Jay Goffman - Co-Founder and Co-CEO of Smith Goffman Partners

Colbert Cannon: Welcome to Season 10 of the HPScast. I’m your host, Colbert Cannon. If you’re new to the pod, HPS is a global investment firm. We manage approximately $110 billion in assets for a broad range of institutional and retail investors. That capital is invested across private credit and public credit strategies.

Each week, I sit down with key relationships to, partners of, and friends of the firm to learn from their experience, ask how that experience shapes their current roles, and give insights into HPS and how we operate. So, with that, let’s bring in our guest.

Our guest this week is a legend in the practice of bankruptcy and restructuring law. After his education at SUNY Binghamton and UNC Law School, he started his career in bankruptcy in the mid-1980s. Through the first decade of his career, he spent time at Weil Gotshal, with a stop at Bear Stearns, rest in peace. And by 1996, he was at Skadden Arps, where he spent 24 years leading some of the most important cases in legal innovations in the bankruptcy world. After stepping down as a partner in 2020, he spent some time at Rothschild and Teneo in senior roles, before starting his own advisory firm, Smith Goffman, earlier this year.

This man is an old friend, a trusted advisor, and someone who HPS has always thought the world of. So, without any further ado, I’m honored to welcome in this week’s HPScast guest, Jay Goffman, bankruptcy lawyer extraordinaire and co-founder of Smith Goffman Partners.

Jay, welcome to the pod.

Jay Goffman: Thanks, Colbert. That’s, that’s very nice of you.

Colbert Cannon: Jay, I like to start from the start. Let’s go all the way back. Where’d you grow up? Where are you from originally?

Jay Goffman: I grew up in Long Island, in North Woodmere, South Shore, in the Five Towns area. It was a very nice area to grow up in. I had a lot of friends, and it was, sort of, what I would call a very normal childhood.

Colbert Cannon: So, you go to SUNY Binghamton undergrad. Why was that the right choice for you, Jay?

Jay Goffman: My dad was born in 1929 in the depression. He went to work right out of high school. He had four kids, and you know, I didn’t want to put him through the expense of private schools.

I think I went into my parents’ bedroom one night, and I said that Binghamton is the best state school. I’ll go there. They said, well, that sounds good, and that’s what it was about.

Colbert Cannon: What did you study undergrad, Jay?

Jay Goffman: I majored in chemical psychobiology with an emphasis in neurochemistry.

Colbert Cannon: I mean, how in the world did you end up doing what you’re doing? That’s amazing.

Jay Goffman: It was very foolish. Look, it was simple. In my family, you had two choices. You could be a lawyer or a doctor. There were no other choices out there. My older brother was going to be the lawyer, so my mom actually figured out I was going to be the doctor. When I got to Binghamton, I didn’t have any guidance. I just said, well, why don’t I just make up my own major? I’ll make it as hard as possible. That’ll impress people down the road. So, I just made up this major, and I took the hardest courses I could find. And what I discovered was, I was okay at it, but I really didn’t love the sciences.

I would sit around with my friends who were majoring in economics, and we would talk about economics and finance and business. And by my senior year of college, I said, I like that stuff a lot more than the sciences, why don’t I go to law school instead? And that’s, sort of, where it happened.

Colbert Cannon: So, you end up in bankruptcy law. Now, tell me about that. Why that practice versus other things you could have done with your law degree?

Jay Goffman: When I was coming out of law school, a lot of the patent-copyright firms wanted to talk to me because of my science background. They thought I’d be a good fit for that, but I really wanted to go more into the business world. So, I went to a small firm, and they rotated you through a few different practice areas. And when I got to the bankruptcy group, which was fairly small, I had never taken a course in bankruptcy or creditor’s rights or any of these things. I bought a nutshell and a handbook, and I read up on it. And what I liked was that it was the perfect combination for me. It was a combination of law, business, finance, and a lot of creativity, and those are the things that just felt natural to me.

Colbert Cannon: So, you mentioned creativity. I want to ask you about one of my favorite stories of yours. You and I played golf once together, and you rolled up in a car that had a custom license plate that said “PREPACK.”

For listeners less in tune to bankruptcy law, what is a prepackaged bankruptcy, and is it factually correct that you invented the prepack, Jay?

Jay Goffman: Yes, I did. I did come up with the idea. For all I know, somebody else may have been thinking about it, but to my knowledge, I invented the idea one night. I can tell you how and when.

