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Thursday, August 5, 2010

The Long Road of Chapter 11 Bankruptcy: A Sample Timeline

The Long Road of Chapter 11 Bankruptcy: A Sample Timeline

If I questioned my instincts before about the truly distressing condition of the economy, the car ad I saw on TV the other day - which sought to induce viewers to purchase a car by telling them that if they lost their source of income over the next year, they would be able to bring the car back - removed all doubt.  Then I heard this morning that theunemployment rate is the highest it has been in TWENTY-FIVE YEARS, which is to say AS LONG AS I'VE BEEN WORKING!!   Which certainly puts things in perspective and leads to the further disturbing conclusion that for lawyers like me working for creditors in the bankruptcy law area, job security is probably somewhat better than for the rest of America.
Unfortunately, for the country as a whole, the number of businesses becoming familiar with the mechanics of Chapter 11 of the Bankruptcy Code is likely to increase in the year ahead.  Either one of their customers or vendors will be going through this or they themselves will become a Chapter 11 debtor-in-possession or DIP, for short.   
In addition, there has been a great deal of discussion recently about prepackaged bankruptcy for Detroit's Big Three automakers as being a possible antidote to the problems associated with the lengthy time frames associated with the usual Chapter 11 bankruptcy. To understand that, it's useful to consider the timelines generally associated with a Chapter 11 bankruptcy proceeding.
So what actually happens when a business "goes Chapter 11"?   In many cases,those not in the know about the particular financial condition of a business may not even know that the business has sought the protection of the federal bankruptcy laws.  Companies in Chapter 11 bankruptcy are allowed to continue operating their business as before and from the customer perspective, the filing of the bankruptcy does not necessarily change the customer experience.  However, it is the bankrupt company's vendors and suppliers that will notice an immediate difference in their relationships as various restrictions imposed by the Bankruptcy Code on the activities of the debtor company come into play. 
Technically, everything grinds to a halt when a bankruptcy petition is filed and the world - for that company (who has now become a Debtor-in-Possession or DIP), its employees, customers, and vendors - was now become divided into
•               "prepetition" involving claims arising and events occurring BEFOREthe bankruptcy petition was filed AND
•                "post-petition" involving claims arising and events occurring AFTERthe bankruptcy petiton was filed
Prepetition claims cannot be paid  - and collection cannot be pursued against the DIP company - absent specific authorization by the Bankruptcy Court.  Post petition claims can be paid in many instances if they arise in the ordinary course of the company's business and even if further authorization by the Bankruptcy Court is required, generally go to the head of the line of unsecured creditors as administrative claims.
The U.S. Courts' website provides a great summary of the typical Chapter 11 process, as well as the Official Forms to be used by the company filing bankruptcy.  While there is no set timeline in a Chapter 11 (for an excellent visual representation of precisely how complicated things can get, look at the well knownLoPucki's Bankruptcy Procedure Charts designed by UCLA law professor Lynn M. LoPucki) , some of the usual benchmarks might include the following:
ONE YEAR BEFORE PETITION IS FILED  - "Preference" period for "insiders" begins
NINETY DAYS BEFORE PETITION IS FILED - "Preference" period for noninsiders begins
PETITION DATE ("P") -   Day that Chapter 11 VOLUNTARY Bankruptcy Petition is filed    (Assume this is January 1, 2009)
•               Bankruptcy Petition  is only a few pages and easy to complete
•               Must also include Creditor Matrix - list of names and addresses of all creditors
•               List of Credtiors Holding 20 Largest Unsecured Claimsmust also be filed.
•               Numerous "first day" motions filed (different ones in different cases), including motions for
◦                                 Appointment of Debtor's Counsel
◦                                 Appointment of other professionals being retained by Debtor (CPA, etc.)
◦                                 Payment of prepetition employee wages and benefits
◦                                 Interim financing
◦                                 Interim use of "cash collateral", i,e. proceeds generated from collateral on which a creditor has a lien
◦                                 Authorizing honoring of Prepetition Obligations to Customers in the form of warranties or gift certificates
◦                                 Ensuring uninterrupted use of utlities
◦                                 Extension of time to file bankruptcy schedules
>>>> Meet with U.S. Trustee, open DIP (debtor-in-possession) bank accounts  
>>>> Resolve use of cash collateral issues, if not (hopefully) already done 
