| Chapter 11 |
 Reorganization
Under the Bankruptcy Code
The chapter of the Bankruptcy Code providing (generally)
for reorganization, usually involving a corporation
or partnership. (A chapter 11 debtor usually proposes
a plan of reorganization to keep its business
alive and pay creditors over time. People in business
or individuals can also seek relief in chapter
11.)
a. Background
b. How Chapter 11 Works
c. The Chapter 11 Debtor in Possession
d. The U.S. Trustee or Bankruptcy
Administrator
e. Creditors' Committees
f. The Small Business Case and the
Small Business Debtor
g. The Single Asset Real Estate Debtor
h. Appointment or Election of a Case
Trustee
i. The Role of an Examiner
j. The Automatic Stay
k. Who Can File a Plan
l. Avoidable Transfers
m. Cash Collateral, Adequate Protection,
and Operating Capital
n. Motions
o. Adversary Proceedings
p. Claims
q. Equity Security Holders
r. Conversion or Dismissal
s. The Disclosure Statement
t. Acceptance of the Plan of Reorganization
u. The Discharge
v. Postconfirmation Modification
of the Plan
w.Postconfirmation Administration
x. Revocation of the Confirmation
Order
y. The Final Decree
Background
A case filed under chapter 11 of the United States
Bankruptcy Code is frequently referred to as a
"reorganization" bankruptcy.
An individual cannot file under chapter 11 or
any other chapter if, during the preceding 180
days, a prior bankruptcy petition was dismissed
due to the debtor's willful failure to appear
before the court or comply with orders of the
court, or was voluntarily dismissed after creditors
sought relief from the bankruptcy court to recover
property upon which they hold liens. 11 U.S.C.
§§ 109(g), 362(d)-(e). In addition,
no individual may be a debtor under chapter 11
or any chapter of the Bankruptcy Code unless he
or she has, within 180 days before filing, received
credit counseling from an approved credit counseling
agency either in an individual or group briefing.
11 U.S.C. §§ 109, 111. There are exceptions
in emergency situations or where the U.S. trustee
(or bankruptcy administrator) has determined that
there are insufficient approved agencies to provide
the required counseling. If a debt management
plan is developed during required credit counseling,
it must be filed with the court.
How Chapter 11
Works
A chapter 11 case begins with the filing of a
petition with the bankruptcy court serving the
area where the debtor has a domicile or residence.
A petition may be a voluntary petition, which
is filed by the debtor, or it may be an involuntary
petition, which is filed by creditors that meet
certain requirements. 11 U.S.C. §§ 301,
303. A voluntary petition must adhere to the format
of Form 1 of the Official Forms prescribed by
the Judicial Conference of the United States.
Unless the court orders otherwise, the debtor
also must file with the court: (1) schedules of
assets and liabilities; (2) a schedule of current
income and expenditures; (3) a schedule of executory
contracts and unexpired leases; and (4) a statement
of financial affairs. Fed. R. Bankr. P. 1007(b).
If the debtor is an individual (or husband and
wife), there are additional document filing requirements.
Such debtors must file: a certificate of credit
counseling and a copy of any debt repayment plan
developed through credit counseling; evidence
of payment from employers, if any, received 60
days before filing; a statement of monthly net
income and any anticipated increase in income
or expenses after filing; and a record of any
interest the debtor has in federal or state qualified
education or tuition accounts.11 U.S.C. §
521. A husband and wife may file a joint petition
or individual petitions. 11 U.S.C. § 302(a).
(The Official Forms are not available from the
court, but may be purchased at legal stationery
stores or downloaded from the Internet at www.uscourts.gov/bkforms/index.html.)
The courts are required to charge an $1,000 case
filing fee and a $39 miscellaneous administrative
fee. The fees must be paid to the clerk of the
court upon filing or may, with the court's permission,
be paid by individual debtors in installments.
28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b);
Bankruptcy Court Miscellaneous Fee Schedule, Item
8. Fed. R. Bankr. P. 1006(b) limits to four the
number of installments for the filing fee. The
final installment must be paid not later than
120 days after filing the petition. For cause
shown, the court may extend the time of any installment,
provided that the last installment is paid not
later than 180 days after the filing of the petition.
Fed. R. Bankr. P. 1006(b). The $39 administrative
fee may be paid in installments in the same manner
as the filing fee. If a joint petition is filed,
only one filing fee and one administrative fee
are charged. Debtors should be aware that failure
to pay these fees may result in dismissal of the
case. 11 U.S.C. § 1112(b)(10).
