also testified to having had periodic "routine" discussions with Peterkin concerning Grant: "We did have a line of credit. Mr. Peterkin in the ordinary course of his activities would be aware of that, and I in the ordinary course of my activities would review our lines with him" (Schroeder, in Morgan v. Grant, 6).

Peterkin's presence on Grant's board created a one-way information network. Throughout this case information concerning Grant flowed from Peterkin to the bank, but information did not flow from the bank to Grant. In fact Peterkin's one-way information flow continued beyond Morgan Guaranty to the rest of the banking community. This wider network came to light in a Chemical Bank document indicating that Peterkin had had conversations about Grant's problems "with at least one banker from Chemical" (Schroeder, in Morgan v. Grant, 107). The evidence indicates that even though the banks knew of the retailer's developing problems and often considered the company insolvent, they did not interfere with the firm's day-to-day operations. Despite top-level managerial changes, the store expansions, credit system, and merchandising practices continued.

In 1974 Grant's banks finally admitted that the firm had substantial problems. In a memorandum prepared in December 1974, Peterkin expressed his opinion "that Grant was at that time on the verge of bankruptcy." Peterkin clearly "knew Grant was insolvent in December of 1974," and yet he continued to make further obligations and loans to the retailer (Rodman, in Morgan v. Grant, 96). Schroeder testified that Grant became a "problem credit" as early as the spring of 1974. He suggested that Peterkin was also aware of Grant's problems because of the bankers' "routine" reviews of credit lines to the retailer. Schroeder told the court that the banks placed Grant on a "special review list" of problem credits in March 1974. This special review indicated to Morgan that "in early July, 1974 . . . it didn't seem prudent . . . to extend additional credit to Grant." At this time, the Irving Trust Company questioned Grant's ability "to survive the crisis." Later that summer several small banks, including the Toms River Bank, concluded that Grant was insolvent, despite denials from the large banks. When asked for his definition of insolvent, Schroeder told


the court that "from a banker's point of view it . . . means . . . inability to pay . . . [the firm's] debts when due." But he denied that Grant was insolvent in 1974, even though the retailer was failing to pay its bank notes "as they matured" and had slowed down its payments to suppliers. According to Schroeder's testimony, he did not conclude that Grant was insolvent until September 1975 (Schroeder, in Morgan v. Grant , 6, 48, 66, 112, 121, 365). Peterkin did not admit Grant's insolvency until December 1974 (Peterkin, in Morgan v. Grant , 365; Rodman, in ibid. , 67). In fact, a Morgan Stanley document indicates that the bank had discussed taking large write-offs of Grant's credit operations back in "late August or early September" of 1974 (Schroeder, in Morgan v. Grant , 123–124).

Despite misgivings about the prudence of further bank involvement, the financial community continued to extend further credit to the company. Although the banks insisted they took this unusual step because they were convinced they could "turn this thing around," Schroeder testified that they acted to "save their own hides." By late summer 1974 "Morgan and the other banks were looking at the Grant credit from a point of view as to how to recoup the most amount of money as possible on the Grant loans." Schroeder further admitted that the reason the banks refrained from liquidating Grant at that point was "because the banks felt they could get more money by keeping it alive" (Schroeder, in Morgan v. Grant , 367, 125). This is a clear statement of the divergence of interests between the banks and the retailer.

A liquidation analysis performed by Citibank in the summer of 1974 indicated that "the banks would get 68 cents on the dollar." The same analysis demonstrated that "in liquidation it was estimated that the Grant liabilities exceeded its assets." In other words, the banks knew Grant would not be able to repay the full amount of their loans if they chose to liquidate the firm at that time. Schroeder told the court that the banks never intended a long-term solution: "We would not be thinking in anything more than a temporary rescue operation." Although according to Schroeder the banks theorized that a short-term rescue would "make cash flows begin," the terms of the loans were too short to allow the deeply troubled firm to repay successfully. Schroeder acknowledged that the banks understood "that it would at least be a number of years


before repayment was made" (Schroeder, in Morgan v. Grant , 90, 132, 22, 25). If the banks were convinced (as they continually testified) that they could transform the retailer from a desperately ailing firm to a profitable one, why was Grant finally thrown into bankruptcy?

