Reorganization Under Bankruptcy Code (Chapter 11)

About Chapter 11 Bankruptcy

A bankruptcy under chapter 11 of the US Bankruptcy Code is called a reorganization bankruptcy. It cannot be filed if the debtor had a prior bankruptcy petition dismissed due to failure to appear or comply with court orders. Credit counseling must be received within 180 days before filing, except in emergency situations or when there are insufficient approved agencies. If a debt management plan is developed during credit counseling, it must be filed with the court. 

How Chapter 11 Works

To file for chapter 11 bankruptcy, a debtor must file a voluntary or involuntary petition with the bankruptcy court. The voluntary petition must adhere to the format of Form 1 of the Official Forms prescribed by the Judicial Conference of the United States. The debtor must also file schedules of assets and liabilities, current income and expenditures, executory contracts and unexpired leases, and a statement of financial affairs. If the debtor is an individual, there are additional document filing requirements. The courts are required to charge an $1,000 case filing fee and a $39 miscellaneous administrative fee. Failure to pay these fees may result in dismissal of the case. Upon filing a voluntary petition for relief under chapter 11, the debtor automatically assumes an additional identity as the “debtor in possession.”

The U.S. trustee or bankruptcy administrator

The U.S. trustee is responsible for monitoring the progress of a chapter 11 case and supervising its administration, including monitoring the debtor in possession’s operation of the business and submitting operating reports and fees. They also impose requirements on the debtor, such as reporting income and expenses, establishing new bank accounts, and paying taxes. The debtor must pay a quarterly fee to the trustee, which may range from $250 to $10,000. If the debtor fails to comply, the trustee may file a motion to convert or dismiss the case. In North Carolina and Alabama, bankruptcy administrators perform the same functions as trustees, while in the remaining 48 states, they are administered by the Department of Justice. For purposes of this publication, references to trustees are also applicable to bankruptcy administrators.

Creditors’ Committees

A creditors’ committee is a group of unsecured creditors who are appointed by the U.S. trustee to represent the interests of all unsecured creditors in a Chapter 11 bankruptcy case. The committee typically consists of the seven largest unsecured creditors.

The committee’s duties include:

• Consulting with the debtor on the administration of the case. 
• Investigating the debtor’s conduct and operation of the business.
• Participating in the formulation of a plan of reorganization.
• The committee may hire an attorney or other professionals to assist in the performance of its duties.

The Small Business Case and the Small Business Debtor

When a U.S. trustee cannot find creditors to serve on a creditors’ committee, or the committee is not actively involved in the case, the Bankruptcy Code treats the case as a “small business case.”

• A small business case is defined as a case with a “small business debtor.” A small business debtor is a business with total non-contingent liquidated secured and unsecured debts of $2,190,000 or less.
• In a small business case, the debtor in possession must attach certain financial documents to the petition, attend court and the U.S. trustee meeting, and make ongoing filings with the court.
• The small business debtor is also subject to additional oversight by the U.S. trustee.
• Because certain filing deadlines are different and extensions are more difficult to obtain, a small business case normally proceeds more quickly than other chapter 11 cases. 

The Single Asset Real Estate Debtor

Single asset real estate debtors are businesses that owe more money than they are worth and that only own one piece of real estate.

• The Bankruptcy Code provides special rules for single asset real estate debtors.
• These rules make it easier for creditors to get relief from the automatic stay, which is a court order that prevents creditors from taking action against a debtor while the bankruptcy case is pending.
• To get relief from the automatic stay, a creditor must show that the debtor has not filed a feasible plan of reorganization or has not begun making interest payments to the creditor within 90 days of filing for bankruptcy.
• The interest payments must be equal to the non-default contract interest rate on the value of the creditor’s interest in the real estate.

Appointment or Election of a Case Trustee

In a Chapter 11 bankruptcy case, a case trustee is rarely appointed. However, a party in interest or the U.S. trustee can request the appointment of a case trustee or examiner at any time before confirmation.

• The court will order the appointment of a case trustee if there is cause, such as fraud, dishonesty, incompetence, or gross mismanagement, or if the appointment is in the best interests of creditors, equity security holders, or other interested parties. 
• The U.S. trustee is required to move for the appointment of a trustee if there are reasonable grounds to believe that any of the parties in control of the debtor have engaged in fraud, dishonesty, or criminal conduct.
• The trustee is appointed by the U.S. trustee, after consultation with parties in interest and subject to the court’s approval.
• Alternatively, a trustee can be elected by creditors if a party in interest requests the election of a trustee within 30 days after the court orders the appointment of a trustee.
• The case trustee is responsible for managing the property of the estate, operating the debtor’s business, and filing a plan of reorganization if appropriate.
• The trustee must file a plan “as soon as practicable” or, alternatively, file a report explaining why a plan will not be filed or to recommend that the case be converted to another chapter or dismissed.
• The court may terminate the trustee’s appointment and restore the debtor in possession to management of the bankruptcy estate at any time before confirmation.

