Photo: Chris Volpe BENSALEM, Pa.–Mitchell B. Arden, corporate turnaround specialist, walked in to work for his first day as Orleans Homebuilders' chief restructuring officer on March 5, four days after the company filed for Chapter 11 bankruptcy court protection.

“By nine o'clock that morning, I sat back down and asked, ‘What have I gotten myself into?' ” remembers Arden, senior managing director and shareholder of Phoenix Management Services. His answer, in a word, was “chaos.” Employees, contractors, vendors, home buyers, bankers, lawyers—all wanted answers and direction.

At that time, if anybody had asked Arden what the odds of successfully reorganizing Orleans Homebuilders versus selling it were, he would have said somewhere south of 5 percent. With his 20-plus years of experience working directly with roughly 150 distressed companies, he knew what he was facing.

“Reorganizing a middle-market company in bankruptcy is a very, very hard thing to do,” says Arden. And that's in a normal economy. Then, factor in that you're trying to reorganize a home building company in the middle of what may be the worst housing recession in decades.

Seven months later, Orleans appears to have beaten those long odds—and Arden's initial pessimism. At press time, the company planned to be out of bankruptcy by the end of 2010. It had a proposed plan up for vote among its creditors that has the backing of the company's unsecured creditors' committee as well as its three major secured debt holders, who will, if the plan is approved by the bankruptcy court, own a majority of the company. And the firm was on the verge of hiring a new CEO.

“The success here was driven by a bit of luck, a lot of hard work, and a tremendous effort by many folks, including the company's employees, contractors, and vendors, as well as its advisers,” Arden says.

A BUILDING STANDSTILL When Arden first took control of the failing home builder, nobody was talking about reorganizing the 92-year-old company. Rather, the most likely scenarios were to either sell its assets or wind down. The immediate issues at hand that first day when Arden arrived were more about how to keep building houses.

“Let me frame what was happening then,” says Arden. “You were four days into the filing and for the better part of February, suppliers and contractors had effectively abandoned the company” because it owed them money.

Even if the firm managed to complete any houses, it couldn't sell them, because Orleans' warranty company had stopped issuing 10-year structural warranties, and title companies were refusing to give clear title, causing problems with getting mortgages on the homes, Arden says.

In addition, under the company's debtor-in-possession financing, Orleans was only allowed cash to finish homes that were past a certain stage of construction. Even though the company had what it considered a “healthy” backlog of homes that were ready to start or had just been started, it couldn't advance construction.