Grant's board was apparently aware of the banks' power to reduce Grant to insolvency and of the banks' sudden decision that no more money would be forthcoming. At a meeting on 23 September 1975 Grant's board weighed the prospect of reorganizing under a Chapter XI bankruptcy proceeding. Chapter XI would allow the company to "continue to operate and endeavor to cure its problems under the protection of the court" from its creditors; whereas in the alternative, "Chapter X, the court appointed a trustee, and for all practical purposes, the company management ceased to direct its affairs" (Kendrick, in Morgan v. Grant , 758).

Banks' collective constraining influence in managerial decisions (including the decision to reorganize or to liquidate) became evident once again. While Grant's board was considering Chapter XI, the banks were also conducting meetings to discuss Grant's bankruptcy. Schroeder testified that Morgan Guaranty disseminated a great deal of information about Grant to the other banks in the consortium. He told the court that the information was "rather complete . . . in order to do our job as the agent bank" and that it was communicated both "at meetings of the banks" and "in written form" (Schroeder, in Morgan v. Grant , 158–159). On 26 September 1975 Morgan Stanley bankers held one such meeting at Morgan headquarters, and after a period of discussion among themselves, they invited Kendrick to join them. Having already decided that a "Chapter XI was inevitable," they told Kendrick that they preferred Chapter XI to Chapter X because under the former Grant's management would continue to direct the firm as debtor-in-possession "and therefore would stand a better chance of securing shipments of merchandise." Under Chapter X, however, the firm would be run by a court-appointed trustee who "could at any time with the permission of the court liquidate the company" (Kendrick, in Morgan v. Grant , 769, 774, 789). Apparently, nervous vendors could be persuaded to ship goods to the retailer only by a guarantee that the banks would pay. Moreover, Schroeder testified that the banks equated Chapter X with liquidation (Schroeder, in


Morgan v. Grant , 187). Peterkin testified that the banks wanted no part of a bankruptcy liquidation (that is, Chapter X) at that time "because [they] wanted to maintain the control of the company" (Peterkin, in Morgan v. Grant , 77–78).

Resisting the banks' pressure for Chapter XI or bankruptcy, Grant's management wanted to recapitalize with more money from the banks. In the end management reluctantly gave in, however, and agreed that without recapitalization a Chapter XI proceeding was preferable to Chapter X: "A Chapter XI petition would be filed if the banks were willing to cooperate . . . [because] they would use their best efforts in keeping the company in Chapter XI when appearances were made before the Securities and Exchange Commission." At this point the banks agreed to cooperate "on the condition that Grant close approximately half its stores" (Kendrick, in Morgan v. Grant , 793, 795; see also Peterkin, in ibid. , 42–44).

The issue of store closings generated more conflict between Grant and its banks, underscoring their divergence of interests. Before September 1975 several bank representatives had told Anderson and Sundman that Grant had to close down more than five hundred stores to increase the retailer's cash flow. Kendrick complained that the banks were "relating it entirely to a cash flow situation." Apparently Grant's banks were primarily interested in augmenting the size of Grant's estate in bankruptcy rather than in reorganizing the firm into a viable retailer. A larger estate in bankruptcy would mean a larger proportion of recovery for the banks. If Grant actually reorganized under Chapter XI protection from its creditors, the banks would be unable to recover any of their money for a long time. According to Kendrick's testimony, Sundman presented the banks with figures indicating that Grant's cash flow "would and could be better than was being projected by the banks . . . [and that] on the basis of the way he saw the cash flow developing that it wouldn't require that many stores to be closed" (Kendrick, in Morgan v. Grant , 733, 734). He estimated that only three hundred to five hundred stores needed to be closed to effectively reorganize Grant into solvency. These events and testimony suggest that the banks were indeed attempting to increase the firm's immediate cash flow position, to the detriment of its future viability.


