By and  on February 9, 1994

NEW YORK -- The fate of R.H. Macy & Co. could very well be in the hands of one man: Chief Bankruptcy Judge Burton R. Lifland.

Judge Lifland is presiding in Macy's Chapter 11 case, and it's up to him either to guide the proceedings to a successful conclusion -- leaving Macy's management in place -- or to entertain outside offers, such as the still-vague plans of Federated Department Stores to take over Macy's.

Who is Judge Lifland and how is he expected to rule in the Macy's case?

Some see Lifland as a fair-minded jurist who tries to satisfy debtor and creditor alike. His supporters say his balanced style has helped upgrade the quality of bankruptcy proceedings.

Others see him as a man who runs a "debtor's paradise," sometimes allowing bankrupt companies to continue to lose money for long periods of time without the prospect for viable reorganization. He has the reputation -- some say ill deserved -- of being a judge who will bend over backwards to help the debtor company and, in the process, trample over the rights of creditors.

If this proves true in the Macy's case, chances are good he will keep Macy's current management in place, give management all the time it needs to come up with a plan and, in turn, block outsiders such as Federated from taking over the company.

But attorneys who appear before him day after day generally discount the "debtor's friend" talk.

One prominent bankruptcy attorney, who requested anonymity, said that in the end, Judge Lifland will give the creditors what they want.

"He is not debtor-oriented. That's a myth. He has an understanding of the Chapter 11 process that he learned in his years of private practice. He has a deep knowledge of the philosophy of bankruptcy. He can be impatient with people who come before him and are not prepared or who pose idiotic arguments.

"Over the years, he's had some of the biggest and toughest cases in the district, and he sometimes has shown the stress of his heavy case load. He had Johns Manville, a hopelessly complicated case with thousands of asbestos victims to deal with. He had LTV, which was in bankruptcy proceedings for seven years, largely because of a very sticky pension fund situation."He also had Eastern Airlines, which turned out to be a disaster. He was subject to some scathing criticism by some of the creditors, and that was one of the cases that helped perpetuate the myth that he was pro-debtor.

"But you have to understand that when Eastern filed, the airline industry was flying high and it looked as if Eastern would be able to pay its creditors in full. But then aircraft fuel went out of sight and the Boeing 727's that Eastern had, which had been valuable aircraft, suddenly became a drag on the market."

Critics say Lifland allowed the losses to mount at Eastern before eventually closing down the business.

Lifland, 64, ascended to the bench in 1980. The judgeship followed a long career as a bankruptcy attorney, so he has hands-on experience in the rough-and-tumble bankruptcy field. He declined to be interviewed for this article, citing the sensitivity of the Macy's proceedings.

After leaving the firm of Lifland, Marcus & Angel in 1973, Lifland joined Levy, Levy & Ruback, which subsequently merged with Finley, Kumble, Wagner, Heine, Underberg, Myerson & Casey. Finley, Kumble came apart in 1987 and went into bankruptcy. By that time, Lifland had been serving as a judge for seven years.

Joshua Angel, who practiced with Lifland in the early Seventies, said he does not believe the judge has any pro-debtor sentiment and noted that during their tenure at Lifland, Marcus & Angel, most of the firm's work was in behalf of creditors.

"I don't understand why they dropped that one on him, but I don't see it that way," said Angel. "I think he is a very good judge, and I don't think he has a bias."

"In those days, we probably had a practice that was about 60 percent bankruptcy and 40 percent collections," said Angel, who is now with Angel & Frankel. "It was a practice oriented almost entirely toward creditors.

One prominent bankruptcy attorney, who asked that his name be withheld, said that Judge Lifland has grown in scholarship since joining the bench and as Chief Judge has done a good job in upgrading the bankruptcy court. "At one time, each bankruptcy judge made up his or her own rules and the attorneys never knew where they stood. Under Lifland, all judges work under the same rules."As to the Macy's case," the attorney said, "I think Judge Lifland will give Macy's a chance to file its plan, but ultimately creditors will decide whether they want to accept the Macy plan or one proposed by an outsider such as Federated. At present, Federated is just a creditor and one with a high-priority status, and if the claim is paid in full with interest, Federated won't even have a vote on the plan."

