Chapter 11

Early Chapter 11s have the best chance of successful reorganization. Businesses typically worth more
alive than dead.
1. 541 - Debtor in Possession (DIP) of the Estate
a. Debtor remains in possession of the assets of the bankruptcy estate during bankruptcy
i. If the debtors management appears to be looting the company or committing some
other form of fraud, then the creditors may have a Trustee appointed by the court.
ii. 1104(a)(2) appointment of a trustee when necessary (ex: best interst of the
creditors, looting, etc)
a. Two mains routes to take
i. (1)MISMANAGEMENT/FRAUD
1. This could work, for all of the free spending
ii. (2) Not considering all creditors / CREDIOTR BODY JUST NOT ON
BOARD
1. Management is only negotiating with 1 creditor, and
there could be other creditors that should be considered
too
2. Loss of trustworthiness
2. 503(c) can be used to keep management from awarding themselves major
payouts as the company is flailing into chapter 11. Can put an end to lavish
spending.
iii. KEEP IN MIND, a US TRUSTEE is always there to oversee the DIPs operation, they just
are not the ones making all the decisions like a trustee would if appointed.
b. 363(c) DIP operates the business in its ordinary course.
c. First Day Orders
i. The judge will be able to exercise broad discretion in handing down first day orders so
that the DIP may run the business as necessary
ii. Typical Requests:
1. Permission to conduct business outside of the ordinary course
2. Authorization to pay employees wages
3. Use of cash collateral
4. Approval of post petition financing plans
5. Employment for the counsel for the debtor and creditors committees
6. Additional injunctive relief beyond automatic stay
7. Motion to hire new special employees: investment banker, valuation expert,
Turnaround Expert, etc
iii. Balance: Three Arguments
1. The Debtor will argue that these motions are necessary actions required or
the business will close and the Creditors will argue that they have a right to be
heard and need more time and the argument by the Trustee is that early
payment of prepetition claims is inconsistent with the provisions and policies
of the bankruptcy code.
d. In Re Colad
i. they allowed the payments to employees from past wages to just go ahead and be
paid, because this claim would have been priority anyways and thus lets just let them
go ahead and pay that as well.
1. Legal argument ^ , but practically they must consider if the employees will
quit or not if they are not paid
e. Additionally, a proposal was made as an Emergency Lending Facility on the first day of
motions (typically you must wait atleast 15 days to get post peition financing). The court
found their arrangement to be Not Acceptable because:
1. The agreement was essentially what the FINAL LOAN agreement would look
like -- not an agreement that handles the absolute needs of the DIP right now
to stay afloat, as the 4001(2) says must be the case
2. Way too complex of an arrangement
3. Agreement changed substantive and procedural rights of the parties involved
(cheifly doing away with the automatic stay, limiting reorg rights, etc)
4. Rate too high for the new 500K post petition debt (potentially a problem with
NY Usary rate)

