Basics of Business Reorganization in Bankruptcy

Basics of Business Reorganization . in Bankruptcy A Special Collection from The Journal of Commercial Bank Lending by Steven L. Schwarcz

BANKRUPTCY· In this article, Steven Schwarcz offers an overview of Chapler II bankruptcy. In addition 10 beginning a Chapter 11 case, he also discusses administration of these cases and the plan ofreorganization that a debtor must consider. Kaye, Scholer The author is a partner with the law /irm of {~. f • f fp .," 'inl and adjunct professor of law, Benjamin N. Cardozo Law School, Yeshiva University, New York City.

Many of my diems, both domestic code and can take the Corm of either a and international, view bankruptcy as a Chapter 7 case or a Chapter 11 ca~. A black box. A company goes into bank .Chapter 7 case ordinarily results in m ruptcy, and, perhaps~ some years later liquidation of the company and. Coo· emerges in a reorganized form. Some that reason. is not very interesting. unfortunate companies, not possessing Most major companies do not liquidate the proper talisman, never emerge at all in bankruptcy. Indeed, a company that from the black box. This article is an is forced into a Chapter 7 case has the attempt to separate fact from myth by absolute legal right to convert the case explaining the overall principles of a to a Chapter 1i.1 business reorganization in bankruptcy. A Chapter 11 case is the basis of business reorganization in bankruptcy. Ae•• AT MClAAI. A ••eCIAT ... [fTlTi]Ci] Once II Chapter 11 case begins. the Th. NaIoOR.' AIIOC.lloon 01 Blnk LOin Ind Cr.d•• O'"c ... INTRODUCTION PhIIldllpllll, Plnnavl.aRla In the U.S .• business bankruptcy is company's creditors will organize. generally governed by a federal legal under the supervision of a federal

• II u.s .c. i 706(1). AU seCliun cilllioD.are 10 Tille It oIllIe Uailld SlIIn Cade, wllicll conllilulCIlbe fellera' B..... rup"y eu .... 79 80 Bankruptcy Filing Under Chapters 81 bankruptcy trustee, into one or more of bankruptcy. On the one hand, bank ately and automatically suspe~ded, or cially indenture trustees) will request comminees (each a cre:ditors' commit ruptcy recognizes that assets of Ihe staYed.) This is one of the most far appointment to a creditors' comminee tee) for the purpose of negotiating with debtor should be distributed for Ihe reaching provisions of bankruptcy law to fulfill wliat they perceive as their the company. benefit of creditors. On Ihe other hand, and is intended to give the debtor an legal obligation to act as a prudent man The company that is the subject of a it also recognizes lhat the debtor should opportunity to rehabilitate itself. The in times of default under the public Chapter JJ case is referred to as the be given a good faith opportunity to stay remains in effeci throughout the debt securities. debtor. The creditors' comminee and reorganize its business. The Chapter J J bankruptcy case unless the court, after the debtor negotiate the majoll' actions consensus process described above is a hearing, lifts it for a particular Creditors' Clash that the debtor must take to reduce an anempt to recognize and give effect creditor because that creditor has Appointmein of the creditors' com operaling costs, sell unnecessary assets to both of these important but some satisfied specific legal standards appli mince is one of the first occasions for a where appropriate, and eventually times conflicting goals. cable to lifting the stay.4 Lifting the clash of interests. However, this lime compromise on a plan (called II plan of automatic stay docs not often occur. the clash is not between the debtor and reorganization) by which the debtor is BEGINNING A its creditors but among the creditors. reorganized as a viable business cor CHAPTER 11 CASE Creditors' Committee Often institutional creditors, such as poration that no longer needs the pro A company having significant finan As already mentioned, one impor banks and insurance companies, want tection of the bankruptcy laws. cial difficulties, especially cash flow tant consequence of a Chapter II case is to recover their claims as quickly as The plan of reorganization also can problems, might consider filing a peti that the debtor and the debtor's rela feasible. Because there is a time value restructure the amount, nature, and lion for Chapter i I to obtain the protec tionship with ilS creditors and other to money, a small face-value recovery maturities of claims against the debtor tiona that the law gives to debtors. The third parties will become subject to the obtained this year may be more valu and provide for the orderly payment of stigma associa.ted with bankruptcy has supervision of a bankruptcy judge and able to an institutional ~reditor than a these restructured claims. Chapter II, le~sened to some degree, particularly a bankruptcy trustee. One of the first larger face-value .recovery obtained therefore, can affect the entire nature since large and relatively viable com impor&aDt ac,ions of the trustee is to next year. The institutiona" creditors, of a debtor and its rlclationsilip with panies, such as Manville Corporation, appoint a creditors' comminee.