|Chapter 11 Bankruptcy - Background
A case filed under Chapter 11 of the United States Bankruptcy Code is frequently
referred to as a "reorganization" bankruptcy.
An individual cannot file under Chapter 11 or any other chapter if, during the
preceeding 180 days, a prior bankruptcy petition was dismissed due to the
debtor's willful failure to appear before the court or comply with orders of the
court, or was voluntarily dismissed after creditors sought relief from the
bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109
(g), 362(d)-(e). In addition, no individual may be a debtor under Chapter 11 or
any Chapter of the Bankruptcy Code unless he or she has, within 180 days
before filing, received credit counseling from an approved credit counseling
agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111. There
are exceptions in emergency situations or where the U.S. Trustee (or bankruptcy
administrator) has determined that there are insufficient approved agencies to
provide the required counseling. If a debt management plan is developed during
required credit counseling, it must be filed with the court.
How Chapter 11 Works
A Chapter 11 case begins with the filing of a petition with the bankruptcy court
serving the area where the debtor has a domicile or residence. A petition may be
a voluntary petition, which is filed by the debtor, or it may be an involuntary
petition, which is filed by creditors that meet certain requirements. 11 U.S.C. §§
301, 303. A voluntary petition must adhere to the format of Form 1 of the Official
Forms prescribed by the Judicial Conference of the United States. (Official
Bankruptcy forms are available on the Forms Page of this website.) Unless the
court orders otherwise, the debtor also must file with the court:
1) Schedules of assets and liabilities.
2) Schedule of current income and expenditures.
3) Schedule of executory contracts and unexpired leases.
4) Statement of financial affairs.
If the debtor is an individual (or husband and wife), there are additional document
filing requirements. Such debtors must file: a certificate of credit counseling and a
copy of any debt repayment plan developed through credit counseling; evidence
of payment from employers, if any, received 60 days before filing; a statement of
monthly net income and any anticipated increase in income or expenses after
filing; and a record of any interest the debtor has in federal or state qualified
education or tuition accounts. 11 U.S.C. § 521. A husband and wife may file a
joint petition or individual petitions. 11 U.S.C. § 302(a).
The courts are required to charge an $1,000 case filing fee and a $39
miscellaneous administrative fee. The fees must be paid to the clerk of the court
upon filing or may, with the court's permission, be paid by individual debtors in
installments. 28 U.S.C. § 1930(a); Bankruptcy Court Miscellaneous Fee Schedule
limits to four the number of installments for the filing fee. The final installment
must be paid not later than 120 days after filing the petition. For cause shown,
the court may extend the time of any installment, provided that the last installment
is paid not later than 180 days after the filing of the petition. The $39
administrative fee may be paid in installments in the same manner as the filing
fee. If a joint petition is filed, only one filing fee and one administrative fee are
charged. Debtors should be aware that failure to pay these fees may result in
dismissal of the case. 11 U.S.C. § 1112(b)(10).
The voluntary petition will include standard information concerning the debtor's
name(s), social security number or tax identification number, residence, location
of principal assets (if a business), the debtor's plan or intention to file a plan, and
a request for relief under the appropriate chapter of the Bankruptcy Code. Upon
filing a voluntary petition for relief under Chapter 11 or, in an involuntary case,
the entry of an order for relief, the debtor automatically assumes an additional
identity as the "debtor in possession." 11 U.S.C. § 1101. The term refers to a
debtor that keeps possession and control of its assets while undergoing a
reorganization under Chapter 11, without the appointment of a case trustee. A
debtor will remain a debtor in possession until the debtor's plan of reorganization
is confirmed, the debtor's case is dismissed or converted to Chapter 7, or a
Chapter 11 Trustee is appointed. The appointment or election of a Trustee
occurs only in a small number of cases. Generally, the debtor, as "debtor in
possession," operates the business and performs many of the functions that a
Trustee performs in cases under other chapters. 11 U.S.C. § 1107(a).
Generally, a written disclosure statement and a plan of reorganization must be
filed with the court. 11 U.S.C. §§ 1121, 1125. The disclosure statement is a
document that must contain information concerning the assets, liabilities, and
business affairs of the debtor sufficient to enable a creditor to make an informed
judgment about the debtor's plan of reorganization. 11 U.S.C. § 1125. The
information required is governed by judicial discretion and the circumstances of
the case. In a "small business case" (discussed below) the debtor may not need
to file a separate disclosure statement if the court determines that adequate
information is contained in the plan. 11 U.S.C. § 1125(f). The contents of the plan
must include a classification of claims and must specify how each class of claims
will be treated under the plan. 11 U.S.C. § 1123. Creditors whose claims are
"impaired," i.e., those whose contractual rights are to be modified or who will be
paid less than the full value of their claims under the plan, vote on the plan by
ballot. 11 U.S.C. § 1126. After the disclosure statement is approved by the court
and the ballots are collected and tallied, the court will conduct a confirmation
hearing to determine whether to confirm the plan. 11 U.S.C. § 1128.