A Citibank memorandum noted the divergence of interests between Grant and the banks: as early as December 1974 the banks recognized that "it was in . . . [Grant's] best interest to file a petition in bankruptcy while at the same time it was recognized that it was not in the bank's best interest to do so." According to Schroeder, the banks acknowledged that "the company's problems with the trade would be solved to a large degree by the filing of a bankruptcy petition." The Citibank memo indicated, however, that "it was important [to the banks] to get into February [1975], since the banks' lien on receivables and Zeller's taken in September would not be perfected until early in that month." Schroeder conceded that "it was the banks' strategy to buy as much time as possible in order to avoid jeopardizing their collateral position." Moreover, a Morgan Guaranty liquidation analysis (found in several other banks' files as well) indicated the deliberateness of this strategy to buy time. To that end the banks secured an agreement from Grant that it would give the banks advance notice of the filing of a Chapter XI petition (Schroeder, in Morgan v. Grant , 221, 222, 254, 408). Grant's managers thus had to seek the banks' permission to go ahead with the very action even the banks acknowledged was in the retailer's best interest. Rodman's testimony indicated that the banks had delayed to position themselves more advantageously before pushing the retailer into bankruptcy.

In late September or early October 1975 Grant's management decided "to actively seek the support of the banks in the filing of the Chapter XI petition." Peterkin acknowledged that "if the banks did not support the filing of the Chapter XI petition . . . [the only alternative] was Chapter X" (Peterkin, in Morgan v. Grant , 87). The banks pressed for the substantial store closings as a condition for their cooperation in a Chapter XI reorganization (Kendrick, in Morgan v. Grant , 797; Peterkin, in ibid. , 42–44), thus increasing the firm's immediate cash flow position. But closing so many stores undermined Grant's future chances of effective reorganization. Although Sundman and Anderson maintained that Grant could reorganize with fewer store closings, the banks were adamant. Grant's management finally acquiesced to an action they clearly viewed as unnecessary and ill advised, and they verbally agreed to comply with the banks' demand.

Grant's managers eventually closed 714 of their 1,073 stores,


leaving 359 stores to operate Grant's business. They fired almost fifty thousand employees and attempted to revamp their merchandising policies by focusing on seasonal merchandise and soft goods (primarily clothing and domestic items) and phasing out the furniture and major appliances that allegedly helped provoke their financial difficulties. The losses incurred by closing down so many stores and holding huge sales of heavily discounted inventory items amounted to approximately $177.3 million for the 1975–76 fiscal year. This discounted inventory loss equaled the total loss for the 1974–75 fiscal year. Grant's managers also replaced their in-house credit system with the use of national bank credit cards, at the suggestion of the banks (Schroeder, in Morgan v. Grant , 139). These changes in Grant's policies indicated a substantial loss of managerial discretion to the banks, which now seemed to run the company altogether. By early 1976 a committee of creditors (consisting of six banks and five trade creditors) formed to consider the future of Grant. John Ingraham, vice president of First National City Bank, chaired the committee.

Meanwhile, Grant went about its radical reorganization to restore the creditors' confidence (or, more accurately, to stave off bankruptcy). The consultants advised the creditors that Grant's survival could not be determined with certainty for another six to eight years. That conclusion prompted the banks to flex their muscles and exert their ultimate control over the future of Grant. The trade creditors, who were completely secured, still seemed willing to do business with the retailer. But the banks were strongly in favor of liquidation, and they were said to be "hungrily eyeing the $320 million in cash accumulated from store closings and liquidations" (New York Times , 14 Oct. 1976, 61). Ironically, only the banking community wanted liquidation of the firm. Despite opposition from the trade creditors and Grant's management, the process of bank-dominated decision making (based on their collective control of desperately needed loan capital) led to a resolution of the struggle in favor of the banks. On 10 February 1976 the committee of creditors decided that Grant should be declared bankrupt. That move touched off "the biggest liquidation in retailing history" (Daily News Record , 11 Feb. 1976, 1).