~ The therefore, arc likely to seck ways to creditors. LTV Corporation, Texaco In~., and law specifics ordinarily that the obtain a quick recovery, and these ways Evcry debtor and its relationship Continental Air Lines; have used creditors holding the seven largest might include anemplS to liquidate the with creditors is unique. For that rea Chapter 11 as II way of anempting to claim .. , if they a'·e willing to serve, arc debtor. Trade creditors, on the other Ion, the laws of Chapter II neither restructure their debts. appointed to .. committee,· but, in hand, may have more of an interest in mandate that every plan or reorganiza Also, many business people mis practice, the trustee will try to make preserving the debtor as a viable busi tion be the same or even similar nor takenly do not think of Chapter II as the comminee representative of the ness entity, especially if the debtor is thai the steps taken to reach a pl~ involving bankruptcy. A comp~ny may claims ;n the bankruptcy case. In major one of the trade creditor's important of reorganization be the same. The also be forced by ils creditors into bankruptcies, it is not uncommon to customers or suppliers. Therefore, ten essence of Chapter II is a consensus Chapter II if certain legal standards are sec comminees with as many as a dozen sion is created at the outsel as to who process through which the debtor and violated, such as the company's gen or more members. Typically, represen -institutional or trade credilors-will hs creditors, represented for adminis erally not paying its debts as they come tatives of banks, insurance company dominate the creditors' committee. trative convenience by the creditors' due.! lenders. and trade creditors will domi There arc Chapter 11 cases in which a comminee, negotiate and compromise Often, the company and its creditors nate the committee. Often trustees for single creditors' comminee is insuffi their way along the path to reorganiza do not think through all of the conse publicly issued debt securities (espe- cientlo represent adequately the inler- tion. quences of filing for Chapter I J. The It would, of course, be more: efficient most immediate and obvious conse • , i62(1). if, instead of neKotiation, the debtor quence for creditors is that all rights of • See , 36l( d) . • The Auomcy Generllippoinlllhne Uuslrn, called UnilN SlIln T.Ullrn, who uncIen.e Ihe admini .. (or, alternalively, the creditors) alone creditors to take actions to collect debts ""Iive, II opposed 10 purelyjudicill, r.sponsibililinohheblllkruplCY jud.e. SccCblplcr 3901 2. U.S.c. made: the decisions at each step. How or foreclose on collateral are immedi- In Iddilion 10 lhe IrUSlOCS' relponsibitilY 10 manilor Ihe pro."" of a.apler tl CllCllnd prevCDI ~elay ,lb. IfU"'" mOf submillO Ihe jud,e commealS lID proposed rco".niZilioa plana. sec 2. U.S.C. S 5'6(1). ever, 10 permit that would lose sight of • S II02(b). the two primary, but conflicting, goals 'S J03(h). 80 Bankruptcy Filing Under Chapters 81 bankruptcy trustee, into one or more of bankruptcy. On the one hand, bank ately and automatically suspe~ded, or cially indenture trustees) will request comminees (each a cre:ditors' commit ruptcy recognizes that assets of Ihe staYed.) This is one of the most far appointment to a creditors' comminee tee) for the purpose of negotiating with debtor should be distributed for Ihe reaching provisions of bankruptcy law to fulfill wliat they perceive as their the company. benefit of creditors. On Ihe other hand, and is intended to give the debtor an legal obligation to act as a prudent man The company that is the subject of a it also recognizes lhat the debtor should opportunity to rehabilitate itself. The in times of default under the public Chapter JJ case is referred to as the be given a good faith opportunity to stay remains in effeci throughout the debt securities. debtor. The creditors' comminee and reorganize its business. The Chapter J J bankruptcy case unless the court, after the debtor negotiate the majoll' actions consensus process described above is a hearing, lifts it for a particular Creditors' Clash that the debtor must take to reduce an anempt to recognize and give effect creditor because that creditor has Appointmein of the creditors' com operaling costs, sell unnecessary assets to both of these important but some satisfied specific legal standards appli mince is one of the first occasions for a where appropriate, and eventually times conflicting goals. cable to lifting the stay.4 Lifting the clash of interests. However, this lime compromise on a plan (called II plan of automatic stay docs not often occur. the clash is not between the debtor and reorganization) by which the debtor is BEGINNING A its creditors but among the creditors. reorganized as a viable business cor CHAPTER 11 CASE Creditors' Committee Often institutional creditors, such as poration that no longer needs the pro A company having significant finan As already mentioned, one impor banks and insurance companies, want tection of the bankruptcy laws. cial difficulties, especially cash flow tant consequence of a Chapter II case is to recover their claims as quickly as The plan of reorganization also can problems, might consider filing a peti that the debtor and the debtor's rela feasible. Because there is a time value restructure the amount, nature, and lion for Chapter i I to obtain the protec tionship with ilS creditors and other to money, a small face-value recovery maturities of claims against the debtor tiona that the law gives to debtors. The third parties will become subject to the obtained this year may be more valu and provide for the orderly payment of stigma associa.ted with bankruptcy has supervision of a bankruptcy judge and able to an institutional ~reditor than a these restructured claims. Chapter II, le~sened to some degree, particularly a bankruptcy trustee. One of the first larger face-value .recovery obtained therefore, can affect the entire nature since large and relatively viable com impor&aDt ac,ions of the trustee is to next year. The institutiona" creditors, of a debtor and its rlclationsilip with panies, such as Manville Corporation, appoint a creditors' comminee.