Bankrupting the faith.

• Author: Foohey, Pamela
• Position: Continuation of III. Efficiencies and Outcomes A. Responsive Bankruptcy Courts through VI. Conclusion, with footnotes, p. 745-776

1. Identifying the Doomed to Fail

   The Chapter 11 cases in this study ended in one of three main ways--dismissal, confirmation of a plan of reorganization, or confirmation of a plan of liquidation or liquidation by sale. (138) Bankruptcy courts disposed of the cases in the study in a median of 228 days (seven and a half months). (139) Consistent with recent studies that found median case durations of 5.7 months and nine months, (140) this figure alone challenges the notion that the Chapter 11 process is relatively lengthy as compared to reasonable benchmarks, such as the four to nine months business brokerage firms report it takes to sell a business (141) and the median of approximately eight months that similar bankruptcy cases pended under the Bankruptcy Act. (142)

   Of note, in sixty-six cases the debtor did not schedule assets or debts and did not file a plan. All of the cases were dismissed. Courts expelled these debtors from Chapter 11 in a median of thirty-nine days (less than six weeks). (143) Likewise, courts dismissed cases based on the debtor's failure to retain counsel in a median of thirty-five days. (144) Bankruptcy courts seem to move swiftly when faced with debtors that do not meet the Code's minimal filing requirements.

   Distinguishing between two types of cases bankruptcy courts encounter--those that warrant dismissal, and those that have a chance at confirming a plan (whether reorganization or liquidation) and thus merit keeping in Chapter 11--based on whether a plan was filed further shows that courts dispose of the cases doomed to fail quickly and hold onto the meritorious cases longer. (145) Courts dismissed cases in which no plan was filed in a median of four and a half months, and disposed of cases in which a plan was filed in a median of eleven months. (146) Indeed, courts dismissed over three-quarters of cases with no plan in nine months or less. In contrast, they dismissed or confirmed plans in less than one-third of the cases with proposed plans during this timeframe. Of the cases that concluded after more than a year had passed, debtors filed a plan in 75% of cases. (147) The data suggest that bankruptcy courts appear to distinguish between those debtors that have a chance of confirming a plan relatively early and continuously throughout the Chapter 11 process. (148)

   A similar analysis can be used to assess bankruptcy courts' overall efficiency in evaluating seemingly viable cases. (149) By filing a plan, the debtor signals that its business may be salvageable. But the technical requirements for filing a plan are not onerous. (150) Courts thus must determine which plans are likely to be confirmed and which are infeasible. Of the cases in which the proposed plan was not confirmed, courts dismissed the case in a median of six months after the plan was filed. (151) Conversely, it took courts less time--a median of four months after the plan was filed--to confirm a proposed plan. (152) Table (4) summarizes the time, measured from the petition date, that it took courts to dispose of cases based on the cases' key characteristics.

   As expected, the number of times a debtor amended its plan affected the time in which the bankruptcy court confirmed the plan. On average, debtors amended their plans once, but some amended three or four times. Courts confirmed once-amended plans four months faster than they confirmed plans amended three or four times, which suggests that courts afforded debtors time to work with their creditors to propose feasible plans. (153) Interestingly, the timing of when a debtor first proposed its plan during the course of the case did not affect how quickly the plan was confirmed.

   The data further suggest that bankruptcy courts continued to identify cases with infeasible plans after initial plan proposal. Debtors amended their plans less frequently in the cases in which courts did not confirm plans. (154) Courts dismissed cases without amended plans faster than they disposed of cases with amended plans. (155) Considering these results together, it may be hypothesized that courts are better at identifying and dismissing cases without plan confirmation prospects if the debtor does not file a plan. Once a plan is filed, based on the cases in this study, courts generally confirm plans quickly but allow cases to linger where they involve infeasible plans or other issues that eventually will require their dismissal. Naturally, creditors may influence this process by representing to the court that they are working with the debtor or simply by not objecting to a proposed plan. Courts also may use the filing of, amendments to, and continued non-objection to a proposed plan as a proxy for productive negotiations between a debtor and creditors or to identify a debtor that creditors and other parties believe can reorganize. Indeed, an alternative explanation for some of the findings above is that parties and the condition in which businesses arrive to Chapter 11 drive the results, and not necessarily bankruptcy judges. (156) Likewise, it is difficult to untwine whether in dismissing nonviable debtors because they do not reach certain benchmarks, such as proposing plans, courts simply do not allow debtors to reach these benchmarks--that is, the results become self-fulfilling. (157) Even so, overall, this result indicates a need for further research into how bankruptcy courts assess cases once plans are proposed. (158)