f.
2. Automatic Stay goes into effect upon filing of the bankruptcy
a. Reasons to lift the Stay:
i. (362)(d)(1) Adequate Protection significant decrease in value immenent.
ii. (362)(d)(2) if no equity in the collateral and the collateral is not necessary for
reorganization.
iii. IN SUM: argue about the specific collateral, or argue about the total business.
1. Courts have 30 days to rule on lift stay motions
2.
b. Exceptions to the Stay:
i. Sietles Case
1. Police or Enforcement Action are allowed to break the automatic, but
otherwise, the government is not allowed to violate 362.
ii. Chateugay gave 2 tests:
1. Pecuniary Interest Test
a. Matters of public safety will be excepted from the test, but when
merely a government monetary interest, it shall be subject to the stay
2. Public Policy Test
a. When public policy interests are so strong as to warrant a breaking of
the stay
c. Automatic Stay Waivers are generally uneforcable.
d. Exceptions for Financial Contracts
i. Derivatives are excepted from the stay, meaning that if AIG files Chapter 11, and
they are on the losing end of a Credit Default Swap, the counterparty is not kept from
collecting their earnings once they come to fruition.
1. This is so that a market panic does not happen, creating systemic failure, due
to the interconnectedness of the financial derivative market.
e. Trade Creditor Special Rules
i. 546(c) Reclamation
1. when a seller, in the ordinary course of business, sells goods to the debtor,
the seller may reclaim the goods if the debtor received the goods while
insolvent, within 45 days of the commencement of the case. The only way to
execute reclamation is to give the debtor a writing within 45 days of the recipt
of the goods OR not later than 20 days after the date of the commencement
of the case. If they fail to do this, move to 503(b)(9)
ii. 503(b)(9)
1. the value of any goods received by the debtor within 20 days of filing in which
the goods were sold in the ordinary course of business will be considered
Administrative Expenses and are to be paid in full at the date of the effective
plan
iii. In Re KMART
1. In KMART
a. We have 4 categories of vendors (eggs & diary), and three others all
fairly narrow, which added up to 100M in debt
b. All of these vendors got 100% paid back, while the others just got 10%
back
c. The court did not allow this, saying that these were not proven to be
critical vendors. 362(b)(1).
d. To show Critical Vendorship:
i. Critical vendors would cease delivery without receiving
payments in full
1. (contractually, they had no obligation to continue
relationship)
ii. residual benefit (from continued business with critical vendors)
to the disfavored creditors not receiving the full payments on
past debts, or atleast leave them no worse off.
f. Cases:
i. In Re Burgess
1. That said licesnes can be property of the estate
2. In this case, a liquor liscense was property of the estate and subject to the
automatic stay.

3. May be Voluntary or Involuntary

a. May be converted involuntarily only from a Chapter 7 case, and may be dismissed or
converted to a Chapter 7 by a party other than the debtor but they must show cause.
4. Negotiations begin
a. A Chapter 11 filing is an invitation to negotiate with creditors
5. Creditors Committee - 341
a. What they do:
b. Who appoints them: The court will order the committee, but the US Trustee will actually
appoint the members of the committee. (usually the 7 largest creditors)
i. THE US TRUSTEE is part of the US DEPT of JUSTICE, resides under the AG.
ii. The US Trustee selects trustees for all of the chapters
iii. IN Chapter 11, if a trsutee is deemed to be necessary, they can be appointed by the
US Trustee, or an election may occur.
1. A trustee is usually just a lawyer, a private party
2. They run the business and file the plan
a. They are essentially the DIP at that point
i. Duty to company and creditors
b. THE private trustee does not appoint the committee of creditors
c. That would be the US Trustee who does that
iv. IF the committee is who formulates the plan, then the judge, who has to approve the
plan, probabaly shouldnt be appointing the member so of the committee, because
there is a conflict of interest there. They would all get to comfortable otherwise.
c. The committee is looking out for the unsecured creditors. Creditors sometimes get nervous
about sitting on the committee, because they have a lot of exposure and learn a lot, and
might have duties to others now.
d. Appointment of Examiners: much more ferquently appointed than trustees, they are just put
there to conudct investigations and look over managements dececisions.
i. They can help develop plans like a mediator gathering input among the creditors and
the debtor
ii. Examine identifiable problems or transactions, while not displcaing management.
e. Equity Committee
i. 1102(a)(2) can be created to prevent collusion between creditors and
management
1. Debtor usually argues that there is no equity value because they are insolvent
usually a winner when actually insolvent
6. Plan
a. Disclosure Statement due at filing/before a vote can take place
i. This statement must be approved by the bankruptcy court, which ensures everyone
that all the proper disclosures have been made (quarterly reports, proof of claims,
etc). This approval must happen before solicitation of votes can take place. 1125.
1. The adequacy of disclosure statements is governed by 1125(b)
a. Requires adequate information = reasonable information given the
circumstances to allow an investigator the ability to make an informed
judgment about the plan.
i. PAGE 603 lists 19 items to be included in the disclosure typically
2. Safe Harbor 1125(e) anyone making disclosure statements in regard to the
financial health of the company, will not be subject to federal securities laws
liabilities so long as they make disclosures in good faith.
b. The DIP has 120 days to have the exclusive right to present a plan to the judge (1121)
c. For the Plan to Pass (If not everyone votes for it):
i. Feasibility (of the plans ability to be carried out) 1129(a)(11)
1. Likelihood that the plan will succeed, as perceived by the judge applying a
case-by case analysis of best business judgment
a. A single creditor can raise this issue

