Chapter 11 Reorganizations


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Chapter 11 Bankruptcy 

In chapter 11 bankruptcy case, the debtor, either a business entity or an individual, maintains control over the assets of the bankruptcy estate and has essentially the same powers as a chapter 7 trustee. The debtor is in chapter 11 case is known as a "debtor-in-possession." The debtor-in-possession is given an exclusive period in which to file and obtain court approval of its chapter 11 plan of reorganization or liquidation, as the case may be.

 Chapter 11 is premised on the notion that creditors are more likely to receive a greater distribution if the debtor-in-possession is able to reorganize itself or direct its assets or capital to their highest value or use than if a disinterested third party is forced to performed a distressed sale liquidation of the debtor-in-possession’s assets. As a practical matter, this public policy, in turn, encourages parties to be creative in compromising rights, claims and disputes in order to reduce costs,  enhance the debtor’s chances for survival and increase the amount of the return to creditors.

 In a business case, the debtor-in-possession continues to operate its business subject to court and creditor oversight. The debtor-in-possession pays current or "postpetition" expenses as they become due. Creditors and interested parties are entitled to notice and to appear and object in various proceedings involving, for example, compensation for officers, certain expenditures and proposed actions, or inactions, by the debtor and confirmation of the debtor’s plan of reorganization.

 Generally, the objective of a debtor in a chapter 11 case is to utilize the time allowed to propose a court-approved plan that restructures the debtor’s prepetition debts and certain accrued postpetition expenses according to the parameters of the bankruptcy code. Examples of the manner in which chapter 11 can be utilized to reorganize include:

  • The restructuring of the debt on distressed real estate;
  • The recapitilization of the debtor with new capital;
  • The sale of the debtor’s stock to new investors;
  • The restructuring of business debt and the utilization of the debtor’s future cash flow;
  • A combination of all the above.

For example, where income producing real property is encumbered by several mortgages and cash flow is insufficient to pay the debt service, a debtor can utilize chapter 11 to value and restructure the debt. If the value of the property is less than the sum of the liens, the bankruptcy code allows the debtor to strip those liens and restructure the obligations. This gives the debtor tremendous flexibility to restructure its payments. Similarly, a secured creditor whose claim is exceeded by the value of the property may be entitled to interest, attorney’s fees and costs during the pendency of the bankruptcy case. Chapter 11 also provides certain exemptions from recording fees such as documentary stamps.

Chapter 11 also allows for piecemeal or wholesale asset sales and voluntary liquidations. In these cases, the debtor may propose a plan of liquidation because the debtor proposes to sell certain assets, or its principal asset, a business unit, or its stock and then distribute the proceeds to its creditors and thereafter cease to exist. Where the debtor-in-possession proposes to issue stock pursuant to its chapter 11 plan, the bankruptcy code provides a registration exemption from certain securities laws.

In a Chapter 11 case, the debtor or plan-proponent classifies claims into separate classes and must provide equal treatment to all creditors in the same class. Chapter 11 incorporates the "absolute priority rule." The absolute priority rule requires that before any junior class receives or retains any property under the plan, senior creditors must receive the full amount of their allowed claims. The absolute priority rule is frequently an issue where insiders, such as owners of a company, seek to retain their ownership interest while unsecured creditors are not being paid in full under the plan of reorganization.

Unlike a chapter 13 case, the claims in a chapter 11 case are typically discharged upon the effective date of the plan. Thereafter, the plan of reorganization becomes the bases of the new obligation between the debtors and creditors provided for in the plan of reorganization. Another difference between chapter 11 and chapter 13 is that in chapter 11 case, the length of the debtor’s payment plan is dictated more by the debtor’s circumstances than a statutory time period.

Creditors and interested parties may file a plan of reorganization if the debtor does not file its plan of reorganization within the required time frame. Creditors may seek the appointment of a chapter 11 trustee to administer the estate and propose a plan of reorganization where, for example, the debtor has engaged in fraud or gross mismanagement or if the appointment of a trustee is in the best interest of creditors. Creditors may also seek the dismissal of a chapter 11 case or the conversion to a chapter 7 case for various reasons. Some of these reasons include, continuing loss, the absence of a likelihood of a reorganization and failure to comply with court orders.

Another significant advantage of chapter 11 is for debtor’s who lease nonresidential real property. The bankruptcy code provides the debtor with the ability to "cure" delinquent rent payments by compelling the debtor to assume the lease or executory contract within a specified time frame. In a chapter 11 case, the debtor-in-possession must pay its postpetition rent on a current basis but may cure the prepetition arrearage over a "prompt" period of time. A landlord is entitled to an administrative expense claim if the debtor or trustee fails to pay any rent or other charges after the case is filed. 

This power to assume or reject lease also includes the power to assign over the objection of the landlord. Like any power, this power is not without exceptions. For example, the debtor cannot assign most personal service contracts or technology licenses without the consent of the licensor.


The Law Offices Of Nicholas B Bangos assists clients with Bankruptcy / Insolvency in Florida area including Coral Gables, Miami Dade and Broward County.


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