Chapter 11
1. Overview
Chapter 11
bankruptcy is a reorganization procedure used by businesses, including sole proprietors, partnerships, and corporations. The debtor in chapter 11 files a petition which includes a list of assets and liabilities, and a detailed statement of financial affairs. The debtor will typically act as his own trustee, called a "debtor in possession", and will remain in possession of all
estate property. The court can appoint a trustee for cause shown, including mismanagement.
The Debtor
About one month after the filing, the debtor and his attorney attend a meeting of
creditors. The debtor files monthly operating reports, showing income and
disbursements, profit and loss, and a balance sheet, and pays quarterly
fees to the U.S. Trustee based on the amoun of money disbursed. The debtor has
the exclusive right to file a plan during the first 4 months. Thereafter, creditors are
permitted to file plans. The Chapter 11 plan is accompanied by a disclosure statement, which describes the debtor’s financial
circumstances, including:
• Prior History and cause of the Filing
• Assets and liabilities
• Income and expenses
• Treatment of creditors
• Liquidation analysis
• Projections of earnings
• Tax consequences
• Discussion of options
The Plan
• The plan places creditors holding
similar types of claims (i.e., unsecured, priority, etc.) into the same
class. Creditors whose claims are impaired are allowed to vote on the
plan. A class is impaired if its legal rights are altered by the plan. To
be confirmed by the court, the creditors actually voting must approve the
plan by a majority in number, and by a 2/3 majority in dollar amount of
claims. At least one impaired class must approve the plan. If a class
votes against the plan, the court may still approve ("cram-down") the plan
if it finds that the plan is "fair and equitable" and does not unfairly discriminate.
• A plan often calls for the debtor to remain in business, and to repay creditors from future earnings, from borrowings, or
from sale of assets. In Chapter 11, priority claims, including recent tax claims, are required to be paid in full, plus interest. Secured claims are required to be paid in full, also with interest. Unsecured non-priority claims
are required to be paid a dividend at least equal to that
which they would receive if it were a Chapter 7 case. Within these limits, there are an infinite
variety of Chapter 11 plans, each based on the debtor’s own financial situation.
• Chapter 11 bankruptcy retains many of the features
present in all, or most bankruptcy proceedings in the United States. It also
provides additional tools for debtors as well. Most importantly, 11 U.S.C.
§ 1108 empowers the trustee to operate the debtor's business. In Chapter 11,
unless appointed for cause, the debtor acts as trustee of the business.[2]
• Bankruptcy affords the debtor in possession a number of mechanisms to restructure its business. A debtor in possession can
acquire financing and loans on favorable terms by giving new lenders first priority on the business' earnings. The court may also permit the debtor in possession to reject and cancel contracts. Debtors are also protected from
other litigation against the business through the imposition of an automatic stay. While the automatic stay is in place, most litigation against the debtor is stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue.
• If the business's debts exceed its assets, the bankruptcy restructuring results in the company's owners being left
with nothing; instead, the owners' rights and interests are ended and the company's creditors are left with ownership of the newly reorganized company.
• All creditors are entitled to be heard by the court.[citation
needed] The court is ultimately
responsible for determining whether the
proposed plan of reorganization complies with the bankruptcy law.
2. The chapter 11 plan
• Chapter 11 is reorganization, as opposed to liquidation. Debtors may "emerge" from a Chapter 11 bankruptcy within
a few months or within several years, depending on the size and complexity of the bankruptcy. The Bankruptcy Code accomplishes this objective through the use of a bankruptcy plan. With some exceptions, the plan may be proposed by
any party in interest. [3] Interested creditors then vote for a plan. Upon its
confirmation, the plan becomes binding and identifies the treatment of debts
and operations of the business for the duration of the plan.
• Debtors in Chapter 11 have the exclusive right to propose a plan of reorganization for a period of time (in most cases 120 days).