The voluntary petition will include standard information
concerning the debtor's name(s), social security
number or tax identification number, residence,
location of principal assets (if a business),
the debtor's plan or intention to file a plan,
and a request for relief under the appropriate
chapter of the Bankruptcy Code. Upon filing a
voluntary petition for relief under chapter 11
or, in an involuntary case, the entry of an order
for relief, the debtor automatically assumes an
additional identity as the "debtor in possession."
11 U.S.C. § 1101. The term refers to a debtor
that keeps possession and control of its assets
while undergoing a reorganization under chapter
11, without the appointment of a case trustee.
A debtor will remain a debtor in possession until
the debtor's plan of reorganization is confirmed,
the debtor's case is dismissed or converted to
chapter 7, or a chapter 11 trustee is appointed.
The appointment or election of a trustee occurs
only in a small number of cases. Generally, the
debtor, as "debtor in possession," operates
the business and performs many of the functions
that a trustee performs in cases under other chapters.
11 U.S.C. § 1107(a).
Generally, a written disclosure statement and
a plan of reorganization must be filed with the
court. 11 U.S.C. §§ 1121, 1125. The
disclosure statement is a document that must contain
information concerning the assets, liabilities,
and business affairs of the debtor sufficient
to enable a creditor to make an informed judgment
about the debtor's plan of reorganization. 11
U.S.C. § 1125. The information required is
governed by judicial discretion and the circumstances
of the case. In a "small business case"
(discussed below) the debtor may not need to file
a separate disclosure statement if the court determines
that adequate information is contained in the
plan. 11 U.S.C. § 1125(f). The contents of
the plan must include a classification of claims
and must specify how each class of claims will
be treated under the plan. 11 U.S.C. § 1123.
Creditors whose claims are "impaired,"
i.e., those whose contractual rights are to be
modified or who will be paid less than the full
value of their claims under the plan, vote on
the plan by ballot. 11 U.S.C. § 1126. After
the disclosure statement is approved by the court
and the ballots are collected and tallied, the
court will conduct a confirmation hearing to determine
whether to confirm the plan.11 U.S.C. § 1128.
In the case of individuals, chapter 11 bears some
similarities to chapter 13. For example, property
of the estate for an individual debtor includes
the debtor's earnings and property acquired by
the debtor after filing until the case is closed,
dismissed or converted; funding of the plan may
be from the debtor's future earnings; and the
plan cannot be confirmed over a creditor's objection
without committing all of the debtor's disposable
income over five years unless the plan pays the
claim in full, with interest, over a shorter period
of time. 11 U.S.C. §§ 1115, 1123(a)(8),
1129(a)(15).
The Chapter 11
Debtor in Possession
Chapter 11 is typically used to reorganize a business,
which may be a corporation, sole proprietorship,
or partnership. A corporation exists separate
and apart from its owners, the stockholders. The
chapter 11 bankruptcy case of a corporation (corporation
as debtor) does not put the personal assets of
the stockholders at risk other than the value
of their investment in the company's stock. A
sole proprietorship (owner as debtor), on the
other hand, does not have an identity separate
and distinct from its owner(s). Accordingly, a
bankruptcy case involving a sole proprietorship
includes both the business and personal assets
of the owners-debtors. Like a corporation, a partnership
exists separate and apart from its partners. In
a partnership bankruptcy case (partnership as
debtor), however, the partners' personal assets
may, in some cases, be used to pay creditors in
the bankruptcy case or the partners, themselves,
may be forced to file for bankruptcy protection.
Section 1107 of the Bankruptcy Code places the
debtor in possession in the position of a fiduciary,
with the rights and powers of a chapter 11 trustee,
and it requires the debtor to perform of all but
the investigative functions and duties of a trustee.
These duties, set forth in the Bankruptcy Code
and Federal Rules of Bankruptcy Procedure, include
accounting for property, examining and objecting
to claims, and filing informational reports as
required by the court and the U.S. trustee or
bankruptcy administrator (discussed below), such
as monthly operating reports. 11 U.S.C. §§
1106, 1107; Fed. R. Bankr. P. 2015(a). The debtor
in possession also has many of the other powers
and duties of a trustee, including the right,
with the court's approval, to employ attorneys,
accountants, appraisers, auctioneers, or other
professional persons to assist the debtor during
its bankruptcy case. Other responsibilities include
filing tax returns and reports which are either
necessary or ordered by the court after confirmation,
such as a final accounting. The U.S. trustee is
responsible for monitoring the compliance of the
debtor in possession with the reporting requirements.
