Chapter 11 of the Bankruptcy Code: an Overview for the General Practitioner
| Publication year | 1991 |
| Pages | 8 |
| Citation | Vol. 4 No. 5 Pg. 8 |
This is Part I of a two-part article—Part II will appear in a later issue.)
Ronald W. Goss, J.
Part I: Commencement of the Case
INTRODUCTION
On November 6, 1978, President Carter signed into law the Bankruptcy Reform Act, commonly referred to as the Bankruptcy Code. The objective of the Code was to modernize the nation's bankruptcy laws. Prior to enactment of the Code, the substantive law of bankruptcy was grounded in the 1898 Bankruptcy Act, which had last been revised in 1938. The impact of the Bankruptcy Code, and Chapter 11 in particular, has been widespread.
Chapter 11 of the Code contained major substantive and procedural changes in reorganization law. The fundamental purpose of Chapter 11 is to enable a distressed business operation to reorganize its affairs in order to prevent loss of jobs and economic waste that result from unnecessary litigation and disposing of assets at their liquidation value.[1] Congress determined that it is more economically efficient for a business to reorganize and use assets for the purpose for which they were designed, rather than to sell those assets for scrap.[2]
Almost everyone is familiar with the Chapter 11 "mega-bankruptcies" of Texaco, A.H. Robins, and Johns-Manville. But in Utah, as in the rest of the nation, enactment of the Code was followed by an unprecedented growth in business reorganization cases. Statistical data provided by the clerk of the court indicate that in the years prior to 1979, the average number of reorganization cases was fewer than 20 per year. In the 1980s, the average number I of Chapter 11 cases filed each year in I Utah exceeded 300. After thousands of I cases and more than a decade of experience, the fundamentals of Chapter 11 practice in Utah can be distilled and some guidance given to the non-specialist.
This article discusses the basics of Chapter 11, from the filing of a petition through confirmation of a plan of reorganization, and various post-confirmation matters. Part I covers the requirements for filing a Chapter 11 case, the debtor's duties after filing, employment of attorneys and payment of their fees, the automatic stay, and the role of the U.S. Trustee and the unsecured creditors' committee. Part II will discuss post-petition financing and operations of a business in Chapter 11, executory contracts and unexpired leases, appointment of a trustee or examiner, preparation of a disclosure statement and plan of reorganization, confirmation of the plan, and post-confirmation issues.
COMMENCEMENT OF THE CASE
A Chapter 11 case begins with the filing of a petition in the bankruptcy court. The filing creates a bankruptcy estate comprised of all legal or equitable interests of the debtor in property as of the commencement of the case, wherever located and by whomever held.[3]The bankruptcy court's jurisdiction over property of the estate and over the reorganization case is exclusive.[4]
Chapter 11 is primarily utilized by corporations and partnerships, but business trusts and individuals engaged in business may also file petitions under that chapter.[5]Even a dissolved corporation may reorganize under Chapter 11.[6] However, the authority to file a bankruptcy petition must be evidenced by a corporate resolution or other appropriate document.[7]
A large body of case law has emerged holding that "good faith" also is a prerequisite to the filing or continuation of a Chapter 11 case.[8]While there is no statutory requirement of good faith, the lack of good faith constitutes "cause" for conversion or dismissal of the case under §1112(b), or for relief from the automatic stay under §362(d) of the Code.
There is a shifting burden of proof on the issue of good faith. Initially, the creditor must introduce sufficient evidence to call the debtor's good faith into question. Then the debtor bears the burden of proving that the Chapter 11 petition was filed in good faith.
In reaching a determination of whether a case has been filed in bad faith, courts have considered numerous factors, including the following:
1. Whether the debtor has no ongoing business or employees.
2. Whether the petition effectively enables the debtor to evade court orders.
3. Whether the debtor has few assets, or a single asset that is threatened with foreclosure.
4. Whether the debtor's income is not sufficient to operate its business.
5. Whether the petition was filed on the eve of foreclosure.
6. Whether the debtor has few or no unsecured creditors.
7. Whether the debtor is attempting to use Chapter 11 to create a new business.
8. Whether the sole purpose of filing is to reject an executory contract.
9. Whether there is no possibility of reorganization.
10. Whether the debtor filed solely to create the automatic stay.
11.Whether the primary purpose of the filing was to give the bankruptcy court jurisdiction over a dispute.
12.Whether the filing was precipitated primarily by a dispute between the debtor and one other party.
13.Whether a corporate debtor was formed and received title to its major assets immediately before the petition and for the purpose of filing bankruptcy.
14.Whether the filing was a substitute for obtaining a supersedeas bond to stay execution of a judgment pending appeal.
A debtor who invokes the protection afforded by Chapter 11 must also assume certain responsibilities under the Bankruptcy Code and Rules. All debtors must file a list of creditors on an approved matrix form, a schedule of assets and liabilities, a statement of financial affairs, a schedule of current income and current expenditures, a statement of executory contracts, a list of creditors that hold the 20 largest unsecured claims, and a list of equity security holders.[9]
Both the debtor and its attorney must attend a meeting of creditors held pursuant to §341 of the Bankruptcy Code. The meeting is held on 20 days' notice to all creditors and not later than 40 days after the petition is filed.[10]The purpose of the meeting is to enable creditors to examine the debtor under oath respecting the existence and condition of assets, the operation of the debtor's business, the desirability of the continuation of such business, and any other matter relevant to the case or to the formulation...
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