~ The therefore, arc likely to seck ways to creditors. LTV Corporation, Texaco In~., and law specifics ordinarily that the obtain a quick recovery, and these ways Evcry debtor and its relationship Continental Air Lines; have used creditors holding the seven largest might include anemplS to liquidate the with creditors is unique. For that rea Chapter 11 as II way of anempting to claim .. , if they a'·e willing to serve, arc debtor. Trade creditors, on the other Ion, the laws of Chapter II neither restructure their debts. appointed to .. committee,· but, in hand, may have more of an interest in mandate that every plan or reorganiza Also, many business people mis practice, the trustee will try to make preserving the debtor as a viable busi tion be the same or even similar nor takenly do not think of Chapter II as the comminee representative of the ness entity, especially if the debtor is thai the steps taken to reach a pl~ involving bankruptcy. A comp~ny may claims ;n the bankruptcy case. In major one of the trade creditor's important of reorganization be the same. The also be forced by ils creditors into bankruptcies, it is not uncommon to customers or suppliers. Therefore, ten essence of Chapter II is a consensus Chapter II if certain legal standards are sec comminees with as many as a dozen sion is created at the outsel as to who process through which the debtor and violated, such as the company's gen or more members. Typically, represen -institutional or trade credilors-will hs creditors, represented for adminis erally not paying its debts as they come tatives of banks, insurance company dominate the creditors' committee. trative convenience by the creditors' due.! lenders. and trade creditors will domi There arc Chapter 11 cases in which a comminee, negotiate and compromise Often, the company and its creditors nate the committee. Often trustees for single creditors' comminee is insuffi their way along the path to reorganiza do not think through all of the conse publicly issued debt securities (espe- cientlo represent adequately the inler- tion. quences of filing for Chapter I J. The It would, of course, be more: efficient most immediate and obvious conse • , i62(1). if, instead of neKotiation, the debtor quence for creditors is that all rights of • See , 36l( d) . • The Auomcy Generllippoinlllhne Uuslrn, called UnilN SlIln T.Ullrn, who uncIen.e Ihe admini .. (or, alternalively, the creditors) alone creditors to take actions to collect debts ""Iive, II opposed 10 purelyjudicill, r.sponsibililinohheblllkruplCY jud.e. SccCblplcr 3901 2. U.S.c. made: the decisions at each step. How or foreclose on collateral are immedi- In Iddilion 10 lhe IrUSlOCS' relponsibitilY 10 manilor Ihe pro."" of a.apler tl CllCllnd prevCDI ~elay ,lb. IfU"'" mOf submillO Ihe jud,e commealS lID proposed rco".niZilioa plana. sec 2. U.S.C. S 5'6(1). ever, 10 permit that would lose sight of • S II02(b). the two primary, but conflicting, goals 'S J03(h). 82 Bankruptcy Filing Under Chapters 83 ests of all the creditors. This sometimes Management During examiner role, II it has become custom· leek new financing to indicate 10 lrade occurs where certain claims against the Chapter 11 ary in large cases for the creditors to creditors that since a financial institu debtor are contractually subordinated select by consensus, at the outset of tion has recognized the debtor as tOl!)ther (senior) claims against the While in Chapter II, the debtor or the case, a prominent lawyer of un worthy of new credit, so, too, should debtor. The holders of the subordi dinarily will have the same manage questioned character who will act as trade creditors reestablish terms of nated claims may petition the bank ment as before bankruptcy.· There examiner aC(:ording to a narrowly de trade credit with the debtor. ruptcy judge for a separate 1C0mminee . is no requirement of law that pre fined charter of responsibilities pre to represent their special concerns. In bankruptcy management must resign, pared by creditors and approved by the Obtaining New Financing some recent cases, separate comminees although officers and directors closely court. These responsibilities usually nle Bankruptcy Code grants far have been formed for competitors of associated with ttic debtor prior to focus on the investigation offraudulent reaching powers 10 a debtor in Chapter the debtor where the: general creditors' bankruptcy and whose credibility has acts of management and third r'~rtic:s 11 to enable it to raise new financing. comminee has acceu to sensitive com been impaired by the bankruptcy may (for example, accountants) and the The court may srant the ncw lender a petitive information. choose. to resign or may be forced out possibility of recovery from these per special priority on its claim for repay by creditor pressure. Sometimes in sons for the benefit of tbe debtor's es ment, ahead· of.lheclail11l pf other I Power of major cases, the debtor's board of di tate. "" In general, through ~ thuf»le of creditors not havins ,0Ilatenl. ' If that Creditors' Committees rectors will replace top management the examiner is in the process of beins is insufficient to allnCI polential new with one or more individuals who have established on a case-by-case basis. lenders. the court may elso Qrder that a Creditors' committees arc powerful partiqliar experience and skill in turn lien be