Chapter 11
1. Who May File a Chapter 11?
Any person or entity who qualifies to file a chapter 7 may file chapter 11 except stockbrokers. Section 109(d). There is no requirement that the debtor be engaged in a business or be insolvent. There is no means test in chapter 11 cases.
2. Overview
Conceptually, chapter 11 cases may be categorized into operating business cases, single asset cases and individuals. An operating business case is self-explanatory; the debtor owns and operates a business. Some operating cases are designated as “small bu entity) that owns a building or buildings which are facing foreclosure. Single asset cases also have separate and additional rules designed to handle the unique problems presented. Individual cases are usually either operating or single asset cases. The 2005 Amendments made a number of changes designed to make the treatment of individual chapter 11 cases similar to chapter 13 cases.
3. Factors to Consider Before Filing Chapter 11
There are several factors to consider before making the decision to file a Chapter 11 petition:
An operating business must be making a profit to have a realistic chance of successfully reorganizing (without liquidating) in Chapter 11. The debtor cannot get farther into debt after it files the petition. Furthermore, the profits generated by operations are often used to fund the plan. A plan may be funded by new investments but that is not too realistic if the business is not generating a profit. An unprofitable company realistically will have to sell its business or simply liquidate and distribute the proceeds to the creditors.
If the purpose for the bankruptcy filing is to save a building (or home), the debtor usually must have equity in the building. If the building is rental property, it must generate a positive cash flow sufficient to pay all operating expenses and encumbrances during the case to have a realistic chance at reorganizing. Property in which there is no equity can be saved over the objection of the creditors but it is rare and difficult and will probably require substantial new investment from the owners.
3.3 Debtor's Income in an Individual Chapter 11 Case
The debtor's income earned after the chapter 11 petition is filed is property of the estate, similar to its treatment in a chapter 13. Section 1115 More importantly, any plan of reorganization proposed by the individual chapter 11 debtor must provide for payment of all of his net income to his creditors for five year period.
3.4 Expense of Chapter 11
A Chapter 11 is a very expensive process. Attorney's fees in a fairly simple case will probably exceed $25,000. Fees of $100,000 to $350,000 and more are common. The U.S. Trustee's Office must be paid fees quarterly which range from $325 to $10,000 depending on the total disbursements of the debtor each quarter.
3.5 Case May Not Be Dismissed
A Chapter 11 case may not be dismissed without approval of the court. Most bankruptcy judges will not approve a requested dismissal unless all of the creditors agree. A Chapter 11 case will generally be converted to Chapter 7 by the court if a Plan of Reorganization cannot be confirmed.
3.6 Ownership May Not Be Retained
A Plan of Reorganization which proposes to keep current ownership in place will not be confirmed over the objection of a majority of the creditors unless all creditors are paid in full or the ownership makes a substantial new investment. This is known as thed an agreement with the creditors who then vote for the plan.
3.7 U.S. Trustee Forms and Regulations
The U.S. Trustee's Office has many rules and regulations which must be followed during the pendency of the Chapter 11. The debtor's bank accounts must be closed and new accounts opened. The new accounts must indicate that the bankruptcy case is pendingst be provided. Most of the items required by the OUST must be filed within 7 days of the filing.
3.8 Disclosure, Disclosure, Disclosure
The debtor must be prepared to disclose almost anything that might be relevant to its business, operations, financial condition, and history.
4. Benefits of Chapter 11 Filing
There are numerous benefits of a Chapter 11 filing:
4.1 Pressure From Creditors will Stop Immediately
iately cease all efforts to collect their particular debt. Any pending litigation stops. Foreclosure and seizure efforts stop. This gives the debtor time to concentrate on business operations to improve profitability and work on a Plan of Reorganization.
4.2 The Debtor Will Start Accumulating Cash
The debtor is not allowed to pay any pre-petition unsecured debts once it files its chapter 11 petition. For this reason, it should start accumulating cash reserves. In fact, failure to accumulate cash over the course of the case is usually evidence that the debtor cannot reorganize. Of course, a lender that has a lien on cash collateral will want the excess cash turned over to it.