Railroad reorganizations have specific requirements
under subsection IV of chapter 11, which will
not be addressed here. In addition, stock and
commodity brokers are prohibited from filing under
chapter 11 and are restricted to chapter 7. 11
U.S.C. § 109(d).
The U.S. trustee
or bankruptcy administrator
The U.S. trustee plays a major role in monitoring
the progress of a chapter 11 case and supervising
its administration. The U.S. trustee is responsible
for monitoring the debtor in possession's operation
of the business and the submission of operating
reports and fees. Additionally, the U.S. trustee
monitors applications for compensation and reimbursement
by professionals, plans and disclosure statements
filed with the court, and creditors' committees.
The U.S. trustee conducts a meeting of the creditors,
often referred to as the "section 341 meeting,"
in a chapter 11 case. 11 U.S.C. § 341. The
U.S. trustee and creditors may question the debtor
under oath at the section 341 meeting concerning
the debtor's acts, conduct, property, and the
administration of the case.
The U.S. trustee also imposes certain requirements
on the debtor in possession concerning matters
such as reporting its monthly income and operating
expenses, establishing new bank accounts, and
paying current employee withholding and other
taxes. By law, the debtor in possession must pay
a quarterly fee to the U.S. trustee for each quarter
of a year until the case is converted or dismissed.
28 U.S.C. § 1930(a)(6). The amount of the
fee, which may range from $250 to $10,000, depends
on the amount of the debtor's disbursements during
each quarter. Should a debtor in possession fail
to comply with the reporting requirements of the
U.S. trustee or orders of the bankruptcy court,
or fail to take the appropriate steps to bring
the case to confirmation, the U.S. trustee may
file a motion with the court to have the debtor's
chapter 11 case converted to another chapter of
the Bankruptcy Code or to have the case dismissed.
In North Carolina and Alabama, bankruptcy administrators perform similar functions that U.S. trustees perform
in the remaining forty-eight states. The bankruptcy
administrator program is administered by the Administrative
Office of the United States Courts, while the
U.S. trustee program is administered by the Department
of Justice. For purposes of this publication,
references to U.S. trustees are also applicable
to bankruptcy administrators.
Creditors' Committees
Creditors' committees can play a major role in
chapter 11 cases. The committee is appointed by
the U.S. trustee and ordinarily consists of unsecured
creditors who hold the seven largest unsecured
claims against the debtor. 11 U.S.C. § 1102.
Among other things, the committee: consults with
the debtor in possession on administration of
the case; investigates the debtor's conduct and
operation of the business; and participates in
formulating a plan. 11 U.S.C. § 1103. A creditors'
committee may, with the court's approval, hire
an attorney or other professionals to assist in
the performance of the committee's duties. A creditors'
committee can be an important safeguard to the
proper management of the business by the debtor
in possession.
The Small Business
Case and the Small Business Debtor
In some smaller cases the U.S. trustee may be
unable to find creditors willing to serve on a
creditors' committee, or the committee may not
be actively involved in the case. The Bankruptcy
Code addresses this issue by treating a "small
business case" somewhat differently than
a regular bankruptcy case. A small business case
is defined as a case with a "small business
debtor." 11 U.S.C. § 101(51C). Determination
of whether a debtor is a "small business
debtor" requires application of a two-part
test. First, the debtor must be engaged in commercial
or business activities (other than primarily owning
or operating real property) with total non-contingent
liquidated secured and unsecured debts of $2,190,000
or less. Second, the debtor's case must be one
in which the U.S. trustee has not appointed a
creditors' committee, or the court has determined
the creditors' committee is insufficiently active
and representative to provide oversight of the
debtor. 11 U.S.C. § 101(51D).
In a small business case, the debtor in possession
must, among other things, attach the most recently
prepared balance sheet, statement of operations,
cash-flow statement and most recently filed tax
return to the petition or provide a statement
under oath explaining the absence of such documents
and must attend court and the U.S. trustee meeting
through senior management personnel and counsel.
The small business debtor must make ongoing filings
with the court concerning its profitability and
projected cash receipts and disbursements, and
must report whether it is in compliance with the
Bankruptcy Code and the Federal Rules of Bankruptcy
Procedure and whether it has paid its taxes and
filed its tax returns. 11 U.S.C. §§
308, 1116.
