Orange County Chapter 11 Business Bankruptcy Lawyer

Choosing Your Chapter 11 Business Bankruptcy Team

Selecting the lawyers, accountants, and perhaps financial advisers to assist with efforts to work out debt or reorganize a small business in bankruptcy is one of the most significant business decisions you will make. Your professionals should become familiar with your business, its assets, liabilities, past and future cash flows, business and financial challenges, opportunities, and value. If the case is not being filed at the last minute to avoid a foreclosure or other business-ending event, the direction of the case should be understood before it is filed, and preparations to finance the case, negotiate with creditors, and file a Chapter 11 plan of reorganization should already have begun.

What steps should I take immediately after I file?

Certain steps should be taken as soon as the case is filed to stabilize the debtor’s business, and depending on the nature and size of the business, include:

• Interim Bankruptcy Court approval for post-petition financing and/or the use of the proceeds of prepetition lenders’ collateral (known as “cash collateral”);
• The uninterrupted payment of employees and employee benefits;
• Providing for bankruptcy utility deposits;
• Maintaining some or all of the debtor’s pre-petition financial management arrangements (e.g., the continued use of payroll processing firms and the associated debtor deposit and sweep accounts);
• Possible store closures and going out of business sales; and
• Payment of critical vendors for pre-petition obligations (an otherwise prohibited practice), etc.

Bankruptcy Court approval is required for the employment of the debtor’s professionals, and those applications and disclosures (to show the absence of disqualifying conflicts) should be filed immediately after the commencement of the case.

The Initial Debtor Interview & Meeting of the Creditors

Shortly after filing, the U.S. Trustee will schedule an initial debtor interview (“IDI”) to acclimate the debtor to its new responsibilities as a debtor in possession (or “DIP”). The debtor becomes subject to oversight by the Bankruptcy Court, the U.S. Trustee, the trustee in a case under the Small Business Reorganization Act (“SBRA”), and creditors. Within a few weeks, the IDI is be followed by the first meeting of creditors (the “341(a) meeting”) at which the U.S. Trustee will interrogate the debtor’s management about where the debtor’s business has been and where management sees it going after Chapter 11. Adequate preparation for the 341 meeting is essential.

The Automatic Stay

Chapter 11 debtors, as long as they abide by the rules governing the process, remain in possession of the property and continue to operate their business after filing for Chapter 11 relief. (Contrast this with a business in Chapter 7, which must cease operations immediately upon filing, unless the interim Chapter 7 trustee seeks and obtains an operating order from the Bankruptcy Court – an exceedingly rare situation.) As soon as the case is filed, the automatic stay of Bankruptcy Code § 362(a) prevents the commencement or continuation of a host of creditor collection and lien enforcement actions. The steps required to maintain the automatic stay in place and to prevent the loss of critical assets can depend on the kind of Chapter 11 case that is filed, and the risks that maintaining the case and the stay in place presents, e.g., to the collateral of secured creditors.

The Chapter 11 Reorganization Plan

The goal of the Chapter 11 debtor in possession is to obtain Bankruptcy Court confirmation of a plan of reorganization, a document that proposes to restructure debts and permit the debtor to emerge from bankruptcy. Generally speaking, a confirmed plan substitutes the debtor’s obligations to each class of creditors in the plan (as they existed when the case was filed) for obligations to that class as per the plan. The old pre-bankruptcy debts are discharged, either when the plan is confirmed or when a stream of payments called for under the plan is completed.

The Bankruptcy Court will ordinarily enter a case scheduling order based on routine timelines formulated by the U.S. Trustee, for the filing of a disclosure statement to accompany the reorganization plan, for the hearing on approval of the disclosure statement, and for the hearing on confirmation of the plan. The Bankruptcy Court may permit the debtor to combine the disclosure statement with the plan in less complicated cases, in order to save time and expense.

The disclosure statement is required to contain “adequate information” for a creditor to make an informed decision about whether to accept or reject the plan. The debtor will initially have the exclusive right to file and solicit approvals of its plan, and that exclusivity may be extended by the Bankruptcy Court for cause shown. If and when exclusivity expires, any party in interest may file a plan.

Chapter 11 Business Bankruptcy for Single Asset Real Estate Owners

The Bankruptcy Code separately classifies Chapter 11 cases where the debtor’s business consists primarily of the ownership and operation of a single real estate asset, such as an apartment complex, an office building, or a development parcel. The automatic stay in such cases will automatically be lifted unless the debtor begins making adequate protection payments to the secured creditor(s), or files a plan and disclosure statement, within 90 days of the commencement of the case.

