Chapter 11 Bankruptcy in Las Vegas

A case filed under chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy.

Both companies and individuals are eligible to file for chapter 11 bankruptcy.

Overview of Chapter 11 Bankruptcy

Chapter 11 is the principal business reorganization chapter of the Bankruptcy Code. The commencement of a chapter 11 case creates an ‘estate’ comprised of all the legal and equitable interests of a debtor. Unlike chapter 7, a chapter 11 debtor may continue to operate its business and control the assets of its estate as a ‘debtor in possession.’  Unless the court orders otherwise, no trustee is assigned to manage the case; the debtor, as debtor-in-possession, manages everything.

The filing of a chapter 11 case also triggers the application of Section 362 of the Bankruptcy Code, which provides for an automatic stay of all attempts to collect upon claims against a debtor that arose before a bankruptcy filing. Generally speaking, the automatic stay prohibits interference with a debtor’s property or business.

The primary goal of a chapter 11 is to get a plan of reorganization confirmed.  A plan of reorganization sets forth the means for satisfying all claims against, and interests in, a debtor. Generally, a claim against a debtor arises from a normal debtor/creditor transaction, such as a promissory note or a trade credit relationship, but may also arise from other contractual agreements or other sources. An interest in a debtor is held by a party that owns the debtor, such as a shareholder or an LLC member.

The Bankruptcy Code requires that a plan of reorganization places all claims in separate classes, grouped by claims that are alike, and describes the treatment each class will receive.  Except in certain circumstances, general unsecured claims are usually grouped into a single class, and secured claims each get their own separate class.

As discussed further below, proposed plans of reorganization must be voted on, by creditor class, in order to be confirmed.

When a plan is confirmed by the bankruptcy court, all creditor claims are paid out according to the provisions of the plan.  Generally, unsecured creditors get paid very little on their claims, sometimes just pennies on the dollar, and are paid over a period of three to five years.

The Disclosure Statement

Before soliciting votes for a plan of reorganization (a “Plan”), a second document called a “disclosure statement” is also prepared, and is sent along with the proposed Plan as part of the voting packages sent to creditors.  Prior to its distribution with the Plan, the court will approve, or conditionally approve, the disclosure statement.

A disclosure statement is typically 35-45 pages long.  It summarizes the Plan and information relating to the plan, and the voting process, and also:

• The history of the Debtor and its business operations;
• Significant events during the bankruptcy case;
• How the Plan proposes to treat claims and interests, and how this treatment compares to what your claim or interest would receive in liquidation;
• Who can vote on or object to the Plan;
• What factors the court will consider when deciding whether to confirm the Plan;
• Why Debtor believes the Plan is feasible; and
• The effect of confirmation of the Plan.

The Bankruptcy Code requires a disclosure statement to contain ‘adequate information’ concerning a plan, to enable parties affected by a plan to make an informed judgment about the proposed plan.

Voting on a Plan

Some creditors are not entitled to vote to accept or reject a Plan. A creditor has a right to vote for or against the Plan only if that creditor has a claim that is both (1) allowed or allowed for voting purposes, and (2) impaired.  A class is considered impaired if the Plan alters the legal, equitable, or contractual rights of the members of that class.

If impaired classes exist, the Court cannot confirm a Plan unless (1) at least one impaired class of creditors has accepted the Plan without counting the votes of any insiders within that class, and (2) all impaired classes have voted to accept a Plan, unless the Plan is eligible to be confirmed by a “cram down” on non-accepting classes.

A class of claims accepts the Plan if both of the following occur: (1) the holders of more than one-half (1/2) of the allowed claims in the class, who vote, cast their votes to accept the Plan, and (2) the holders of at least two-thirds (2/3) in dollar amount of the allowed claims in the class, who vote, cast their votes to accept the Plan.

A class of equity interests accepts the Plan if the holders of at least two-thirds (2/3) in amount of the allowed equity interests in the class, who vote, cast their votes to accept the Plan.