In the case of individuals, Chapter 11 bears some similarities to chapter 13. For
example, property of the estate for an individual debtor includes the debtor's
earnings and property acquired by the debtor after filing until the case is closed,
dismissed or converted; funding of the plan may be from the debtor's future
earnings; and the plan cannot be confirmed over a creditor's objection without
committing all of the debtor's disposable income over five years unless the plan
pays the claim in full, with interest, over a shorter period of time. 11 U.S.C. §§
1115, 1123(a)(8), 1129(a)(15).
Chapter 11 Debtor in Possession
Chapter 11 is typically used to reorganize a business, which may be a
corporation, sole proprietorship, or partnership. A corporation exists separate
and apart from its owners, the stockholders. The Chapter 11 bankruptcy case of
a corporation (corporation as debtor) does not put the personal assets of the
stockholders at risk other than the value of their investment in the company's
stock. A sole proprietorship (owner as debtor), on the other hand, does not have
an identity separate and distinct from its owner(s). Accordingly, a bankruptcy
case involving a sole proprietorship includes both the business and personal
assets of the owners-debtors. Like a corporation, a partnership exists separate
and apart from its partners. In a partnership bankruptcy case (partnership as
debtor), however, the partners' personal assets may, in some cases, be used to
pay creditors in the bankruptcy case or the partners, themselves, may be forced
to file for bankruptcy protection.
Section 1107 of the Bankruptcy Code places the debtor in possession in the
position of a fiduciary, with the rights and powers of a Chapter 11 Trustee, and it
requires the debtor to perform of all but the investigative functions and duties of a
trustee. These duties, set forth in the Bankruptcy Code and Federal Rules of
Bankruptcy Procedure, include accounting for property, examining and objecting
to claims, and filing informational reports as required by the court and the US
Trustee or Bankruptcy Administrator (discussed below), such as monthly
operating reports. 11 U.S.C. §§ 1106, 1107; The debtor in possession also has
many of the other powers and duties of a Trustee, including the right, with the
court's approval, to employ attorneys, accountants, appraisers, auctioneers, or
other professional persons to assist the debtor during its bankruptcy case. Other
responsibilities include filing tax returns and reports which are either necessary or
ordered by the court after confirmation, such as a final accounting. The US
Trustee is responsible for monitoring the compliance of the debtor in possession
with the reporting requirements.
Railroad reorganizations have specific requirements under subsection IV of
Chapter 11, which will not be addressed here. In addition, stock and commodity
brokers are prohibited from filing under Chapter 11 and are restricted to Chapter
7. 11 U.S.C. § 109(d).
US Trustee or Bankruptcy Administrator
The US Trustee plays a major role in monitoring the progress of a Chapter 11
case and supervising its administration. The US Trustee is responsible for
monitoring the debtor in possession's operation of the business and the
submission of operating reports and fees. Additionally, the US Trustee monitors
applications for compensation and reimbursement by professionals, plans and
disclosure statements filed with the court, and creditors' committees. The US
Trustee conducts a meeting of the creditors, often referred to as the "section 341
meeting," in a Chapter 11 case. 11 U.S.C. § 341. The US Trustee and creditors
may question the debtor under oath at the section 341 meeting concerning the
debtor's acts, conduct, property, and the administration of the case.
The US Trustee also imposes certain requirements on the debtor in possession
concerning matters such as reporting its monthly income and operating
expenses, establishing new bank accounts, and paying current employee
withholding and other taxes. By law, the debtor in possession must pay a
quarterly fee to the US Trustee for each quarter of a year until the case is
converted or dismissed. 28 U.S.C. § 1930(a)(6). The amount of the fee, which
may range from $250 to $10,000, depends on the amount of the debtor's
disbursements during each quarter. Should a debtor in possession fail to comply
with the reporting requirements of the US Trustee or orders of the bankruptcy
court, or fail to take the appropriate steps to bring the case to confirmation, the
US Trustee may file a motion with the court to have the debtor's Chapter 11 case
converted to another chapter of the Bankruptcy Code or to have the case
In North Carolina and Alabama, bankruptcy administrators perform similar
functions that US Trustees perform in the remaining forty-eight states. The
bankruptcy administrator program is administered by the Administrative Office of
the United States Courts, while the US Trustee program is administered by the
Department of Justice. For purposes of this publication, references to US
Trustees are also applicable to bankruptcy administrators.