Essentially, it’s a restructuring where you do all of the negotiations on an out-of-court basis, which avoids all of the costs and the degradation to the business. And then, when you have your votes in hand, then you go into Chapter 11 for a short period of time – anywhere from 30 days down to a day – in order to confirm the case, make a binding on holdouts and anyone else you couldn’t find, and to take advantages of the other tools of Chapter 11. It’s a way to shorten restructurings from. when I started, they were going five, six, seven, or eight years, down to a matter of days by looking at it as a business transaction. And I always thought that made sense.

You mentioned Bear Stearns. I left the practice of law after the first few years, and I went to Bear Stearns. The CEO of the first business I ever reorganized asked me to go down there, and, at the time, there wasn’t anybody doing distressed debt trading. There were four or five people in the whole world doing it, but it sounded interesting.

And our idea is what everybody does today. We were going analyze companies, figure out what the right balance sheet should look like, buy the fulcrum security, convert it into equity, fix the company and then sell it. And what I discovered after being at Bear Stearns is, even though they said we could do that, what they really meant was we could buy the debt as long as we sold it to a customer 30 seconds later.

I didn’t want to do that, but what it allowed me to do was to start thinking about restructuring in a different way, more of a business standpoint. And I remember sitting on the trading floor and saying, if I can figure out what the balance sheet of a reorganized company should look like with my pad and HP 12C (calculator) in a couple of days, it really shouldn’t take five to 10 years to reorganize these businesses.

So, I went back to Weil, and look, I was lucky. I got to work for some of the legends in the industry. I worked for Harvey, I worked for Corrine, I worked for all of the brilliant people.

It’s 7:00 or 8:00 one night, and Harvey came to me. He said, you’re our most creative associate. Here’s a problem. It was a very large, multinational business, had operations all around the world and also had vast layers of public bonds. And so, they needed to fix the capital structure, but you couldn’t do a traditional Chapter 11 case. So, if you filed, you were really going to liquidate. And practically, you couldn’t get an out-of-court trial restructuring done because the bonds were just too widely held.

So, he said to me, I want a new, creative solution, something that hasn’t been thought of before. So, I sit down and around midnight, I remember I wandered out to my buddy John Rapisardi’s office. And I said, “John, Harvey wants a new idea. Here’s what I’m thinking.”

And then I walked him through how I think the prepack should work. I said that we have this provision in the code, it’s never been used before, but this should work, right? And he goes, “Yeah, sounds right.”

So, I remember I did the memo for Harvey, and he called me in the next day. He said, “I read it. It’s very interesting. We’re not going to do it, and we’re not going to tell anybody about it..” And he said to tear it up, and throw it away, and we moved on. That was, sort of, the genesis.

A couple years later, I left and started doing all the prepacks on my own. First of all, I had no one to tell me I couldn’t do it because, when I went to O’Sullivan Graev, I was the only restructuring lawyer. Nobody knew that this was new. And secondly, when Drexel Burnham Lambert filed, you had all of these companies that had gone private through these Drexel junk bonds. You couldn’t get these companies restructured out of court, and you couldn’t get these companies filed for traditional cases. So, it was a perfect tool to use in those situations.

So, going back to the license plate, a number of years later, my wife said to me, “Look, you weren’t smart enough to trademark the idea. Why not at least get a license plate?”

I said that made sense to me.

Colbert Cannon: I love it.

Okay, so you’d been at it for about a decade post law school. You joined Skadden Arps in the mid-90s, where you spent the bulk of your career. Let’s start with some background. For those less familiar, tell us about mid-90s Skadden Arps, the firm, and what was the draw of joining the larger practice then?

Jay Goffman: Yeah. So look, Skadden was the perfect firm for me. It was truly the most business-oriented law firm in the world, and I thought I was the most business-oriented restructuring lawyer in the world. So, after I left Weil, I went to a O’Sullivan Graev. I did all the early prepacks there, and I did a couple where Skadden was co-counsel. And after I did one of them, I had lunch with one of the fairly senior M&A partners, and he said, “We’d like to build our restructuring practice – would you think about coming over?”

I said, “Sure.” And I remember it was a very difficult interview process because they had never brought in a lateral partner into the firm before in an area where they already had an established practice. So, I think I met almost every M& A partner along the way. And I remember the senior people said, “Why is it that you’re getting so much restructuring business at the little firm you’re at when we’re not?”

I said that I didn’t know, and I think about it as a business transaction.

And they said, “Well, our guys tell us it’s a litigation.”

I said, “Well, that’s probably why. You guys are the most business-oriented firm. Think about it like an M& A deal.” And they liked that.

