ROAD MAP THROUGH CHAPTER 11 BANKRUPTCY
by: Betty F. Mullin
With the
recent downturn in the economy, many businesses are receiving notice that
companies they have dealt with have filed for Chapter 11 bankruptcy
protection. A brief overview of the Chapter 11 process can help creditors
understand what lies ahead in one of these cases.
Chapter 11 of the United States Bankruptcy Code enables a financially distressed company to file for bankruptcy protection while continuing to operate its business as a debtor-in-possession. In rare instances the debtor in possession may be displaced by a trustee appointed to operate the business in cases involving debtor fraud or incompetence, or if such appointment is “in the interest of creditors.” The primary goal of Chapter 11 is to permit the debtor-in-possession to enjoy a brief respite from creditor collection action in order to formulate a plan of reorganization for repayment of its debts. This allows the debtor-in-possession to continue business operations as a going concern, thus preserving optimum value for the benefit of creditors. In contrast, under a Chapter 7 bankruptcy liquidation case a court appointed trustee takes control of the debtor’s assets, closes the business, and liquidates all assets as soon as possible in order to make cash distributions to creditors according to their priority.
A debtor is permitted to file a bankruptcy case in the district of its domicile or residence, its principal place of business or the principal place of its assets, for a period of 180 days immediately preceding the filing. Creditors may request that the bankruptcy case be transferred to another district in the interest of justice or for the convenience of the parties. Once a bankruptcy case is filed, an injunction is issued prohibiting any party from taking action against the debtor or its property. This injunction, referred to as an “automatic stay,” lasts until the Bankruptcy Court confirms a plan for the repayment of debts.
Shortly after a Chapter 11 case is filed, the largest unsecured creditors are invited to join an Unsecured Creditors’ Committee (the “Committee”). Usually an organizational meeting of the Committee is scheduled around the time of the First Meeting of Creditors. Joining the Committee is advantageous in at least two respects. First, use of the Committee is an economical way to handle litigation expense for issues common to all Committee members inasmuch as the Committee is allowed to retain counsel whose fees are paid by the debtor after court approval. Second, the Committee has more clout than an individual creditor in a Chapter 11 case. Further, it is difficult for a debtor to confirm a plan of reorganization without support from the Committee.
Shortly
after the bankruptcy case is filed the Bankruptcy Court schedules a First
Meeting of Creditors to allow creditors to question the debtor’s
representatives about any matter relevant to the bankruptcy. Typically the
debtor’s management appears for this meeting. After being sworn in, the
debtor’s representative is subjected to questions by creditors and a
representative from the U.S. Trustee’s Office. This meeting is often used
for taking limited discovery early in the bankruptcy case. At the time of
the meeting the debtor has usually filed the required Statement of
Financial Affairs and Schedules of Assets and Liabilities. Parties usually
question the debtor’s representatives about these filings.
Under Chapter 11 a debtor is granted a 120 day exclusivity period during which it has the exclusive right to file a plan of reorganization for restructuring its debts (“Plan”). After expiration of this 120 day period any party in interest may file a Plan. In highly contested cases competing Plans are often filed by the debtor, the Committee or individual creditors. A Plan proponent is required to file a disclosure statement (“Disclosure Statement”) which must give all parties entitled to vote on the Plan adequate information to enable them to cast an informed vote. The Disclosure Statement usually includes historical financial information and future projections which creditors can use to judge the Plan’s feasibility. The Disclosure Statement must be approved by the Bankruptcy Court before the Plan proponent can solicit votes in favor of the Plan. Ultimately, a Plan can be approved or confirmed by the Bankruptcy Court if it passes voting requirements and satisfies complex rules relating to the treatment of various claims.
Debt repayment under a Plan is governed by various Bankruptcy Code provisions which rank creditors in order of their priority of payment. A creditor holding security is entitled to be repaid the equivalent of 100% of the value of its collateral. Unsecured creditors are usually paid a fraction of their debt. There are a number of safeguards which are designed to protect unsecured creditors. Generally speaking, the debtor’s owners are prevented from enjoying a possible future increase in value of their equity after having paid unsecured creditors a nominal amount on their claims.
In many Chapter 11 cases, debtors are not financially viable. Rather than reorganizing their debts for repayment through future cash flow, such debtors are subjected to voluntary or involuntary liquidation. In such circumstances, an orderly plan of liquidation can sometimes maximize the value of the assets for the benefit of creditors. Liquidation of the debtor’s business may also be accomplished by the Bankruptcy Court converting the case to a Chapter 7 liquidation proceeding and appointing a trustee to expeditiously collect and distribute the assets to the creditors.
The bankruptcy reorganization process is demystified once creditors have a road map of what lies ahead. The ultimate goal in a Chapter 11 case should be a financially rehabilitated company which is able to repay its debts in a manner which nets creditors more than they would otherwise recover in a Chapter 7 liquidation case.