After that time has elapsed, creditors may also propose plans. Plans must satisfy a number of criteria in order to be "confirmed" by the bankruptcy court. Among other things, creditors must vote to approve the plan of reorganization.
If a plan cannot be confirmed, the court may either convert the case to a liquidation under Chapter 7, or, if in the best interests of the creditors and the estate, the case may be dismissed resulting in a return to the status quo before bankruptcy. If the case is dismissed, creditors will look to non bankruptcy law in order to satisfy their claims.
3. Automatic stay
• As with other forms of bankruptcy, petitions filed under Chapter 11 invoke
the automatic stay of § 362. The automatic stay requires all creditors to cease collection attempts, and makes post-petition debt collection void. Under some circumstances, creditors or the United States Trustee can ask
the court to convert the case to a liquidation under Chapter 7, or to appoint a
trustee to manage the debtor's business. The court will grant a motion to convert to Chapter 7 or appoint a trustee if either of these actions is in the best interest of all creditors. Sometimes a company will liquidate under Chapter
11, in which the pre-existing management may be able to help get a higher price for divisions or other assets than a Chapter 7 liquidation would be likely to achieve. Appointment of a trustee requires some wrongdoing or gross mismanagement on the part of existing management, and is relatively rare.
4. Executory contracts
• Some contracts, known as
executory contracts, may be rejected if canceling them would be financially
favorable to the company and its creditors. Such contracts may include labor
union contracts, supply or operating contracts (with both vendors and
customers), and real estate
leases. The standard feature of executory
contracts is that each party to the contract has duties remaining under the
contract. In the event of a rejection, the remaining parties to the contract
become unsecured creditors of the debtor.
5. Priority
• Chapter
11 follows the same priority scheme as other bankruptcy chapters. The priority
structure is defined primarily by § 507 of the Bankruptcy Code (11 U.S.C. § 507.)
• As a general rule secured creditors—creditors who
have a security interest, or collateral, in the debtor's property—will be paid before
unsecured creditors. Unsecured creditors' claims are prioritized by § 507. For
instance the claims of suppliers of products or employees of a company may be
paid before other unsecured creditors are paid. Each priority level must be paid
in full before the next lowest priority level may receive payment.
6. Stock
• If the company's stock is publicly traded, a Chapter 11 filing
generally causes it to be delisted from its primary stock exchange if
listed on the New York Stock Exchange, the American Stock Exchange, or the
NASDAQ. On the NASDAQ the identifying fifth letter "Q" at the end of a stock
symbol indicates the company is in bankruptcy (formerly the "Q" was placed in
front of the pre-existing stock symbol; a celebrated example was Penn
Central, whose symbol was originally "PC" and became "QPC" after the company
filed Chapter 11 in 1970). Many stocks that are delisted quickly resume listing
as over-the-counter (OTC) stocks. In the overwhelming majority of cases, the
Chapter 11 plan, when confirmed, terminates the shares of the company,
rendering shares valueless.
• Individuals may file Chapter 11, but due to
the complexity and expense of the proceeding, this option is rarely chosen by
debtors who are eligible for Chapter 7 or Chapter 13 relief.
7. Rationale
In enacting Chapter 11 of the Bankruptcy code, Congress concluded that it is sometimes the case that the value of a business is greater if sold or reorganized as a going concern than the value of the sum of its parts if
the business's assets were to be sold off individually. It follows that it may be more economically efficient to allow a troubled company to continue running, cancel some of its debts, and give ownership of the newly reorganized company to the creditors whose debts were canceled. Alternatively, the business can be sold as a going concern with the net proceeds of the sale distributed to creditors ratably in accordance with statutory priorities. In this way, jobs may be saved, the (previously mismanaged) engine of
profitability which is the business is maintained (presumably under better management) rather than being dismantled, and, as a proponent of a chapter 11 plan is required to demonstrate as a precursor to plan confirmation,
the business's creditors end up with more money than they would in a Chapter 7 liquidation.
