A written tour of business bankruptcy and its alternatives In case you are hopping on board the bus in the middle of our tour, you may want to know that this installment looks at some of the more mundane stuff that happens after a Chapter 11 case is filed but before the end of the case.  We will discuss that in later installments. Before we let you out of the bus to look around at this stop, let’s review what we’ve already seen (and what you may want to go […]

A written tour of business bankruptcy and its alternatives Subsequent installments in this series will cover the concepts touched upon here in more detail.  We think it prudent, if not necessary, to at least throw some basic chapter 11 concepts on the table now, however, since they are so fundamental to any Chapter 11 case- regardless of which side of the table you sit on. The Automatic Stay Commencing a bankruptcy case triggers an “automatic stay,” which, with certain exceptions (carved out by §362(b)), operates as an injunction against actions […]

A written tour of business bankruptcy and its alternatives Companies in chapter 11 typically consider (or at least should consider) other options before ending up there. In fact, distressed businesses tend to follow a fairly predictable pattern, or lifecycle: denial, anger, bargaining, depression, and acceptance- – – No, those are the five stages of grief. In all seriousness, understanding how to cope with, counsel, or live through a distressed businesses situation is easier if you understand the typical lifecycle. You can think about the lifecycle of a chapter 11 debtor […]

A written tour of business bankruptcy and its alternatives In order to understand the options a financially distressed business (or its owners, creditors, or potential buyers) has, one has to understand the Bankruptcy Code. The Bankruptcy Code is contained in Title 11 of the U.S. Code and is divided into chapters. Chapters 1, 3 and 5 are “general” chapters, applicable in all cases: Chapter 1 contains definitions, defines who can be a debtor, describes the courts’ powers, and contains some other general rules. Chapter 3 governs “case administration,” which sounds […]

Anathema to trade creditors. Under section 547(b) of the Bankruptcy Code, a DIP or a trustee may sue a recipient of certain payments it received from the debtor immediately before the beginning of the bankruptcy case, in order to avoid and recover those payments, which would then (in most cases) be distributed to unsecured creditors of the debtor. Under section 546(b), the DIP or trustee may avoid: any transfer of property of the debtor a) to or for the benefit of a creditor b) for or on account of an antecedent debt c) […]

A written tour of business bankruptcy and its alternatives A typical commercial litigation case involves a judge, a plaintiff, and a defendant. A typical commercial bankruptcy case also has a judge, but that’s about where the similarities stop. A typical commercial litigation case, you see, is a two-party dispute. A typical commercial bankruptcy case is anything but. Who are the parties? The company that files the bankruptcy is the debtor (once a chapter 11 petition is filed, the debtor is called the debtor-in-possession). And, a debtor can have any number of creditors, each […]

A written tour of business bankruptcy and its alternatives You manage a private equity or hedge fund. Or maybe you work for a family office. Or maybe you’re the CEO or CFO of a business that has a competitor that is failing and you are considering trying to buy it on the cheap. Or perhaps you are the general counsel of a company that does business with a company that just filed for bankruptcy or that is being sued for a preference. Or maybe you are a business owner considering […]

The bankruptcy case of the Spokane Country Club (“SCC” the “Club” or the “Debtor”) is a very interesting study of how the bankruptcy process has not only been used to disrupt the collection efforts of plaintiff creditors who have already been awarded a judgment, but also to essentially negate significant policy changes for a club that had been stipulated to in a state court proceeding. The Club was founded in Spokane, Washington in 1898. Spokane is located on the far eastern side of Washington State, closer to Missoula, MT than to Seattle. The city […]

In general terms, the absolute priority rule of Section 1129(b) of the Bankruptcy Code provides that if a class of unsecured creditors rejects a debtor’s reorganization plan and is not paid in full, junior creditors and equity interest holders may not receive or retain any property under the plan. The rule thus implements the general state-law principle that creditors are entitled to payment before shareholders, unless creditors agree to a different result.

Professional advisors to a bankrupt company (or debtor) face a risk that they will not be paid their fees and expenses because the debtor estate’s only assets will be encumbered by a secured creditor’s (or DIP lender’s) first-priority lien. To deal with this risk, professionals frequently negotiate a “carve-out” to provide for the “super-priority” treatment of their allowed fees. The carve-out is essentially an agreement by the secured creditor to subordinate its lien and claim to certain allowed professional fees. This agreement thus permits those fees to come first in line in terms of payment from the estate’s assets.  Carve-outs are normally subject […]