Bankruptcy & Restructuring

Our bankruptcy attorneys have a well-earned reputation as turnaround strategists in Chapter 11 scenarios. This chapter of the bankruptcy code proposes a reorganization plan to shed debt based on current asset worth, keep businesses alive, and pay creditors over time. As skilled negotiators and litigators, our toolkit includes strong experience in franchise disputes, real estate restructurings and complex workouts for landlords, tenants, lenders, and property owners. We have handled complex domestic and cross-border Chapter 11 reorganizations. From out-of-court restructurings to formal reorganization proceedings, we help clients find options to work-out or eliminate debt, renegotiate finance, and lease terms, and restructure operations to turn their business around and emerge from bankruptcy able to avoid similar problems in the future. Bankruptcy does not necessarily mean the end of a business. A Chapter 11 bankruptcy is appropriate for businesses that intend to continue operations and for businesses for which the expense of the Chapter 11 proceeding is justified by the potential for a greater return to the creditors. Traditional Chapter 11 Typically, the management team remains in place in possession of the business assets, but with fiduciary obligations to the creditors of the business.  These obligations include accounting for the assets of the business, filing monthly reports with the court, and developing a plan of reorganization.  These activities are monitored by the United States Bankruptcy Trustee. The typical benchmark of a successful plan of reorganization is one that provides the creditors at least as much as they would receive in a liquidation. Many well-known businesses have emerged from Chapter 11 bankruptcy and operated successfully for many years, including General Motors, Chrysler, Six Flags, United Airlines, and Texaco. The Participation Process A Chapter 11 bankruptcy requires a great deal of involvement by the managers of the business.  In addition to all of the tasks involved in a Chapter 7 bankruptcy, the managers’ duties may include:

• Preparing (or overseeing the preparation of) monthly financial reports for the court;
• Negotiating for financing of the business operations while the bankruptcy is pending;
• Assisting with early motions to obtain court permission to continue certain activities critical to the business;
• Assisting with the preparation of a plan of reorganization that is in the best interests of the creditors; and
• Assisting with the preparation of a disclosure statement explaining the operations of the business and explaining why the reorganization is better for creditors than liquidation.

The Small Business Reorganization Act The new Small Business Reorganization Act (SBRA) was signed into law on August 23, 2019, and became effective in February 2020.  Prior to enacting SBRA a business had to choose between liquidating all of its assets and winding up through a Chapter 7 bankruptcy and the long, arduous and expensive Chapter 11 reorganization bankruptcy.  As discussed in the Chapter 7 bankruptcy page, when a Chapter 7 bankruptcy is filed a bankruptcy estate is created to include the debtor\'s nonexempt assets.  The bankruptcy court appoints a trustee to oversee the estate, liquidate the assets and pay the creditors from the proceeds of the non-exempt assets.  A business does receive a discharge of its debts, but winds up operations after the bankruptcy order is issued. When a business files for Chapter 11 bankruptcy it is the debtor, not a trustee, who oversees the bankruptcy estate and restructures its debt obligations through a plan submitted to and approved by the bankruptcy court.  This is often referred to as “debtor in possession” because the debtor remains in possession of its assets throughout the bankruptcy.  Although the chapter 11 debtor retains control, the debtor is subject to increased oversight from the bankruptcy court and the bankruptcy court trustee. The chapter 11 debtor\'s plan to repay its debts must meet stringent requirements and be confirmed by the bankruptcy court before the debtor can exit bankruptcy. While in bankruptcy, the debtor is required to obtain the court\'s approval of all non-ordinary course-of-business transactions and must comply with the U.S. trustee\'s monthly reporting requirements.  In addition to these costs, the chapter 11 debtor is responsible for paying the attorney fees and professional fees of the committee of creditors, who also have the ability to file competing plans.  As a result, a small business may not be able to afford the costs of a chapter 11. The SBRA is somewhat of a hybrid between chapters 7 and 11.  The SBRA debtors are the debtor in possession and have a trustee appointed and no committee of creditors will be appointed unless ordered by the court. The SBRA trustee will perform similar actions as the chapter 13 trustee and oversee the plan implementation.  Avoiding the costs of the committee of creditors professional and attorney’s fees in addition to avoiding competing plans will be a substantial savings to the SBRA debtor. The SBRA plan confirmation process will also benefit the SBRA debtor because there will not be competing plan hearings or committee of creditor motions for expenses.  The SBRA trustee will oversee the plan submitted rather than the chapter 11 submitting disclosure statements detailing key provisions of the plan.   So long as the SBRA plan does not “discriminate unfairly” and is “fair and equitable” the court will approve the plan.  A plan will be confirmed so long as it provides that all projected disposable income for three to five years will be used to make plan payments. Eligibility A debtor is eligible for the SBRA bankruptcy if the following are true:

• The debtor (whether an entity or an individual) must be engaged in business and have total debt, secured and unsecured, not exceeding $2,725,625 (subject to adjustment every three years).  However, under the CARES Act this amount has been temporarily increased to $7,500,000.
• In calculating the debt amount, the SBRA does not include “contingent” or “unliquidated” debt.
• One-half or more of the debt must have arisen from business, as opposed to personal, activities.
• Under the CARES Act none of the Paycheck Protection Program Loan or Economic Impact Disaster Loans will be counted towards the maximum debt.  Also, none of the proceeds from these loans will be counted towards the debtor’s assets.