1. To provide a “fresh start” for economically viable debtors;

2. To promote equality of distribution among similarly situated creditors;

3. To concentrate the activities of judgment creditors into a single court of broad and exclusive federal jurisdiction;

4. To provide “breathing space” to a debtor, permit a structured process outside of a quick liquidation to enhance asset values, and a determination by creditor classes of a “plan” for the distribution of the value of those assets.

When is Chapter 11 useful?

1. To provide an opportunity for financially troubled but economically viable company to restructure and continue operations, either under new ownership or a new financial structure, or by removing debt impediments to viability such as ruinous unsecured debt or disastrous contracts; or

2. To provide an orderly liquidation of a failed business that possesses assets that will have an enhanced value if sold for their “going concern” value or that need to be marketed through a special process, or that would benefit from the retention of current management and continuing operations throughout the liquidation process.

When is it not useful?

1. To postpone the death of an irretrievably failed business that lacks significant salvageable assets;

2. To halt a foreclosure entirely upon speculative hope that something will turn up in a few weeks;

3. To escape the oppressive terms of a secured lender with a blanket lien on all business assets (except in a few rare instances);

4. When a consensual workout or an assignment for the benefit of creditors in state court would work and is the less costly alternative.

Use of bankruptcy as a sales vehicle

1. Under § 363 (f) of the Bankruptcy Code, a debtor may sell property of the bankruptcy estate free and clear of liens, claims and encumbrances, subject to certain restrictions. This allows debtor to make assets more marketable by severing third party claims and cleaning title.

2. Under certain conditions, a bankruptcy court can also, pursuant to § 363 (f), permit the debtor to sell property for which the debtor holds only a partial interest or where the debtor’s interests are contested by a third party.

II. First Steps in a Chapter 11 Case

Petition and Initial Filings

A chapter 11 case is commenced by filing a petition. The petition consists of an official form (or a document that substantially conforms to the official form) that requires the debtor to estimate the amount of its assets and liabilities. The required initial filings also include a list o the top 20 creditors and their addresses, parties with whom the debtor has executory (existing) contracts and leases, a corporate resolution authorizing the filing (if the debtor is a corporation) and an attorney’s verified statement disclosing the attorney’s fee arrangement.  A matrix of creditor addresses is also often required under the bankruptcy jurisdiction’s local rules.

Often filed initially, however, not required to be, are the schedules listing all secured and unsecured creditors, their potential claims, and the debtor’s assets and a list of equity security holders. Finally, a statement of financial affairs (called the “SOFA”) is required to be filed, a form document of some length that provides for a more detailed view of the debtor’s finances and situation regarding such things as litigation and property transfers pre-petition.

“First Day Motions”

Because the bankruptcy process initiated by the bankruptcy petition places the debtor under court supervision and restricts its ability to operate its business, a debtor must in the first instance obtain court permission to operate realistically. So-called “first day motions” are not necessarily filed the first day, but with an operating business they are often required to be filed and heard by the bankruptcy court as soon as possible, if not, in fact, the first day. Typical first day motions include:

 1. Employee Wages

2. Cash Collateral

3. Debtor in Possession (”DIP”) Financing

4. Retention Motions

5. Utilities

III. Small Business Debtor v. Non-Small Business Debtor

A small business bankruptcy case is a chapter 11 case involving a small business debtor, whom the Bankruptcy Code defines as a person engaged in commercial or business activities other than owning or operating real estate with debt no greater than (as of December 28, 2009) $2.19 million, not including debt to insiders and affiliates.

All chapter 11 debtors must attend meetings and timely file schedules and tax returns and allow the UST to inspect its books, but the 2005 amendments to the Bankruptcy Code added other obligations for the small business debtor. One theme of the small business amendments is that creditors deserve more and better information, presented in understandable and recognizable formats. Many sections of the small business amendments were framed with this goal in mind. As a result, small business debtors must file balance sheets, income statements, and cash flow statements with the petition, or state under penalty of perjury that none exist.

Small business debtors can receive only a 30 day extension of its time to file schedules and statement of financial affairs. In a small business case, the United States Trustee is required to conduct an initial interview with the small business debtor before the Section 341 meeting. Senior management and counsel are required to the initial debtor interview, as well as scheduling conferences and meetings of creditors.

IV. Leases and Executory Contracts

1. Leases

Section 365(d) (4) requires a debtor to assume or reject a lease of non-residential real property within 120 days of the petition date or the lease will be rejected. The court upon motion may extend the deadline an additional 90 days. No additional extension is permitted accept with the written approval of the landlord. The deadline may force a debtor to make premature decisions as to its future needs related to subject real estate, since, not atypically, a Chapter 11 debtor may not have its financing in place or its plan formulated (particularly if it turns on settlement of litigation) by the 210 day deadline.

In large retail cases, where there may be dozens of leases and sites to analyze, this requirement may be particularly burdensome. Leases may be rejected, assumed, or assumed and assigned, in accordance with the rules discussed below for executory contracts.

