LAWDOG BANKRUPTCY: CHAPTER 11

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Chapter 11 Is A "Reorganization" Bankruptcy

Chapter 11 of the Bankruptcy Code may permit individual, partnership, and corporate debtors to reorganize a business structure, reject certain burdensome contracts or property, and to modify payment terms of secured and unsecured obligations. Unlike a Chapter 7 liquidation bankruptcy, a Chapter 11 debtor generally is allowed to remain in possession of its property, and to continue to operate its business. See Section 1101 reproduced here for illustration purposes only.

"Debtor In Possession" of Business

This Chapter 11 debtor is generally referred to as a "Debtor-In-Possession". Under Section 1107, the debtor in possession has the rights and powers of a Chapter 11 trustee, and is required to perform most of the duties of a trustee. These powers and duties include accounting for property, examining and objecting to claims, and filing monthly operating reports. The debtor in possession may employ attorneys, accountants, appraisers, and others to assist in the administration of the estate with the approval of the Bankruptcy Court. See Section 1107 reproduced here for illustration purposes only.

Debtor In Possession May Be Replaced By Trustee

A Trustee is rarely appointed in a Chapter 11 case. After the Chapter 11 has been filed but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court may order the appointment of a trustee for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, or if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate. See Section 1104 reproduced here for illustration purposes only.

Court May Appoint An "Examiner"

If the court does not order the appointment of a trustee under this section, then at any time before the confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court may order the appointment of an examiner to conduct such an investigation of the debtor as is appropriate, including allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor, if such appointment is in the interests of creditors, security holders and other interests of the estate, or if certain debts exceed $5,000,000. See Section 1104 (c) reproduced here for illustration purposes only.

Automatic Stay Applies In All Chapters

An automatic stay is a statutory "order", effective upon the filing of a bankruptcy, which protects the debtor and prohibits actions by creditors. The "automatic stay" arises automatically, and does not require any specific order by a judge. Generally, all acts against the debtor or the property of the debtor MUST CEASE upon the filing of a bankruptcy. See Automatic Stay from previous menu.

Creditors' Committee

An unsecured creditors' committee is appointed by the United States Trustee upon the filing of a Chapter 11 petition, to represent the interests of unsecured creditors in the bankruptcy estate. In a case involving a "Small Business Debtor", the appointment of a creditors' committee may not be required. See "Small Business Debtor" below.

Generally,a creditors' committee may consult with the debtor in possession or trustee, investigate the acts, conduct, assets, liabilities, and financial condition of debtor, the operation of debtor's business and the desirability of the continuance of such a business, and any other matter relevant to the case or to a plan. The committee also may participate in the formulation of a plan, advise those represented by the committee of its determination as to any plan formulated, and collect and file with the court acceptances or rejections of a plan; request the appointment of a trustee or examiner under Section 1104, and perform such other services as are in the interest of those it represents. The committee may also, upon approval of the Bankruptcy Court, hire attorneys, accountants, or such other professionals. See Creditors' Committee from previous menu or here. Link does not return to this page.

Exclusive Right To Propose Chapter 11 Plan

During the first 120 day period, the debtor in possession may have the exclusive right to propose a Chapter 11 Plan of Reorganization . This time period begins, generally, on the date of the filing of the Chapter 11 bankruptcy petition. For a debtor who qualifies and elects to be treated as a "Small Business Debtor", this exclusive period may be 100 days. See "Small Business Debtor" below.

If the debtor has not filed a Chapter 11 plan before the end of the 120 day "exclusive" period, or has not obtained certain "approvals" for a filed plan before 180 days after the date of filing, or at any time in the unusual Chapter 11 case where a trustee has been appointed, any party in interest, including the debtor, the trustee, a creditors' committee, a creditor and others, may file a plan.

A Chapter 11 plan must provide a classification of all claims and interests, specify any class that is not impaired under the plan, specify the treatment of any class that is impaired under the plan, provide equal treatment of claims under the same class unless a particular creditor agrees to a less favorable treatment, provide adequate means for the implementation of the plan, and meet other requirements. See Plan of Reorganization from previous menu or here. Link does not return to this page.

Disclosure And Solicitation

Creditors with allowed claims may accept or reject a Chapter 11 plan in writing. A debtor may solicit the acceptance or rejection of a plan after the commencement of the bankruptcy case only if the debtor transmits to each creditor, a plan or a summary of a plan, and a written disclosure statement, approved by the Court after notice and a hearing. See Disclosure Statements from previous menu or here. Link does not return to this page.

Confirmation Hearing Required

A Chapter 11 plan must be approved by the court at a confirmation hearing. If the Court finds that the plan is proposed in good faith, is in compliance with all statutory requirements, is not unfairly discriminatory, and is fair and equitable, and meets other rules, the plan will be confirmed. See Confirmation & Discharge from previous menu or here. Link does not return to this page.

Once a plan is confirmed, all of the property will be vested in the debtor and free and clear of all claims and interests unless the plan or the order confirming the plan provides otherwise. The debtor will also be discharged from all pre-confirmation debts except for certain "non-dischargeable" debts. If a plan of reorganization is not approved, the case may be dismissed, or converted to a Chapter 7 liquidation. See Conversion & Dismissal from previous menu or here. Link does not return to this page.

Small Business Debtor

Under Chapter 11, a debtor may qualify as a Small Business Debtor if engaged in a commercial or business activity (other than owning or managing real property and activities incidental thereto) and the total amount of noncontingent, liquidated secured and unsecured debts does not exceed $2,000,000 when the case is filed. A qualifying debtor may elect to be treated as a Small Business Debtor. This expedited procedure may permit the elimination of a creditors' committee. Certain time periods are shortened, and some disclosure and acceptance procedures are simplified. For more information, see Small Business Debtor here. Link does not return to this page.

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