Reforming bankruptcy law could deter private equity deadbeats, Dean Baker argues

Dean Baker's argument for bankruptcy law reform addresses a structural weakness in how the U.S. legal system treats private equity ownership of operating companies. Baker, identified as a senior economist at the Center for Economic and Policy Research, contends that existing bankruptcy statutes fail to deter private equity firms from engaging in practices that deliberately undermine company solvency while enriching equity investors at the expense of creditors, vendors, employees, and communities.

The mechanics of the problem are well-established in case law. Private equity firms acquire companies using leveraged buyouts—structures that place significant debt on the target company's balance sheet. Subsequent dividend payments to equity holders during periods of financial distress, combined with asset-stripping maneuvers (such as the sale of valuable real estate without compensation to the operating company), concentrate returns to private equity partners while transferring bankruptcy risk to creditors and stakeholders. This strategy is technically illegal under existing law, yet enforcement remains sporadic and remedies arrive only after significant damage has occurred.

A defining example illustrates the scale and pattern of abuse: Mervyn's, a mid-tier department store chain spun off from Target in 2004, employed 30,000 workers across 257 stores when acquired by private equity firms Cerberus Capital, Sun Capital Partners, and Lubert-Adler/Klaff. The private equity owners allegedly engaged in fraudulent asset transfers by separating valuable real estate holdings and selling them without compensating Mervyn's for the loss. They were also accused of requiring dividend payments from an essentially insolvent company, breaching fiduciary duties to both the firm and its creditors. A $166 million settlement reached in October 2012 between creditors and these private equity firms represented one of the largest recoveries against private equity ownership, yet neither the settlement amount nor its timing provided meaningful relief to displaced workers or affected communities.

Baker's reform argument emphasizes that legal recourse currently available to vendors and creditors—while potentially substantial in dollar terms—comes too late to prevent the destruction of viable businesses and the loss of employment for tens of thousands of workers. The debate, revived by recent retail bankruptcies, centers on whether bankruptcy law should be reformed to either restrict private equity's leverage-and-extract model or to strengthen fiduciary duty enforcement and creditor protections. Without legislative action, the current framework permits private equity firms to prioritize capital gains to equity partners over the preservation of operating businesses as going concerns.