Creditors' committees can play a major role in Chapter 11 cases. The committee
is appointed by the US Trustee and ordinarily consists of unsecured creditors
who hold the seven largest unsecured claims against the debtor. 11 U.S.C. §
1102. Among other things, the committee: consults with the debtor in possession
on administration of the case; investigates the debtor's conduct and operation of
the business; and participates in formulating a plan. 11 U.S.C. § 1103. A
creditors' committee may, with the court's approval, hire an attorney or other
professionals to assist in the performance of the committee's duties. A creditors'
committee can be an important safeguard to the proper management of the
business by the debtor in possession.
The Small Business Case and the Small Business Debtor
In some smaller cases the US Trustee may be unable to find creditors willing to
serve on a creditors' committee, or the committee may not be actively involved in
the case. The Bankruptcy Code addresses this issue by treating a "small
business case" somewhat differently than a regular bankruptcy case. A small
business case is defined as a case with a "small business debtor." 11 U.S.C. §
101(51C). Determination of whether a debtor is a "small business debtor"
requires application of a two-part test. First, the debtor must be engaged in
commercial or business activities (other than primarily owning or operating real
property) with total non-contingent liquidated secured and unsecured debts of
$2,000,000 or less. Second, the debtor's case must be one in which the US
Trustee has not appointed a creditors' committee, or the court has determined
the creditors' committee is insufficiently active and representative to provide
oversight of the debtor. 11 U.S.C. § 101(51D).
In a small business case, the debtor in possession must, among other things,
attach the most recently prepared balance sheet, statement of operations, cash-
flow statement and most recently filed tax return to the petition or provide a
statement under oath explaining the absence of such documents and must attend
court and the US Trustee meeting through senior management personnel and
counsel. The small business debtor must make ongoing filings with the court
concerning its profitability and projected cash receipts and disbursements, and
must report whether it is in compliance with the Bankruptcy Code and the Federal
Rules of Bankruptcy Procedure and whether it has paid its taxes and filed its tax
returns. 11 U.S.C. §§ 308, 1116.
In contrast to other Chapter 11 debtors, the small business debtor is subject to
additional oversight by the US Trustee. Early in the case, the small business
debtor must attend an "initial interview" with the US Trustee at which time the US
Trustee will evaluate the debtor's viability, inquire about the debtor's business
plan, and explain certain debtor obligations including the debtor's responsibility to
file various reports. 28 U.S.C. § 586(a)(7). The US Trustee will also monitor the
activities of the small business debtor during the case to identify as promptly as
possible whether the debtor will be unable to confirm a plan.
Because certain filing deadlines are different and extensions are more difficult to
obtain, a case designated as a small business case normally proceeds more
quickly than other Chapter 11 cases. For example, only the debtor may file a plan
during the first 180 days of a small business case. 11 U.S.C. § 1121(e). This
"exclusivity period" may be extended by the court, but only to 300 days, and only
if the debtor demonstrates by a preponderance of the evidence that the court will
confirm a plan within a reasonable period of time. When the case is not a small
business case, however, the court may extend the exclusivity period "for cause"
up to 18 months.
Single Asset Real Estate Debtor
Single asset real estate debtors are subject to special provisions of the
Bankruptcy Code. The term "single asset real estate" is defined as "a single
property or project, other than residential real property with fewer than four
residential units, which generates substantially all of the gross income of a debtor
who is not a family farmer and on which no substantial business is being
conducted by a debtor other than the business of operating the real property and
activities incidental." 11 U.S.C. § 101(51B). The Bankruptcy Code provides
circumstances under which creditors of a single asset real estate debtor may
obtain relief from the automatic stay which are not available to creditors in
ordinary bankruptcy cases. 11 U.S.C. § 362(d). On request of a creditor with a
claim secured by the single asset real estate and after notice and a hearing, the
court will grant relief from the automatic stay to the creditor unless the debtor files
a feasible plan of reorganization or begins making interest payments to the
creditor within 90 days from the date of the filing of the case, or within 30 days of
the court's determination that the case is a single asset real estate case. The
interest payments must be equal to the non-default contract interest rate on the
value of the creditor's interest in the real estate. 11 U.S.C. § 362(d)(3).
Appointment or Election of a Case Trustee
Although the appointment of a case trustee is a rarity in a Chapter 11 case, a
party in interest or the US Trustee can request the appointment of a case trustee
or examiner at any time prior to confirmation in a Chapter 11 case. The court, on
motion by a party in interest or the US Trustee and after notice and hearing, shall
order the appointment of a case trustee for cause, including fraud, dishonesty,
incompetence, or gross mismanagement, or if such an appointment is in the
interest of creditors, any equity security holders, and other interests of the estate.
