Growing up in working-class Brooklyn, Chaim J. Fortgang turned schoolyard basketball games into survival contests.
Decades later he still hates to lose, but now he saves his intensity for another court, heading the bankruptcy practice at the high-powered New York law firm Wachtell Lipton Rosen & Katz. And with the slumping economy bringing in big cases, its as if the 54-year-old attorney is competing in the legal worlds Madison Square Garden.
Known for explosive outbursts, blustery tactics, and grueling schedules, Mr. Fortgang is to workouts, restructurings, and bankruptcies what his partners are to mergers and acquisitions: the lawyer to call when a major companys future is on the line. In just the past few months, he has waded into some of the most important corporate bankruptcies in many years. The companies involved include Finova Group, Sunbeam Corp., and Pacific Gas and Electric Co.
Yet while this economic downturn is good for business, it has also created some unique problems. Mr. Fortgang only represents creditors, and his clients Bank of America, Citigroup, and J.P. Morgan Chase, among others now have perhaps more money at risk than ever. And the chances of getting it all back arent good either.
Ive never seen them this low, says Edward Altman, a New York University business school professor who tracks the amounts of money that creditors recover.
At his 33rd-floor office overlooking the Hudson River, it appears that all of Mr. Fortgangs wars have already been fought and lost. Mountains of papers are scattered about, and his Rosebud a toy basketball hoop stands in a corner. Dressed in a crisp white shirt and suspenders, Mr. Fortgang insists, with a smile, that he recently cleaned up the place.
He is equally unruffled in discussing the bankruptcy environment. He says that, while its true recoveries are low, the point is to get as much as possible regardless of the circumstances. Some cases youll get 70 cents on the dollar and youre disappointed, he says. In others, if you get 30 cents its a miracle. Were not Midas. If theres nothing there, theres nothing there.
Mr. Fortgang built his firms bankruptcy practice from scratch and has been reorganizing companies and divvying up corporate carcasses for 25 years. His resume includes the restructuring of Donald Trumps empire, R.H. Macy & Co.s liquidation, the splitting of Marriott Corp., and the Marvel Entertainment Group bankruptcy. Even debtors came away impressed.
When he spoke, everyone listened, Mr. Trump says.
Still, its the creditors he must please first, and it will be hard making them happy this time around. According to BankruptcyData.com, the 176 publicly traded companies that filed for protection last year under Chapter 11 had a combined $95 million of assets, compared with 123 companies with assets of $94 billion, in the 1990-91 recession. And while its still early in 2001, the pace of bankruptcies 39 public companies with assets of $29 billion, through March 9 is picking up.
The chances for getting all the money the debtors owe look even worse than a decade ago. In 2000, says New York Universitys Mr. Altman, the face value of all outstanding distressed and defaulted debt was $652 billion, but the market value was $407 billion, or just 62 cents on the dollar. That compares with a face value of $300 billion, with a market value of $200 billion, or 68 cents on the dollar, 10 years earlier.
Mr. Fortgangs biggest bankruptcy is a case in point. When Finova Group, a Phoenix-based lender to middle-market businesses, filed under Chapter 11 last month, it owed about $11 billion to Bank of America, Citigroup, J.P. Morgan Chase, and others, making for one of the largest corporate collapses in history.
Finova cut a tentative deal with Warren Buffett, value shopper extraordinaire, for $6 billion in cash and a bundle of new debt. That amounts to 55 cents on the dollar for creditors.
Its a great deal for Mr. Buffetts Berkshire Hathaway and its partner in the rescue effort, Leucadia National, but not for Finovas earlier lenders. Mr. Fortgang is plainly unhappy with it.
Its too rich, he says. Mr. Buffetts side would get too much interest, fees, equity, and the $5 billion on the back end is less secure and of uncertain value, Mr. Fortgang says.
The deal needs the approval of the creditors committee, which is dominated by bankers and represented by Mr. Fortgang. Trying to drum up another bid, he has held informal meetings with General Electrics GE Capital Services, but so far nothing has come of them. (Before Mr. Buffett came along, Finova turned down an offer by GE Capital and Goldman, Sachs & Co.)
The bond market is watching. I think theres increased sensitivity, says Robert Young, a senior vice president at Moodys Investors Service. People are wondering if the company they are buying bonds from could become the next Finova.
Still, Mr. Fortgang does not think the Finova game is over, and he is something of an expert in getting past difficult starts.
Mr. Fortgang was born in July 1947 in a refugee camp in Bensheim, Germany. His parents had escaped imprisonment in Siberia and wanted to return to their native Poland, but there was nothing to go back to, he says. When he was five months old they immigrated to the United States to live near relatives in the Brownsville section of Brooklyn. There he honed his combat skills in the neighborhood playgrounds.
He never gave an inch, says childhood friend Harry Silber, who used to play basketball with Mr. Fortgang. It was difficult to score on him. It was like stealing his food.
School was no different. He rushed through Brooklyn College in two and a half years, lamenting such stray blemishes on his record as the B he received in a health education course.
