Reorganization Under Chapter 11
Bankruptcy Road Map: Navigating the Landscape, Avoiding the Pitfalls (State Bar of Texas — Chapter 10)
By: E. Lee Morris
March 2010
Chapter 11 of the Bankruptcy Code sets out the provisions applicable to the reorganization of a debtor. Chapter 11 embodies the practical reality that assets that are acquired, used and maintained by an operating debtor for the particular purposes of the debtor’s business or trade often have a greater “going concern” value than the value realizable in liquidation or on a “scrap sale” basis. From a public policy perspective, Chapter 11 also embodies Congress’ interest in preserving jobs, preserving the local tax base, and minimizing the possibility of collateral damage in the form of additional business failures of suppliers and customers who are dependent upon the debtor’s continuing existence, all of which may be accomplished by facilitating the reorganization of a debtor that is financially troubled, yet functionally viable. See H.R. Rep. 95-595, 95th Cong., 1st Sess. 220 (1977).
In Chapter 11, the reorganization takes place through approval of a plan of reorganization. The development of a Chapter 11 plan “involves the thankless task of determining who should share the losses incurred by an unsuccessful business and how the values of the estate should be apportioned among creditors and stockholders.” S. Rep. No. 95-989, 95th Cong., 2nd Sess. 10 (1978). In many respects, Congress has dictated how such losses and values are to be apportioned by establishing specific claim priorities within the Bankruptcy Code. Nevertheless, the Code also provides a fair degree of flexibility in the restructuring of debt obligations consistent with such priorities. Provided the plan satisfies specific statutory requirements and is either accepted by each class of claims and equity interests or is at least fair and equitable to, and does not discriminate unfairly against, any dissenting classes, the bankruptcy court may approve the plan as the new governing agreement among the debtor and its creditors and equity interest holders.
Chapter 11 is a widely-available form of relief for financially troubled debtors. In this regard, while it may seem logical to believe that a debtor must be insolvent before becoming eligible for such relief, technically the Bankruptcy Code does not impose an insolvency requirement. Moreover, while Chapter 11 is primarily designed for business reorganizations, the Bankruptcy Code is designed to accommodate individual Chapter 11 cases as well. Notwithstanding the broad availability of Chapter 11, certain highly regulated, financial-based businesses are not eligible for such relief. Additionally, because of unique issues associated with certain types of Chapter 11 debtors, various provisions of the Bankruptcy Code have been specially tailored to address these types of Chapter 11 cases (e.g., railroads, “small business debtors,” and individuals).
In this chapter, we focus on a typical Chapter 11 business case. In doing so, we:
- Identify the key players to the case and their respective roles;
- Describe the interplay between the Bankruptcy Code and the debtor’s operations during the course of the case;
- Discuss the means by which claims and equity interests are evidenced in the case and the manner in which secured claims are determined in relation to the value of the underlying collateral securing such claims;
- Outline the requirements of a Chapter 11 plan and the classification of claims and equity interests;
- Highlight the key requirements for confirmation of the plan, including the manner in which votes on the plan may be solicited; and
- Conclude with a discussion of the effects of confirmation.