Chapter 11
bankruptcy is a reorganization procedure used by businesses, including sole proprietors, partnerships, and corporations. The debtor in chapter 11 files a petition which includes a list of assets and liabilities, and a detailed statement of financial affairs. The debtor will typically act as his own trustee, called a "debtor in possession", and will remain in possession of all
estate property. The court can appoint a trustee for cause shown, including mismanagement.
The Debtor
About one month after the filing, the debtor and his attorney attend a meeting of
creditors. The debtor files monthly operating reports, showing income and
disbursements, profit and loss, and a balance sheet, and pays quarterly
fees to the U.S. Trustee based on the amoun of money disbursed. The debtor has
the exclusive right to file a plan during the first 4 months. Thereafter, creditors are
permitted to file plans. The Chapter 11 plan is accompanied by a disclosure statement, which describes the debtor’s financial
circumstances, including:
• Prior History and cause of the Filing
• Assets and liabilities
• Income and expenses
• Treatment of creditors
• Liquidation analysis
• Projections of earnings
• Tax consequences
• Discussion of options
The Plan
• The plan places creditors holding
similar types of claims (i.e., unsecured, priority, etc.) into the same
class. Creditors whose claims are impaired are allowed to vote on the
plan. A class is impaired if its legal rights are altered by the plan. To
be confirmed by the court, the creditors actually voting must approve the
plan by a majority in number, and by a 2/3 majority in dollar amount of
claims. At least one impaired class must approve the plan. If a class
votes against the plan, the court may still approve ("cram-down") the plan
if it finds that the plan is "fair and equitable" and does not unfairly discriminate.
• A plan often calls for the debtor to remain in business, and to repay creditors from future earnings, from borrowings, or
from sale of assets. In Chapter 11, priority claims, including recent tax claims, are required to be paid in full, plus interest. Secured claims are required to be paid in full, also with interest. Unsecured non-priority claims
are required to be paid a dividend at least equal to that
which they would receive if it were a Chapter 7 case. Within these limits, there are an infinite
variety of Chapter 11 plans, each based on the debtor’s own financial situation.
• Chapter 11 bankruptcy retains many of the features
present in all, or most bankruptcy proceedings in the United States. It also
provides additional tools for debtors as well. Most importantly, 11 U.S.C.
§ 1108 empowers the trustee to operate the debtor's business. In Chapter 11,
unless appointed for cause, the debtor acts as trustee of the business.[2]
• Bankruptcy affords the debtor in possession a number of mechanisms to restructure its business. A debtor in possession can
acquire financing and loans on favorable terms by giving new lenders first priority on the business' earnings. The court may also permit the debtor in possession to reject and cancel contracts. Debtors are also protected from
other litigation against the business through the imposition of an automatic stay. While the automatic stay is in place, most litigation against the debtor is stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue.
• If the business's debts exceed its assets, the bankruptcy restructuring results in the company's owners being left
with nothing; instead, the owners' rights and interests are ended and the company's creditors are left with ownership of the newly reorganized company.
• All creditors are entitled to be heard by the court.[citation
needed] The court is ultimately
responsible for determining whether the
proposed plan of reorganization complies with the bankruptcy law.
2. The chapter 11 plan
• Chapter 11 is reorganization, as opposed to liquidation. Debtors may "emerge" from a Chapter 11 bankruptcy within
a few months or within several years, depending on the size and complexity of the bankruptcy. The Bankruptcy Code accomplishes this objective through the use of a bankruptcy plan. With some exceptions, the plan may be proposed by
any party in interest. [3] Interested creditors then vote for a plan. Upon its
confirmation, the plan becomes binding and identifies the treatment of debts
and operations of the business for the duration of the plan.
• Debtors in Chapter 11 have the exclusive right to propose a plan of reorganization for a period of time (in most cases 120 days).
