THE DECISION TO REORGANIZE
– Deciding whether to liquidate and what losses might occur:
o Employee jobs
o Future profits
o Time spend, opportunity costs
o Reputation in the community
– Deciding to do a workout and non-bankruptcy rights of separate creditors:
o Disadvantage of BR
§ Not enough money to go around
§ Atty fees/legal fees (will you get paid as their atty)
§ Reputation of debtor
§ Filing a Chp 11 does not mean the plan will be confirmed, it could go into a 7
§ Different creditor rights
– If workout fails, must file for BR
o BR creates an automatic stay
§ Starts the minute the BR is filed
§ Creditors don’t have to know about it
§ No evictions, no lien enforcement, stops all creditor actions
o Finding cash to keep the business running
§ Business has to operate still à 2 sources in which cash may be available:
· Regular business operation à generating cash à cash collateral
§ Borrowing money
– Debtor in possession – (DIP)
o Debtor that is now in possession of the BR estate and continues to make business decisions.
o Typically no trustee is appointed.
– Understanding financial statements of a business: (looking @ pg. 59)
o Audited financial statements are prepared from start to finish by independent accountants?
§ False. Sometimes it is just the secretary. Bigger firms uses in-house finance teams.
o Does the balance sheet tell the story of what has happened over the past year or is it a snapshot of the company’s financial position at one point in time:
o BALANCE SHEET:
§ Assets – liabilities = stockholders equities a/k/a owner’s equity or net worth
§ A – L = SE, thus L + SE = A
§ What does book value mean?
· Value at which assets are listed on the balance sheet
§ Does that mean assets will sell for the book value listed on the balance sheet?
· No. They often sell for a lessor/distressed amount.
o INCOME STATEMENT/STATEMENT OF OPERATIONS
§ When are expenses incurred? à when they are shipped
§ When is a company treated as having the revenue? à when product was shipped
§ Income & expenses are not treated as the date the cash came in or went out.
o In analyzing statement of operations you want to concern yourself with the operating profit instead of loss because if you have ample profit it can be used for reorganization.
o Current asset v noncurrent asset
§ Current assets – assets that will be turned into cash or used up within yr.
§ Noncurrent is everything else.
· Cash in bank = current
· Machine being used in business = noncurrent
· Product waiting for shipment = current
· Patent/trademark = noncurrent
o It is important to have a healthy level of current assets for your current liabilities.
o FIFO v LIFO
§ FIFO means that the product that were made the earliest were the ones that were sold first.
§ LIFO means “last in, first out” thus last products made were the first sold.
o STUDY SLIDE SHOW – WEEK 2 – FOR QUESTIONS ON OPERATION SHEETS
– BR CODE §109
o Who can file for Chp. 11 BR?
§ 109(a): Person that resides or has a domicile, a place of business, or property in the US may be a debtor
§ 109(b): Who cannot file a Chp. 7
· Railroad, domestic insurance company, banks, foreign insurance company
§ 109(d): Only a railroad, a person that may be a debtor under chapter 7 of this title and an uninsured state member bank may be a debtor under chapter 11 of this title.
o Chapter 13 requirements
§ 109(e): Only an individual
· 2 requirements
o Unsecured debt of less than 383K
o Secured debt no more than 1.149M
o Insolvency requirement
§ Person does not have to be insolvent to file.
§ Insolvency measured in 2 way
· Balance sheet insolvency – L’s are greater than A’s
· Failing to pay debts as they come due.
– BR Code §303 – Involuntary BR
o Only certain groups cannot be brought into a 303 BR
§ Farmers & charitable entities
§ Only chapter 7 or 11
o 303(b): Procedure
§ If the debtor has more than 12 creditors, at least 3 of the creditors must file and the unsecured creditors have to equal at least 15,325.
§ If there are less than 12, then any ONE creditor can file but still have to meet the 15,325 requisite.
o 303(h): Also, have to prove debtor is not paying or subject to a bona fide dispute.
o 303(i)(1): These creditors will have to pay atty fees and costs if they cannot prove these things.
o 303(i)(2): If done in bad faith the DAS for proximate cause can be awarded.
o 303(f): (wont deal with this much in class): GAP period
§ Deals with the in between time of the petition period and the time in which it is being determined whether the elements of the involuntary BR have been met.
§ The debtor gets to operate accordingly; operate as if the BR has not happened.
§ The automatic stay still comes into place.
– BR Code § 11.1112(b) – Jurisdiction
o Can convert or dismiss a case à always work in the best interest of the creditors.
o Authorizing filing is usually found in the bylaws of the corporation or operating agreement.
o Deepening insolvency
§ There is an independent action against board of directors if they breach their fiduciary duties:
· Fraudulent balance statements (lying about value)
· Actions made in bad faith, increasing losses of creditors
· No intent factor but negligence is weighed.
– BR Code § 28.1334
o (a): District crt shall have original and exclusive jx over all cases under title 11
o (b): DC’s shall have
ange the membership of a committee appointed under this subsection, if the court determines that the change is necessary to ensure adequate representation of creditors or equity security holders
o (b) A committee of creditor will consists of 7 of the largest claims but the US Trustee may appoint more if necessary;
§ A committee of equity shareholders appointed under (a) will consists of 7 of the largest amounts of equity securities.
o (b)(3) A committee appointed under (a) shall:
§ Provided access to information for creditors who:
· Hold claims of the kind represented by that committee; and
· Are not appointed to the committee.
o MAJORITY RULE FROM CASE: UNDER-SECURED CREDITOR WITH LIENS ON THE MAJORITY OF PROPERTY OF BUSINESS SHALL NOT BE APPOINTED TO THE COMMITTEE
– BR Code §1103 – Powers and duties of committees (CRIPP)
o 1103(c): A committee may (committees are appted by US Tee à 1102)
§ Consult w/the trustee or DIP concerning the administration of the case.
§ Investigate acts, conduct, assets, liabilities, & financial condition of the debtor
§ Participate in formulation of a plan, advise those represented by such committee of such committee’s determinations as to any plan formulated and collect & file w/the court acceptances or rejections of a plan;
§ Request the appt of a trustee or examiner; and
§ Perform such other services as are in the interest of those represented.
– BR CODE §1104 – Appointment of trustee or examiner (see pg 48 in Worley outline)
o On request of a party in interest or the US Tee and after notice & hearing the court shall order the appointment of a trustee –
§ For cause, including fraud, dishonestly, incompetence, or gross mismanagement of the affairs of the debtor by current management OR
§ If such appointment is in the best interest of the creditors, equity security holders, and other interests of the estate.
o Cardinal case re §1104
§ Gross management was the issue; mismanagement or competence alone is usually not enough.
§ Court merged (a1) and (a2) together; found cause & best interest of the estate b/c of lack of confidence from the interested creditors
§ NOTE: Q LIKE THIS ON TEST, ANALYZE THEM TOGETHER. THESE ITEMS ALONE MIGHT CONSTITUTE CAUSE & IT IS IN THE BEST INTEREST OF THE ESTATE