2. Executory Contracts

Section 365 of the Bankruptcy Code provides a debtor with authority to assume or reject an executory contract subject to court approval. In re Carlisle Homes, Inc., 103 B.R. 524, 534 (Bankr. D. N.J. 1988) the court explained: The purpose of § 365 is, in part, to enable the debtor to take advantage of favorable agreements that benefit the estate. The Bankruptcy Code does not define “executory contract.” The legislative history of § 365, however, is instructive as to the meaning of the term in the bankruptcy context. An executory contract is one on which performance remains due to some extent on both sides.

Upon rejection, the debtor must pay “rejection damages”, consisting of damages for breach of the contract, however, despite the fact the contract is rejected after the filing of the bankruptcy petition, the claim is as a general unsecured pre-petition claim and thus subjected to the limitations of any pro rata distributions to unsecured creditors. A debtor may also assume a favorable contract, and obligate itself to pay a “cure amount” and provide adequate assurance of future performance. Cure amounts are paid in full amount as a current obligation.

With some exceptions, a debtor may also assume and assign (i.e. sell) a favorable contract to a third party, subject to court approval. In such instances, the third party pays the cure amount and provides the adequate assurance of future performance. With both executory contracts and leases, upon assumption, the debtor is required to meet post-assumption obligations under those contracts and leases as those obligations come due.

This is a classic example of how planning ahead and in particular how you are going to finance the restructuring of your capital structure is an imperative to a successful reorganization. CIT has been working on this specific issue for months.

CIT is preparing a sweeping exchange offer that would eliminate 30% to 40% of its more than $30 billion in debt outstanding, said people familiar with the matter. The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured firm. The new debt would mature later than current debt, the impending maturity of which has posed a problem for CIT.

The plan sets up a potential showdown between bondholders with debt coming due soon and those whose debt does not come due for years. If the company doesn’t receive enough bondholder support, it plans to execute the restructuring in bankruptcy court, the people familiar with the situation said.

In a move smoothing its restructuring, the company recently said that it had persuaded billionaire investor Carl Icahn to support its prepackaged bankruptcy plan. Mr. Icahn, who wanted to push CIT into liquidation, failed to persuade other bondholders to derail CIT’s restructuring plan. Please see the link provided to the WSJ article.

One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program to help stabilize the lender, which was weighed down by billions of dollars of bad student loans and subprime mortgages. The government investment is likely to be wiped out, said people familiar with the matter. Common shares would likely drop to zero, too, these people said. To learn more, read the article by  the Wall Street Journal or read the article posted on the New York Times website.

This is not a good sign. The Sun Sentinel did not indicate whether the NexStore had filed for protection from creditors, bankruptcy, however this fact pattern is the classic pattern where bankruptcy, should be and is, a very valuable tool to assist the cash strapped business to get some relief.

To learn more about how to protect yourself from creditors and/or bankruptcy, contact me at 561-208-6383 or emailing me at info@sidneyturnerllc.com.

The debtors filed motions seeking approval to, among other things, continue using their prepetition cash management system, use the secured lenders’ cash collateral and obtain debtor-in-possession (“DIP”) financing. Prior to the filings, the SPEs and other GGP subsidiaries practice was to upstream their income to a commingled account (the “Main Operating Account”) from which the expenses of all subsidiaries were paid and intercompany loans were made. The debtors indicated that they kept track and record all upstreamed cash and intercompany loans.

Initially, the debtors proposed that a DIP loan would be made to GGP and GGP LP and guaranteed by the SPEs. Many of the SPE debtors’ secured lenders objected to the debtors’ motions. The secured lenders argued, among other things, that the debtors’ use of their cash collateral, the continuation of the cash management system and the court’s approval of the DIP loan would constitute a de facto substantive consolidation of the debtors’ estates and violate the terms of the SPE debtors’ organizational documents and/or loan documents.

The court rejected objections stating that approval of the DIP loan and the cash collateral motion did not result in a substantive consolidation of the debtors’ estates. In addition to approving the DIP loan, the court also approved the debtors’ cash collateral and cash management motions. While there are still important unresolved issues, the angst generated by the bankruptcy filings of the SPEs has abated, at least temporarily, because the court’s orders have respected the separateness of the SPEs.

A few secured lenders have moved to dismiss the cases of some of the SPEs for cause on the ground that they were filed in bad faith. The lenders argue that the loans made to these SPEs are not in default, that each property is generating cash flow that is more than sufficient to cover the debt service, property taxes and operating expenses, and that the loans will not mature for at least a year.

According to these lenders, its respective SPE debtor’s bankruptcy case was not filed for a legitimate reorganizational purpose. The motions to dismiss raise many of the same issues about the debtors’ bankruptcy-remote status. Additionally, one lender has argued that its SPE debtor’s case should be dismissed because the corporate resolutions that authorized its bankruptcy filing were ineffective under state law and the filing violated the SPE’s organizational documents. That lender is pursuing the facts relating to the formal requirements of the bankruptcy filing, including the identity of any independent directors who consented to the filing and whether they met the requirements to serve as independent directors