created on exislinl or afler· ernitiu. bin lheir power is thal of per· ins arpund troubled companies. ADMINISTRATION OF " acquired properly of Ihe deblor 10 se· suasion. Although technically each In· In certain cases in which there has' CHAPTER 11 CASE . ,uri r~paymCI\I of lb. pew loan. AI dividual creditor has the legal right to been fraud or gross mismanagement, An important goal for a Chapter II times, the debtor needs the new financ be heard in court 'on each issue in a the court will consider arguments, if debtor is to obtain financing to permit ing but has no unencumbered assets on case, the judge will 'naturally give greal . advanced by creditors, for the ap the debtor to continue its business op which a lien can be granted ofsufficient emphasis to the view of a court pointment of a trustee-in-bankruptcy.' erations. (As discussed, a debtor may vz:lue to entice a potential lender. In appointed credilors' com mince that is who would manage the debtor in lieu of operate: in Chapter II much as it docs such extraordinary circumstances, the represeJ1tative of many claims in the its normal officers and directors. In outside of Chapter II but is subject to court may order that a new lender re case. Also. by law,' each crediton' pr.ctice, however, bankruptcy courts Ii~pervi$ion of the banltruptcy cQun.) ceive a first lien on property Ihat is committee has lhe power till hire legal art reluctant to appoint trustees-in. Sometimes financing may not aClually already Sl.Ib;ec:lIO aUen "e.ted prior to counsel, accoumants, and business ad bankruptty except in extreme cases. be needed; the debtor will be atJle 10 bankruptcy. 14 vilors (such as invest menu bankers) perhaps because they are reluctant 10 save money because il no lonser i, obli SometimOl new finall':in, i, P8'O Ind to bav!! tile fees and llpenses of lub.thute eouru-appointed experts in gated (0 pay i'" debt service on a cur· vide4 by ~n eliltins lender. A. an in· these experts paid directlY from the place of businessmen who know lhe rent basisY Even in circumstances ducement to the existin, lender to debtor's eslile. These elpcr" contri debtor and its business. where the debtor docs not need to ob· mak. new advances, the debtor may bute significantly to the value of wllat Wbe~ I trustee-in· bankruptcy II nOI tain new financing, however, it may offer 10 s!!cure both the lender's exist- the creditors' comminee can say, and appointed. the court may (and in a lhe commiuee ordinarily is not deter large case probably will) appoint an red by costs from doing a proper inves examiner. 10 The role of the examiner is tigation and analysis of each issue in the not dearly defined in the Bankruptcy " for caomplc. in one bankruplCY case in whicb .he aUlhor putkiplued ,Ibe ludiC Ippoialed bit CGllcllue casll:. Code. Because of early abuses of the ellminer and Iricd 10 run Ihe ClK Ihruulb Ibe C&lI1Iincr, Illintn ill clillqll'd ohbe iIllerall eaprcucd b, Ih' deblor and "coIil"n. . . UA For ...mplc. on caaminer WII appoinled in Ibe A.H. Robina cue II Ibe requCl! ~. COPlPlIIICC of , S 1I0)(al. penonal injury plainliffs wbo Illcled wrun,rul conduct on lbe pari a1lbe CGmpan, I _lIcmeDl. • CcImpare S 1101 wilh S 1101. II Sec Ih. pr•• ious d;scuuion of Ihe IUlomllk Ill, uncler , )62. • S 1104(.). " S 364. II S 1I000b). ,. S•• S 364(d). tn .uch ClK,Ihe ",ebankruptcy lencler would baYe 10 receive ndcqUIIC proleClion Dr bia claim. 82 Bankruptcy Filing Under Chapters 83 ests of all the creditors. This sometimes Management During examiner role, II it has become custom· leek new financing to indicate 10 lrade occurs where certain claims against the Chapter 11 ary in large cases for the creditors to creditors that since a financial institu debtor are contractually subordinated select by consensus, at the outset of tion has recognized the debtor as tOl!)ther (senior) claims against the While in Chapter II, the debtor or the case, a prominent lawyer of un worthy of new credit, so, too, should debtor. The holders of the subordi dinarily will have the same manage questioned character who will act as trade creditors reestablish terms of nated claims may petition the bank ment as before bankruptcy.· There examiner aC(:ording to a narrowly de trade credit with the debtor. ruptcy judge for a separate 1C0mminee . is no requirement of law that pre fined charter of responsibilities pre to represent their special concerns. In bankruptcy management must resign, pared by creditors and approved by the Obtaining New Financing some recent cases, separate comminees although officers and directors closely court. These responsibilities usually nle Bankruptcy Code grants far have been formed for competitors of associated with ttic debtor prior to focus on the investigation offraudulent reaching powers 10 a debtor in Chapter the debtor where the: general creditors' bankruptcy and whose credibility has acts of management and third r'~rtic:s 11 to enable it to raise new financing. comminee has acceu to sensitive com been impaired by the bankruptcy may (for example, accountants) and the The court may srant the ncw lender a petitive information. choose. to resign or may be forced out possibility of recovery from these per special priority on its claim for repay by creditor pressure. Sometimes in sons for the benefit of tbe debtor's es ment, ahead· of.lheclail11l pf other I Power of major cases, the debtor's board of di tate. "" In general, through ~ thuf»le of creditors not havins ,0Ilatenl. ' If that Creditors' Committees rectors will replace top management the examiner is in the process of beins is