CHAPTER 2 THE INCEPTION OF A CASE
| Jurisdiction | United States |
(May 1986)
THE INCEPTION OF A CHAPTER 11 CASE
JAN N. STEIERT
HOLME ROBERTS & OWEN
Denver, Colorado *
I. INTRODUCTION.
A number of issues invariably arise at the outset of a Chapter 11 case. These issues include:
1. Can the case be dismissed because the debtor is ineligible for relief, the proper procedures were not followed, the debtor is solvent or there is no realistic hope of reorganization?
2. Who should operate the debtor's business — the debtor or the trustee?
3. If the debtor operates the business, how are the debtor's activities to be policed while the Chapter 11 case is pending?
4. Under what circumstances will creditors be permitted to proceed with foreclosure or other debt collection activities?
5. Where will the debtor obtain the cash necessary to operate its business?
6. Under what circumstances will the debtor be able to continue to use or sell its property, especially if that property is subject to liens or security interests?
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If the debtor does not anticipate and address these issues before the Chapter 11 case is commenced, a significant risk exists that the reorganization will collapse. If creditors do not deal with these issues at the outset of the case, they may find that their interests have been needlessly impaired by the pendancy of the case.
The purpose of this paper is to provide the legal framework for consideration of these issues by debtors and creditors alike.
II. COMMENCEMENT OF A CHAPTER 11 CASE.
A Chapter 11 case is commenced by the filing of a Chapter 11 petition under the Bankruptcy Code, 11 U.S.C., et. seq. (hereinafter the "Code"). The petition can be voluntary1 or involuntary.2 If the debtor files a voluntary petition, the case proceeds immediately, as the petition itself constitutes an order for relief.3 If an involuntary petition is filed against the debtor, the debtor, unless the court orders otherwise, continues to operate its business as if the petition
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had not been filed, until the court determines whether to enter an order for relief.4
A. Voluntary Chapter 11.
There are few limitations on a debtor's ability to file a voluntary Chapter 11 petition.
To file Chapter 11, the debtor must be a type of "person" deemed eligible to file by the Code. Persons who are eligible for relief under Chapter 11 include individuals, partnerships and corporations.5 Only persons who reside, have a domicile, a place of business or property in the United States are eligible for relief under the Code, but a case that is ancillary to a foreign proceeding may be commenced under Code § 304. Certain types of business — banks, savings and loan associations, insurance companies, stockbrokers, commodity brokers and similar institutions — can not file Chapter 11.6
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A debtor need not be insolvent or unable to pay its debts as they mature to file a voluntary petition.7 But if the debtor is solvent and able to pay its debts, a court might dismiss the petition where it finds that the petition was not filed in good faith to further the policies of the Code.8
A debtor that is not a natural person can not file a voluntary petition unless authorized to do so under applicable state law. In general, a corporation can file a voluntary petition only if authorized by its board of directors.9 A partnership may file a voluntary petition only if all general partners consent to the filing.10
Jurisdictionally, the debtor need only file a one-page petition (which must substantially conform to Official
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Form No. 6) to commence a bankruptcy case. The Bankruptcy Rules (hereinafter the "Rules"), however, require that the debtor file with the petition a schedule of assets and liabilities (Official Form No. 6), a statement of financial affairs (Official Form No. 8 for a debtor engaged in business), a statement of executory contracts11 and a list of its creditors holding the twenty largest unsecured claims against it (Official Form No. 9).12 If the debtor files with the petition a list containing the name and address of each of its creditors, the debtor has an additional 15 days to file the remaining schedules and statements.13 A debtor filing a schedule of liabilities with the petition need not file a separate list of all creditors. Code § 521(1) requires the debtor to file a schedule of current income and expenditures along with the petition,14 and Rule 1007(a) requires a corporate debtor to file a list of equity security holders within 15 days after the filing of the petition.