What is the Role of an Examiner in Chapter 11?

A Chapter 11 examiner is a person who is appointed by the court to investigate the debtor’s business and report on its findings. Examiners are rarely appointed, and their role is generally more limited than that of a trustee.

An examiner is authorized to perform the same investigatory functions as a trustee, and is required to file a report of their findings. However, an examiner may also be ordered by the court to perform other duties of a trustee, such as filing a plan of reorganization or negotiating with creditors.

The specific duties of an examiner are determined by the court in each case. Some common duties of examiners include:

• Filing a plan of reorganization
• Negotiating or helping the parties negotiate
• Reviewing the debtor’s schedules to determine whether any claims are improperly categorized
• Determining whether objections to any proofs of claim should be filed
• Determining whether causes of action have sufficient merit so that further legal action should be taken

An examiner may not subsequently serve as a trustee in the case.

The Automatic Stay

When a debtor files for Chapter 11 bankruptcy, an automatic stay goes into effect. This means that all creditors must stop collecting debts and repossessing property from the debtor. The automatic stay gives the debtor time to negotiate with creditors and develop a plan to repay its debts.

There are some exceptions to the automatic stay. For example, creditors can still pursue certain types of actions, such as criminal proceedings, tax audits, and domestic support proceedings. Creditors can also ask the court to lift the stay in certain cases, such as when the debtor does not have equity in the property and the property is not necessary for an effective reorganization.

The Bankruptcy Code also allows certain professionals, such as trustees, attorneys, and accountants, to apply for fees during the case. These fees are typically paid out of the bankruptcy estate, which is the collection of all of the debtor’s assets. However, the debtor cannot make payments to professional creditors on prepetition obligations, which are debts that arose before the bankruptcy filing.

Who Can File a Plan

The debtor (unless a “small business debtor”) has a 120-day period during which it has an exclusive right to file a plan. 11 U.S.C. § 1121(b). This exclusivity period may be extended or reduced by the court. But, in no event, may the exclusivity period, including all extensions, be longer than 18 months. 11 U.S.C. § 1121(d). After the exclusivity period has expired, a creditor or the case trustee may file a competing plan. The U.S. trustee may not file a plan. 11 U.S.C. § 307.

A chapter 11 case may continue for many years unless the court, the U.S. trustee, the committee, or another party in interest acts to ensure the case’s timely resolution. The creditors’ right to file a competing plan provides incentive for the debtor to file a plan within the exclusivity period and acts as a check on excessive delay in the case.

Avoidable Transfers

The debtor in possession or the trustee, as the case may be, has what are called “avoiding” powers. These powers may be used to undo a transfer of money or property made during a certain period of time before the filing of the bankruptcy petition. By avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return or “disgorgement” of the payments or property, which then are available to pay all creditors. Generally, and subject to various defenses, the power to avoid transfers is effective against transfers made by the debtor within 90 days before filing the petition. But transfers to “insiders” (i.e., relatives, general partners, and directors or officers of the debtor) made up to a year before filing may be avoided. 11 U.S.C. §§ 101(31), 101(54), 547, 548. In addition, under 11 U.S.C. § 544, the trustee is authorized to avoid transfers under applicable state law, which often provides for longer time periods. Avoiding powers prevent unfair prepetition payments to one creditor at the expense of all other creditors.

Cash Collateral, Adequate Protection, and Operating Capital

Although the preparation, confirmation, and implementation of a plan of reorganization is at the heart of a chapter 11 case, other issues may arise that must be addressed by the debtor in possession. The debtor in possession may use, sell, or lease property of the estate in the ordinary course of its business, without prior approval, unless the court orders otherwise. 11 U.S.C. § 363(c). If the intended sale or use is outside the ordinary course of its business, the debtor must obtain permission from the court.

A debtor in possession may not use “cash collateral” without the consent of the secured party or authorization by the court, which must first examine whether the interest of the secured party is adequately protected. 11 U.S.C. § 363. Section 363 defines “cash collateral” as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest. It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor’s security interest.