11 U.S.C. § 1104(a). Moreover, the US Trustee is required to move for
appointment of a trustee if there are reasonable grounds to believe that any of
the parties in control of the debtor "participated in actual fraud, dishonesty or
criminal conduct in the management of the debtor or the debtor's financial
reporting." 11 U.S.C. § 1104(e). The Trustee is appointed by the US Trustee,
after consultation with parties in interest and subject to the court's approval.
Alternatively, a Trustee in a case may be elected if a party in interest requests
the election of a Trustee within 30 days after the court orders the appointment of
a Trustee. In that instance, the US Trustee convenes a meeting of creditors for
the purpose of electing a person to serve as Trustee in the case. 11 U.S.C. §
The case trustee is responsible for management of the property of the estate,
operation of the debtor's business, and, if appropriate, the filing of a plan of
reorganization. Section 1106 of the Bankruptcy Code requires the trustee to file a
plan "as soon as practicable" or, alternatively, to file a report explaining why a
plan will not be filed or to recommend that the case be converted to another
Chapter or dismissed. 11 U.S.C. § 1106(a)(5).
Upon the request of a party in interest or the US Trustee, the court may terminate
the trustee's appointment and restore the debtor in possession to management of
the bankruptcy estate at any time before confirmation. 11 U.S.C. § 1105.
The Role of an Examiner
The appointment of an examiner in a Chapter 11 case is rare. The role of an
examiner is generally more limited than that of a Trustee. The examiner is
authorized to perform the investigatory functions of the Trustee and is required to
file a statement of any investigation conducted. If ordered to do so by the court,
however, an examiner may carry out any other duties of a Trustee that the court
orders the debtor in possession not to perform. 11 U.S.C. § 1106. Each court
has the authority to determine the duties of an examiner in each particular case.
In some cases, the examiner may file a plan of reorganization, negotiate or help
the parties negotiate, or review the debtor's schedules to determine whether
some of the claims are improperly categorized. Sometimes, the examiner may be
directed to determine if objections to any proofs of claim should be filed or
whether causes of action have sufficient merit so that further legal action should
be taken. The examiner may not subsequently serve as a Trustee in the case. 11
U.S.C. § 321.
The automatic stay provides a period of time in which all judgments, collection
activities, foreclosures, and repossessions of property are suspended and may
not be pursued by the creditors on any debt or claim that arose before the filing
of the bankruptcy petition. As with cases under other chapters of the Bankruptcy
Code, a stay of creditor actions against the Chapter 11 debtor automatically goes
into effect when the bankruptcy petition is filed. 11 U.S.C. § 362(a). The filing of a
petition, however, does not operate as a stay for certain types of actions listed
under 11 U.S.C. § 362(b). The stay provides a breathing spell for the debtor,
during which negotiations can take place to try to resolve the difficulties in the
debtor's financial situation.
Under specific circumstances, the secured creditor can obtain an order from the
court granting relief from the automatic stay. For example, when the debtor has
no equity in the property and the property is not necessary for an effective
reorganization, the secured creditor can seek an order of the court lifting the stay
to permit the creditor to foreclose on the property, sell it, and apply the proceeds
to the debt. 11 U.S.C. § 362(d).
The Bankruptcy Code permits applications for fees to be made by certain
professionals during the case. Thus, a trustee, a debtor's attorney, or any
professional person appointed by the court may apply to the court at intervals of
120 days for interim compensation and reimbursement payments. In very large
cases with extensive legal work, the court may permit more frequent applications.
Although professional fees may be paid if authorized by the court, the debtor
cannot make payments to professional creditors on prepetition obligations (
obligations which arose before the filing of the bankruptcy petition). The ordinary
expenses of the ongoing business, however, continue to be paid.
Who Can File a Plan?
The debtor (unless a "small business debtor") has a 120-day period during which
it has an exclusive right to file a plan. 11 U.S.C. § 1121(b). This exclusivity period
may be extended or reduced by the court. But, in no event, may the exclusivity
period, including all extensions, be longer than 18 months. 11 U.S.C. § 1121(d).
After the exclusivity period has expired, a creditor or the case trustee may file a
competing plan. The US Trustee may not file a plan. 11 U.S.C. § 307.
A Chapter 11 case may continue for many years unless the court, the US
Trustee, the committee, or another party in interest acts to ensure the case's
timely resolution. The creditors' right to file a competing plan provides incentive
for the debtor to file a plan within the exclusivity period and acts as a check on
excessive delay in the case.