i. Visionary Schemes are not sufficient enough to make a plan

feasible Soverign Oil
ii. Best Interest (of the creditors) 1129(a)(7)
1. Would they have received more in liquidation than in this Chapter 11?
2. This can be raised by an individual debtor, not afforded to the right of a class
iii. At least 1 impaired accepting class (1129(a)(10))
1. If all impaired classes accept, then the plan can pass, if you move through
cram down
d. Say you meet i-iii above, but you have 1 dissenting impaired class, then you have to meet:
e. Cram Down Requirements:
i. At least 1 accepting impaired class - 1129
ii. The Plan must not unfairly discriminate against the dissenting class
1. Often easy to prove as courts give wide latitude to the business judgment of
DIPs
2. Markel Test (Material Difference) v Aztec Test (totality of Circumstances)
a. Aztec is a 4 factor Test
b. Markel is typically tougher to pass
iii. The plan must be fair and equitable - 1129(b)(1)
1. Standard for Secured Creditors River East
a. 3 ways the opposition can be overcome:
2. (1) similar to how we saw in Chapter 13 1129(b)(2)(a)(i)
a. Pay them the present value of the allowed secured claim
b. whats the collateral worth, and what is the interest rate over that
time,
c. Comes down to Valuation and INterst Rate
d. Prime Rate + Risk Factor
3. (2) Sale with the right to credit bid
a. 363K
b. you can credit bid up to the value of the outstanding debt, but if you
dont bid, we will sell it, and you wil have a lien on the value of the sale
4. (3) Indubitable Equivilient.
a. Lots of questions around just giving back the collateral and thinking
that will satisfy the entire debt
b. Or if there is a guarantor
c. Dirt for Debt
d. piece of property that didnt get developed (funding dies) lender says
I could foreclose on this and then go after someone for a difficiency
judgment because the land is shitty now..
i. We get to this, because the secured creditor doesnt want the
plan to move forward. TO have the plan secured, they just
need to meet one of the three requirements above.
1. River East - 1111(b) election
a. the creditor swapped the bifurcated claim for a
fully secured claim.
i. This is a bet on the future if you think
that the collateral will increase in value in
the future, and the debtor is likely to
default again, then you can get more
value later.
5. Standard for Unsecured Creditors Red Mountain
a. Either pay the unsecured creditors in full (rare), OR
b. Absolute Priority Rule (1129(b)(2))
i. any dissenting class needs to be paid in full, or else any junior
intersts may not receive any value, and equity needs to be
wiped out. The then new owners of the company are the
creditors who did not get paid they get the equity in the
company. So Sam Pickens would have to give up his equity to
the unpaid dissenting creditors. Its not an automatic thing, its
just that a plan will be rejected that doesnt account for this.

