CHAPTER 3 Bankruptcy Planning

• Jurisdiction: United States

CHAPTER 3: Bankruptcy Planning

CONTRIBUTING AUTHORS:

Allen G. Kadish (DiConza Traurig LLP)

David D. Cleary (GreenbergTraurig, LLP)

Nancy A. Mitchell (Greenberg Traurig, LLP)

Kaitlin R. Walsh (Greenberg Traurig, LLP)

Victoria Watson Counihan (State of Delaware Department of Justice)

Rebecca A. Roof (Alixpartners LLP)

Brian J. Fox (Alixpartners LLP)

Pilar Tarry (Alixpartners LLP)

Once a determination is made that a bankruptcy filing must occur, typically a company will have several choices of jurisdictions within which it can file its bankruptcy cases. A company can file in the venue in which it has its principal place of business, or where it has had its principal assets for the 180 days immediately preceding the date of the petition or for a longer part of the 180 days than in any other district.³⁰ A debtor may have more than one appropriate venue choice based on more than one principal asset. The law governing various issues that may occur in a bankruptcy case can vary widely from one jurisdiction to another. The CRO will need to help the company's legal advisors determine what the most major and critical issues likely to impact the company's chapter 11 case will be so that the company can determine the best choice of venue for filing the chapter 11 case given the issues expected to drive the case.

In order to assist the company's efforts to actively negotiate with secured creditors, the CRO will need to ensure that an analysis of the validity and priority of the liens of the various secured creditors is conducted by the company's legal advisors. The strength of the company's negotiating position with its lenders will depend on the validity of those lenders' secured liens. Any holes in a secured creditor's collateral package could change the playing field to the company's advantage.

The CRO should be actively involved in the determination of which affiliates in the corporate structure need to, or strategically should, file bankruptcy petitions. It is often the case that certain affiliates file petitions while other affiliates do not. It may depend on which affiliates are obligors or guarantors on secured debt, or there could be strategic or operational reasons to include certain affiliates within a complex corporate structure in a bankruptcy filing while excluding others. The issues are often complicated when certain affiliates are "bankruptcy-remote" entities that may not have the ability to file for bankruptcy protection without triggering dissolution or default provisions. Therefore, extreme care should be taken in conducting a thorough review of each affiliate's charter and bylaws, the operational implications of each subsidiary or affiliate filing for bankruptcy should be considered along with the other affiliates.

The organizational documents of each affiliated company should also be reviewed by skilled corporate or alternative-entity counsel to ensure that the bankruptcy filing of one affiliate in the corporate structure does not trigger the dissolution of another affiliate, whether a debtor or nondebtor affiliate. To avoid any issues of an unauthorized filing, organizational documents need to identify the proper parties to approve the bankruptcy filing and execute the petition. In many instances, after review of the charter, bylaws and other corporate documents governing a company in preparation for a bankruptcy filing, irregularities are discovered relating to the issuance of stock or the formation of the legal entity, among others. These corporate formalities can often be corrected by corporate actions taken prior to the bankruptcy filing so that the filing is properly authorized.

A large part of the CRO's responsibilities as a bankruptcy case is being prepared is to manage the expectations of management and key personnel within the company. A skilled CRO has had experience in a variety of troubled companies and chapter 11 cases, and as any CRO knows, both the preparation and administration of a chapter 11 case increase the workloads of and place additional burdens on the current employees of the company. The employees and management of the company often do not know what to expect, but a skilled CRO is able to manage expectations and anxieties to provide as smooth a transition as possible into and through the bankruptcy.

The CRO is the party often tasked with providing the strategic vision for the company, as approved by the board of directors. It is therefore necessary for the CRO to be able to articulate to the board, management and the company's legal and financial advisors the purpose or goal of the proposed bankruptcy case, whether it be to shed burdensome contracts, restructure the equity or debt, attract new capital, deleverage the balance sheet, or sell all or part of the company's business lines or assets. Focusing on the purpose or stated goal of the chapter 11 case will provide direction to management and the advisors as they make decisions or provide alternatives for the company throughout the bankruptcy process.

Significant information should be gathered in order to adequately prepare for the filing of a chapter 11 case. The advisors should conduct due diligence on the company to understand its debt structure, equity position, operations and other important information required to appropriately prepare for a bankruptcy filing. In addition, the immediate information required for the bankruptcy petition and related documents need to be gathered. The advisors will also need to collect certain key financial and other operational information to prepare the emergency motions that will need to be filed and heard within the first few days of the petition date in order to ensure a smooth transition into bankruptcy. The CRO will be required to oversee the gathering of the necessary bankruptcy preparation documentation and due diligence, which will likely include delegating information-gathering tasks to various employees and management personnel.

A. IMPLICATIONS OF BANKRUPTCY ON BUSINESS OPERATIONS

A bankruptcy filing has an immediate and invasive impact on the operations of the business. An organized and proactive approach to planning for this operational impact can make the difference between a potentially catastrophic disruption and a mere distraction. A good CRO will work proactively to mitigate this disruption and ensure that employees are able to focus on managing the business, rather than spending significant time responding to new, unusual and unpredictable requests from a variety of fronts.

To enjoy the benefits of chapter 11, a debtor must be able to meet a variety of reporting requirements that are entirely new and often onerous for a debtor or group of debtors. Certain of these requirements are governed by the local rules of the bankruptcy court or U.S. Trustee (UST) in the venue in which the bankruptcy is commenced. Certain requirements are universal across venues, and certain requirements are driven by the first-day relief requested by the debtors or by outside parties-in-interest in the cases. In many cases, the reporting is public and subject to scrutiny by the court, the UST and by outside constituents interested or with a stake in the cases. This public availability of information and scrutiny can, in and of itself, be disquieting for management of the debtors.

All of these requirements are in addition to any existing reporting or disclosure requirements, and therefore add additional burden, primarily on the accounting and finance organizations. An experienced CRO is familiar with the breadth of these requirements and the most efficient ways to attack them, and will work with the debtor to prepare them in advance to mitigate the time and distraction required to fulfill such requirements.

Much of the reporting required in a chapter 11 begins at the date the chapter 11 petition is filed, also called the petition date. Thus, it is critical to be able to capture not only balances but activity and history for each of the accounts on the balance sheet as of the petition date, specifically for the liability accounts. This information will be required for a number of reporting requirements that will be discussed in more detail.

A CRO will be able to assist debtors with a plan to capture this information as of the petition date through the development of "cut-off" procedures, which should include a systems-focused plan to freeze accounts and back-up activity for each account as of the petition date. There are a number of ways to develop a systems plan, and details will vary depending on the operating systems (including how many separate systems exist, each of which will require its own plan), the number of legal entities involved in the chapter 11 filing, whether legal entity boundaries are strictly respected in the existing accounting structure and the type of industry in which the debtor operates. For example, service industries have different procedures for recording accounts payable and expenses than companies that receive physical product, and thus they require very different cut-off procedures.

It is equally crucial that the developed plan permit the debtor to resume operations in the post-petition environment as quickly and smoothly as possible. Thus, any cut-off plan must also contemplate the ability to resume normal processes relative to activities that commence on the petition date and enable the debtors to make prompt payment for that activity and to report their financial information consistently with past practices.

Accounting systems have a very difficult time handling an additional period and doing so can complicate prior period comparisons. Yet the timing of a chapter 11 filing is often driven by factors, such as liquidity needs or expiration of a forbearance period, that preclude timing a petition date to coincide with a normal periodic closing date. To the extent this occurs, there are a variety of ways to establish a roll-back of the financial information such that a...