In March 1976 Federal Judge John Galgay signed the order that called for Grant's liquidation within sixty days. By now Grant had


debts to the banks of $640 million and to trade creditors and debenture holders of more than $500 million. The committee of creditors' original vote was seven to four in favor of liquidation; by the time the committee presented its case to Judge Galgay, the decision was unanimous. The banks' collective power and their motivations were not lost on Judge Galgay, who pointedly asked the committee, "Was it more comfortable to pull the plug after Grant's had already built its cash up from $90 million to $320 million?" (New York Times , 13 Feb. 1976, 1).

Securities and Exchange Commission regional head Marvin Jacob pressed Anderson about whether or not he felt Grant could survive if he were allowed to use $150 million of Grant's $320 million in bank deposits. Anderson responded that he thought Grant's chances were "relatively good if we could just undo the results of the committee's decision" (New York Times , 13 Feb. 1976, 1). Here Anderson alluded to the fact that when the committee voted to "pull the plug," suppliers of merchandise refused to ship to Grant any longer, thereby exacerbating the firm's situation by depleting inventory. The action of the committee, led by the banks, illustrates the process of the social construction of corporate crisis. The decisions of the banking community to define Grant's cash flow problems as a crisis permanently altered Grant's business trajectory from slow but eventual recovery to liquidation. Moreover, only the financial institutions had the power, based on their collective control of critical loan capital, to enforce their definition over the opposing assessments of the situation by Grant's management.

At this point Grant's assets totaled $400–475 million, including $320 million cash, $43 million in inventory at cost, $75 million in accounts receivable, and $25 million in stock of Zeller's, Ltd. The creditors scrambled to secure recovery of a portion of these assets. Business Week reported:

First crack at the assets goes to holders of $24 million worth of senior debentures. Then, because of an unusual lien arrangement, come trade creditors, with $110 million owed. The banks, which subordinated to the trade $300 million of their $640 million loan to Grant's, come next and have an additional $90 million that gets preferred treatment; it was lent after the filing for reorganization. Then come junior debenture holders, with $94 million, and finally the unsecured debt, including $300 million in landlord claims and utility bills. . . . And Grant will owe approxi-


mately $15 million in severance pay to its 84,000 employees, although this is not a priority payment. An unresolved Internal Revenue Service claim of $60 million plus interest could possibly take precedence over unsecured creditors. But legal fees, which will run into the millions, are likely to assume a priority status. (Business Week, 1 Mar. 1976, 21)

Clearly there would be little or nothing left to cover the unsecured debt.

The banks did not have to step in and overtly seize control of Grant's executive positions to produce the managerial decisions they wanted. They merely relied on their collective control of capital flows to persuade Grant's management team to acquiesce, precluding consideration of decisions that would displease them. The same power could not have been exerted by single banks acting alone. The organized concerted control of capital flows engendered and enhanced the banking community's power over W. T. Grant.

Pointing to the links between Morgan Guaranty and Grant formed by Peterkin and Chinn, Rodman charged that this interlocking relation had existed "for an extended period of time prior to the commencement of bankruptcy proceedings by Grant." The interlocks helped the banks exercise control over Grant's board and management. Peterkin and Chinn's presence facilitated the dissemination of information about Grant to the banking community and served as a constant reminder to Grant's management that the banks could define the situation as a crisis at any time and withdraw their capital support. The presence of the bankers was a source of preemptive power, in that Grant's management took only those decisions that would please the banks (Rodman, in Morgan v. Grant, 63, 71–74).

By March 1977 Rodman had begun making assessments and proposing plans to Judge Galgay on how to meet Grant's obligations for severance and vacation pay owed to former employees. Since Grant originally filed under Chapter XI, claims made while the firm functioned under bankruptcy and those made during the four months prior to the filing would be recognized. Claims made after the filing of Chapter XI would be prorated from the bankrupt estate. Consequently, employees who quit before Grant filed under Chapter XI received all their benefits, whereas those who remained with the company to the bitter end received almost nothing.