Colbert Cannon: I love it. You mentioned this theme. The best bankruptcy lawyers have to think with a business hat on, and it’s exactly right in the framing of “it’s a litigation.” Nope. Like that’s not how this is supposed to work. And you’ve always been so good at that.

So, 24 years at Skadden, you had a long and storied career there. When you think back, what are some of the most important, impactful cases you were involved in? What do you look back on fondly and say “these ones mattered?”

Jay Goffman: Yeah. So, let me pull out a few.

One of my favorites is Bluebird. Bluebird was the company that makes all the yellow buses. If you look around the country at all the yellow school buses, most of them have a little Bluebird on it. It’s a company in southern Georgia that’s been around almost 100 years now. And it was a great company. And this is all they did.

They were taken over in an LBO by an English company. And at some point, all of their money got sucked out by the parent. I get a call one day from the CEO, who was a friend because he reorganized another business in a prepack, and he said, “I’ve got a problem. Can you come down here?”

And by the time we got in down there and into it, what happened was they thought they were going to do an M& A deal. They didn’t prepare for anything else. The M& A deal fell apart at the very last second. They were out of money. They were basically shut down. And the board and the group of bank lenders had basically all agreed that they would liquidate the business.

And I look at my friend, I said that’s crazy. We both know this is a really good business. It’s having problems but not because of its own issues. Let’s fix it. And they said that everyone else had given up.

We called up the banks and got them all on a conference call. And I remember it was a Friday afternoon. I said, Here’s what we’re going to do. We’re not liquidating this business. We’re going to save it. We’re going to do a one day prepack, and we’re going to do the start to finish in a week. I want you to show up in my office tomorrow morning at 9am. We’re going to negotiate the deal tomorrow. We’re going to document it on Sunday. I’m going to send it out to you to vote on Monday. You’re going to send it back on Tuesday. We’re going to file on Wednesday, and we’re going to ask the court to confirm it the very next day.”

And you could hear the banks laughing on the other end of the phone. I said, “Yeah, you can laugh guys.”

But they all came in. We had one objector who prevented us from doing it out of court. When we confirmed it, it was seven days start to finish and 32 hours in Chapter 11 over the objection of the creditor. And I remember walking out of court that day and saying, “We did something really good today.” We saved the company, we saved all the jobs, the business did well, and everybody made money on it. It was the right thing to do.

So, that was one. I’ve done a lot of fun ones over the years. Here’s a good one.

American Airlines. That was one where I actually had the Creditors Committee.

Colbert Cannon: For our listeners, what does it mean to have the Creditors Committee? Who are you representing?

Jay Goffman: So, in Chapter 11, you can represent the company – the debtor – but there’s always an official creditors committee that’s formed in every case. And so, they get their own counsel and financial advisors. And there may be other parties, but those are the two big ones. Usually, I did the company side, but in that one, while I was doing the company side, I remember pitching the committee. It’s one of the few times I actually agreed to do it. And I said to them, “If all you do is what you normally do, and you fight the debtor, you’re going to lose. The debtor gets the benefit of the doubt. They’ve got Harvey on the other side. He’s a brilliant strategist and tactician. But if we think like business people, we can create a better plan.”

And I said I think that there should be a merger. I know the guys at USAIR and AmericaWest because I’ve done the AmericaWest out of court restructuring after 9/11. I said that they’d be a good merger candidate.

We need to have two lines of thought so that we can compare a standalone against a merger. Play one against the other. That’s how you create value. And ultimately, that’s what we ended up doing, creating the world’s largest airline and getting everyone paid in full with interest and having a big day for equity also. So, that was a good one.

Colbert Cannon: And I think the theme there that’s interesting is – legal innovation is one thing, but it’s the thinking with a business person’s hat on. That’s what the best bankruptcy lawyers have to do. And it’s clear, you know, that you can drive value creation both through legal and through business means. It’s a super interesting one.

Jay Goffman: Probably my favorite, well, it’s not even a deal, but my favorite client of all time was a company called Evergreen Aviation.

Colbert Cannon: Del Smith.

Jay Goffman: Del was a legend in the aviation industry. He’s a legend. And he built, from nothing, this giant cargo aviation airline. He also built a helicopter business. When I started working with him was when Pan Am filed for Chapter 11. He had done a sale and lease-back with Pan Am six months before. So, he paid them a few hundred million dollars and then leased back to buy seven 747s. He leased them back to Pan Am. That same week, basically, the first Gulf War started, and it was the first time ever in our country they had what’s called a “craft activation.”

