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The Y2K Problem It Means More Bankruptcies

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The single greatest problem facing the civilized world today in terms of predictable economic impact is not AIDS, nuclear proliferation or El Nino. It is the Year 2000 problem, generally referred to as the Y2K problem. If this problem is not addressed promptly, predictions of some leading economists are that a global recession is possible. This recession will include the United States and will result in an increase in business financial hardships and even failures. Thoughtful commentators have suggested that an effort on the scope of a global Manhattan Project is required to avert crisis.

What Is the Y2K Problem?

In short, many older mainframe computer software systems, software programs and millions of embedded semiconductor chips have the potential to "crash" on or about January 1, 2000. Most older software programs have a standard two-digit year field. The new year will appear as "00" within the computer system, and it will be read by the computer as meaning the year 1900. The number of potentially affected systems is unknown, but it is estimated to be in the millions. Major aspects of the economy will be affected in some way with substantial worry about infrastructure essential systems such as: electrical power systems, transportation, telecommunications, finance and banking, wholesale and retail distribution, and government service and administration.

Is This a Hardware or Software Problem?

Both. On the hardware side, "embedded" devices are the problem. These are semiconductors—usually micro-controllers—that are an integral part of a system but which are typically invisible to the user and may be hard to recognize. Microcontrollers use "firmware," which is software electronically installed on the chip. Such firmware may and usually does include features such as clock calculators that are date sensitive. First, these chips must be identified and a determination made if there is a problem. If there is a problem, a solution will usually require an upgrade of the controller code—if such an upgrade exists. Replacing microcontroller chips will not be easy as the specific devices may no longer be made. Many semiconductor manufacturers are making aggressive plans to advise customers of the need for remediation. The question is, will the customers be paying attention?

On the software side, literally thousands of software programs in current use will require substantial rewrites to become Y2K compliant. Testing the new systems will be time-consuming and, in many cases, require close coordination with work being done on other systems linked through data networks. As always, the resources of time, talent and money will be limited, and those limitations will weigh most heavily on the small businesses that comprise 95 percent of the economy.


...for bankruptcy lawyers...this crisis will present many opportunities at both the business and consumer level.

What Will It Cost?

Statistics tell an economic horror story—the most costly economic fix in history. Estimates are that it will cost $500 billion dollars to find and change the systems and billions of lines of computer code that are embedded into millions of chips. General Motors expects to spend $500 million in assessing and fixing the problem. AT&T expects to spend $350 million in 1998 alone and could exceed $500 million in total expenditures. And it began this process in 1996!

The problem is international in scope. The European Union estimates it will cost $95 billion to fix the Y2K problem in Europe. The rest of the world will also spend tens of billions to fix their computers.

How Will It Impact Businesses?

The impact is being felt now as companies across the nation and the world devote major resources to ferreting out problems that might exist with their computer systems and then addressing them. As the year 2000 approaches, and the public becomes more aware of the issue and starts to take precautions, the impact will become more dramatic. Because so many companies are networked with other computer data systems, they are inter--dependent. Even if one company has addressed successfully its Y2K issues, it must hope that its suppliers, customers, banks and other business contacts have also done so. Many companies may cease to do business with companies that cannot demonstrate that they have fixed their Y2K problem. For example, Edward Goldberg, executive vice president of Merrill Lynch, stated that his company "just won’t do business" with other brokers or vendors that fail to pass industry-wide Y2K testing. It is anticipated that companies who have addressed the issue will "fortress" against those who have not. Dr. Edward Yardeni, chief economist of the Deutsche Bank Securities, has indicated that a recession could occur "if the Y2K barbarians are left to die outside of the fortress wall." He places the likelihood of a worldwide recession directly as a result of the Y2K problem at 60 percent.

Are Problems Already Occurring?

Yes. A recent information technology survey indicated that nearly one-half of respondents had already experienced a Y2K failure, most of these occurring during system tests. The New York Post reported that management for one large retailer was shocked to find that its computerized inventory management and pricing system was slashing the prices of goods because the system was misreading the year 2000 for 1900 and thought, in effect, that it had inventory on hand that was aging and had to be discounted. In another cited example, employees, having just signed three-year contracts, did not receive paychecks on time because the software again mistook 2000 for 1900 and froze up, refusing to issue the paychecks. Credit card customers routinely are having difficulties with credit cards whose expiration is 2000 or beyond because many retailers have not updated their systems to receive these cards—this even though companies such as MasterCard and Visa have addressed the Y2K problem.

What Are the Legal Issues?

First of all, product liability lawyers can see a bonanza. Class action lawsuits are being filed now. Suits are likely against manufacturers of hardware and software, retailers, financing agents, auditing firms and independent engineering contractors. The Uniform Commercial Code may or may not protect one from legal claims if the products used have known latent defects or if the claims are for product liability where negligence is involved, a breach of warranty occurs on a contract, or there is fraud through material omissions of material fact. Liability estimates range to $1 trillion. Many companies reacting to this potential exposure are trying to work with the Department of Justice and Federal Trade Commission to permit them to share information regarding the Y2K issue without incurring antitrust liability. In fact, on July 14, in an address to the National Academy of Sciences, President Clinton made it clear that the Y2K issue is a priority for the government. Clinton announced plans to submit legislation to Congress permitting companies to protect companies that share solutions and problem-solving information from liability claims based on the disclosure of that information.

>What Impact Will Y2K Have on Bankruptcies?

The Y2K problem may be a precipitating cause of bankruptcy in a number of business failures. In other bankruptcy cases, the presence of a Y2K problem will simply make everything more complicated and uncertain—data will be inaccurate, it will be costly to fix the problem, and issues relating to receivables and executory contracts might become even more prevalent. And what about computers serving as collateral that have Y2K problems—or might have a problem? The trustee, debtor-in-possession, creditors’ committee and others involved in the administration of liquidations or reorganizations will have yet another difficult and time-consuming problem to overcome. And the new issues presented by Y2K will challenge the judiciary at all levels to understand the problem and to deal with the legal conundrums it will present.

Will the World End?

No. And we probably will not have nuclear war and planes will not fall from the sky. But after $500 billion in repairs, and countless headaches and heartaches, and social and economic disruptions, many people might have wished it had. The January 13, 1998, Financial Times reported that President Clinton and other major country government leaders had received a letter from 60 senior business executives warning that governments were not moving quickly enough to fix their Y2K problems. The letter cited the possibility of "financial chaos" among other issues to be con-fronted. But for bankruptcy lawyers, as with any period of economic uncertainty, this crisis will present many opportunities at both the business and consumer level.

Journal Date: 
Wednesday, July 1, 1998

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