1. Companies can also maintain their own equity while still

giving some away to make sure that the dissenting
creditors get their total value of the amount due
c. New Value Corollary
i. Requirements (Listed in Red Mountain p 657)
1. New
2. Substantial
3. Money or Moneys worth
4. Necessary for Successful Reorganization
5. Reasonably equivalent to the value or interest received
a. Is the cash infusion equal to the equity stake they
are getting for the infusion.
i. Selling an asset on the free market is the
best way to value it, but DCF, Comparitive,
EBITDA, -- whichever one that is chosen is
called the Judicial Valuation.
iv. Once these are satisfied, then the cram down may occur.
f. Cases:
i. Bank of America Nat Trust & Sav. Assn v N. LaSalle Street
a. 293 North LaSalle you cannot retain an interest on account of your
old equity, and if you are the only one to have the option to put money
in the company, then that itself, is a property right, and should be
considered as asset that shouldnt be excluded from the creditors.
ii. In re Red Mountain Machinery Co. (Ariz 2011)
1. Fair and Equitable Standard for Unsecured Crediotrs
a. Any insider is welcome to make the cash infusion, but they cant have
exclusive access
b. You cant have an exclusive right to infuse equity on account of your
previous equity stake in the company.
iii.
g. 363 Sale
i. 363(b) can either be a sale of some assets or the entire company
1. just selling parts of the business to raise capital can be approved by the court
ii. 363(b) gives the judge the power to grant a sale that is outside of the ordinary
course of business -- this has been applied to mean that even a sale of ALL OF THE
ASSETS can be approved in accordance with subsection (b).
1. Good Business Reason seems to be the standard, discussed below
a. this refutes both the emergency only standard and the Carte
Blanche Standard, and falls in between
iii. Articulate a good business justification rejected an emergency standard, and
opened up the door for a wide variety of justifications Lionel.
iv. Factors to Consider:
1. Does the estate have enough money (liquidity) to survive until confirmation of
the plan
i. Post Petition Financing Available?
ii. Will the current creditors extend more to them now
2. Will the sale opportunity still exist at the time of the plan confirmation
3. Are assets increasing or decreasing in value
i. Doing away with the Emergency Standard helped to deal with
the Melting Ice Cube Problem and turning off the refrigerator
so that an apparent emergency turned up justifying the 363
sale.
v. A lot of management will want to file 11, so they have control, and can set
themselves up for their next job, opposed to a 7 where the trustee makes the calls
and might not look out for the future of the sold off business.
vi. People like selling of companies in bankruptcy because it creates a lot of clarity to it
all, the federal government is putting its seal of approval on it
1. There is an implicit good faith requirement to file into chapter 11, so you cant
just use it to scrub potential liabilities.
2. So we worry about the debtor unplugging the freezer to try and show thay
they are in distress.

vii. Risks that might come about:

1. Evaluation problems has the company been sold for its true market value
a. Tough to be sure when the process happens to quickly
2. Credit Bidding and the Stalking Horse break Up
a. Credit bidding, when the secured creditor doesnt have to put new
money on the table, they can use their credit balance they are owed.
viii. 363(k)
ix. Stalking Horse Bidder / Break Up Fees
1. Management says hey we found a great buyer for the company. And then
anyone who bids over the great matchs price, will then have to pay a
premium to the great match, who agreed to buy if they win the bid.
x. People who are out of the money will really care about the sale occurring outside of
the plan
1. IN LIONEL, there was an equity committee that was really upset about the 363
sell
a. Old equity was not shaping up to get much of anything, so they threw
a hail mary, and tried to get some negotiating power
2. Takaways from Lionel:
a. Lionel was selling a majority share of stock in another company, DALE,
for $50M
i. This was a healthy company, and there didnt appear to be a
need for speedy sale.
ii. Later, after the litigation, they ended up selling the company for
$72M
xi. Free and Clear Passage of Assets to the Buyer in a 363 Sale
1. 363(f)
2. sub rosa means not an arms length transaction to a complete third party,
more of a disguised reorganization.
3. In Re Trans World Airlines
a. Because of 363(m) many sales just dont get appealed.
b. This one did though
4. Priorities in Bankkruptcy:
a. Allowing one group of claims to travel to the buyer and not others,
might subvert the priorities of the creditors
5. Who Would buy subject to the settlements
xii. 363(f) is an if, with an Or.
1. You just have to find one IN
xiii. The interest in property included unsecured claims
1. Because lien is considered to be one type of interest, then it is not the only
type of interest that 363(f) is considering.
2. What makes it so that these claims are considered property interests
3. Other circuits have said that an employees benefits plan would be considered
a property interest as well.
7. Executory Contracts
a. 541(c) will invalidate any anti-assignment clauses, so that the DIP may
i. Reject,
ii. Assume, OR
iii. Assume and Assign
b. Rejection
i. The DIP may decide to Reject the contract (365(a)), ultimately breaching its
agreement. The damages are treated just like prepetition unsecured debt. Important
to note that rejection is not an avoidance power, it is just a breach, so long as the
contract/agreement is still able to be carried out by the opposite party, they may act
in accordance with the terms (Sunbeam Case)
ii. 365(g) rejection simply constitutes a breach and after a breach, the debtor is
not subject to specific performance
iii. 365(n) deals with intellectual property use after rejection
c. Assumption
i. I want to stay in this contract and continue to perform it, honor the deal I made.
ii. The challenges here depend on whether the debtor defaulted prior to bankruptcy.