When “cash collateral” is used (spent), the secured creditors are entitled to receive additional protection under section 363 of the Bankruptcy Code. The debtor in possession must file a motion requesting an order from the court authorizing the use of the cash collateral. Pending consent of the secured creditor or court authorization for the debtor in possession’s use of cash collateral, the debtor in possession must segregate and account for all cash collateral in its possession. 11 U.S.C. § 363(c)(4). A party with an interest in property being used by the debtor may request that the court prohibit or condition this use to the extent necessary to provide “adequate protection” to the creditor.

Adequate protection may be required to protect the value of the creditor’s interest in the property being used by the debtor in possession. This is especially important when there is a decrease in value of the property. The debtor may make periodic or lump sum cash payments, or provide an additional or replacement lien that will result in the creditor’s property interest being adequately protected. 11 U.S.C. § 361.

When a chapter 11 debtor needs operating capital, it may be able to obtain it from a lender by giving the lender a court-approved “superpriority” over other unsecured creditors or a lien on property of the estate. 11 U.S.C. § 364.

Motions

Before confirmation of a plan, several activities may take place in a chapter 11 case. Continued operation of the debtor’s business may lead to the filing of a number of contested motions. The most common are those seeking relief from the automatic stay, the use of cash collateral, or to obtain credit. There may also be litigation over executory (i.e., unfulfilled) contracts and unexpired leases and the assumption or rejection of those executory contracts and unexpired leases by the debtor in possession. 11 U.S.C. § 365. Delays in formulating, filing, and obtaining confirmation of a plan often prompt creditors to file motions for relief from stay, to convert the case to chapter 7, or to dismiss the case altogether.

Adversary Proceedings

An adversary proceeding is a lawsuit filed in bankruptcy court to recover money or property for the bankruptcy estate. It is often filed by the debtor in possession, but it can also be filed by other parties, such as a creditors’ committee or a creditor.

Adversary proceedings can be used to avoid liens, preferences, and fraudulent transfers. They can also be used to determine the validity or priority of a lien, revoke an order confirming a plan, determine the dischargeability of a debt, obtain an injunction, or subordinate a claim of another creditor.

Here are some examples of adversary proceedings:

• A debtor in possession may file an adversary proceeding to avoid a lien on its property that was granted to a creditor within 90 days of the bankruptcy filing.
• A creditors’ committee may file an adversary proceeding to recover money from an insider of the debtor who received a preference within one year of the bankruptcy filing.
• A creditor may file an adversary proceeding to determine the validity of a lien on the debtor’s property.
• A creditor may file an adversary proceeding to revoke an order confirming the debtor’s reorganization plan if the creditor believes that the plan was not fair to creditors.
• A debtor may file an adversary proceeding to determine whether a debt is dischargeable in bankruptcy.
• A creditor may file an adversary proceeding to obtain an injunction against the debtor to prevent the debtor from selling or transferring certain assets.
• A creditor may file an adversary proceeding to subordinate the claim of another creditor to its own claim.

Adversary proceedings are governed by the Federal Rules of Bankruptcy Procedure. These rules are similar to the rules that govern lawsuits in federal district court, but there are some important differences. For example, in an adversary proceeding, the debtor does not have the right to a jury trial.

If you are considering filing an adversary proceeding in New Jersey, you should consult with an experienced bankruptcy attorney.

What is a claim in Chapter 11 Bankruptcy? 

The Bankruptcy Code defines a claim as:

1. A right to payment.
2. Or a right to an equitable remedy for a failure of performance if the breach gives rise to a right to payment.

How to file a proof of claim

Generally, any creditor whose claim is not listed on the debtor’s schedules or is listed as disputed, contingent, or unliquidated must file a proof of claim (and attach evidence documenting the claim) in order to be treated as a creditor for purposes of voting on the debtor’s reorganization plan and receiving distributions under it.

However, filing a proof of claim is not necessary if the creditor’s claim is listed on the debtor’s schedules (but is not listed as disputed, contingent, or unliquidated). This is because the debtor’s schedules are deemed to constitute evidence of the validity and amount of those claims.

If a scheduled creditor chooses to file a claim, a properly filed proof of claim supersedes any scheduling of that claim.

It is the responsibility of the creditor to determine whether the claim is accurately listed on the debtor’s schedules.

Debtor’s notification to creditors

The debtor must provide notification to those creditors whose names are added and whose claims are listed as a result of an amendment to the schedules. The notification also should advise such creditors of their right to file proofs of claim and that their failure to do so may prevent them from voting upon the debtor’s plan of reorganization or participating in any distribution under that plan.

When a debtor amends the schedule of liabilities to add a creditor or change the status of any claims to disputed, contingent, or unliquidated, the debtor must provide notice of the amendment to any entity affected.

