Chapter 11

Reorganization

Creditors may benefit more from the continuation of a debtor's business than from liquidation of the estate

Used by corporations to restructure financing arrangements, get out of unfavorable contracts, or just to benefit from an Automatic Stay

Petition that alleges company can't pay debts as they become due. Soon after Order for Relief, court appoints various committees: Committees may employ attorneys and accountants to represent them. Each class will get at least one attorney. Committees are to consult with DIP or trustee regarding administration of estate or in formulating reorganization plan
 * Committee of unsecured creditors (usually those who hold the seven larged unsecured claims against the debtor)
 * Committee of shareholders (equity security holders)
 * A DIP (Debtor in Possession)

Distinction between 7 and 11
Who controls the debtor entity

With Chapter 7, the trustee controls debtor entity, but with 11, it is the DIP

DIP continues to manage/operate business. It is a separate legal entity than the debtor

Normally, management will be appointed as the DIP. Management also put the company in bankruptcy = fallacy of corporate governance

DIP has the same powers as Chapter 7 Trustee - can sue to recover voidable preferences. Will maximize what is in the estate

Problem that arises in Chapter 11 is the need for new capital - why would a Lender want to lend money to an organization that is in Chapter 11?

To encourage DIP financing, Lender can get SUPERPRIORITY

Key to Chapter 11 is Plan of Reorganization = a blueprint of how the DIP plans to reorganize

Available to:

 * Individual (including small business) and
 * Business enterprises (partnerships, corporations, unincorporated association)

Excluded:
Banks, savings and loan associations, insurance companies, commodities brokers, and stockbrokers

Primary objectives of Chapter 11:

 * 1) Rehabilitate the troubled debtor
 * 2) Maximize the return to creditors
 * 3) Maintain jobs and preserve economic benefits to communities