The debtor in possession or the Trustee, as the case may be, has what are
called "avoiding" powers. These powers may be used to undo a transfer of money
or property made during a certain period of time before the filing of the
bankruptcy petition. By avoiding a particular transfer of property, the debtor in
possession can cancel the transaction and force the return or "disgorgement" of
the payments or property, which then are available to pay all creditors. Generally,
and subject to various defenses, the power to avoid transfers is effective against
transfers made by the debtor within 90 days before filing the petition. But
transfers to "insiders" (i.e., relatives, general partners, and directors or officers of
the debtor) made up to a year before filing may be avoided. 11 U.S.C. §§ 101
(31), 101(54), 547, 548. In addition, under 11 U.S.C. § 544, the Trustee is
authorized to avoid transfers under applicable state law, which often provides for
longer time periods. Avoiding powers prevent unfair prepetition payments to one
creditor at the expense of all other creditors.
Cash Collateral, Adequate Protection, and Operating Capital
Although the preparation, confirmation, and implementation of a plan of
reorganization is at the heart of a Chapter 11 case, other issues may arise that
must be addressed by the debtor in possession. The debtor in possession may
use, sell, or lease property of the estate in the ordinary course of its business,
without prior approval, unless the court orders otherwise. 11 U.S.C. § 363(c). If
the intended sale or use is outside the ordinary course of its business, the debtor
must obtain permission from the court.
A debtor in possession may not use "cash collateral" without the consent of the
secured party or authorization by the court, which must first examine whether the
interest of the secured party is adequately protected. 11 U.S.C. § 363. Section
363 defines "cash collateral" as cash, negotiable instruments, documents of title,
securities, deposit accounts, or other cash equivalents, whenever acquired, in
which the estate and an entity other than the estate have an interest. It includes
the proceeds, products, offspring, rents, or profits of property and the fees,
charges, accounts or payments for the use or occupancy of rooms and other
public facilities in hotels, motels, or other lodging properties subject to a creditor's
When "cash collateral" is used (spent), the secured creditors are entitled to
receive additional protection under Section 363 of the Bankruptcy Code. The
debtor in possession must file a motion requesting an order from the court
authorizing the use of the cash collateral. Pending consent of the secured
creditor or court authorization for the debtor in possession's use of cash
collateral, the debtor in possession must segregate and account for all cash
collateral in its possession. 11 U.S.C. § 363(c)(4). A party with an interest in
property being used by the debtor may request that the court prohibit or condition
this use to the extent necessary to provide "adequate protection" to the creditor.
Adequate protection may be required to protect the value of the creditor's interest
in the property being used by the debtor in possession. This is especially
important when there is a decrease in value of the property. The debtor may
make periodic or lump sum cash payments, or provide an additional or
replacement lien that will result in the creditor's property interest being
adequately protected. 11 U.S.C. § 361.
When a Chapter 11 debtor needs operating capital, it may be able to obtain it
from a lender by giving the lender a court-approved "superpriority" over other
unsecured creditors or a lien on property of the estate. 11 U.S.C. § 364.
Before confirmation of a plan, several activities may take place in a Chapter 11
case. Continued operation of the debtor's business may lead to the filing of a
number of contested motions. The most common are those seeking relief from
the automatic stay, the use of cash collateral, or to obtain credit. There may also
be litigation over executory (unfulfilled) contracts and unexpired leases and the
assumption or rejection of those executory contracts and unexpired leases by the
debtor in possession. 11 U.S.C. § 365. Delays in formulating, filing, and obtaining
confirmation of a plan often prompt creditors to file motions for relief from stay, to
convert the case to Chapter 7, or to dismiss the case altogether.
Frequently, the debtor in possession will institute a lawsuit, known as an
adversary proceeding, to recover money or property for the estate. Adversary
proceedings may take the form of lien avoidance actions, actions to avoid
preferences, actions to avoid fraudulent transfers, or actions to avoid post-
petition transfers. These proceedings are governed by Part VII of the Federal
Rules of Bankruptcy Procedure. At times, a creditors' committee may be
authorized by the bankruptcy court to pursue these actions against insiders of the
debtor if the plan provides for the committee to do so or if the debtor has refused
a demand to do so. Creditors may also initiate adversary proceedings by filing
complaints to determine the validity or priority of a lien, revoke an order
confirming a plan, determine the dischargeability of a debt, obtain an injunction,
or subordinate a claim of another creditor.