Severance and vacation pay constituted only a part of the cost of Grant's bankruptcy that fell on the workers' shoulders. There was also the question of the account employees had with Grant for the purchase of securities in the firm. Judge Galgay informed the workers that the prospects of recovery of the account's funds looked "bleak" (Wall Street Journal, 11 Mar. 1977, 20). In the end workers had to pay the bill for Grant's (and the banks') excesses. Moreover, other workers outside the firm also shouldered some of that burden. A large proportion of the investors in Grant's sinking fund were the Illinois and Michigan teachers' pension funds.

In early 1978 Rodman reached an agreement with twenty-six of Grant's lender banks on a tentative settlement of their claims of $560 million against the company. This settlement provided for the orderly distribution of the assets of the now bankrupt retailing giant. As part of the compromise agreement, Rodman agreed to discontinue prosecuting the banks to recover $57 million. (That sum represents payments the company made to the banks in June 1975, before it declared bankruptcy.) The terms of the compromise settlement of Grant's estate were as follows:

1. The participating creditors (including secured suppliers, senior debenture holders, and holders of the outstanding sinking fund) were initially given 25 percent of their filed claims and then pro rata distributions of their claims ("Agreement of Compromise and Settlement Among Charles G. Rodman, as Trustee of the Estate of W.T. Grant Company, Bankrupt, and the Banks Listed on Exhibit 1 Hereto," in Morgan v. Grant, 24 Feb. 1978, 3; hereafter cited as "Agreement of Compromise"). The holders of the sinking fund were offered 100 cents on the dollar, but without interest, on their loans. Those creditors who benefited from the trade subordination agreement with the banks have gotten 70 percent of their claims ($90 million), and the unsecured creditors have gotten 39 percent of their claims.

2. The bank claimants agreed not to "enforce security interests and liens against the Bankrupt Estate" to avoid depleting the assets of the estate in litigation prompted by Rodman's suit. The banks' claims would "be allowed in at least an aggregate amount of $650,000,000" ("Agreement of Compromise," 4). Thereafter, prorated payments from the estate would be made to the banks at six-month intervals after settlements were made of the


other claims against the firm's estate. By July 1978 the banks had recovered more than 60 percent of their claims, with more to come. Indeed, these six-month payments may "ultimately result in the banks' recovering a higher percentage of their claims than those of the participating creditors," thanks to the compromise settlement provision specifying that "the participating creditors will receive no more than 50% of their claims or the percentage of their claims that the banks recover, whichever is less" (New York Times, 31 July 1978, D3).

The case is still not completely settled. Pro rata distributions of the estate are still being made to the banks, and the court is still considering contested distributions. Moreover, the pace of the settlement has slowed since the death of Rodman (who has been replaced by his assistant, Joseph Pardo) and of Judge Galgay (replaced by Judge Edward J. Ryan). Still, the compromise settlement between Rodman and the banks attests to the power the banks exercised over W. T. Grant. They have recovered much more of their investment than any other participants in the case. According to a telephone conversation with one of Grant's lawyers, the unsecured creditors have recovered approximately 39 percent and debenture holders 19 percent of their claims, whereas the banks have recovered more than 60 percent thus far. In fact, the banks are the only creditors who will continue to receive payments from the remaining $22 million of the estate. The estate's lawyers indicated that the banks will ultimately recover about 80 percent of their claims—that is, 97–98 percent of the remaining estate, with the other 2–3 percent of the estate devoted to administrative costs.

Clearly the banks did not enjoy absolute power. They lost more money than any other creditors and were unable to recover all their investment. They accepted the compromise settlement under the threat of protracted and prohibitively expensive litigation from Rodman's suit. Such litigation would have depleted the estate and prevented the banks from recovering any of their investment, because Chapter XI provides for payment in full of the legal fees incurred in the settlement of bankrupt estates. The banks' acceptance of a partial recovery demonstrates the limits of bank power and illustrates the difference between bank control and bank hegemony. Control implies absolute power. Thus bank control theory is a static description of power as a trait accruing to banks. By


contrast, bank hegemony is a process of relative power that depends on structurally unified action (here in a lending consortium) activated in the context of struggle.

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Chapter Two— W. T. Grant: The Social Construction of Bankruptcy
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