1. 365(b) is getting at the fact that to assume the K you need to cure any
defaults (make the full payment on the past owed debts to this counter party
in the K).
a. Congress says look, you MUST pay your monetary defaults, but when it
comes to non-monetary defaults, it comes down to the type of the
contract:
2. Personal Property Leases are particularly problematic -- as is insurance (?)
3. 365[c] not about whether there was a default, instead about whether the
counter party can prevent an assumption going forward even if there was no
default
iii. ***If you assume a contract, then say, oh wait never mind, I dont think we can do
this anymore, then that expense is tallied as an Administrative Expense, and thus
entitled to 100% payment.
d. Assume & Assign
e. Assignment (Jamesway Case) (must meet the assumption hurdles first, then the additional
assignment hurdles)
1. Can it be assumed? (curing issues, etc)
2. Can it then be assigned?
a. There are a variety of contracts which cannot be assigned
i. Substituting a Jamesway Department Store for a Rite Aid might
not be the best for the commercial real estate owner.
ii. 365(d) is where the time restraint deadline comes into play, generally you get 60
days. Loose standards on extensions.
iii. 365(d)(4) - gives 120 days, with heightened standard for any extensions.
iv. The more the debtor controls the timing of the filing, the more they are considering
these contracts. Say they want to include Christmas sales into their window to see if
contracts are valuable, they will strategically file on a certain date.
f. Restrictions on Assumption and Rejection
i. 365's 3 most important restraints are:
1. (b) says that the DIP must cure or arrange to cure most defaults as a condition
of assumption
a. Adequate assurance of future performance" is also a requirement at
times (b)(1)[c] and (f)(2)(b)
2. The debtor may not assume a contract for a loan or financial accomidations
[c](2)
3. Section [c](1) says that you cannot assing a contract that would not have
been assignable under applicable state law. Like if Leo Dicaprio had a
contract for a movie, he can't assign that contract to me. That's against state
law under a personal services provision.
g. Cases:
i. In re Jamesway Corp (Bankr. SDNY 1996)
1. Jamesway had a lease agreement with Mass Mutual. Their agreement had a
provision that spelled out a penalty essentially for subleasing the
property/assinging the lease to others.
2. Under 365, Jamesway decided to assume and assign the lease, leasing it to
Rite-Aid.
3. 365(f)(1) -- invalidated the provisions of the contract which restricted the
assingment of the lease. As a result, the 50,000 sitting in excrow was given to
the debtor to realize the full value of the lease.
ii. Sunbeam Products Inc v Chicago American MFG, LLC (7th Cir 2012)
1. Lakewood, held a patent and trademark on box fans. It also had an
agreement with CAM that CAM would be able to use the trademark, and sell
the fans splitting the proceeds with Lakewood, and that if lakewood stopped
providing the trademark, that CAM could sell the fans on it's own without the
trademark on it.
2. Lakewood was forced into Bankruptcy, and the trustee elected to reject its
contract with CAM. CAM continued to sell the fans with the lakewoods logo.
Trustee brought an adversary suit.
3. 365(n) allows for licensees to continue to use intellectual property after a
contract has been rejected
4. Problem: IP in the code does not include TRADEMARKS