After that time has elapsed, creditors may also propose plans. Plans must satisfy a number of criteria in order to be "confirmed" by the bankruptcy court. Among other things, creditors must vote to approve the plan of reorganization.
If a plan cannot be confirmed, the court may either convert the case to a liquidation under Chapter 7, or, if in the best interests of the creditors and the estate, the case may be dismissed resulting in a return to the status quo before bankruptcy. If the case is dismissed, creditors will look to non bankruptcy law in order to satisfy their claims.
3. Automatic stay
• As with other forms of bankruptcy, petitions filed under Chapter 11 invoke
the automatic stay of § 362. The automatic stay requires all creditors to cease collection attempts, and makes post-petition debt collection void. Under some circumstances, creditors or the United States Trustee can ask
the court to convert the case to a liquidation under Chapter 7, or to appoint a
trustee to manage the debtor's business. The court will grant a motion to convert to Chapter 7 or appoint a trustee if either of these actions is in the best interest of all creditors. Sometimes a company will liquidate under Chapter
11, in which the pre-existing management may be able to help get a higher price for divisions or other assets than a Chapter 7 liquidation would be likely to achieve. Appointment of a trustee requires some wrongdoing or gross mismanagement on the part of existing management, and is relatively rare.
4. Executory contracts
• Some contracts, known as
executory contracts, may be rejected if canceling them would be financially
favorable to the company and its creditors. Such contracts may include labor
union contracts, supply or operating contracts (with both vendors and
customers), and real estate
leases. The standard feature of executory
contracts is that each party to the contract has duties remaining under the
contract. In the event of a rejection, the remaining parties to the contract
become unsecured creditors of the debtor.
5. Priority
• Chapter
11 follows the same priority scheme as other bankruptcy chapters. The priority
structure is defined primarily by § 507 of the Bankruptcy Code (11 U.S.C. § 507.)
• As a general rule secured creditors—creditors who
have a security interest, or collateral, in the debtor's property—will be paid before
unsecured creditors. Unsecured creditors' claims are prioritized by § 507. For
instance the claims of suppliers of products or employees of a company may be
paid before other unsecured creditors are paid. Each priority level must be paid
in full before the next lowest priority level may receive payment.
6. Stock
• If the company's stock is publicly traded, a Chapter 11 filing
generally causes it to be delisted from its primary stock exchange if
listed on the New York Stock Exchange, the American Stock Exchange, or the
NASDAQ. On the NASDAQ the identifying fifth letter "Q" at the end of a stock
symbol indicates the company is in bankruptcy (formerly the "Q" was placed in
front of the pre-existing stock symbol; a celebrated example was Penn
Central, whose symbol was originally "PC" and became "QPC" after the company
filed Chapter 11 in 1970). Many stocks that are delisted quickly resume listing
as over-the-counter (OTC) stocks. In the overwhelming majority of cases, the
Chapter 11 plan, when confirmed, terminates the shares of the company,
rendering shares valueless.
• Individuals may file Chapter 11, but due to
the complexity and expense of the proceeding, this option is rarely chosen by
debtors who are eligible for Chapter 7 or Chapter 13 relief.
7. Rationale
In enacting Chapter 11 of the Bankruptcy code, Congress concluded that it is sometimes the case that the value of a business is greater if sold or reorganized as a going concern than the value of the sum of its parts if
the business's assets were to be sold off individually. It follows that it may be more economically efficient to allow a troubled company to continue running, cancel some of its debts, and give ownership of the newly reorganized company to the creditors whose debts were canceled. Alternatively, the business can be sold as a going concern with the net proceeds of the sale distributed to creditors ratably in accordance with statutory priorities. In this way, jobs may be saved, the (previously mismanaged) engine of
profitability which is the business is maintained (presumably under better management) rather than being dismantled, and, as a proponent of a chapter 11 plan is required to demonstrate as a precursor to plan confirmation,
the business's creditors end up with more money than they would in a Chapter 7 liquidation.