4.3 Secured Loans May Be Modified
In general, secured creditors must be paid in full with reasonable interest for a reasonable amount of time. Section 1129(b)(2)(A). In full means the total amount owed, or the value of the collateral if that is less than the amount owed. The effect of this is that a high interest, short term loan may be rewritten to reasonable interest for a period of years with a balloon payment at the end. Secured creditors generally vigorously oppose attempts by the debtor to rewrite the loan. A loan secured solely by the debtor's home may not be adjusted or changed. Section 1123(b)(5).
OVERVIEW OF A CHAPTER 11 PROCEEDING
1. The Initial Filing Schedules
A Chapter 11 bankruptcy case is commenced by filing a petition and the same schedules as a Chapter 7 or Chapter 13. The schedules include a list of all of the debtor's assets and liabilities and a Statement of Financial Affairs. Section 521(a). The schedules must be filed within 15 days after a case is commenced.
1.1 Credit Counseling Required for Individuals
An individual must be obtain credit counseling before filing the chapter 11 petition.
2. The Initial U.S. Trustee Requirements
The U.S. Trustee's Office has a lengthy list of documents and forms they require at the outset of the case. Among the documents they require are the debtor's income tax returns, payroll and sales tax returns, financial statements, inventories, insuranc piece of real property in which the debtor has an interest and each real property lease. Most of these items are due within seven days after the bankruptcy filing.
2.1 Meeting of Creditors
About six weeks after the case is filed, the debtor will have to attend a meeting of creditors, convened by the U.S. Trustee's Office. Section 341(a). At this fairly formal meeting, the debtor or its management is questioned first by the staff attorney for the U.S. Trustee and then by creditors, although few creditors appear as a rule. The questions focus primarily on the assets of the debtor and the compliance with the rules and guidelines of the U. S. Trustee. The testimony is recorded and is under oath.
3. The Disclosure Statement and Plan of Reorganization
3.1 When a Plan Must Be Filed
The Plan of Reorganization is not due at any particular time. Generally it is filed four to ten months after the case is startedsivity period may be extended by the court for cause. After the case is four months old, creditors may file a plan if the exclusivity period is not extended. Creditor plans are very rare.
3.2 The Disclosure Statement
The creditors vote yes or no on the proposed Plan of Reorganization. They must be given sufficient information to allow them to determine how to vote. The presentation of a Plan of Reorganization to the creditors must, therefore, be accompanied by a Disclosure Statement. The concept of the Disclosure Statement is similar to that of a prospectus. It contains everything a person who was going to invest money into this enterprise would reasonably want to know. The Disclosure Statement must be approved by the court as containing adequate information before it can be sent to creditors.
3.3 The Plan of Reorganization
The Plan of Reorganization divides the creditors into classes and explains how each class is to be treated once the plan is confirmed. The Plan of Reorganization also explains how the plan will be implemented, i.e., through a sale of property, new loans, new investments or profits from business operations.
4. Confirming the Plan of Reorganization
Once the Disclosure Statement has been approved by the court, it is sent to the creditors with a ballot. A hearing is set for about two months later. At the hearing, the debtor announces the results of the balloting. If each class has voted for the plan, the plan is usually confirmed. If a class of creditors has voted no, the debtor can ask the court to confirm the plan anyway. Thi
5. The Final Decree
Once the Plan of Reorganization has been confirmed, the debtor takes the steps required by the plan such as making payments, selling or transferring property. Once the plan has been substantially consummated and no further activities are pending before the bankruptcy court, the debtor files a Motion for Final Decree. Entry of the Final Decree closes the case.
6. Other Matters During the Case
6.1 Leases and Executory Contracts
The debtor must assume or reject its leases and other executory contracts during the case. The assumption or rejection may be part of the plan, however often the assumption or rejection takes place before the plan is submitted. This is because the assumption of a lease may be critical to the success of the plan.