Equity Security Holders

An equity security holder is someone who owns a piece of the debtor company. Examples of equity securities include shares in a corporation, interests in a limited partnership, and rights to buy or sell shares or interests in a corporation or limited partnership.

Equity security holders have the right to vote on the debtor’s reorganization plan and to file a proof of interest, instead of a proof of claim. A proof of interest is a document that lists the equity security holder’s interest in the debtor company. It is considered filed for any interest that appears in the debtor’s schedules, unless it is listed as disputed, contingent, or unliquidated.

Equity security holders whose interests are not scheduled or are scheduled as disputed, contingent, or unliquidated must file a proof of interest in order to be treated as creditors for purposes of voting on the plan and receiving distributions under it. A properly filed proof of interest supersedes any scheduling of that interest.

In general, most of the provisions that apply to proofs of claim also apply to proofs of interest.

Conversion or Dismissal

A debtor in a Chapter 11 bankruptcy case has the right to convert the case to a Chapter 7 bankruptcy case, but only once. The debtor does not have the right to have the case dismissed on request.

Another party in interest can file a motion to dismiss or convert a Chapter 11 case to a Chapter 7 case for cause. If the court finds cause, it must convert or dismiss the case (whichever is in the best interests of the creditors and the estate), unless it specifically finds that the requested conversion or dismissal is not in the best interests of the creditors and the estate.

There are many examples of what can constitute cause for dismissal or conversion, including:

• Substantial or continuing loss to the estate and the absence of a reasonable likelihood of rehabilitation
• Gross mismanagement of the estate
  Failure to maintain insurance that poses a risk to the estate or the public
• Unauthorized use of cash collateral that is substantially harmful to a creditor
• Unexcused failure to timely comply with reporting and filing requirements
• Failure to attend the meeting of creditors or attend a Fed. R. Bankr. P. 2004 examination without good cause
• Failure to timely provide information to the U.S. trustee
• Failure to timely pay post-petition taxes or timely file post-petition returns
• Failure to file a disclosure statement or to file and confirm a plan within the time fixed by the Bankruptcy Code or order of the court
• Inability to effectuate a plan
• Denial or revocation of confirmation
• Inability to consummate a confirmed plan
• In an individual case, failure of the debtor to pay post-petition domestic support obligations

There is one important exception to the conversion process in a Chapter 11 case. The court is prohibited from converting a case involving a farmer or charitable institution to a liquidation case under Chapter 7 unless the debtor requests the conversion.

The Disclosure Statement

Before creditors can vote on a Chapter 11 bankruptcy plan, the debtor or plan proponent must file and get court approval of a disclosure statement. This statement must provide enough information about the debtor’s affairs so that creditors can make an informed decision about the plan.

In a small business case, the court may decide that the plan itself contains enough information and that a separate disclosure statement is not necessary.

After the disclosure statement is filed, the court will hold a hearing to decide whether to approve it. Creditors cannot vote on the plan until the court has approved the disclosure statement.

There is one exception to this rule. If the debtor negotiated a plan with major creditor groups before filing for bankruptcy, creditors can vote on the plan before the court approves the disclosure statement. This is known as a prepackaged bankruptcy.

Once the court approves the disclosure statement, the debtor or plan proponent can start asking creditors to accept the plan. Creditors can also ask other creditors to reject the plan.

After the court approves the disclosure statement, the debtor or plan proponent must mail the following to the U.S. trustee and all creditors and equity security holders:

• The plan or a court-approved summary of the plan
• The court-approved disclosure statement
• Notice of the time within which creditors can accept or reject the plan
• Any other information that the court orders, including a court-approved summary of the court’s opinion approving the disclosure statement

The debtor must also mail the following to the creditors and equity security holders who are entitled to vote on the plan:

• Notice of the time limit for filing objections to the plan
• Notice of the date and time of the hearing on confirmation of the plan
• A ballot for accepting or rejecting the plan and, if applicable, a designation for creditors to identify their preference among competing plans

In a small business case, the court may conditionally approve a disclosure statement subject to final approval after notice and a combined disclosure statement/plan confirmation hearing.

Acceptance of the Plan of Reorganization

Filing and Acceptance

Only the debtor can file a Chapter 11 bankruptcy plan during the first 120 days after the bankruptcy petition is filed. The court can extend this period to up to 18 months. The debtor has 180 days to get creditors to accept the plan. The court can extend this period to up to 20 months.

If the debtor does not file and get creditors to accept a plan within these deadlines, other parties in interest, such as the creditors’ committee or a creditor, can file a plan.

Types of Plans

A Chapter 11 plan can be a reorganization plan or a liquidation plan. A reorganization plan allows the debtor to stay in business. A liquidation plan allows the debtor to sell its assets and pay off its debts.

