Chapter 11 Reorganization

Chapter 11 bankruptcy is the means by which a troubled business may continue to operate and revitalize itself, while also paying creditors and keeping workers employed. In recent years, it also had been used as a vehicle for sustaining large companies that are defendants in multitudinous tort actions throughout the country, and for providing in one forum a method by which the tort victims may be compensated. In short, it may be a favorable alternative to a chapter 7 liquidation. Note that individuals not engaged in business can also be eligible

The business debtor generally continues to remain in possession of the business after the filing of a Chapter 11, and carries out the provisions
of the plan without the supervision of a Trustee. In operating the business the debtor is bound by the "business judgment rule" and generally
the court will not disturb these decisions absent allegations of, and a real potential for, abuse by corporate insiders.

Shortly after the order for relief, the United States trustee appoints a committee of unsecured creditors, usually consisting of those holding the seven largest unsecured claims against the debtor. The creditors committee consults with the business, can investigate the business conduct, finances, operations and the propriety of continuing to operate, participates in the preparation of the plan of reorganization. advises the creditors or equity security holders of the committees judgment or conclusions concerning any plan formulated, collects and files the acceptances or rejections of a plan, and when appropriate requests the appointment of a trustee or examiner.

Since the debtor in possession is usually considered to be the most appropriate person to operate the particular business, it is viewed as the exception, rather than the rule for a trustee to be appointed. Cause for appointment exists where the debtor shows acts evidencing, fraud, dishonesty, incompetence or gross mismanagement. If a trustee is appointed in a Chapter 11 case, the trustee is authorized to manage the business of the debtor. As a consequence, the trustee replaces the debtors directors, and they must surrender the corporations property to the trustee.

In a Chapter 11 case in which a trustee has not been appointed, the court sometimes will order the appointment of an examiner, prior to confirmation of a plan, to investigate any charges of fraud, dishonesty incompetence or mismanagement.

One of the unique features of Chapter 11 is the 1111(b) election which allows a partially secured creditor to elect to have her claim treated as a fully secured claim at the expense of the waiver of a deficiency claim.
The election cannot be made where the creditor has a junior lien that would bring only minimal recovery at foreclosure. Where a secured creditor making the election rejects the proposed plan, confirmation can be had under the Code's "cram down" provisions provided that the electing creditor receives at least the full dollar amount of her allowed claim without interest, and not less than the present value of the collateral.

A Chapter 11 plan must:

• Classify all claims and interests;
• Specify any class that is not impaired;
• Describe the treatment to be accorded any impaired class;
• Treat every claim or interest within a particular class identically;
• Establish adequate ways to implement the plan;

A Chapter 11 plan may:

• Provide for any class of claims to be impaired or unimpaired;
• Provide for the assume or rejection of executory contracts or leases;
  Provide for the settlement of any claim or interest;
• The liquidation of estate property;
• Provide for the rejection of collective bargaining agreements;
   

Post petition solicitation for acceptances of the Chapter 11 plan may be conducted only at or after the time that the plan and a written a written court approved disclosure statement have been sent to holders of claims or interest whose acceptances or rejections are being sought.

A Chapter 11 plan will be confirmed if the plan is filed in good faith, meets the "Best interests of the Creditors" test, all impaired classes accept the plan, all seventh priority tax claims are provided for, the plan is feasible, bankruptcy fees are paid.

A Chapter 11 plan will be confirmed over the objection of impaired classes provided that there is a reasonable basis for discriminatory treatment, the presence of good faith, and the holder of secured claims receive not less than the value of the collateral in deferred cash payments together with an appropriate interest rate.

The provisions of a confirmed Chapter 11 plan are binding upon all creditors and equity security holders, the debtor, any general partners of the debtor, and any entity that issues securities or acquires property under the plan regardless of whether they have accepted
the plan or are impaired under the plan.

Generally, unless the plan or the confirmation order provides otherwise, confirmation discharges the debtor from all pre-confirmation debts, as well as debts arising from the rejection of executory contracts or unexpired leases not assumed by the trustee or the debtor in possession.

Click here for Chapter 11 claims.

200 William St. STE 202
Elmira, NY 14901
Copyright © 2005 Web Imaging Productions