In contrast to other chapter 11 debtors, the small
business debtor is subject to additional oversight
by the U.S. trustee. Early in the case, the small
business debtor must attend an "initial interview"
with the U.S. trustee at which time the U.S. trustee
will evaluate the debtor's viability, inquire
about the debtor's business plan, and explain
certain debtor obligations including the debtor's
responsibility to file various reports. 28 U.S.C.
§ 586(a)(7). The U.S. trustee will also monitor
the activities of the small business debtor during
the case to identify as promptly as possible whether
the debtor will be unable to confirm a plan.
Because certain filing deadlines are different
and extensions are more difficult to obtain, a
case designated as a small business case normally
proceeds more quickly than other chapter 11 cases.
For example, only the debtor may file a plan during
the first 180 days of a small business case. 11
U.S.C. § 1121(e). This "exclusivity
period" may be extended by the court, but
only to 300 days, and only if the debtor demonstrates
by a preponderance of the evidence that the court
will confirm a plan within a reasonable period
of time. When the case is not a small business
case, however, the court may extend the exclusivity
period "for cause" up to 18 months.
The Single Asset
Real Estate Debtor
Single asset real estate debtors are subject to
special provisions of the Bankruptcy Code. The
term "single asset real estate" is defined
as "a single property or project, other than
residential real property with fewer than four
residential units, which generates substantially
all of the gross income of a debtor who is not
a family farmer and on which no substantial business
is being conducted by a debtor other than the
business of operating the real property and activities
incidental." 11 U.S.C. § 101(51B). The
Bankruptcy Code provides circumstances under which
creditors of a single asset real estate debtor
may obtain relief from the automatic stay which
are not available to creditors in ordinary bankruptcy
cases. 11 U.S.C. § 362(d). On request of
a creditor with a claim secured by the single
asset real estate and after notice and a hearing,
the court will grant relief from the automatic
stay to the creditor unless the debtor files a
feasible plan of reorganization or begins making
interest payments to the creditor within 90 days
from the date of the filing of the case, or within
30 days of the court's determination that the
case is a single asset real estate case. 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. 11 U.S.C. § 362(d)(3).
Appointment or
Election of a Case Trustee
Although the appointment of a case trustee is
a rarity in a chapter 11 case, a party in interest
or the U.S. trustee can request the appointment
of a case trustee or examiner at any time prior
to confirmation in a chapter 11 case. The court,
on motion by a party in interest or the U.S. trustee
and after notice and hearing, shall order the
appointment of a case trustee for cause, including
fraud, dishonesty, incompetence, or gross mismanagement,
or if such an appointment is in the interest of
creditors, any equity security holders, and other
interests of the estate. 11 U.S.C. § 1104(a).
Moreover, the U.S. trustee is required to move
for appointment of a trustee if there are reasonable
grounds to believe that any of the parties in
control of the debtor "participated in actual
fraud, dishonesty or criminal conduct in the management
of the debtor or the debtor's financial reporting."
11 U.S.C. § 1104(e). The trustee is appointed
by the U.S. trustee, after consultation with parties
in interest and subject to the court's approval.
Fed. R. Bankr. P. 2007.1. Alternatively, a trustee
in a case may be elected if a party in interest
requests the election of a trustee within 30 days
after the court orders the appointment of a trustee.
In that instance, the U.S. trustee convenes a
meeting of creditors for the purpose of electing
a person to serve as trustee in the case. 11 U.S.C.
§ 1104(b).
The case trustee is responsible for management
of the property of the estate, operation of the
debtor's business, and, if appropriate, the filing
of a plan of reorganization. Section 1106 of the
Bankruptcy Code requires the trustee to file a
plan "as soon as practicable" or, alternatively,
to file a report explaining why a plan will not
be filed or to recommend that the case be converted
to another chapter or dismissed. 11 U.S.C. §
1106(a)(5).
Upon the request of a party in interest or the
U.S. trustee, the court may terminate the trustee's
appointment and restore the debtor in possession
to management of bankruptcy estate at any time
before confirmation.11 U.S.C. § 1105.
The Role of an
Examiner
The appointment of an examiner in a chapter 11
case is rare. The role of an examiner is generally
more limited than that of a trustee. The examiner
is authorized to perform the investigatory functions
of the trustee and is required to file a statement
of any investigation conducted. If ordered to
do so by the court, however, an examiner may carry
out any other duties of a trustee that the court
orders the debtor in possession not to perform.