5. Judge said that's not the real issue here:

a. Because the ending of the contract did not indeed abrogate all of the
rights of CAM, they were still allowed to sell the fans already in
inventory according to the contract. Lakewoods\'s breach did not
effect their ability to carry out their end of the contract, and as a result,
they were able to act on the adequate assurance they bargained for.
6. Rejection is just a breach of the contract, it is not an avoidance power! It is
not recission, you are not going back in time and saying this contract never
happened.
8. Voting (1126)
a. 1121 Who may File a Claim
b. 1122 classes need to be substantially similar
i. Piano case (Good Business Reason) to have a strategic mix
c. 1123 each member in a class must be treated the same (ie offered the same rate and
time frame of payback)
d. 1126(f) presumes that unimpaired classes are voting FOR the plan
e. 1126 provides 2 separate voting requirements:
1. at least 2/3 in dollar amount per class needs to approve the plan for that class
to approve the plan
2. AND at least of the number of claimants in the class must approve for the
class to approve.
f. 1122:
i. (a) claims can be classified together if substantially similar
ii. (b) a plan may designate a separate class of claims consisting only of every
unsecured claim that is less than or reduced to an amount that the court approves as
reasonable and necessary for administrative convenience.
g. Case:
i. In Re Bernhard Steiner Pianos USA, Inc
1. Good business reason to pay consignment creditors class ahead of other, less
vital creditors.
Adequate Protection
h. 361
i. 362
9. Plan is confirmed
10. Discharge
a. Occurs at plan confirmation
11. Timeline basics:
a. Traditional
i. File Chapter 11
ii. Negotiation, disclosure, and voting
iii. Then plan confirmation (Can be a liquidating plan under 1123(b)(4))
iv. Then effective date of the plan
b. Prepack
i. Negotiation, disclosure, voting
ii. File Chapter 11
iii. Plan confirmation can happen very quickly! Maybe a couple days after filing
iv. Jake Offman of Skadden invented this maybe
c. 363
i. File Chapter 11
1. They come into the court with the notion that they want to do a 363 sale
ii. Three paths from there:
1. Plan to hand out the money, which would be voted on and confiremed
2. Convert to Chapter 7
3. Dismiss the Case (Structured Dismissal)
12. Chapter 11 Financing
a. 363(b)
i. Selling assets outside of the ordinary course of business to raise capital can be
approved by the judge
b. 364 Outlines this Process
i. Unsecured Debt:

c.

d.
13. Small
a.

1. 364(a) DIP may obtain unsecured debt, so long as it is in the ordinary

course of business which is allowed under 503(b)(1), as an administrative
ex/pense
2. 364(b) After a hearing, the DIP may obtain unsecured debt other than what
is allowed in subsection (a) as an administrative expense (this is if its not in
the ORDINARY COURSE OF BUSINESS)(so the judge has to appoint it).
ii. Secured Debt:
1. 364(c) when you cant get (a) or (b), you then have three possibilities to
obtain secured debt:
a. Give a Super Priority this will jump priority over (a) and (b) creditors
above and all other administrative expenses
b. Give a lien on the property, of which the property is unencumbered by
a previous lien
c. Give a secured Jr Lien on the asset
2. 364(d) (Priming Secured Credit) Last Resort Provision- the court may allow
secured debt on an already secured piece of property only if
a. The trustee is unable to obtain credit otherwise and
b. There is adequate protection of the interest of the holder of the current
lien on the property
iii. Finality Provision
1. 364(e) Finality Provision -- you cannot really appeal decisions made on
loans outlined in 364.
2. ***if a circuit is ruling on a cross collateralization provision, they might be able
to say, look 364 doesn't even mention cross collateralization so 364 (e)
doesnt protect that authorization and we can strike it down.
Strategies outside of 364:
i. Cross Collateralization
1. Fully securing a pre-petition claim by securing more collateral during post
petition lending
a. 11th Circuit decision in In re Saybrook (1992) found crosscollateralization to be impermissible
b. Equitable treatment of creditors is the argument
ii. Roll Up
1. when some of the loan money that the post petition DIP is borrowing goes to
pay of the pre-peititon loan that they were once given. So that pre-petition
loan gets paid off at a certain level and at a certain time period, a guarantee
which other pre-petition creditors are left without.
a. Courts are more comfortable with Roll-Ups than with Cross
Collateralization
iii. Carve Out
1. we will give these special provisions to this lender, but, we need to carve out
money from their loan to pay off the lawyers and admin expenses, so part of
their loan needs to be carved out. Usually this lender is the highest possible
priority lender, and has as secured interest in everything, but some of their
loans still needs to be carved out.
2. Carve out can also be used to distribute funds to non secured creditors in
certain situations..
iv. Waivers
1. Sometimes companies will say you waive your right to look back and
scrutinize our old pre-petition transactions to try and void them ---- they will
also say things like
2. These waivers may seem like they are hurting other creditors, but the money
obtained from signing will likely grow the pie for all.
Cases:
i. In Re Devlin (1995)
1. When the mother primes the mortgage
Business Requirements in Chapter 11
Overview:
1. BAPCPA made it more difficult for small business to get a confirmation in
Chapter 11