It was his biggest underachievement, Mr. Silber says. He still talks about how he messed up.
After graduating in 1968, he attended NYU law school and graduated first in his class in 1970. After spending a few months at a firm that was breaking up, he joined the then little-known Wachtell Lipton. It had just 15 attorneys and an approach that suited his disdain for rules.
We made them up as we went along, he says.
His first bankruptcy client, in 1976, was also the firms first: W.T. Grant, a dying five-and-dime chain (Wachtell Lipton would never work for a debtor in a bankruptcy again). The firm already had close ties with creditors through its mergers-and-acquisition work, and the Grant demise opened Wachtell Lipton to criticism that it liquidated the chain without fighting to save it.
Even though he stuck with creditors after that, Mr. Fortgang will tell them when he thinks they should step back. In 1990, when Mr. Trump was near bankruptcy, Mr. Fortgang persuaded his clients to give the developer more time.
One of the reasons I can deal with the banks today is because I paid, and thats a tribute to Chaim, Mr. Trump says.
But tactical forbearance is not the same as being soft. He is a yeller, a screamer, says a lawyer who was involved in the Trump reorganization. He uses profanity. Hell use whatever it takes.
He will even go after a debtors mother. At least that was the case three years later when the former Marriott Corp. was making Mr. Fortgangs bondholding clients very unhappy.
Marriott was splitting itself in two: a real estate management company, Host Marriott Corp., and a hotel management company, Marriott International. The weaker of the pair, Host Marriott, became responsible for the debt, which drove down the bonds value.
The bond covenants had nothing to stop the maneuver, but Mr. Fortgang was not out of weapons.
We embarked on a public relations campaign that they would not be welcome back to the market to raise capital, he says. And he was willing to tighten the screws even more.
The mother of chairman J.W. Bill Marriott Jr. was a director of the company. Mr. Fortgang says he told Mr. Marriott that it could negotiate or you could have, from our perspective, a really bitter litigation. Wed have to depose everybody including his mother, who was an older woman. The late Alice Marriott was 86 at the time.
Mr. Marriott couldnt be reached for comment, so its not clear what effect the threat had, but Mr. Fortgang was able to negotiate a deal that satisfied his clients. Its higher interest rates and stronger covenants allowed the bonds to trade almost as high as before the company split.
Mr. Fortgang has used other arrows in his quiver to get the most for his clients. Last year, when he was working on the bankruptcy of the United Cos., the former subprime mortgage lender, he arranged to set up a controversial auction for some difficult-to-unload loans. What made it controversial were questions over the bidding.
Mr. Fortgang got Bear, Stearns & Co. interested in the loan portfolio, and the creditors he represented agreed to pay Goldman Sachs $4 million to bid against it. Bringing in Goldman satisfied a bankruptcy court ruling that there had to be at least two bidders and, Mr. Fortgang says, the price went up like a $100 million.
The final going price for the assets was reportedly $848 million, but not everyone was happy; United shareholders certainly werent.
We were trying to prove that Goldman wasnt really bidding, says Aaron Brown, a shareholder who lost $25,000 in the liquidation. We were told over and over that Goldman Sachs was a legitimate bidder. This is evidence that we were right.
Mr. Brown, a professor of finance at Yeshiva University in New York, says the liquidation made everyone lose out. Without an auction, if the company had been allowed to keep going at least until its customers had paid its outstanding loans, it would have grossed closer to $1.5 billion, he says.
The bondholders would have got back their $1.1 billion, and the shareholders could have split $400 million, Mr. Brown says.
Its a two-in-the-bush type of argument, and Mr. Fortgang defends his strategy. That includes arranging for a bidder. When someone makes a bid, that bid is real, he says. Thats not a sham. If Bear Stearns had stopped bidding, Goldman Sachs would have had to come up with the money. Paying a company to bid is nothing unusual, he says, since if it loses it will be out for expenses such as research and due diligence.
Staying on top of every case affords him little rest from the legal battle fields. What little relief he gets from working 15-hour days, six days a week, he gets at home in Brooklyn, where he has lived all his life and raised a family of four grown children. An Orthodox Jew, he never works between Friday evening and Saturday night, spending the Sabbath attending services and teaching at his temple.
He was smart enough or creative enough to get to the cutoff point at the right time, says Stan Ross, who was the chief negotiator for Mr. Trump when he was restructuring his company. Even if it was a crisis, hed stop and pick it up on Sunday. Some lawyers might have been forced to deviate from their priorities in life. He kept them. All of us were impressed with that.
When he was a young man, Mr. Fortgang thought of becoming a rabbi or a Talmudic scholar like his grandfather. Even now he sometimes thinks about what it would be like to stretch his one day for religious devotion to seven, and money would be no object. He lives in the same house he bought in the middle-class neighborhood of Midwood when he was much younger, even though he charges a top-rated $675 an hour for his services.Every so often when you evaluate your life, you think about what you are doing, what you could have done, he says. Then, quickly reverting to form, he adds: Im not going anywhere.