2. Influence of Debtors, Creditors, and Other Parties

   Though bankruptcy courts in general appear to distinguish between potentially nonviable and viable cases, one might be concerned that the demands of particular parties have outsized influence on courts' decision making. An analysis of the motions that led to each case's disposition sheds light on which, if any, parties dominate the Chapter 11 process. Prevailing accounts of Chapter 11 argue that debtors control the process while courts' passivity prevents creditors from exercising desirable influence, leading to the preservation of businesses whose cases actually require dismissal. (159) Alternatively, creditors or the United States Trustee (U.S. Trustee) could drive the process.

   The question is whether cases dismissed before plan confirmation actually warranted dismissal, or whether creditors or other parties forced a dismissal too early in the process. A review of the trajectory of the cases' dispositions does not show evidence of control--by debtors, creditors, or the U.S. Trustee. Using which party moved to dismiss the case as a proxy for control, (160) as Table 5 details, (161) a party other than the debtor was responsible for 75% of all dismissals. (162)

   That creditors and the U.S. Trustee were the most active parties in these cases may cause concern about their influence. However, bankruptcy courts frequently denied creditors' motions to lift the automatic stay, and, likewise, denied U.S. Trustees' motions to dismiss. For instance, in those cases in which a plan was not filed, creditors moved at least once to lift the automatic stay in approximately half of the cases. (163) Courts granted 55% of these motions and denied less than 10%. (164) As to the remainder, the parties generally reached a solution.

   Additionally, in cases dismissed on creditors' motions, creditors filed at least one motion to lift the stay in every case, but the bankruptcy court lifted the stay in the first instance in only a quarter of the cases. (165) As an example, in one case, in the span of seven months, the court denied two motions to dismiss and one motion to lift the stay before eventually dismissing the case on a creditor's motion. (166) Courts appeared to initially give debtors a chance to show that they could reorganize successfully, but dismissed their cases rather swiftly if the debtors did not make good use of that chance.

   Bankruptcy courts' ostensible willingness to give debtors an opportunity to reorganize seems further apparent in their denial of creditors' motions to lift the stay in those cases in which a plan was confirmed. Creditors moved to lift the stay in just over half of these cases. Courts granted at least one motion in 45% of the cases, and only about one-third of the total number of motions filed. (167) All but two of these cases culminated in confirmation of a reorganization plan. (168) Taking the cases in this study as a whole, courts appear generally able to identify property that is not necessary to an effective reorganization and provide creditors appropriate relief in these circumstances.

   By allowing religious organization debtors to remedy procedural missteps or giving them another chance to negotiate with creditors, courts may have provided the debtors with the necessary time to formulate viable reorganization strategies. Few debtors proposed plans at the beginning of their cases; rather, most filed plans between four and nine months after the petition date. Figure 2 depicts the time from the petition date to plan filing in cases with proposed plans. (169) Overall, debtors proposed plans within a median of about six months after the petition date. As a whole, the history of the religious organizations' Chapter 11 cases suggests that no one party dominated the process. (170)

   2. Varieties of Outcomes

      The outcomes of the Chapter 11 cases in this study include dismissal because the bankruptcy court had lifted the automatic stay, dismissal on the debtor's motion that it had reached an agreement with its creditors, and confirmation of a reorganization or liquidation plan. (171) A portion of these outcomes preserved value for debtors and creditors; thus, those cases may be categorized as ending productively. This subpart explores the outcomes of all the cases in the dataset to pinpoint these successful cases.

      Success can be (and has been) reported simply as the percentage of cases in which a plan was confirmed. (172) Of the cases in this study disposed of either by dismissal or plan confirmation as...