The Bankruptcy Code defines a claim as: (1) a right to payment; (2) or a right to
an equitable remedy for a failure of performance if the breach gives rise to a right
to payment. 11 U.S.C. § 101(5). Generally, any creditor whose claim is not
scheduled (listed by the debtor on the debtor's schedules) or is scheduled as
disputed, contingent, or unliquidated must file a proof of claim (and attach
evidence documenting the claim) in order to be treated as a creditor for purposes
of voting on the plan and distribution under it. But filing a proof of claim is not
necessary if the creditor's claim is scheduled (but is not listed as disputed,
contingent, or unliquidated by the debtor) because the debtor's schedules are
deemed to constitute evidence of the validity and amount of those claims. 11 U.S.
C. § 1111. If a scheduled creditor chooses to file a claim, a properly filed proof of
claim supersedes any scheduling of that claim. It is the responsibility of the
creditor to determine whether the claim is accurately listed on the debtor's
schedules. The debtor must provide notification to those creditors whose names
are added and whose claims are listed as a result of an amendment to the
schedules. The notification also should advise such creditors of their right to file
proofs of claim and that their failure to do so may prevent them from voting upon
the debtor's plan of reorganization or participating in any distribution under that
plan. When a debtor amends the schedule of liabilities to add a creditor or
change the status of any claims to disputed, contingent, or unliquidated, the
debtor must provide notice of the amendment to any entity affected.
Equity Security Holders
An equity security holder is a holder of an equity security of the debtor. Examples
of an equity security are a share in a corporation, an interest of a limited partner
in a limited partnership, or a right to purchase, sell, or subscribe to a share,
security, or interest of a share in a corporation or an interest in a limited
partnership. 11 U.S.C. § 101(16), (17). An equity security holder may vote on the
plan of reorganization and may file a proof of interest, rather than a proof of
claim. A proof of interest is deemed filed for any interest that appears in the
debtor's schedules, unless it is scheduled as disputed, contingent, or
unliquidated. 11 U.S.C. § 1111. An equity security holder whose interest is not
scheduled or scheduled as disputed, contingent, or unliquidated must file a proof
of interest in order to be treated as a creditor for purposes of voting on the plan
and distribution under it. A properly filed proof of interest supersedes any
scheduling of that interest. Generally, most of the provisions that apply to proofs
of claim, as discussed above, are also applicable to proofs of interest.
Conversion or Dismissal
A debtor in a case under Chapter 11 has a one-time absolute right to convert the
Chapter 11 case to a case under Chapter 7 unless:
A) The debtor is not a debtor in possession.
B) The case originally was commenced as an involuntary case under Chapter 11.
C) The case was converted to a case under Chapter 11 other than at the
debtor's request. 11 U.S.C. § 1112(a). A debtor in a Chapter 11 case does not
have an absolute right to have the case dismissed upon request.
A party in interest may file a motion to dismiss or convert a Chapter 11 case to a
Chapter 7 case "for cause." Generally, if cause is established after notice and
hearing, the court must convert or dismiss the case (whichever is in the best
interests of creditors and the estate) unless it specifically finds that the requested
conversion or dismissal is not in the best interest of creditors and the estate. 11 U.
S.C. § 1112(b). Alternatively, the court may decide that appointment of a
Chapter 11 trustee or an examiner is in the best interests of creditors and the
estate. 11 U.S.C. § 1104(a)(3). Section 1112(b)(4) of the Bankruptcy Code sets
forth numerous examples of cause that would support dismissal or conversion.
For example, the moving party may establish cause by showing that there is
substantial or continuing loss to the estate and the absence of a reasonable
likelihood of rehabilitation; gross mismanagement of the estate; failure to maintain
insurance that poses a risk to the estate or the public; or unauthorized use of
cash collateral that is substantially harmful to a creditor.
Cause for dismissal or conversion also includes an unexcused failure to timely
comply with reporting and filing requirements; failure to attend the meeting of
creditors or attend an examination without good cause; failure to timely provide
information to the US Trustee; and failure to timely pay post-petition taxes or
timely file post-petition returns. Additionally, failure to file a disclosure statement
or to file and confirm a plan within the time fixed by the Bankruptcy Code or order
of the court; inability to effectuate a plan; denial or revocation of confirmation;
inability to consummate a confirmed plan represent "cause" for dismissal under
the statute. In an individual case, failure of the debtor to pay post-petition
domestic support obligations constitutes "cause" for dismissal or conversion.
Section 1112(c) of the Bankruptcy Code provides an important exception to the
conversion process in a Chapter 11 case. Under this provision, the court is
prohibited from converting a case involving a farmer or charitable institution to a
liquidation case under Chapter 7 unless the debtor requests the conversion.