11 U.S.C. § 1106. Each court has the authority
to determine the duties of an examiner in each
particular case. In some cases, the examiner may
file a plan of reorganization, negotiate or help
the parties negotiate, or review the debtor's
schedules to determine whether some of the claims
are improperly categorized. Sometimes, the examiner
may be directed to determine if objections to
any proofs of claim should be filed or whether
causes of action have sufficient merit so that
further legal action should be taken. The examiner
may not subsequently serve as a trustee in the
case. 11 U.S.C. § 321.
The Automatic
Stay
The automatic stay provides a period of time in
which all judgments, collection activities, foreclosures,
and repossessions of property are suspended and
may not be pursued by the creditors on any debt
or claim that arose before the filing of the bankruptcy
petition. As with cases under other chapters of
the Bankruptcy Code, a stay of creditor actions
against the chapter 11 debtor automatically goes
into effect when the bankruptcy petition is filed.
11 U.S.C. § 362(a). The filing of a petition,
however, does not operate as a stay for certain
types of actions listed under 11 U.S.C. §
362(b). The stay provides a breathing spell for
the debtor, during which negotiations can take
place to try to resolve the difficulties in the
debtor's financial situation.
Under specific circumstances, the secured creditor
can obtain an order from the court granting relief
from the automatic stay. For example, when the
debtor has no equity in the property and the property
is not necessary for an effective reorganization,
the secured creditor can seek an order of the
court lifting the stay to permit the creditor
to foreclose on the property, sell it, and apply
the proceeds to the debt. 11 U.S.C. § 362(d).
The Bankruptcy Code permits applications for fees
to be made by certain professionals during the
case. Thus, a trustee, a debtor's attorney, or
any professional person appointed by the court
may apply to the court at intervals of 120 days
for interim compensation and reimbursement payments.
In very large cases with extensive legal work,
the court may permit more frequent applications.
Although professional fees may be paid if authorized
by the court, the debtor cannot make payments
to professional creditors on prepetition obligations,
i.e., obligations which arose before the filing
of the bankruptcy petition. The ordinary expenses
of the ongoing business, however, continue to
be paid.
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
Frequently, the debtor in possession will institute
a lawsuit, known as an adversary proceeding, to
recover money or property for the estate. Adversary
proceedings may take the form of lien avoidance
actions, actions to avoid preferences, actions
to avoid fraudulent transfers, or actions to avoid
post-petition transfers. These proceedings are
governed by Part VII of the Federal Rules of Bankruptcy
Procedure. At times, a creditors' committee may
be authorized by the bankruptcy court to pursue
these actions against insiders of the debtor if
the plan provides for the committee to do so or
if the debtor has refused a demand to do so. Creditors
may also initiate adversary proceedings by filing
complaints 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.
Claims
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. 11 U.S.C. §
101(5). Generally, any creditor whose claim is
not scheduled (i.e., listed by the debtor on the
debtor's schedules) or is scheduled 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 plan and distribution
under it. Fed. R. Bankr. P. 3003(c)(2). But filing
a proof of claim is not necessary if the creditor's
claim is scheduled (but is not listed as disputed,
contingent, or unliquidated by the debtor) because
the debtor's schedules are deemed to constitute
evidence of the validity and amount of those claims.
11 U.S.C. § 1111. If a scheduled creditor
chooses to file a claim, a properly filed proof
of claim supersedes any scheduling of that claim.
Fed. R. Bankr. P. 3003(c)(4). It is the responsibility
of the creditor to determine whether the claim
is accurately listed on the debtor's schedules.
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. Fed. R. Bankr. P. 1009(a).
Equity Security
Holders
An equity security holder is a holder of an equity
security of the debtor. Examples of an equity
security are a share in a corporation, an interest
of a limited partner in a limited partnership,
or a right to purchase, sell, or subscribe to
a share, security, or interest of a share in a
corporation or an interest in a limited partnership.
11 U.S.C. § 101(16), (17). An equity security
holder may vote on the plan of reorganization
and may file a proof of interest, rather than
a proof of claim. A proof of interest is deemed
filed for any interest that appears in the debtor's
schedules, unless it is scheduled as disputed,
contingent, or unliquidated. 11 U.S.C. §
1111. An equity security holder whose interest
is not scheduled or scheduled as disputed, contingent,
or unliquidated must file a proof of interest
in order to be treated as a creditor for purposes
of voting on the plan and distribution under it.
