Chapter 11 Overview and Features
- Chapter 11 is a federal bankruptcy option for businesses unable to pay their debts.
- In Chapter 7, the business ceases operations and its assets are sold to pay creditors.
- In Chapter 11, the debtor remains in control of the business under court oversight.
- Outcomes of Chapter 11 include reorganization, conversion to Chapter 7, or dismissal.
- A plan of reorganization must be filed and confirmed by the court for the debtor to reorganize.
- Chapter 11 allows the debtor in possession to operate the business.
- The debtor can acquire financing and loans on favorable terms.
- Contracts can be rejected and canceled by the debtor in possession.
- The automatic stay protects the debtor from most litigation and collection attempts.
- Creditors may seek relief from the automatic stay.
Chapter 11 Plan and Confirmation
- Chapter 11 can result in reorganization or liquidation of the debtor's assets and debts.
- The debtor in possession has exclusivity to propose a plan within 120 days.
- Any party in interest can propose a plan, and interested creditors vote for a plan.
- If the plan is confirmed and creditors agree, it becomes binding.
- If a plan cannot be confirmed, the case may be converted to Chapter 7 or dismissed.
- If the reorganization plan is approved by the judge and all creditors agree, it can be confirmed.
- Cramdown allows confirmation even if one class of creditors objects, under certain conditions.
- The plan must be fair and equitable to all classes of creditors.
- Upon confirmation, the plan becomes binding and determines debt treatment and business operations.
- If a plan cannot be confirmed, the case may be converted to Chapter 7 or dismissed.
Bankruptcy Valuation and Controversies
- Chapter 11 often involves valuation of the reorganized business.
- Valuation methods used in bankruptcy have evolved over time.
- Valuation is subjective and can significantly impact case outcomes.
- Controversies arise regarding the amount of disclosure required from creditors committees.
- The court determines whether the proposed plan complies with bankruptcy laws.
Subtopics - Automatic Stay, Executory Contracts, Priority, Section 1110, Subchapter V
- Chapter 11 petitions invoke the automatic stay of §362.
- The automatic stay requires creditors to cease collection attempts.
- Post-petition debt collection efforts may be void or voidable.
- Creditors or the United States Trustee can request conversion to Chapter 7 or appointment of a trustee.
- Liquidation under Chapter 11 may result in higher prices for assets than Chapter 7.
- Airlines have faced scrutiny for using Chapter 11 to escape labor contracts.
- Trustee or debtor-in-possession can assume or reject executory contracts and leases.
- Administrative expenses are paid first in the priority structure.
- Secured creditors are paid before unsecured creditors.
- Suppliers and employees may be paid before other unsecured creditors.
- Section 1110 allows secured parties to take possession of aircraft within 60 days.
- The automatic stay provisions do not hamper the lender's right to take possession.
- Subchapter V was added to Chapter 11 by the Small Business Reorganization Act of 2019.
- Subchapter V expedites bankruptcy procedure for small businesses.
- U.S. Trustee appoints a Subchapter V trustee to supervise and control estate funds.
- Small business owners can retain equity if the reorganization plan is fair and equitable.
Bankruptcy Statistics and Notable Cases
- Chapter 11 cases dropped by 60% from 1991 to 2003.
- Businesses turned to bankruptcy-like proceedings under state law.
- Insolvency proceedings under state law are faster, less expensive, and more private.
- Increase in incorrect classification of bankruptcies as consumer cases may have contributed to the drop.
- Cases with over $50 million in assets are usually handled in federal bankruptcy court.
- Lehman Brothers Holdings Inc. had the largest bankruptcy in history.
- Lehman Brothers listed $639 billion in assets in its Chapter 11 filing in 2008.
- Other notable bankruptcies and acquisitions are listed.
Chapter 11 of the United States Bankruptcy Code (Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, whether organized as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, though liquidation may also occur under Chapter 11; while Chapter 13 provides a reorganization process for the majority of private individuals.