Generally, the debtor (or any plan proponent) must file and get court approval of
a written disclosure statement before there can be a vote on the plan of
reorganization. The disclosure statement must provide "adequate information"
concerning the affairs of the debtor to enable the holder of a claim or interest to
make an informed judgment about the plan. 11 U.S.C. § 1125. In a small business
case, however, the court may determine that the plan itself contains adequate
information and that a separate disclosure statement is unnecessary. 11 U.S.C. §
1125(f). After the disclosure statement is filed, the court must hold a hearing to
determine whether the disclosure statement should be approved. Acceptance or
rejection of a plan usually cannot be solicited until the court has first approved
the written disclosure statement. 11 U.S.C. § 1125(b). An exception to this rule
exists if the initial solicitation of the party occurred before the bankruptcy filing, as
would be the case in so-called "prepackaged" bankruptcy plans (where the
debtor negotiates a plan with significant creditor constituencies before filing for
bankruptcy). Continued post-filing solicitation of such parties is not prohibited.
After the court approves the disclosure statement, the debtor or proponent of a
plan can begin to solicit acceptances of the plan, and creditors may also solicit
rejections of the plan.
Upon approval of a disclosure statement, the plan proponent must mail the
following to the US Trustee and all creditors and equity security holders:
(1) The plan, or a court approved summary of the plan.
(2) The disclosure statement approved by the court.
(3) Notice of the time within which acceptances and rejections of the plan may be
(4) Such other information as the court may direct, including any opinion of the
court approving the disclosure statement or a court-approved summary of the
In addition, the debtor must mail to the creditors and equity security holders
entitled to vote on the plan or plans:
(1) Notice of the time fixed for filing objections.
(2) Notice of the date and time for the hearing on confirmation of the plan.
(3) A ballot for accepting or rejecting the plan and, if appropriate, a designation
for the creditors to identify their preference among competing plans. But in a
small business case, the court may conditionally approve a disclosure statement
subject to final approval after notice and a combined disclosure statement/plan
confirmation hearing. 11 U.S.C. § 1125(f).
Acceptance of the Plan of Reorganization
As noted earlier, only the debtor may file a plan of reorganization during the first
120-day period after the petition is filed (or after entry of the order for relief, if an
involuntary petition was filed). The court may grant extension of this exclusive
period up to 18 months after the petition date. In addition, the debtor has 180
days after the petition date or entry of the order for relief to obtain acceptances
of its plan. 11 U.S.C. § 1121. The court may extend (up to 20 months) or reduce
this acceptance exclusive period for cause. 11 U.S.C. § 1121(d). In practice,
debtors typically seek extensions of both the plan filing and plan acceptance
deadlines at the same time so that any order sought from the court allows the
debtor two months to seek acceptances after filing a plan before any competing
plan can be filed.
If the exclusive period expires before the debtor has filed and obtained
acceptance of a plan, other parties in interest in a case, such as the creditors'
committee or a creditor, may file a plan. Such a plan may compete with a plan
filed by another party in interest or by the debtor. If a trustee is appointed, the
trustee must file a plan, a report explaining why the trustee will not file a plan, or a
recommendation for conversion or dismissal of the case. 11 U.S.C. § 1106(a)(5).
A proponent of a plan is subject to the same requirements as the debtor with
respect to disclosure and solicitation.
In a Chapter 11 case, a liquidating plan is permissible. Such a plan often allows
the debtor in possession to liquidate the business under more economically
advantageous circumstances than a Chapter 7 liquidation. It also permits the
creditors to take a more active role in fashioning the liquidation of the assets and
the distribution of the proceeds than in a Chapter 7 case.
Section 1123(a) of the Bankruptcy Code lists the mandatory provisions of a
chapter 11 plan, and section 1123(b) lists the discretionary provisions. Section
1123(a)(1) provides that a Chapter 11 plan must designate classes of claims and
interests for treatment under the reorganization. Generally, a plan will classify
claim holders as secured creditors, unsecured creditors entitled to priority,
general unsecured creditors, and equity security holders.
Under section 1126(c) of the Bankruptcy Code, an entire class of claims is
deemed to accept a plan if the plan is accepted by creditors that hold at least two-
thirds in amount and more than one-half in number of the allowed claims in the
class. Under section 1129(a)(10), if there are impaired classes of claims, the
court cannot confirm a plan unless it has been accepted by at least one class of
non-insiders who hold impaired claims (i.e., claims that are not going to be paid
completely or in which some legal, equitable, or contractual right is altered).
Moreover, under section 1126(f), holders of unimpaired claims are deemed to
have accepted the plan.
