Background
Bankruptcy Courts
Bankruptcy judges decisions on matters are appealed to the district court, which reviews them on a “clearly erroneous” basis
Code allows any of the circuit courts to adopt a special appellate procedure whereby the first appeal from a bankruptcy court decision is to a panel of bankruptcy judges and from there to court of appeals – called BAPs. Code §158(c)
Structure of the Bankruptcy Code
Title 11 is divided into chapters – 1, 3, 5,6, 9, 11, 12, 13, 15
Chapters 1, 3, and 5 are general provisions that are applicable
o Chapter 1 – devoted to structural subjects such as definitions rules of construction, general powers of the bankruptcy court, and the qualifications of debtors eligible for each of the type of proceeding
o Chapter 3 – governs case administration, including appointment and compensation of the Trustee in Bankruptcy and regulation of the operation of the bankruptcy estate
Chapters 7, 9, 11, 12, 13, and 15 each govern a different type of bankruptcy proceeding
o Ch. 7 – classic, “straight” bankruptcy liquidation for both consumers and businesses
o Ch. 9 – special provisions for the bankruptcy of municipality/governmental unit
o Ch. 11 – chapter most often used by reorganizing business
o Ch. 13 – dockets include those who iwsh to save non-exempt property
o Ch. 12 – specialized version of Ch. 13 for family farmers
o Ch. 15- special ancillary proceeding in which US court assists foreign court that has primary J over a foreign debtor.
Chapter 7 Liquidation
Differences between personal and corporate bankruptcies:
o §727(a): There is no discharge for Ch. 7 debtor that is not an individual.
§ Corporation expires under state corporate law following financial demise after bankruptcy
§ No exemptions for corporate property – all is available
Ch. 7 is often the end game,, where all unsuccessful reorganization goes to die
All Ch. 11 negotiations are held in the shadow of Ch. 7 à debtor usually has an absolute right to convert the case to Ch. 7, §1112(a), and the creditors can do so on a proper showing, §1112(b).
State law encourages grabbing whatever creditors can, as quickly as they can while Ch. 7 allows a more orderly sale of assets
Chapter 11 Reorganization
A corporation never wants to liquidate because, unlike the individual debtor, there is no advantage in liquidation – no exemption and no discharge from debt
Mechanics of Chapter 11
Once a debtor files a petition, the §362(a) automatic stay is imposed.
Business continues to operate in “the ordinary course,” §363(c) under the control of the debtor in possession (DIP)
DIP controls a new legal entity – the estate and has most of the rights and duties of a Trustee in Bankruptcy (TIB) §1107
o No TIB typically appointed in Ch. 11 since DIP has the same rights, duties, and powers
Rights, duties, and powers of DIP
o DIP limited in use of assets if they are subject to a security agreement §363(c), (e).
o Secured creditors may seek court approval for lifting the automatic stay as to their collateral unless DIP can provide “adequate protection” of their interests §§361, 362(d).
o DIP can obtain financing and other credit during bankruptcy with approval of the court §364.
o TIP or DIP has “avoiding powers,”
§ powers to recover preferences (payments or transfers of property to favored creditors within 90 days of bankruptcy) §547
§ power to assume or to breach outstanding executory contracts §365
§ power to void fraudulent conveyances §§548 and 544(b)
§ power to set aside unperfected or late-perfected security interest in debtor’s property, §§544(a) and 547
§ power to require turnover of property of the debtor being held by another entity §§542 and 543.
Once stability achieved, creditors’ committee is appointed to scrutinize the debtor’s activities on behalf of all creditors and to negotiate with the debtor §1102.
Once debtor proposes plan to all creditors, plan has to be approved by majority of creditors in each class §1126(c)
Then it is confirmed by the court if it meets the requirements of §1129, including the requirement that every creditor who has not accepted get as much as they would in liquidation §1129(a)(7) (the analog to the “best interests” test)
After confirmation, debtor is discharged of all pre-petition debts except as provided in the plan §1141(d)
Benefits of Ch. 11 for Debtor
Automatic stay and the breathing room it provides – however subject to exceptions
Possibility of adopting a plan that will legally bind all creditors, even though a minority reject it
Turnover and avoiding powers, that can greatly augment the assets available and provide powerful leverage over certain creditors
Stop payment of interest on unsecure debt
Gives business the power
le bankruptcy…Lenders can veto bankruptcy by requiring unanimous board approval and placing a director on the boardFiling must be made in good faith. Company here filed bankruptcy and barred pending class action litigants from recovering. Sole reason for company filing was to avoid litigation liability. Court will look at totality of circumstances and see if you cannot pay debts as they become due. In re SGL Carbon Corp.
§1112(b): Creditors can request relief from stay for cause and dismissal/conversion to Ch. 7 for cause – cannot file in bad faith!
(b) Filing constitutes an order for relief – this is the automatic stay
In re SGL Carbon Corp. (3d. Cir. 1999)
Court finds that the company had plenty of financial reserves and did not face immediate financial difficulty
o Although the Code does not require a debtor to be insolvent before filing for protection, it does not allow premature filings nor filings of a bankruptcy petition that lacks a valid reorganizational purpose
Absence of a valid reorganizational purpose consequently lacks good faith making it subject to dismissal “for cause” under §1112(b).
A Ch. 11 petition is in bad faith where the corporation filing the petition is not near insolvency and merely anticipates extensive potential liability from litigation.
§303: Involuntary Filings
(a) Allows you to commence a case under chapter 7 or 11 that is a debtorNOTE: Debtor must be a “money-making” corporation to be forced to file an involuntary filing. Ex: cannot file an involuntary case as a political campaign organization (not money-making).
(b) Involuntary case requires
1) Three or more entities, each holding a claim against a person that is not contingent on the resolution of a bona fide dispute, if they aggregate to at least $10,000 of unsecured claims
2) If there are fewer than 12 such holders, by one or more of such holders that hold in the aggregate at least $10,000 of such claims