insufficient to allnCI polential new with one or more individuals who have established on a case-by-case basis. lenders. the court may elso Qrder that a Creditors' committees arc powerful partiqliar experience and skill in turn lien be created on exislinl or afler· ernitiu. bin lheir power is thal of per· ins arpund troubled companies. ADMINISTRATION OF " acquired properly of Ihe deblor 10 se· suasion. Although technically each In· In certain cases in which there has' CHAPTER 11 CASE . ,uri r~paymCI\I of lb. pew loan. AI dividual creditor has the legal right to been fraud or gross mismanagement, An important goal for a Chapter II times, the debtor needs the new financ be heard in court 'on each issue in a the court will consider arguments, if debtor is to obtain financing to permit ing but has no unencumbered assets on case, the judge will 'naturally give greal . advanced by creditors, for the ap the debtor to continue its business op which a lien can be granted ofsufficient emphasis to the view of a court pointment of a trustee-in-bankruptcy.' erations. (As discussed, a debtor may vz:lue to entice a potential lender. In appointed credilors' com mince that is who would manage the debtor in lieu of operate: in Chapter II much as it docs such extraordinary circumstances, the represeJ1tative of many claims in the its normal officers and directors. In outside of Chapter II but is subject to court may order that a new lender re case. Also. by law,' each crediton' pr.ctice, however, bankruptcy courts Ii~pervi$ion of the banltruptcy cQun.) ceive a first lien on property Ihat is committee has lhe power till hire legal art reluctant to appoint trustees-in. Sometimes financing may not aClually already Sl.Ib;ec:lIO aUen "e.ted prior to counsel, accoumants, and business ad bankruptty except in extreme cases. be needed; the debtor will be atJle 10 bankruptcy. 14 vilors (such as invest menu bankers) perhaps because they are reluctant 10 save money because il no lonser i, obli SometimOl new finall':in, i, P8'O Ind to bav!! tile fees and llpenses of lub.thute eouru-appointed experts in gated (0 pay i'" debt service on a cur· vide4 by ~n eliltins lender. A. an in· these experts paid directlY from the place of businessmen who know lhe rent basisY Even in circumstances ducement to the existin, lender to debtor's eslile. These elpcr" contri debtor and its business. where the debtor docs not need to ob· mak. new advances, the debtor may bute significantly to the value of wllat Wbe~ I trustee-in· bankruptcy II nOI tain new financing, however, it may offer 10 s!!cure both the lender's exist- the creditors' comminee can say, and appointed. the court may (and in a lhe commiuee ordinarily is not deter large case probably will) appoint an red by costs from doing a proper inves examiner. 10 The role of the examiner is tigation and analysis of each issue in the not dearly defined in the Bankruptcy " for caomplc. in one bankruplCY case in whicb .he aUlhor putkiplued ,Ibe ludiC Ippoialed bit CGllcllue casll:. Code. Because of early abuses of the ellminer and Iricd 10 run Ihe ClK Ihruulb Ibe C&lI1Iincr, Illintn ill clillqll'd ohbe iIllerall eaprcucd b, Ih' deblor and "coIil"n. . . UA For ...mplc. on caaminer WII appoinled in Ibe A.H. Robina cue II Ibe requCl! ~. COPlPlIIICC of , S 1I0)(al. penonal injury plainliffs wbo Illcled wrun,rul conduct on lbe pari a1lbe CGmpan, I _lIcmeDl. • CcImpare S 1101 wilh S 1101. II Sec Ih. pr•• ious d;scuuion of Ihe IUlomllk Ill, uncler , )62. • S 1104(.). " S 364. II S 1I000b). ,. S•• S 364(d). tn .uch ClK,Ihe ",ebankruptcy lencler would baYe 10 receive ndcqUIIC proleClion Dr bia claim. 84 Bankruptcy Filing Under Chapters ¥5 ing claim (to the extent it is not already it down and terminating the em a contract prior to the plan of reorgani the benefil of long-Ierm advantageous secured) and hs claim for the new ad ployees. zation if the debtor has convincing ar contracts. The debtor even hal Ihe vances. Such an arrangement, known Investmenl bankers may also be re guments that it cannot properly make right to assign or sell these contracls to as cross-collateralization, is subjecI to tained, especially in large cases, to that decision before it thinks through third parlies." court approval, which may be: granted identify major assets, divisions, and the requirements of its plan of reor afler nOlice and Ii hearing. subsidiaries 10 sell. An example might ganization. PLAN OF A debtor's allempllo oblain new fin be the sale of a division with an unre The debtor does, however, have the REORGANIZATION ancing during a Chapter II case can lated product. The debtor might not right under the Bankruptcy Code 10 Once the debtor has managed to con raise many problems. Of particular in have the managemenl skills 10 make reject a contract al any lime if Ihe trol its costs and stabilize ils business terest is the tension between a debtor the division profitahie, but the product debtor can show that conlinued per operations, it will begin considering that wants new financing to purchase itself may have considerable commer formance is not in its business inter how to structure its plan of reorganiza inventory to manufacture new prod cial value. The division could be sold to cstS.11 If a conlract is rejecled. the tion. The chief purpose of the plan is to ucts and a creditor who would prefer a company having expertise in that debtor no longer must perform its obli f@ffilate the contractual relationship be that no new claims, equal to or ahead of product. The happy result is that the gations thereunder but will be liable