Property Value & Adequate Protection

Real estate values are often contested in Chapter 11. Whether the value figure comes in high or low has implications for the handling of the debtor’s case and the payments required in and after bankruptcy.

Secured creditors are entitled to what is known as adequate protection of their liens. If a secured creditor’s collateral value exceeds the creditor’s claim (if the creditor is ‘oversecured’) as of the date the case was filed (the “petition date”), the adequate protection owed to the creditor includes interest on its claim and attorneys’ fees and expenses (both before and after the petition date). If a creditor’s claim exceeds the value of its collateral (i.e., its claim is undersecured), it is entitled to interest and attorneys’ fees on its claim before the petition date but not after the petition date through the confirmation of a plan.

The Absolute Priority Rule & New Value Exception

The absolute priority rule provides that equity cannot receive or retain anything of value under a Chapter 11 plan (other than in an SBRA case and to a much more limited extent in an individual Chapter 11 case) if senior classes of claims are not paid in full. In the typical single asset real estate case, in the absence of an exception to the absolute priority rule, the debtor will not be able to confirm a plan over the objection of the undersecured (mortgage) creditor, wearing its unsecured creditor hat.

The debtor can overcome the undersecured creditor’s objection through the use of an exception to the absolute priority rule, known as the “new value” exception. Generally speaking, to accomplish this the debtor’s ownership interest must be valued in some fashion acceptable to the Bankruptcy Court, and the debtor must contribute value equivalent to the value of its ownership interest (equity) from non-estate assets, and such new value infusion must be necessary to the success of the plan. That may include funds obtained from a new loan. A single-asset real estate debtor dealing with an undersecured creditor with whom a consensual plan cannot be reached will need exit financing of some kind to confirm.

Sub Chapter V Chapter 11 Cases

The Small Business Reorganization Act, SubChapter V of Chapter 11 of the Bankruptcy Code, went into effect in February 2020. This new small business Chapter offers new promise to debtors in business the sum of whose non-contingent, liquidated secured and unsecured debts does not exceed $2,725,625. Bankruptcy Code § 101(51)(D).

What makes the SBRA different?

Perhaps the most important changes to Chapter 11 under the SBRA are (i) the elimination of the requirement to obtain at least one impaired consenting class of claims in order to proceed to cramdown when not all classes of claims consent to their treatment under the plan; and (ii) the elimination of the absolute priority rule. In cases brought by Main Street small businesses under the SBRA, unsecured or undersecured creditors no longer have the leverage to prevent the confirmation of a plan through those restrictions on confirmation in other kinds of Chapter 11 cases.

Mortgage Modification Under SBRA

Another major improvement under the SBRA is the debtor’s ability in some cases to modify a mortgage that encumbers only the debtor’s primary residence, such as an SBA second mortgage on the debtor’s home, securing an SBA loan guaranty required from the debtor’s principal. If a loan that encumbers only the debtor’s primary residence was not used primarily to acquire the real property and the proceeds were used primarily in connection with the debtor’s small business, the debtor can modify the mortgage. That is not the case either in an individual Chapter 11 case outside of the SBRA, or in a consumer or business Chapter 13 case.

Consensual Vs. Non-Consensual SBRA Plans

If the debtor in a SubChapter V Small Business Reorganization Act case is unable to negotiate a consensual plan with its creditors, the debtor’s plan must provide that all of the debtor’s projected disposable income be committed to funding plan obligations for a period of between 3 and 5 years. That requirement does not apply to consensual plans. In some cases, this will be a meaningful difference in the allocation of cash flow. In others, all projected disposable income will be required to fund the debtor’s plan anyway.

Also unlike cases in Chapter 11 generally, fees will not be payable to the U.S. Trustee based on the total of a debtor’s disbursements during a given calendar quarter. Instead, the SubChapter V trustee will be entitled to compensation from the debtor under a confirmed plan. It remains to be seen whether this shift in oversight expenses will be a benefit or a burden for qualifying small business debtors. It is expected that these cases will proceed to confirmation more quickly and with less cost than is the case with other types of Chapter 11 business bankruptcy cases.

Contact a Newburgh Chapter 11 Business Bankruptcy Lawyer

No matter what type of Hudson Valley small business you are, the Law Office of Michael D. Pinsky, P.C. is here to help answer any questions you may have regarding Chapter 11 business bankruptcy. All of this may feel overwhelming, but our firm is prepared to guide you forward and lend a helping hand no matter how complex your situation. To learn more about our Orange County Chapter 11 bankruptcy services, contact the Law Offices of Michael D. Pinsky, P.C. today.