Evergreen was a very patriotic company made up mainly of former military guys. They were the only ones who wanted to fly into the hot zone, so they had to get back their aircraft. I’m 28 years old. I’m like a kid. And I said, “Look, it’s the first Gulf War. We need back our aircraft. You’re not going to use them anyway.”

The General Counsel of Pan Am says, “No, no. Our pilots want to fly that mission.”

And I go, “Bull crap. Your pilots aren’t flying into the hot zone. Give us back our damn aircraft.”

Del looked at me, and he goes, “You’re my lawyer.”

Colbert Cannon: (laughing) That’s awesome.

So, I want to talk about your new venture, Jay. You’ve led large groups at large organizations for much of your career. Why was now the right time to start something entrepreneurial?

Jay Goffman: Well, first of all, I figured I was finally old enough to do something on my own. The other thing is, look, what I really love to do is, sort of, the hands-on creative restructuring work, figuring out solutions to difficult problems. What I found was when I left Skadden and moved over to the world of Rothschild and Teneo, I was doing more introducing than actually working. So, I sat down with my partner, Steve Smith, who I’ve known for years. I did deals with Steve like Charter, GGP, Lyondell Bazelle, Sentro. We did all of those together, and we said why don’t we do something together, but let’s do something different, something that’s not out there.

So, restructuring by its nature is partly business, partly financial, and partly legal. If we could bring all of that experience to one place, we’re going to probably get to the right solution a lot quicker and a lot more inexpensively. We didn’t think anybody was doing that. Then we said, what if we also brought capital to the table, because a lot of these situations require new capital, especially if you want to keep companies out of Chapter 11, which we did. So, we said let’s use, sort of, the old DLJ Merchant Banking model to bring that in.

And then finally, we said, what we really like to do is build long-term relationships. And the best way to do that is convince the client that you’re actually on their side. How do you do that? By putting skin in the game.

So, we said, in a lot of these, where we can, let’s take a big chunk of our compensation in equity, if it’s possible, so that our client knows we’re on the same page. We’re not just offering a solution because we’ll get a fee. And so, if our clients do really well, we’ll do really well. And if they don’t, then we won’t, but that’s okay, because we’re building that relationship. And so, that’s what we put together.

Colbert Cannon: There’s power in aligned incentives.

Jay, tell me the Smith of Smith Goffman, Steve Smith you mentioned. Why was he the right partner? What does he bring to the table that complements you?

Jay Goffman: Steve actually is the perfect partner. He started as a lawyer at Latham and spent a number of years there doing all of the Drexel deals. So, he learned at the foot of Michael Milken. And after about seven or eight years after I helped file Drexel for bankruptcy, he had nothing left to do there, so he decided he was going to go into the business world. And he followed a young investment banker named Kenny Moelis over to DLJ. Ken’s done okay for himself, and he spent the next 20 years with Ken.

When Ken went over to UBS after Credit Suisse bought DLJ, he made Steve the Head of Global Restructuring and Head of Leveraged Finance. And it was interesting. I think Steve was the only person on Wall Street who held both titles because both Ken and Michael Milken thought that restructuring and lending are just two sides of the same coin. And if you’re good at one, you’re going to be better at the other. And Steve did that through the financial crisis, but after the financial crisis, with U. S. regulators and Swiss regulators sitting on his floor determining which loans he can make, I think it became less fun for him.

So, he decided to go off into the private equity world, moved to Los Angeles and ran a private distressed business fund for about 10 years. He did well there, but when he got done with that, he called me one day and said, “Why don’t we get together and talk about things?”

I was a little bored with what I was doing. So, we got together, and we talked. And we came up with this idea. And I’ve always thought that, in any partnership, culture in any business is the most important thing. But a good friend of mine told me a long time ago, if you’re going to bring in and have a partner, you’ve got to check three boxes: like, trust, and respect.

I like Steve. I trust him, and I respect him. And it’s funny – we were able to figure out everything in a very brief conversation. We’ve never disagreed on anything, and I trust him implicitly. So, to me, it’s the perfect combination.

At this point in my career, look, I’ve been blessed to have done fun things with great people, and I’ve made a bunch of money. So, I’m doing stuff now that I like to do, and I’m only going to do the stuff I like to do with people that I like to do it with. And so, we’re actually having a lot of fun.

Colbert Cannon: Jay, I wanted to talk a little bit big picture now about the future of restructuring. You and I have both been involved in bankruptcies and restructuring for a very long time. What’s changed? Shat’s happened in the restructuring world? What are the themes and trends that you see in the next couple years really playing out?