for tween the debtor and its creditors in a his own claim, be created by the in~ debtor would receive value for selling a damages for breach of conlracl. How manner that will 'allow the debtor to currence of the new financing. The division which previously was a cash ever, the damage claim against the og;cll'ate as a viable company outside of creditor probably will not be sym drain, and the division would be man debtor will be a general unsecured thw protections of Chapter II. palhelic to the desire of a debtor to aged by a'new company having the ex claim and not be entitled to any special fhe debtor has the exclusive right to manufacture more inventory thaI may pertise to render it profitable. priorities in bankruptcy. propose a plan of reorganizalion for the not be readily salabli:. The deblor also has the righl to first 120 days after the bankruptcy Third.Party Contracts affirm, or assume, a conlracl Ihat it commences. l • In large cases. Ihis is Making Money The ultimate goal of the debtor and regards as advantageous, even if the rarely enough time. and the court may Once the debtor has obtained needed its creditors is 10 reduce costs and gain contract, by its terms. lerminates iii extend this period of exclusivity for financing and reestablished lines of effective control of the businel'S suffi case of bankruptcy. For example. as sufficient periods to allow the debtor Irade credit, it can begin to turn its ciently so that it becomes feasible 10 sume the debtor has a contract with time 10 control costs and stabilize the anent ion to the job of making money. propose a plan for financial reorganiza ABC Company to purchase widgets at busincss.zo The debtor has a period of Because a company known to be in tion. Achieving this goal almosl cer $5 per widget. The price of widgets has exclusivity because it was recognized Chapter II is unlikely, at least al the tainly will lake months, and in a large increased 10 $7 per widget. The debtor that it would be awkward to allow outset of the case, to be in a position to case, could take years. During that could, if it cures the defaults under this creditors the right to file separate plans. expand hs markels, the usual focus is time. third parties having contracts contract (olher than defaults generally without firsl giving the debtor the righl on reducing operating costs and selling with Ihe debtor may want to enforce relaling to bankruptcy, insolvency, or to file its own plan.ll unneeded assets. Ihese contraclS, but they are prevented financial condition) and provides ade In a typical plan of reorganization, The debtor will often relain accoun from doing so by the automatic stay, q uate assurance of fUlUre performance, each of Ihe claims againsl lhe debtor lants to help identify areas where costs already discussed above. IS There is a assume this contracl and thereby ob incurred prior 10 bankruptcy would be can be reduced and to institute controls procedure by which parties to contracts lain the benefit of the $2 per widget classified according 10 the Bankruptcy on the incurrence of future costs. For can allempl to compel the debtor to favorable price differential. This is a Code. Holders of general unsecured example, a particular manufacturing decide whether or not to accept, or as powerful right .>Cthe debtor to preserve claims might. for example, receive plant might, under close scrutiny, be sume, Ihese contracts. III In practice, found to be obsolescent; the debtor however, a court is reluctanllo compel ., S J65(1). This rilhl only c.. endllo Ihe reicclion of ue"'lory eonulas; mil is, coalrlell where mllerial could save significant cos IS by shulling the debtor to choose to assume or reject perrormance il IliII due on bolh lida. II S 36S(O. ,. S 1I··(b). "S162 ,. S IIlI(d). It i J6)(d). /. One could imlline Ihl' I credilor', plan _uld focus on repllYlllenl in ruu or claiml, wlthoul IU/ficicn. rClarll ror rchlbililltion or Ihe lIeblor. 84 Bankruptcy Filing Under Chapters ¥5 ing claim (to the extent it is not already it down and terminating the em a contract prior to the plan of reorgani the benefil of long-Ierm advantageous secured) and hs claim for the new ad ployees. zation if the debtor has convincing ar contracts. The debtor even hal Ihe vances. Such an arrangement, known Investmenl bankers may also be re guments that it cannot properly make right to assign or sell these contracls to as cross-collateralization, is subjecI to tained, especially in large cases, to that decision before it thinks through third parlies." court approval, which may be: granted identify major assets, divisions, and the requirements of its plan of reor afler nOlice and Ii hearing. subsidiaries 10 sell. An example might ganization. PLAN OF A debtor's allempllo oblain new fin be the sale of a division with an unre The debtor does, however, have the REORGANIZATION ancing during a Chapter II case can lated product. The debtor might not right under the Bankruptcy Code 10 Once the debtor has managed to con raise many problems. Of particular in have the managemenl skills 10 make reject a contract al any lime if Ihe trol its costs and stabilize ils business terest is the tension between a debtor the division profitahie, but the product debtor can show that conlinued per operations, it will begin considering that wants new financing to purchase itself may have considerable commer formance is not in its business inter how to structure its plan of reorganiza inventory to manufacture new prod cial value. The division could be sold to cstS.11 If a conlract is rejecled. the tion. The chief