The ‘Cram Down’ of Non-Accepting Classes: Even if one or more impaired classes reject the Plan, the Court may nonetheless confirm the Plan if the non-accepting classes are treated in the manner prescribed by Section 1129(b) of the Bankruptcy Code. A plan that binds non-accepting classes is commonly referred to as a ‘cram down’ plan.  The Bankruptcy Code allows the Plan to bind non-accepting classes of claims or equity interests if it meets all the requirements for consensual confirmation except the voting requirements of Section 1129(a)(8), does not ‘discriminate unfairly’, and is ‘fair and equitable’ toward each impaired class that has not voted to accept the Plan.

In addition to voting, any party in interest may also separately object to the overall confirmation of a Plan, if the party believes that the requirements for confirmation are not met.

Feasibility

In addition to obtaining enough votes, the bankruptcy court must also find that confirmation of a Plan is feasible, i.e., not likely to be followed by the liquidation, or further financial reorganization, of the Debtor.

The Debtor must also demonstrate that it will have enough cash over the life of the Plan to make the required Plan payments.

Discharge

A bankruptcy court order confirming a plan of reorganization usually provides for the discharge of the Debtor from any debt that arose before the date of confirmation of the plan, and provides for the treatment of such debt in accordance with the terms of the confirmed plan of reorganization.  A confirmed plan acts as a contract between the Debtor and all of its pre-petition creditors, so after plan confirmation those creditors are only entitled to be paid via the terms of the Plan, and cannot object or sue the Debtor if the Debtor timely makes all Plan payments.

Final Decree and Case Closing

Pursuant to Local Bankruptcy Rule 3022, unless there are pending contested matters or adversary proceedings, a non-individual chapter 11 case is deemed fully administered 180 days after plan confirmation (even if Plan payments still need to be made for several years), and the court clerk will enter a final decree and close the case.

Adversary Proceedings and other Complexities

Chapter 11 cases can be relatively straightforward, or extremely complex.

Oftentimes, litigation is commenced in the bankruptcy case either by the Debtor, or against the Debtor.  A lawsuit in a bankruptcy is called an “adversary proceeding” and can cover a wide span of claims and causes of action.  An adversary proceeding is the main process by which the Debtor can recover pre-petition transfers of property made to creditors.

Many debtors have secured creditors to whom they have pledged their accounts receivable and bank accounts as collateral.  In these cases, the Debtor’s counsel has to file a motion seeking court approval of use of this “cash collateral.”

Small business debtors are defined as debtors with less than $2.49 million in debt.  Different rules apply in bankruptcy to small business debtors.

Single-asset real estate debtors are debtors who own one parcel of real estate (or contiguous parcels that act as a single parcel), generally either raw land, or with a building on it that generates revenue.  Different rules apply in bankruptcy to single-asset real estate debtors.

Individuals in Chapter 11 Bankruptcy

Most people perceive chapter 11 as only being available for companies, but that is not true.  Individuals can also file for chapter 11.  Indeed, chapter 11 bankruptcy is relatively popular for individuals who own many parcels of real estate, especially if they are upside-down on the loan.  Oftentimes, the loan principal can be reduced to the current market value of the property.  Unlike chapter 7, an individual debtor in chapter 11 stays in control and continues to manage the property.

Sometimes, individuals who own significant assets other than real estate also prefer to file chapter 11 rather than chapter 7.  Please call our office to discuss the particulars of your situation, to see which chapter might be right for you.

Chapter 11 as an Alternative to Chapter 7

Although usually referred to as a plan of reorganization, a ‘liquidating plan’ may also provide for the liquidation of assets.  Some debtors who need to liquidate but have reason to want to avoid chapter 7 thus prefer to file for chapter 11 bankruptcy and then submit a liquidating plan, thereby controlling the whole process instead of having the liquidation being controlled by a chapter 7 trustee.

Pricing

As you can tell from the above, chapter 11 is much more complicated, and expensive, compared to chapter 7.  We generally require a sizeable up-front retainer, and charge on an hourly basis during the course of the chapter 11 bankruptcy case.  Each chapter 11 case is different, so please call our office to discuss pricing / retainer for your situation.