6.2 Claims Issues
The amount owed by the debtor to each particular creditor must be resolved at some point during the case. The amount owed generally is the amount the debtor lists in its schedules unless the listing indicates that the debt is disputed, contingent or unliquidated. In that case, or when the creditor disagrees with the amount in the debtor's schedules (or when the creditor is not listed at all), the creditor must file a Proof of Claim. If the debtor or any other creditor disagrees with the basis for or the amount of the Proof of Claim, they may object. If the matter cannot be resolved at the hearing on the debtor's objection, it will be litigated in bankruptcy court much the same as any litigation outside of bankruptcy.
6.2.1 Bar Date
to file Proofs of Claim or have their claim is barred. The bar date is usually several months into the case.
6.3 Fee Applications
Professionals may not be paid during the bankruptcy case until the fees are approved by the court. A fee application may be filed only once every four months. Section 331. The fee application is a fairly big job for the professional and some judges are hesitant to allow fees during the case at all.
6.4 Litigation
6.4.1 Pending Litigation
Pending pre-petition litigation against the debtor is stopped automatically once the bankruptcy petition is filed. Litigation in which the debtor is the plaintiff proceeds unaffected by the automatic stay.
6.4.2 Postpetition Litigation
The debtor may commence litigation in bankruptcy court or in state court during the bankruptcy case. For example, the debtor may file declaratory relief actions to determine the rights of other persons in property of the estate. Creditors may also commence litigation post-petition in bankruptcy court. Examples would be actions to determine the dischargeability of a debt or the enforceability of an agreement.
6.4.3 Preference Litigation
The debtor should commence preference avoidance actions against creditors who have received preferences. Typically, the debtor does not do this as the debtor is usually trying to get creditors to support the reorganization. Preference litigation often occurs after the plan is confirmed and often the right to proceed with the litigation is assigned to the creditor's committee as part of the plan.
6.5 Motions for Relief From Stay
Secured creditors will often file a Motion for Relief from Stay during the chapter 11 case. This is a request that they be allowed to ignore the bankruptcy and foreclose on their collateral. These motions are denied early in the case if there is equity in the property the creditor seeks to sell or the creditor is otherwise adequately protected.
6.6 Sales of Assets
al. Section 363(c). All other sales must be approved by the court. Section 363(b).
6.7 Tax Issues
The debtor often owes prepetition income and/or payroll taxes. The amount owed must be resolved and whether or not the debt is secured, unsecured or priority must be resolved. This is usually worked out informally with the IRS Special Procedures Office. If it cannot be resolved informally, the debtor may file an objection to the IRS proof of claim or institute an adversary proceeding to resolve the issues.
6.8 Status Conferences
Most judges in the Central District of California set one or more Status Conferences early in the case. A Status Report must be filed prior to the hearing.
6.9 Motions to Dismiss or Convert the Case
The U.S. Trustee's Office often files a Motion to Dismiss or Convert the case during the chapter 11. The most common reason is the failure of the debtor to comply with all of the rules and regulations of the U.S. Trustee. The U.S. Trustee will also file a motion if the case is getting old or if the U.S. Trustee believes that a plan is not possible. The court will dismiss the case usually only if there are no unsecured creditors or no equity in any property of the estate. In most cases, the court converts the case to Chapter 7.
6.10 Motions to Extend Exclusivity
The Plan of Reorganization is not due at any particular time. The code however provides that only the debtor may file a plan during the initial 120 days of the case. This is known as the exclusivity period. Often the debtor will file a Motion to Extend Exclusivity which is usually granted for a period of a few additional months.
7. Single Asset Real Estate Cases
Congress added this concept to the bankruptcy code in 1994. A single asset real estate case is one where the debtor owns a single building or project other than residential real property of fewer than four units, and, operating the building is the debtor's only business, and, the secured debt is less than $-- million. The only apparent significance to this status is that the automatic stay is automatically lifted if the debtor does not file a reasonable plan within 90 days or start making monthly payments to the secured creditors. Typically the debtor will commence monthly payments within the first three months anyway and therefore this amendment has had little practical effect.