purpose of the plan is to ucts and a creditor who would prefer a company having expertise in that debtor no longer must perform its obli f@ffilate the contractual relationship be that no new claims, equal to or ahead of product. The happy result is that the gations thereunder but will be liable for tween the debtor and its creditors in a his own claim, be created by the in~ debtor would receive value for selling a damages for breach of conlracl. How manner that will 'allow the debtor to currence of the new financing. The division which previously was a cash ever, the damage claim against the og;cll'ate as a viable company outside of creditor probably will not be sym drain, and the division would be man debtor will be a general unsecured thw protections of Chapter II. palhelic to the desire of a debtor to aged by a'new company having the ex claim and not be entitled to any special fhe debtor has the exclusive right to manufacture more inventory thaI may pertise to render it profitable. priorities in bankruptcy. propose a plan of reorganizalion for the not be readily salabli:. The deblor also has the righl to first 120 days after the bankruptcy Third.Party Contracts affirm, or assume, a conlracl Ihat it commences. l • In large cases. Ihis is Making Money The ultimate goal of the debtor and regards as advantageous, even if the rarely enough time. and the court may Once the debtor has obtained needed its creditors is 10 reduce costs and gain contract, by its terms. lerminates iii extend this period of exclusivity for financing and reestablished lines of effective control of the businel'S suffi case of bankruptcy. For example. as sufficient periods to allow the debtor Irade credit, it can begin to turn its ciently so that it becomes feasible 10 sume the debtor has a contract with time 10 control costs and stabilize the anent ion to the job of making money. propose a plan for financial reorganiza ABC Company to purchase widgets at busincss.zo The debtor has a period of Because a company known to be in tion. Achieving this goal almosl cer $5 per widget. The price of widgets has exclusivity because it was recognized Chapter II is unlikely, at least al the tainly will lake months, and in a large increased 10 $7 per widget. The debtor that it would be awkward to allow outset of the case, to be in a position to case, could take years. During that could, if it cures the defaults under this creditors the right to file separate plans. expand hs markels, the usual focus is time. third parties having contracts contract (olher than defaults generally without firsl giving the debtor the righl on reducing operating costs and selling with Ihe debtor may want to enforce relaling to bankruptcy, insolvency, or to file its own plan.ll unneeded assets. Ihese contraclS, but they are prevented financial condition) and provides ade In a typical plan of reorganization, The debtor will often relain accoun from doing so by the automatic stay, q uate assurance of fUlUre performance, each of Ihe claims againsl lhe debtor lants to help identify areas where costs already discussed above. IS There is a assume this contracl and thereby ob incurred prior 10 bankruptcy would be can be reduced and to institute controls procedure by which parties to contracts lain the benefit of the $2 per widget classified according 10 the Bankruptcy on the incurrence of future costs. For can allempl to compel the debtor to favorable price differential. This is a Code. Holders of general unsecured example, a particular manufacturing decide whether or not to accept, or as powerful right .>Cthe debtor to preserve claims might. for example, receive plant might, under close scrutiny, be sume, Ihese contracts. III In practice, found to be obsolescent; the debtor however, a court is reluctanllo compel ., S J65(1). This rilhl only c.. endllo Ihe reicclion of ue"'lory eonulas; mil is, coalrlell where mllerial could save significant cos IS by shulling the debtor to choose to assume or reject perrormance il IliII due on bolh lida. II S 36S(O. ,. S 1I··(b). "S162 ,. S IIlI(d). It i J6)(d). /. One could imlline Ihl' I credilor', plan _uld focus on repllYlllenl in ruu or claiml, wlthoul IU/ficicn. rClarll ror rchlbililltion or Ihe lIeblor. 87 86 Bankruptcy Filing Under Chapters an inducement to Ihe debtor and federal income tax attributes. Most payment of their claims through a 2. No class junior to it receives any holders of senior claims to offer a rea bankrupt companies operate It a loss c(lmbination of cash and long-term value on account of its claims or inter sonable proposal to the holders of for several years prior to bankruptcy debt instruments or equity securities. ests. junior claims.lS and, therefore. typically will have Holders of claims subordinated @o gen significant carryovers to fUIUre tax eral unsecured claims would probably Cramdown Principle CONCl.USION years for nel operating and capilal receive a significantly lesser value per Consider a class of general unsecured There are many other important losses and investment tax credits. The dollar of claim. Claims of other classifi daimants receiving cash and debt secu considerations in a Chapter 11 case not manner in which the bankrupl com cations would be expected to receive rities valued at 100% of the general un mentioned in this overview. For exam pany is restruclured should be tailored more or less, depending on the relative secured claims. Those claimants may ple, one of the most valuable assets of to maximize and preserve these carry- rlanking of the claims illl a bankruptcy !be able to cram down