Fed. R. Bankr. P. 3003(c)(2). A properly filed
proof of interest supersedes any scheduling of
that interest. Fed. R. Bankr. P. 3003(c)(4). Generally,
most of the provisions that apply to proofs of
claim, as discussed above, are also applicable
to proofs of interest.
Conversion or
Dismissal
A debtor in a case under chapter 11 has a one-time
absolute right to convert the chapter 11 case
to a case under chapter 7 unless: (1) the debtor
is not a debtor in possession; (2) the case originally
was commenced as an involuntary case under chapter
11; or (3) the case was converted to a case under
chapter 11 other than at the debtor's request.
11 U.S.C. § 1112(a). A debtor in a chapter
11 case does not have an absolute right to have
the case dismissed upon request.
A party in interest may file a motion to dismiss
or convert a chapter 11 case to a chapter 7 case
"for cause." Generally, if cause is
established after notice and hearing, the court
must convert or dismiss the case (whichever is
in the best interests of creditors and the estate)
unless it specifically finds that the requested
conversion or dismissal is not in the best interest
of creditors and the estate. 11 U.S.C. §
1112(b). Alternatively, the court may decide that
appointment of a chapter 11 trustee or an examiner
is in the best interests of creditors and the
estate. 11 U.S.C. § 1104(a)(3). Section 1112(b)(4)
of the Bankruptcy Code sets forth numerous examples
of cause that would support dismissal or conversion.
For example, the moving party may establish cause
by showing that there is 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; or unauthorized
use of cash collateral that is substantially harmful
to a creditor.
Cause for dismissal or conversion also includes
an 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;
and failure to timely pay post-petition taxes
or timely file post-petition returns. Additionally,
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 represent "cause" for dismissal
under the statute. In an individual case, failure
of the debtor to pay post-petition domestic support
obligations constitutes "cause" for
dismissal or conversion.
Section 1112(c) of the Bankruptcy Code provides
an important exception to the conversion process
in a chapter 11 case. Under this provision, 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
Generally, the debtor (or any plan proponent)
must file and get court approval of a written
disclosure statement before there can be a vote
on the plan of reorganization. The disclosure
statement must provide "adequate information"
concerning the affairs of the debtor to enable
the holder of a claim or interest to make an informed
judgment about the plan. 11 U.S.C. § 1125.
In a small business case, however, the court may
determine that the plan itself contains adequate
information and that a separate disclosure statement
is unnecessary. 11 U.S.C. § 1125(f). After
the disclosure statement is filed, the court must
hold a hearing to determine whether the disclosure
statement should be approved. Acceptance or rejection
of a plan usually cannot be solicited until the
court has first approved the written disclosure
statement. 11 U.S.C. § 1125(b). An exception
to this rule exists if the initial solicitation
of the party occurred before the bankruptcy filing,
as would be the case in so-called "prepackaged"
bankruptcy plans (i.e., where the debtor negotiates
a plan with significant creditor constituencies
before filing for bankruptcy). Continued post-filing
solicitation of such parties is not prohibited.
After the court approves the disclosure statement,
the debtor or proponent of a plan can begin to
solicit acceptances of the plan, and creditors
may also solicit rejections of the plan.
Upon approval of a disclosure statement, the plan
proponent must mail the following to the U.S.
trustee and all creditors and equity security
holders: (1) the plan, or a court approved summary
of the plan; (2) the disclosure statement approved
by the court; (3) notice of the time within which
acceptances and rejections of the plan may be
filed; and (4) such other information as the court
may direct, including any opinion of the court
approving the disclosure statement or a court-approved
summary of the opinion. Fed. R. Bankr. P. 3017(d).
In addition, the debtor must mail to the creditors
and equity security holders entitled to vote on
the plan or plans: (1) notice of the time fixed
for filing objections; (2) notice of the date
and time for the hearing on confirmation of the
plan; and (3) a ballot for accepting or rejecting
the plan and, if appropriate, a designation for
the creditors to identify their preference among
competing plans. Id. But 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. 11 U.S.C. § 1125(f).
Acceptance of the Plan
of Reorganization
As noted earlier, only the debtor may file a plan
of reorganization during the first 120-day period
after the petition is filed (or after entry of
the order for relief, if an involuntary petition
was filed). The court may grant extension of this
exclusive period up to 18 months after the petition
date. In addition, the debtor has 180 days after
the petition date or entry of the order for relief
to obtain acceptances of its plan. 11 U.S.C. §
1121. The court may extend (up to 20 months) or
reduce this acceptance exclusive period for cause.