a. Policy reasons: congress sees Small Businesses as analogous to

consumers, small business lobby not very strong, who knows.
2. Increased Paperwork
3. Greater Supervision from the Office of the US Trustee
4. Higher Feasibility Screen to gain confirmation
a. From decreased judicial discretion in ability to approve plans
b. Shorter deadlines for plan proposal222
b. Who Qualifies:
i. 101(51D)(A): every person engaged in commercial or business activities is
possibly a small business debtor
1. the Code includes person to be partnerships and corporations 101(41)
ii. Size is measured by the amount of DEBT - 101(51D)
1. A small business debtor is one who has aggregate non-contingent liquidated
secured and unsecured debts as of the date of the petition in an amount not
more than $2M.
a. With inflation, the 2013 debt limit was $2.49M
i. Additionally, debts to insiders are not calculated in this number
iii. Additionally,
1. Only cases in which no creditors committee has been appointed or in which
the committee is not sufficiently active and representative to provide effective
oversight of the creditor will be tagged for treatment as a small business
debtor - 101(51D)(A)
c. Small Business Rules
i. Additional Paperwork
1. Management must append a balance sheet, statement of operations, cash
flow statements, and federal income tax returns, or file a statement under
penalty of perjury that no such documents have been prepared. 1116
2. Projected Cash receipts and disbursements as well as future profitability
statements 308
ii. Attend meetings with the US Trustee
1. This trustee will act as an investigator to ensure the debtor has come clean
about everything - 586(a)(7)
iii. At Confirmation time:
1. Courts may not extend the exclusivity period for a small business to propose
a plan unless it is more likely than not that a court will confirm a plan in a
reasonable period of time. 1121(e)
2. Confirmation is placed on a fast track to expedite the process.
iv. A small biz debtor looking to re-enter Chapter 11 for the second time within 2 years
of the original Chapter 11 must show the court that the failure occurred as a result of
circumstances outside of the debtors control that were not foreseeable at the time
the case was filed, and that it is more likely then not that the court will confirm a
plan.
1. If the debtor cant show this, then no automatic stay will be afforded
14. Special Claimants Uncertain, Difficult, and Large Liabilities
a. 502(c) allows the judges to estimate caims to address contingent or in liquidated claims,
which if waited for, would indefinitely prolong the bankruptcy process in an undue manner
b. Mass Torts
i. Johns Manville Case
1. Big Point:
a. Conflict of interest between people who are already injured, and people
who might be injured in the future. So 2 different types of creditors.
b. The present claimant wanted to appeal on behalf of future claimants,
but the judge said you do not have the same interests as they do, you
can only sue on peoples behalf in your position.
2. 524(g) asbestos provisions
a. Manville amendments
i. Question as to if we should apply this to analogous cases that
are not necessarily asbestos cases.
c. Environmental Liabilities
i. Clean Up Costs
1. Often granted Administrative Expense Priority 1129(a)(9)