RECENT COMMUNITY ACTIVITIES
SPS&R sponsored and actively participated in two recent community events in addition to Bowl for Kids’ Sake.
First, the Firm was Patron of the Legacy of Activism Program on April 3, 2003, honoring Carol B. Wise and Julie Wise Oreck and benefiting the Hillel Foundation of New Orleans. That event included a concert by Peter Yarrow (of Peter, Paul and Mary) and his daughter Bethany.
In addition, on May 16, 2003, more than 20 SPS&R staff members pitched in to help Habitat for Humanity construct a house in downtown New Orleans, as part of their 1st Annual Bench & Bar Project. The day was hot and the work was hard, but also very satisfying.
| Wade Bass, John Shreves, Dan Caruso and Herman Hoffmann | (back row, l to r) Susan Caruso, Patty Couch, Marilyn Baroni, Cindy Armand, Shelley MacDonald and Lovelle Blitch (front row, l to r) April McQuillar, Becky Ellis, Judy Martinez, Joan Perrin, Marie Horne and Theresa Blum |
SPS&R WELCOMES NEW STAFF
Simon, Peragine, Smith & Redfearn, L.L.P. would like to welcome the following additions to their firm:
Jeffrey
J. Thomas is the firm’s newest attorney. He is a graduate of
Millersville University in PA where he earned a Bachelor of Science in
Education degree in Biology and he earned a Juris Doctor degree from
Tulane Law School with a certificate in environmental law.
Before joining the firm, Mr.Thomas clerked with Earthjustice-New Orleans, assisting in National Environmental Policy Act and Clean Air Act litigation. In addition, he assisted the American Bar Association’s Central European and Eurasian Law Initiative Program as a researcher and editor.
Mr. Thomas is admitted to practice in all state courts in Louisiana and is a member of the ABA’s Young Lawyers Division and the New Orleans Bar Association Young Lawyers Section.
His primary areas of practice are commercial and general civil litigation, with experience in environmental and energy Law.
Amanda Claverie and Becky Ellis join the firm as paralegals.
Ms. Claverie is a graduate of the University of New Orleans with a Bachelor of Science degree in Business Administration. She earned her Paralegal Certificate in 1997. Prior to joining SPS&R she worked as a paralegal for several other law firms in the city.
Ms. Ellis is a recent graduate of the University of Georgia with a Bachelor of Science degree in Business Administration and a major in management.
Welcome aboard!
SPS&R GOES OUT TO THE BALLGAME
The night of April 4th marked the annual SPS&R “Zephyr’s Night Out” extravaganza held at the stadium’s Home Run Porch. Attended by 167 firm members and their families, the evening was loaded with fun, which included baseball, food and activities. Participants were treated to hamburgers, hot dogs, jambalaya, red beans and rice, peanuts, cotton candy and ice cream. The evening concluded with a brilliant fireworks display.
BOWLING FOR KIDS
SPS&R sponsored and participated in the Big Brothers/Big Sisters “Bowl for Kids’ Sake” fundraiser held on Saturday, March 22nd at the AMF Bowling Center in Kenner from 10:00 a.m. to 5:00 p.m.. The firm formed four teams, with 18 bowlers total. Each bowler had to raise at least $50.00 in pledge money to participate.
|
Josh Arvan, Cindy Armand, Linda Pasternostro, Sue
Hughes, Mandy Waugh and Marie Mischler |
Evelyn Audler, Susan Frolich, Roxanne Ziegler and
Kathy Smith |
Team captains were Shelley McDonald, Evelyn Audler, Sue Hughes and Tracy Marquez. Participants included Cindy Armand, Josh Arvan, Evelyn Audler, Lovelle Blitch, David Couch, Patty Couch, Rhonda Ferguson, Susan Frolich, Sue Hughes, Taylor Jeansonne, Shelley McDonald, Andrew Marquez, Tracy Marquez, Marie Mischler, Linda Pasternostro, Kathy Smith, Mandy Waugh and Roxanne Ziegler.
Additionally, SPS&R employee Marie Mischler won a gift basket loaded with perfume and cologne as a door prize.
For more information on Big Brothers/Big sisters, contact Beth at 485-5661.
HONORING THE ARMED FORCES
SPS&R would like to recognize and thank the family members of the firm who are currently serving their country in Iraq.
| Damon Bowen, U.S. Marine reservist and son of Ken Bowen, was activated and is presently serving with the 1st Marine Division, 3rd Battalion, 23rd Marines, Sniper Platoon in Iraq. As a civilian, Bowen is a member of the New Orleans Police Department. | Wade Weaver First Lieutenant in the U.S. Army and son of Karen Weaver, is serving with the 4th Infantry Division in Iraq. Weaver is a West Point graduate. |
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