Mandatory Provisions

A Chapter 11 plan must:

• Classify claims and interests for treatment under the reorganization.
  Designate classes of claims that are impaired and classes of claims that are unimpaired.
• Treat all claims in the same class equally, unless there is a reasonable basis for different treatment.

Acceptance

A class of claims is deemed to accept a plan if creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims in the class accept the plan.

Confirmation

The court cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims. The court must also find that the plan is feasible, proposed in good faith, and in compliance with the Bankruptcy Code.

What does it mean to be discharged in a Chapter 11 Bankruptcy?

When you are discharged in Chapter 11 bankruptcy, it means that you are no longer legally obligated to pay most of the debts that you had before you filed bankruptcy. This includes debts like credit card debt, medical debt, and personal loans.

What debts are not discharged in Chapter 11 bankruptcy?

Some debts cannot be discharged in Chapter 11 bankruptcy. These debts include student loans, child support, and alimony. Additionally, you may not be discharged from a debt if you committed fraud or other misconduct in connection with the debt.

How do I get a discharge in Chapter 11 bankruptcy?

To get a discharge in Chapter 11 bankruptcy, you must first complete your bankruptcy plan. This plan will outline how you will repay your debts to your creditors. Once your plan is confirmed by the court, you will be discharged from most of your debts.

What happens if I don’t make all of my payments under my Chapter 11 bankruptcy plan?

If you don’t make all of your payments under your Chapter 11 bankruptcy plan, you may not be discharged. In some cases, the court may allow you to modify your plan so that you can make lower payments. However, if you are unable to make any payments at all, the court may dismiss your bankruptcy case.

Postconfirmation Modification of the Plan

After a Chapter 11 plan is confirmed, the person who proposed the plan can ask the court to modify it, but only before it has been “substantially consummated.” This means that most of the important parts of the plan have not yet been completed.

To be modified, the plan must still meet all of the requirements of the Bankruptcy Code.

This is different from modifying a plan before it is confirmed.

A modified plan does not automatically become the new plan. The court must hold a hearing and approve the modified plan before it can take effect.

If the debtor is an individual, the plan can also be modified after confirmation at the request of the debtor, the trustee, the U.S. trustee, or the holder of an unsecured claim. This type of modification is typically used to make adjustments to the payments that the debtor must make under the plan.

Postconfirmation Administration

Even after the confirmation order is issued, the court still has the power to make any other orders necessary to manage the debtor’s estate. This includes deciding on any objections to claims or lawsuits that were filed before the plan was confirmed. These matters must be resolved before the plan can be fully carried out.

Sections 1106(a)(7) and 1107(a) of the Bankruptcy Code require the debtor in possession or trustee to report on how the plan is being implemented after it is confirmed.

A Chapter 11 trustee or debtor in possession has a number of responsibilities after confirmation, including:

• Carrying out the plan
• Reporting on the status of carrying out the plan
• Asking the court for a final decree

Revocation of the Confirmation Order

Revocation of the confirmation order is when a bankruptcy court cancels or reverses its decision to confirm a Chapter 11 bankruptcy plan. A party in interest, which is someone who has a stake in the bankruptcy case, can request that the court revoke the confirmation order. However, the request must be made within 180 days of the confirmation date.

The court will only revoke the confirmation order if it finds that the order was obtained by fraud. Fraud is defined as intentional deception or misrepresentation that is made with the intent to mislead another person. If the court finds that fraud was committed, it will revoke the confirmation order and the bankruptcy case will be reopened.

The Final Decree

A final decree closing the case must be entered after the estate has been “fully administered.” Fed. R. Bankr. P. 3022. Local bankruptcy court policies generally determine when the final decree is entered and the case closed.

NOTES

Debts that are not discharged in Chapter 11 bankruptcy

• Alimony and child support
• Certain taxes
• Educational benefit overpayments or loans made or guaranteed by a governmental unit
• Willful and malicious injury by the debtor to another entity or to the property of another entity
• Death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances
• Certain criminal restitution orders

The debtor will still be liable for these debts, even if they are not paid in the Chapter 11 case.

Debts that may be discharged, but only if a creditor does not file a timely action

• Debts for money or property obtained by false pretenses
• Debts for fraud or defalcation while acting in a fiduciary capacity
• Debts for willful and malicious injury by the debtor to another entity or to the property of another entity

If a creditor files a timely action, these debts will not be discharged.

For any specific questions on Chapter 11 Bankruptcy, please contact Abelson Law Offices in New Jersey today.