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Pew Law Center Blog
May 14, 2012 Lawrence 'D' Pew

Is Congress Remixing Chapter 11 Bankruptcy?

The bankruptcy laws controlling Chapter 11 reorganizations haven’t been significantly revised in several decades. Many bankruptcy professionals and politicians are saying that the time for Chapter 11 change is long overdue. The emphasis for distressed businesses? Improving implementation of business reorganization procedures and improving employee retention.

ABI Goes to Washington

As “the largest multi-disciplinary, non-partisan organization dedicated to research and education on matters related to insolvency,” the American Bankruptcy Institute (ABI) has taken the first important step toward Chapter 11 reform.

The ABI’s new commission on Chapter 11 reform recommendations met in Washington, D.C., last April for the first time. The commission’s co-chair is attorney Robert Keach of Maine. Keach described the group as a “who’s who of the insolvency world,” and that’s not an overstatement. ABI members include “more than 13,000 attorneys, auctioneers, bankers, judges, lenders, professors, turnaround specialists, accountants and other bankruptcy professionals.”  Two honorary and influential members of the ABI’s commission are U.S. Senator Richard Durbin (D-IL) and U.S. Representative Howard Coble (R-NC).

Problems with Chapter 11 of the U.S. Bankruptcy Code

Although the U.S. Bankruptcy Code underwent significant changes to Chapter 7 and Chapter 13 with the Bankruptcy Abuse Prevention and Consumer Protection Act (2005), very few noteworthy changes have been made to the Chapter 11 process. Given that today’s businesses must deal with financial issues that were inconceivable 30 years ago, revisions that industry leaders and the ABI are recommending should address many persistent problems, including:

Financing: Impact of Wall Street brokered debts on petitioners;

Cost: Exceedingly high cost of bankruptcy for smaller companies;

Fairness: Difficulty unsecured creditors have in recovering any repayment;

Ouster: Difficulty of ousting incompetent executives and managers;

Valuation: Challenges on valuation of companies and their assets;

Employees: Difficulties with labor, pensions and benefits.

Should Structured Dismissal Be Authorized By the Code?

In a recent ABI Journal article by New York’s Brent Weisenberg (Cooley, LLP), the author made a strong case for Chapter 11 structured dismissals, among other revisions. He argued that without essential changes to the Chapter 11 process, bankruptcy creditors and others “will be forced to expend funds on an overly complicated and cumbersome plan confirmation process, or be compelled to fight over whether utilizing these alternative exit strategies [ie., the structured dismissal] is permitted under the Code.” Although the structured dismissal has been permitted by some bankruptcy judges, Weisenberg posits that it should be clearly authorized by the Bankruptcy Code. The structured dismissal:

“[S]hould include (1) the debtor holding less cash to be distributed than some maximum amount, and (2) establishing, by a preponderance of the evidence, that (a) proceeding in the requested fashion is in the best interests of all creditors and (b) confirming that a Chapter 11 plan of liquidation would be overly burdensome or impractical under the specific facts of the case.”

The structured dismissal as an exit strategy may be one of the issues considered by the ABI’s commission. Be mindful, though, that the commission is focusing its recommendations on improving Chapter 11 procedures to better serve the needs of financially strapped businesses and not the financial concerns of consumer debtors.

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