Jay Goffman: Yeah, it’s interesting. So, when I started, it was a different world back in 1983. The Banker’s Code had just been enacted in 1978, and everybody was figuring it out, but nobody called the restructuring lawyer. There was still a real stigma attached to Chapter 11. Unfortunately, the last few years, Chapter 11 has become such an expensive proposition that companies are trying to find every which way to avoid it.

Colbert Cannon: An expensive one and also a fixed cost. Like it doesn’t really scale that much, and even small businesses restructuring is extraordinarily expensive in Chapter 11.

Jay Goffman: Yeah, and that’s why a lot of companies are trying to find any way to  avoid Chapter 11, which I think, as a general rule, is a good idea, but that’s why you’re seeing all these liability management transactions.

I think you’re going to see more out-of-court restructurings. I think you’re going to see restructurings that take advantage of the laws in other countries, where they’re less expensive. But I also think you’re going to see a lot more prepacks because there’s just the costs of traditional Chapter 11 cases being just way too high. And they eat away at the returns to creditors, and frankly, if you’re an owner of a business, at your value. So, I think you’re going to see more of that.

I remember when I first started with this, people would say, well, you don’t want to do these quick prepacks. You know, there won’t be anything to do. I said that there’s lots of companies out there that need help, and I think that’s the way to think about it. And it’s funny – that’s the way we thought about it at Skadden. Our business model wasn’t let’s make as much as we can on each restructuring. Our business model was let’s make as little as we can on each restructuring, so that when we’re done, the client looks at it and says, “You guys are great. I’m going to stay here to do the rest of our work here.”

Colbert Cannon:  Yep, that’s exactly right. It’s the old Goldman, you know, short-term greedy versus long-term greedy. It’s okay to be greedy. You just have to think long-term with it.

All right, Jay. It’s always a treat to be with you. Thank you for all of the thoughtful perspectives today. With that, I want to move to the last segment of the pod, something we like to call “Best Ideas.” It’s where we offer up something that’s added value in our lives recently, and it’s “Best Ideas” because it’s our goal as investors to maximize exposure to those.

Jay, you’re our guest. I’m going to ask you to go first. What is your best idea this week?

Jay Goffman: So, over the years, one of the things I’ve done outside of work is a lot of charity work. The board I sit on now that I’m most proud of is called “Third Option Foundation.” We take care of the CIA Special Forces when they get injured or killed, in many cases. We take care of their families.

So, we raised money. The board covers all of the expenses, and then we raised money and built a world class program for them up at Mass General in Boston and one down at MedHealth in Washington, D.C. And we take care of them. So even though I didn’t serve, I feel really good about giving back, and so, that’s one thing.

The other thing is, at the start of the pandemic, I was really concerned about what this would mean for everyone, because none of us had ever been through it before. So, I started sending around weekly emails to friends to keep people’s spirits up. And over time, it morphed. It’s now at about 140 – 150 people on the weekly emails. And it changed from weekly to monthly, eventually, and is now quarterly.

The beginning was about the pandemic and people, getting people’s spirits up. Over time, it morphed into thinking more about values and things that I think are important, and it made me more introspective about things and allowed people to express things that we normally don’t talk about in the business world.

So, those are my two good ideas for the day.

Colbert Cannon: I love it. I think introspection can be hard, Jay. It’s something personal. You’re putting yourself out there, and I love that. It’s a great idea.

Well, so then Jay, for my best idea, as people know, I like to be inspired by the guest of the week. As you could tell today, Jay is a great storyteller. It’s not enough to have had a front row seat to some of the most important cases in bankruptcy law. It’s a gift to be able to tell the story in a compelling way.

So, I started to think about other great raconteurs, and I wanted to offer up as my “Best Idea this week, my favorite book I’ve read recently from an author I consider one of the great storytellers on the planet. My “Best Idea” this week is the new collection of short stories from Amor Tolles. I want to recommend his latest work called “Table for Two.”

Tolles is a remarkable writer. He’s got multiple bestsellers to his credit, and his latest work is a collection of six short stories and a novella with characters drawn from his previous works. His writing is always incredibly sophisticated, funny, and tightly constructed. Words you could use to describe Jay when you’ve got a head of steam on a good story.

So, from one storyteller to another, in honor of Jay, let me recommend the great collection, “Table for Two”, from former HPScast guest, Amor Tolles.

With that, Jay, it’s time to wrap up for the week. We sincerely appreciate you taking the time today. We look forward to hearing about Smith Goffman’s successes in the coming years, and thanks again for coming on.

Jay Goffman: Thank you so much, Colbert.