A crucial Macy hearing comes up on Feb. 22, when arguments begin on Macy's request for six more months of "exclusivity."

Macy's exclusivity is scheduled to expire on March 15. It's within Judge Lifland's power to give Macy's the time it wants. It is also within his power to cut back on the time requested or even to throw the proceedings open for others to come in and propose a reorganization plan.

Observers are betting he'll give Macy's what it wants, but creditors are getting restless.

In the past two fiscal years, Macy's has lost nearly $2 billion. It continues to operate at a loss, although it has met or exceeded its cash flow plan in 11 of the past 12 months. Its cash position remains strong, so there is no crisis. As of the end of December, Macy's had about $279 million in cash and $475 million in unused borrowing power.

Nevertheless, some creditors are becoming impatient with the slow pace of the proceedings.

Lifland has extended Macy's exclusivity many times in the past, but there has not been much opposition. Most of Macy's creditor groups went along with the extensions. But with Federated in the picture, opposition to further extensions is building.

Macy's has previously stated in court that it probably could not propose a plan until the Christmas of 1994. This would stretch the Chapter 11 proceedings to three years, compared with the two years it took for Federated to complete its Chapter 11 reorganization and emerge as a profitable company.

The consensus among bankruptcy attorneys involved in the case is that Lifland will extend the exclusivity period beyond the March 15 deadline, but he will build a fire under Macy's to speed up the process of working out a plan.In the forefront of the movement to speed up the proceedings is Michael Crames, who represents the so-called Swiss Bank Group with mortgage claims of about $565 million, most of which are now held by Fidelity Investments.

"We're trying to move the Macy's case along, probably faster than the debtor is going," said Crames in a telephone interview. "On March 15 we'll see what Macy's has to say and also what Federated has to say. Creditors are seeking the earliest possible reorganization. If this is in any way at variance with what the debtor wants, Judge Lifland will listen and decide on the basis of what is best for Macy's and what is best for creditors."

Crames continued, "Macy's has had two years to make the changes needed and to do what it wanted to do. It has had time to close all the stores that it plans to close and has brought in the people needed to run the business. The next step is to deal with the liabilities. Macy's has been dragging its feet. Lets start talking about the plan."

With the threat of a takeover by Federated hanging over the Macy's proceedings, the issue of exclusivity is pivotal.

As long as Macy's has the exclusive right to file a plan of reorganization, Federated can be held safely at bay. Federated injected itself into the Macy proceeding by purchasing a half interest in the $1 billion secured claim of The Prudential. The Prudential claim is collateralized by 70 Macy locations and is considered the most likely to get paid in full.

This makes it a relatively good investment for Federated, but there is a downside. If it is found that Prudential is fully secured and is entitled to interest that has accrued since Macy's filed its petition two years ago, Federated will make a nice profit on its investment. At the same time, if the Prudential claim gets completely paid off, the claim holder will have little to say in the reorganization plan. Only those creditors who are not being paid in full will have a vote on whether or not to accept the plan.

The important players in the formation of the plan are those creditors who will have to accept less than 100 cents on the dollar or exchange their claims for stock or new debt securities. This is probably everybody except Prudential.To really have a say in the reorganization, Federated will have to buy up some of the lower priority claims or forge alliances with holders of these claims. In addition to the $1 billion Prudential claim, there are about $5.5 billion in total claims, ranging from other mortgage holders at the top of the heap to zero coupon bondholders at the bottom.

One likely Federated ally is Fidelity Investments, which has purchased millions in Macy claims at various priority levels and is probably Macy's largest creditor. According to Crames, Fidelity is the largest holder of the Swiss banks' $565 million claim. And Fidelity is one of the creditors that has shown impatience with the pace of the Macy proceeding. Fidelity's attorney declined to comment.