Under section 1127(a) of the Bankruptcy Code, the plan proponent may modify
the plan at any time before confirmation, but the plan as modified must meet all
the requirements of Chapter 11. When there is a proposed modification after
balloting has been conducted, and the court finds after a hearing that the
proposed modification does not adversely affect the treatment of any creditor who
has not accepted the modification in writing, the modification is deemed to have
been accepted by all creditors who previously accepted the plan. If it is
determined that the proposed modification does have an adverse effect on the
claims of non-consenting creditors, then another balloting must take place.
Because more than one plan may be submitted to the creditors for approval,
every proposed plan and modification must be dated and identified with the name
of the entity or entities submitting the plan or modification. When competing
plans are presented that meet the requirements for confirmation, the court must
consider the preferences of the creditors and equity security holders in
determining which plan to confirm.
Any party in interest may file an objection to confirmation of a plan. The
Bankruptcy Code requires the court, after notice, to hold a hearing on
confirmation of a plan. If no objection to confirmation has been timely filed, the
Bankruptcy Code allows the court to determine whether the plan has been
proposed in good faith and according to law. Before confirmation can be
granted, the court must be satisfied that there has been compliance with all the
other requirements of confirmation set forth in section 1129 of the Bankruptcy
Code, even in the absence of any objections. In order to confirm the plan, the
court must find, among other things, that:
(1) The plan is feasible.
(2) It is proposed in good faith.
(3) The plan and the proponent of the plan are in compliance with the
In order to satisfy the feasibility requirement, the court must find that confirmation
of the plan is not likely to be followed by liquidation (unless the plan is a
liquidating plan) or the need for further financial reorganization.
Section 1141(d)(1) generally provides that confirmation of a plan discharges a
debtor from any debt that arose before the date of confirmation. After the plan is
confirmed, the debtor is required to make plan payments and is bound by the
provisions of the plan of reorganization. The confirmed plan creates new
contractual rights, replacing or superseding pre-bankruptcy contracts.
There are, of course, exceptions to the general rule that an order confirming a
plan operates as a discharge. Confirmation of a plan of reorganization discharges
any type of debtor – corporation, partnership, or individual – from most types of
prepetition debts. It does not, however, discharge an individual debtor from any
debt made nondischargeable by Section 523 of the Bankruptcy Code. Moreover,
except in limited circumstances, a discharge is not available to an individual
debtor unless and until all payments have been made under the plan. 11 U.S.C. §
1141(d)(5). Confirmation does not discharge the debtor if the plan is a liquidation
plan, as opposed to one of reorganization, unless the debtor is an individual.
When the debtor is an individual, confirmation of a liquidation plan will result in a
discharge (after plan payments are made) unless grounds would exist for denying
the debtor a discharge if the case were proceeding under Chapter 7 instead of
Chapter 11. 11 U.S.C. §§ 727(a), 1141(d).
Postconfirmation Modification of the Plan
At any time after confirmation and before "substantial consummation" of a plan,
the proponent of a plan may modify the plan if the modified plan would meet
certain Bankruptcy Code requirements. 11 U.S.C. § 1127(b). This should be
distinguished from preconfirmation modification of the plan. A modified
postconfirmation plan does not automatically become the plan. A modified
postconfirmation plan in a Chapter 11 case becomes the plan only "if
circumstances warrant such modification" and the court, after notice and hearing,
confirms the plan as modified. If the debtor is an individual, the plan may be
modified postconfirmation upon the request of the debtor, the Trustee, the US
Trustee, or the holder of an allowed unsecured claim to make adjustments to
payments due under the plan. 11 U.S.C. § 1127(e).
Notwithstanding the entry of the confirmation order, the court has the authority to
issue any other order necessary to administer the estate. This authority would
include the postconfirmation determination of objections to claims or adversary
proceedings, which must be resolved before a plan can be fully consummated.
Sections 1106(a)(7) and 1107(a) of the Bankruptcy Code require a debtor in
possession or a Trustee to report on the progress made in implementing a plan
after confirmation. A Chapter 11 Trustee or debtor in possession has a number
of responsibilities to perform after confirmation, including consummating the plan,
reporting on the status of consummation, and applying for a final decree.
Revocation of the Confirmation Order
Revocation of the confirmation order is an undoing or cancellation of the
confirmation of a plan. A request for revocation of confirmation, if made at all,
must be made by a party in interest within 180 days of confirmation. The court,
after notice and hearing, may revoke a confirmation order "if and only if the
[confirmation] order was procured by fraud." 11 U.S.C. § 1144.
A final decree closing the case must be entered after the estate has been "fully
administered." Local bankruptcy court policies generally determine when the
final decree is entered and the case closed.