a plan of reor a bankrupt company frequently is its overs. • Iiquidalionu and, therefore, the rela ganization over the objection of a class dve negotiating strength of creditors of subordinated public debentures as holding these claims. long as no class of claims or interests junior to Ihe subordinated public de bentures receives value under the plan Key to Successful Plan of reorganization. The key to a successful plan of reor Although in principle cramdown ganwtion is that it be consensual. That sounds like a powerful tool, in practice, means, in practice, that each class of it would require a hearing to value the claims must receive enough value for debtor's assets and the benefits re hs claims to persuade tine class to vote ceived by the senior claimants to ensure affirmatively for the plan. The: Bank that no senior claimants receive more ruptcy Code contains certain ,induce than 100% of their claims. A valuation ments to consensus. Perhaps the most hearing of this sorl can be very expen important and well known is the so sive and time consuming and will al called cramdown provision.lJ In es most certainly result in prolonged liti licnce, this provision maintains the fol gation as to whether the valuation was lowing: properly done. Therefore, cramdown I. A junior class (for example, a class is most important as a threat to induce t;)f subordinated claims or a class of junior classes of creditors to accept a lequity interests) will be legally deemed plan ofreorganization proposed by the ~o have accepted a plan of reorganiza debtor or by senior creditors, since don which provides that no class senior there is a theoretical risk that the junior 10 it receives, in the plan, value worth class could receivl: much less in a cram more than 100% of the claims repre down. On the other hand, the difficulty sented by such senior c1ass. 14 caused by the valuation hearing is also

II Cum pare S 726(1) . .. , ll29(b) . .. The ""ncepllhll ~ .cn.ior diU rcc.iva no more Ihlll 100% 01 il' dlim, is nol ,el fDrlh in' IIl9(b) bUI is " Thai il why, for Cli ,'ple, subordinllcd crcdilon in bankruplC)' .re oilen able to recov" I ""nioa on their de.. from Ihe leallll .. ve hISIOr}'. Sce HOUle of Reprelenilliv.. Rc""n No. )') 'Slh eo",. III S-. 41).18 (1977). • • -•. cl. ;ms ..en lhou' n .enior credilon hue nol bten paid in full. 87 86 Bankruptcy Filing Under Chapters an inducement to Ihe debtor and federal income tax attributes. Most payment of their claims through a 2. No class junior to it receives any holders of senior claims to offer a rea bankrupt companies operate It a loss c(lmbination of cash and long-term value on account of its claims or inter sonable proposal to the holders of for several years prior to bankruptcy debt instruments or equity securities. ests. junior claims.lS and, therefore. typically will have Holders of claims subordinated @o gen significant carryovers to fUIUre tax eral unsecured claims would probably Cramdown Principle CONCl.USION years for nel operating and capilal receive a significantly lesser value per Consider a class of general unsecured There are many other important losses and investment tax credits. The dollar of claim. Claims of other classifi daimants receiving cash and debt secu considerations in a Chapter 11 case not manner in which the bankrupl com cations would be expected to receive rities valued at 100% of the general un mentioned in this overview. For exam pany is restruclured should be tailored more or less, depending on the relative secured claims. Those claimants may ple, one of the most valuable assets of to maximize and preserve these carry- rlanking of the claims illl a bankruptcy !be able to cram down a plan of reor a bankrupt company frequently is its overs. • Iiquidalionu and, therefore, the rela ganization over the objection of a class dve negotiating strength of creditors of subordinated public debentures as holding these claims. long as no class of claims or interests junior to Ihe subordinated public de bentures receives value under the plan Key to Successful Plan of reorganization. The key to a successful plan of reor Although in principle cramdown ganwtion is that it be consensual. That sounds like a powerful tool, in practice, means, in practice, that each class of it would require a hearing to value the claims must receive enough value for debtor's assets and the benefits re hs claims to persuade tine class to vote ceived by the senior claimants to ensure affirmatively for the plan. The: Bank that no senior claimants receive more ruptcy Code contains certain ,induce than 100% of their claims. A valuation ments to consensus. Perhaps the most hearing of this sorl can be very expen important and well known is the so sive and time consuming and will al called cramdown provision.lJ In es most certainly result in prolonged liti licnce, this provision maintains the fol gation as to whether the valuation was lowing: properly done. Therefore, cramdown I. A junior class (for example, a class is most important as a threat to induce t;)f subordinated claims or a class of junior classes of creditors to accept a lequity interests) will be legally deemed plan ofreorganization proposed by the ~o have accepted a plan of reorganiza debtor or by senior creditors, since don which provides that no class senior there is a theoretical risk that the junior 10 it receives, in the plan, value worth class could receivl: much less in a cram more than 100% of the claims repre down. On the other hand, the difficulty sented by such senior c1ass. 14 caused by the valuation hearing is also