Will Macy's management have an ally in Judge Lifland come March 15?

Ronald Itzler, a veteran debtor's attorney with Fischbein Badillo Wagner Itzler, said the pro-debtor rap against Judge Lifland is unfounded, adding his own personal experience shows no pro-debtor or creditor leanings.

"He has been perceived both by the press and the bar as a pro-debtor judge," said Itzler. "It's an unfair characterization because it's not a correct description of what a judge can or cannot do.

" I think he is perceived that way because he has a desire to permit the success of Chapter 11 cases and in doing so it looks like he may be pro one side or another.

"I feel his goal is to give everybody a chance. If more judges were more reasonable in giving a debtor more time, I think there would be more successful cases." When liquidation is in order, Judge Lifland will liquidate, according to Itzler.

"His decisions are well thought out; he doesn't shoot from the hip," Itzler added. "I am very often the victim of his decisions, but I don't think his decisions are made for any reason other than to carry out the purpose of the bankruptcy code."

While most attorneys had only praise for Judge Lifland's ability, one practitioner said the judge can be "abusive with people who don't have power or authority and goes out of his way to humiliate some of them."He told of one relatively junior lawyer appearing before Lifland with an emergency order to collect vacation pay for a group of employees of a company in bankruptcy.

"We were struggling with the debtor's lawyer, but he was jerking us around. So the young attorney went to court with an emergency order.

"The judge started screaming about lawyers who are always bringing in emergency orders. He said he wasn't going to sign it and directed the ashen-faced attorney to go through the normal and very slow process of bringing a motion. And just to add to the attorney's humiliation, the judge had just signed an emergency order granting bonuses to the top executives of the same company.

"Ultimately, he signed the emergency order, but not before humiliating the attorney before a courtroom full of spectators."

Lifland also tends to give a hard time to investment bankers who serve as financial advisers in bankruptcy cases.

Unlike lawyers and accountants, who charge by the hour, investment bankers generally bill a flat monthly fee, which makes it harder to gauge their services.

Not surprisingly, investment bankers are among Lifland's harshest critics.

"He has a fairly sophisticated legal perspective, but not as much of a business perspective, and in these large mega-bankruptcies you need to have business judgment," said one investment banker, who asked not to be quoted by name. "What happened in Eastern is an example, to have to learn when to listen to other points of view."

Turning to billing, the banker added: "He does the best he can, but he simply doesn't understand what an investment banker does. He doesn't blink when a lawyer or accountant submits a multi-million-dollar bill, but when a financial adviser does, forget about it, 'What's valuation? What's estimation of securities?' He doesn't really have a gut feel for it."

Crames, who heads the bankruptcy practice at Kaye, Scholer, Fierman, Hays & Handler, has specialized in bankruptcy for 33 years and has been involved in many major bankruptcies, including Johns Manville, Allis Chalmers, LTV and Texaco.

He is among Lifland's admirers. "I think Lifland has an excellent grasp on the process and how it is expected to work, and in large cases, this translates into doing everything that is reasonable to produce a sensible conclusion. He is very good at guiding a case to a successful conclusion."He also has a talent for spotting litigation designed to delay a case and has been able to avoid litigation that has no point but to create leverage to serve the agenda of a special interest. If it's litigation just for the sake of litigation, he won't stand for it. He also will extend exclusivity for a debtor if it appears warranted.

"I think he is as bright and knowledgeable as they come and tries very hard to keep his eyes on the forest, even when there are some pretty big trees."

It should be noted that attorneys commenting about Lifland are not always completely objective.

Leon C. Marcus, Marcus Montgomery Wolfson & Burten, another veteran bankruptcy attorney and a former Lifland law partner, declined to be quoted, other than to say: "No lawyer will tell you the truth about Burt Lifland or any other bankruptcy judge. If I know that I have to appear before a judge to get my fees approved or to represent a client, it would be professional suicide to say anything negative."

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