The petition and all lists, statements and schedules filed by the debtor must either be verified or accompanied by
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an unsworn declaration under penalty of perjury.15 In Chapter 11 cases that do not concern a railroad, the petition must be accompanied by a filing fee of $200,16 which local rules may require to be in the form of a money order or cashier's check or a check drawn on a law firm admitted to practice before the court. The debtor may pay the $200 filing fee in installments if the court so orders under Rule 1006(b).
Attorneys, accountants and other professionals who are to be employed by the debtor must have their employment approved by the Court.17 Some courts will refuse to award fees earned prior to the time that the professional's employment is authorized by the Court.18 The procedure for employing professionals is set out in Rule 2014. Generally, the debtor must submit to the court an application stating the specific reasons as to why the employment is necessary, the name of the person to be employed, the reasons for his selection, the proposed compensation and the person's connection with the
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debtor, the creditor, other parties in interest and their accountants or attorneys.
Rule 1002(b)(2) provides that the debtor must file an original and five copies of the petition and all lists, statements and schedules. Local rules may require additional copies and may prescribe a particular format. Rule 1007(h) requires the debtor to file supplemental schedules with respect to certain property that is acquired within 180 days after filing the petition, and Rule 1009 allows the debtor to amend the petition and any lists, statements or schedules. If the debtor fails to prepare any list, statement or schedule required under Rule 1007, the court may order the trustee, a petitioning creditor, committee or other party to prepare and file that list, statement or schedule.
The preparation of the lists, schedules and statements need not delay the filing of a bankruptcy case because, under Rule 1007(a)(4), the court may extend, on motion and for cause, the time required for filing.
B. Commencement of an Involuntary Chapter 11 Case.
An involuntary Chapter 11 case is commenced by filing an involuntary Chapter 11 petition against a debtor under Code § 303. An involuntary Chapter 11 petition can be commenced
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against any person that may be a debtor under Chapter 11, except a farmer or a nonprofit corporation.19
An involuntary case must be commenced by the appropriate parties and those parties must plead and prove that grounds for relief exist.
At least three entities20 who are creditors with unsecured claims aggregating in excess of $5,000 must join together to file an involuntary petition against the debtor.21 If the debtor has less than 12 such creditors, one or more entities holding an aggregate of at least $5,000 of unsecured claims may file an involuntary petition against the debtor.22 If the debtor is a partnership, any general partner may file an involuntary petition without the other general partners' consent (and despite a contrary agreement or state or local statutory provision).23 Where all of its general partners are debtors under the Code, an involuntary petition can also be filed against a partnership by one of the partner's trustees or by any holder of a claim against the partnership.
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An order for relief will be entered only if the petitioners plead and prove that either: (1) the debtor is generally not paying its debts as they become due (except debts that are disputed in good faith); or (2) within 120 days prior to the filing of the involuntary petition, a custodian24 was appointed or took possession of the debtor's property (other than a trustee, receiver or agent of less than substantially all of the debtor's property appointed for the purpose of enforcing a lien against that property).
If an involuntary petition is dismissed, the court may assess the petitioner for the debtor's costs and attorneys' fees and, if the petition was filed in bad faith, any damages proximately caused by the filing or punitive damages.25
An involuntary petition must substantially conform to Official Form No. 11,26 if filed against a nonpartnership debtor, or Official Form No. 12,27 if filed against a partnership
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debtor. The petitioners must pay the $200 filing fee either at the time of filing the petition or in installments as provided in Rule 1006. Rule 1010 provides that the court clerk shall then issue a summons (conforming to Official Form No. 13) to be served upon the debtor together with a copy of the petition. The debtor may contest the petition by filing, within 20 days after service of the summons, a motion under Federal Rule of Civil Procedure 12(b) or an answer containing its defenses and objections. Under Rule 1007(c), a debtor must file all schedules and statements required in a voluntary case within 15 days after the entry of the order for relief.28 Rule 1012 provides rules for discovery and examination of the debtor on the issue of nonpayment of its debts as they become due.
Because of the risk that a debtor might dispose of its assets pending trial on the involuntary petition, Code § 303(g) allows the court, upon request of a party in interest and after hearing on notice,29 but prior to...
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