11 U.S.C. § 1121(d). In practice, debtors
typically seek extensions of both the plan filing
and plan acceptance deadlines at the same time
so that any order sought from the court allows
the debtor two months to seek acceptances after
filing a plan before any competing plan can be
filed.
If the exclusive period expires before the debtor
has filed and obtained acceptance of a plan, other
parties in interest in a case, such as the creditors'
committee or a creditor, may file a plan. Such
a plan may compete with a plan filed by another
party in interest or by the debtor. If a trustee
is appointed, the trustee must file a plan, a
report explaining why the trustee will not file
a plan, or a recommendation for conversion or
dismissal of the case. 11 U.S.C. § 1106(a)(5).
A proponent of a plan is subject to the same requirements
as the debtor with respect to disclosure and solicitation.
In a chapter 11 case, a liquidating plan is permissible.
Such a plan often allows the debtor in possession
to liquidate the business under more economically
advantageous circumstances than a chapter 7 liquidation.
It also permits the creditors to take a more active
role in fashioning the liquidation of the assets
and the distribution of the proceeds than in a
chapter 7 case.
Section 1123(a) of the Bankruptcy Code lists the
mandatory provisions of a chapter 11 plan, and
section 1123(b) lists the discretionary provisions.
Section 1123(a)(1) provides that a chapter 11
plan must designate classes of claims and interests
for treatment under the reorganization. Generally,
a plan will classify claim holders as secured
creditors, unsecured creditors entitled to priority,
general unsecured creditors, and equity security
holders.
Under section 1126(c) of the Bankruptcy Code,
an entire class of claims is deemed to accept
a plan if the plan is accepted by creditors that
hold at least two-thirds in amount and more than
one-half in number of the allowed claims in the
class. Under section 1129(a)(10), if there are
impaired classes of claims, the court cannot confirm
a plan unless it has been accepted by at least
one class of non-insiders who hold impaired claims
(i.e., claims that are not going to be paid completely
or in which some legal, equitable, or contractual
right is altered). Moreover, under section 1126(f),
holders of unimpaired claims are deemed to have
accepted the plan.
Under section 1127(a) of the Bankruptcy Code,
the plan proponent may modify the plan at any
time before confirmation, but the plan as modified
must meet all the requirements of chapter 11.
When there is a proposed modification after balloting
has been conducted, and the court finds after
a hearing that the proposed modification does
not adversely affect the treatment of any creditor
who has not accepted the modification in writing,
the modification is deemed to have been accepted
by all creditors who previously accepted the plan.
Fed. R. Bankr. P. 3019. If it is determined that
the proposed modification does have an adverse
effect on the claims of non-consenting creditors,
then another balloting must take place.
Because more than one plan may be submitted to
the creditors for approval, every proposed plan
and modification must be dated and identified
with the name of the entity or entities submitting
the plan or modification. Fed. R. Bankr. P. 3016(b).
When competing plans are presented that meet the
requirements for confirmation, the court must
consider the preferences of the creditors and
equity security holders in determining which plan
to confirm.
Any party in interest may file an objection to
confirmation of a plan. The Bankruptcy Code requires
the court, after notice, to hold a hearing on
confirmation of a plan. If no objection to confirmation
has been timely filed, the Bankruptcy Code allows
the court to determine whether the plan has been
proposed in good faith and according to law. Fed.
R. Bankr. P. 3020(b)(2). Before confirmation can
be granted, the court must be satisfied that there
has been compliance with all the other requirements
of confirmation set forth in section 1129 of the
Bankruptcy Code, even in the absence of any objections.
In order to confirm the plan, the court must find,
among other things, that: (1) the plan is feasible;
(2) it is proposed in good faith; and (3) the
plan and the proponent of the plan are in compliance
with the Bankruptcy Code. In order to satisfy
the feasibility requirement, the court must find
that confirmation of the plan is not likely to
be followed by liquidation (unless the plan is
a liquidating plan) or the need for further financial
reorganization.
The Discharge
Section 1141(d)(1) generally provides that confirmation
of a plan discharges a debtor from any debt that
arose before the date of confirmation. After the
plan is confirmed, the debtor is required to make
plan payments and is bound by the provisions of
the plan of reorganization. The confirmed plan
creates new contractual rights, replacing or superseding
pre-bankruptcy contracts.