a. Meaning it would have to be paid in full

b. Most likely to happen when the costs are first incurred post-petition
and relate to the reorganization
c. Further strong evidence for admin expense is when the contamination
happens both pre and post bankruptcy, heading to a deplorable state.
ii. Signature Combs Inc v USA (2003)
1. From the 4 approaches, the court chose the Fair Contemplation Approach
and found that MDL indeed had not discharged their liabilities to the EPA
2. MDL had the burden of proving discharge because they brought the motion.
3. The approaches are used to see when the claims arise for the purpose of
bankruptcy discharge
a. Right to Payment Approach: 1. D falls w/in one of the 4 categories of
responsible parties. 2. Hazardous substances are disposed at a facility.
3. There is a relase or threatened release of hazardous substances
from the facility into the environment, and 4. The release causes the
incurrence of response costs including removal activities and
enforcement activities related thereto. Debtors CERCLA liability will be
discharged only if all 4 exist prior to bankruptcy.
b. Underlying Act Approach: Pre bankruptcy claim subject to the codes
discharge provisions exist so long as the underlying polluting act
occurred prior to the debtors bankruptcy. Evades those who dont
know yet about the behavior.
c. Debtor-Creditor Relationship Approach: Any CERCLA liability is
discharged if the creditor and debtor began a relationship before the
debtor filed for bankruptcy, so long as the underlying act occurred
before the bankruptcy petition was filed. EPA ought to know, so they
have a relationship.
d. ***Fair Contemplation Approach: A contingent CERCLA claim arises prepetition only if it is based upon pre-petition conduct that can fairly be
contemplated by the parties at the time of the debtors bankruptcy.
Reasonable diligence that it had a claim against the debtor for a
hazardous release. Claim accrues earlier than the right to payment
standard b/c the potential claimant need not incure response costs for
a contingent claim to arise under this standard.
d. When Claims arise that related back to Pre-Bankruptcy Entity
i. Fairchild
1. The bankruptcy judge signed off on the sale of assets of an Airplane Company
which was sold free and clear of future liabilities from the debtor airplane
company.
2. This judge then went against his order and held the Buying Company liable for
the new deaths from old planes made by the previous debtor.
a. A big part: the debtor never made a good faith attempt to alert
purchasors of their airplanes that this deal was going on and that
future claims would be absolved of successor liability.
b. These future claimants were not included in the bankruptcy
proceedings because of a lack of notice. Therefore a lack of due
process!
3. This case shows us that free and clear is not always granted. You must
bring everyone together to the table to really make it effective.
ii.
A. In re Kmart Corp. (7th Cir. 2004)
NOT OK: Unsubstantiated Critical Vendor Orders
1.

Facts: Debtor sought and received permission on first day of BR to pay off critical vendors
vendors who allegedly would cease doing business w/ debtor in BR, thus making other creds.
worse off. Debtor argued for order under (inter alia) 105(a) equity powers, doctrine of
necessity, and 363(b)(1). But lower court did not require debtor to establish either (1) that
vendors would cease doing business, or (2) that other creds. would at least be no worse off if
critical vendors paid immediately

2.

3.

Holding: While 363(b)(1) may authorize a critical vendor order as long as fact that (1) critical
vendors will cease doing business w/ debtor if not paid, and (2) other creds. will at least be no
worse off if critical vendors paid immediately, fact that neither of those was established means
order must be rejected. (Also, 105(a) and doctrine of necessity rationales rejected).
TM: Process problem here

B. In re Lionel Corp. (2d Cir. 1983)

NOT OK: Sale under 363(b)(1) just because creditors want it
1.

2.
3.

Facts: Debtor in trouble, its best asset was large stake in another, profitable company (Dale).
Filed Chap. 11. Sale of stake approved under 363(b)(1), rather than under later Chap. 11
procedures, and turns out company requested it only b/c creds. wanted it, and (according to CEO
witness) no difference selling now under 363 or later under Chap. 11. Equity holders objected.
Only other reason offered for use was to avoid delay.
Holding: Sale rejected b/c no business justification was articulated; cred. desires and delay not
enough. BR judges discretion under 363 not unfettered.
TM:
a. Creds. want to sell now b/c who knows how long Dale will be profitable (hence, CEO witness
wrong that it made no difference). Equity wants to delay b/c willing to take risk, unlimited
upside.
b. Process problem.