 P+15 days: (January 16, 2009)  Statement of Financial Affairs  and Schedules of Assets and Liabilities  must be filed unless deadline extended by Bankruptcy Court,  (In large cases, deadline often extended several times.)   Schedules include  a Summary, as well as the following  (Schedule I-Current Income and Schedule J-Current Expenditures relate only to individuals).
•               Schedule A       Real Property
•               Schedule B       Personal Property
•               Schedule C       Property Claimed as Exempt (not relevant for non individual debtors)
•               Schedule D       Creditors Holding Secured Claims (includes both fully secured and only partially secured creditors)
•               Schedule E       Creditors Holding Unsecured Priority Claims(continuation sheet)
•               Schedule F       Creditors Holding Unsecured Nonpriority Claims
•               Schedule G       Executory Contracts and Unexpired Leases
•               Schedule H       Codebtors
Completing the Statement of Financial Affairs which relates to debtor's prepetition behavior with respect to its assets, liabilities, and revenues, and especially all of the above bankruptcy Schedules relating to the debtor's assets and liabilities, is extremely time consuming.  The larger the business, the more complicated the process becomes.  in addition, companies needing to file bankruptcy often may not have had the best recordkeeping to begin with.  
>>>> UNSECURED CREDITORS' COMMITTEE FORMED (usually within the first couple of weeks following the Petition Date) based on the identity of the Twenty Largest Creditors as listed by the Debtor.  Generally selected by U.S. Trustee.  Motion for Appointment of Counsel for Creditors' Committee filed.  In smaller Chapter 11 cases, often no Unsecured Creditors Committee is ever formed.  Purpose of Creditors' Committee is to represent the interest of creditors with smaller unsecured claims .
P+30 Days (February 1, 2009) - first Monthly Operating Report due showing results of post petition activities.
>>>>>FIRST MEETING OF CREDITORS (aka 341 Meeting because it is mandated by 11 U.S.C. 341) conducted by U.S. Trustee at which debtor's representative answers questions under oath from creditors about the factors triggering the filing, status of assets (including those pledged as collateral), and plans for restructuring.
>>> continued filing of Monthly Operating Reports
>>>>Miscellaneous stay relief, adequate protection, lease and executory contract assumption/rejection issues arise; adversary proceedings filed
>>>>Revisit or further establish cash collateral arrangements and post-petition financing arrangements
>>>Establishment of a BAR DATE for when proof of claims must be filed by creditors
>>>>Begin formulation and negotiation with pertinent creditors regarding terms of Plan of Reorganization, including proposed classification and treatment of claims
>>>Begin analysis of potential preference recoveries.
P+120 DAYS  (May 2009) - Expiration of "exclusive period" during which only DIP is permitted to file plan of reorganization.  Exclusive period often extended at request of DIP by Bankruptcy Court. 
>>>> PROOF OF CLAIM BAR DATE - all creditors not agreeing to amount of claim shown in bankruptcy schedules must have filed proof of claim form to participate in any distributions
>>>>> Continued formulation and negotiation of Plan of Reorganization.  Proposed PLAN OF REORGANIZATION and proposed DISCLOSURE STATEMENT filed.  Disclosure Statement must summarize contents of proposed Plan and provide "adequate information" concerning the Plan and its implementation.
•               At least a 25 day notice period is required for hearing on Disclosure Statement
•               Once Disclosure Statement approved, proposed Plan of Reorganization, approved Disclosure Statement, and Ballot for voting on Plan must be distributed to all creditors and parties in interest.
•               Revision and extensive negotiation of Plan often required
>>>>> CONFIRMATION HEARING on proposed Plan of Reorganization
•               At least a 25 day notice period is required for confirmation hearing  
•               Ballots must be tabulated - at least amajority in number and two-thirds in amount of claims voted in at least one class of impaired claims required for confirmation
•               Other confirmation requirements (including provisions governing contents of plan) set forth in sections 1126 and 1129  of the Bankruptcy Code such as feasibility must be satisfied
 >>>>PREFERENCE ACTIONS and other adversary proceedings initiated.
>>>> Claims determination and allowance proceedings
That, somewhat oversimplified, is the timeline of a typical Chapter 11 case.  Because there is often no way to know how long it may take to reach agreement or determination of such crucial issues as the valuation of particular property securing creditor claims, it is rarely easy to predict how long any particular case may take to resolve sufficient issues for the company to emerge from bankruptcy.  Along the way, questions as to whether the company has the ability to service even a debt burden as permitted to be modified under the Bankruptcy Code may arise.

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