There are, of course, exceptions to the general
rule that an order confirming a plan operates
as a discharge. Confirmation of a plan of reorganization
discharges any type of debtor – corporation,
partnership, or individual – from most types
of prepetition debts. It does not, however, discharge
an individual debtor from any debt made nondischargeable
by section 523 of the Bankruptcy Code. (1) Moreover,
except in limited circumstances, a discharge is
not available to an individual debtor unless and
until all payments have been made under the plan.
11 U.S.C. § 1141(d)(5). Confirmation does
not discharge the debtor if the plan is a liquidation
plan, as opposed to one of reorganization, unless
the debtor is an individual. When the debtor is
an individual, confirmation of a liquidation plan
will result in a discharge (after plan payments
are made) unless grounds would exist for denying
the debtor a discharge if the case were proceeding
under chapter 7 instead of chapter 11. 11 U.S.C.
§§ 727(a), 1141(d).
Postconfirmation
Modification of the Plan
At any time after confirmation and before "substantial
consummation" of a plan, the proponent of
a plan may modify the plan if the modified plan
would meet certain Bankruptcy Code requirements.
11 U.S.C. § 1127(b). This should be distinguished
from preconfirmation modification of the plan.
A modified postconfirmation plan does not automatically
become the plan. A modified postconfirmation plan
in a chapter 11 case becomes the plan only "if
circumstances warrant such modification"
and the court, after notice and hearing, confirms
the plan as modified. If the debtor is an individual,
the plan may be modified postconfirmation upon
the request of the debtor, the trustee, the U.S.
trustee, or the holder of an allowed unsecured
claim to make adjustments to payments due under
the plan. 11 U.S.C. § 1127(e).
Postconfirmation
Administration
Notwithstanding the entry of the confirmation
order, the court has the authority to issue any
other order necessary to administer the estate.
Fed. R. Bankr. P. 3020(d). This authority would
include the postconfirmation determination of
objections to claims or adversary proceedings,
which must be resolved before a plan can be fully
consummated. Sections 1106(a)(7) and 1107(a) of
the Bankruptcy Code require a debtor in possession
or a trustee to report on the progress made in
implementing a plan after confirmation. A chapter
11 trustee or debtor in possession has a number
of responsibilities to perform after confirmation,
including consummating the plan, reporting on
the status of consummation, and applying for a
final decree.
Revocation of
the Confirmation Order
Revocation of the confirmation order is an undoing
or cancellation of the confirmation of a plan.
A request for revocation of confirmation, if made
at all, must be made by a party in interest within
180 days of confirmation. The court, after notice
and hearing, may revoke a confirmation order "if
and only if the [confirmation] order was procured
by fraud." 11 U.S.C. § 1144.
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
1. Debts not discharged include debts for alimony
and child support, certain taxes, debts for certain
educational benefit overpayments or loans made
or guaranteed by a governmental unit, debts for
willful and malicious injury by the debtor to
another entity or to the property of another entity,
debts for death or personal injury caused by the
debtor's operation of a motor vehicle while the
debtor was intoxicated from alcohol or other substances,
and debts for certain criminal restitution orders.11
U.S.C. § 523(a). The debtor will continue
to be liable for these types of debts to the extent
that they are not paid in the chapter 11 case.
Debts for money or property obtained by false
pretenses, debts for fraud or defalcation while
acting in a fiduciary capacity, and debts for
willful and malicious injury by the debtor to
another entity or to the property of another entity
will be discharged unless a creditor timely files
and prevails in an action to have such debts declared
nondischargeable. 11 U.S.C. § 523(c); Fed.
R. Bankr. P. 4007(c). return to text
|
|
|
|
We are a debt relief agency. We help people file for bankruptcy relief under the
bankruptcy code. This Web Site is designed for general information only. The information
presented at this site should not be construed to be formal legal advice nor the
formation of a lawyer/client relationship |
|
|
|
|
|
OUR SERVICES
|
 |
Free Consultation |
|
|
Weekend Appointments
|
|
|
Home Visits |
|
|
Payment Plans |
|
|
HOURS OF OPERATIONS |
|
Monday - Friday |
|
9:00 a.m. - 9:00 p.m. |
|
Saturday & Sunday By Appointment Only |
|
Most Major Credit Cards Accepted |
|
|
|
|
