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Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
Chapter 11 Through the Debtor's Eyes
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Chapter 11 Through the Debtor's Eyes

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Information on dealing with a chapter 11 case through the debtor's eyes.

Information on dealing with a chapter 11 case through the debtor's eyes.

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  • 1. Chapter 11 Through the Debtor’s Eyes CMA/NACM Oregon Webinar Presentation February 19, 2009 Jonathan Friedland Levenfeld Pearlstein LLC 2 N. LaSalle Street, Suite 1300 Chicago, IL 60602 (312) 476-7528
  • 2. Chapter 11: Generally <ul><li>What is a Chapter 11 Restructuring? </li></ul><ul><ul><li>Chapter 11 is a court-supervised restructuring of a company’s business and financial obligations </li></ul></ul><ul><ul><li>Management remains in control of company </li></ul></ul><ul><ul><li>Chapter 11 is NOT the same as a liquidation </li></ul></ul><ul><ul><ul><li>Company generally continues to operate in the ordinary course of business </li></ul></ul></ul>
  • 3. Chapter 11: Generally <ul><li>What is the goal of Chapter 11? </li></ul><ul><ul><li>“ Plan of reorganization” that is: </li></ul></ul><ul><ul><ul><li>voted on certain types/classes of creditors AND </li></ul></ul></ul><ul><ul><ul><li>approved by the bankruptcy court </li></ul></ul></ul><ul><ul><li>The plan of reorganization is a “court-sanctioned contract” between the company and its creditors that governs the company’s obligations upon its “exit” from Chapter 11 </li></ul></ul>
  • 4. Chapter 11: Benefits <ul><li>What are the Benefits of Chapter 11? </li></ul><ul><ul><li>Automatic stay stops all outstanding actions from before the filing date </li></ul></ul><ul><ul><li>Enables debtor to force other parties to the negotiating table </li></ul></ul><ul><ul><li>Opportunity to restructure certain obligations in the plan of reorganization </li></ul></ul>
  • 5. Chapter 11: Responsibilities <ul><li>What are the Responsibilities of a Chapter 11 Debtor? </li></ul><ul><ul><li>Limited ability to pay debts that arose before the filing date </li></ul></ul><ul><ul><li>Elevated disclosure obligations </li></ul></ul><ul><ul><li>Certain business transactions require court approval </li></ul></ul>
  • 6. Chapter 11 Lifecycle Out of Court Restructuring Chapter 7 Liquidation Free- Fall Pre- Packaged Chapter 11 Proceeding <ul><li>Cash is king </li></ul><ul><li>Strategy </li></ul><ul><li>Slow pay/no pay </li></ul><ul><li>Credit restrictions </li></ul>Distressed Business Chapter 11 Debtor Secured Creditors Customers Shareholders Unsecured Creditors <ul><li>Ordinary course of business </li></ul><ul><li>Executory contracts/lease assumption/rejection </li></ul><ul><li>Asset sales, if applicable </li></ul><ul><li>Reporting obligations </li></ul><ul><li>Schedules/SOFAs </li></ul><ul><ul><li>Plan Formulation </li></ul></ul><ul><ul><li>Disclosure Statement </li></ul></ul><ul><ul><li>Exclusivity Periods </li></ul></ul><ul><ul><li>Solicitation </li></ul></ul><ul><ul><li>Confirmation Requirements </li></ul></ul><ul><li>Exit from chapter 11 </li></ul><ul><li>Implement Restructuring </li></ul><ul><li>Claims resolution process </li></ul><ul><li>Avoidance action/asset recoveries </li></ul>First Days of Case Business as Usual Plan Confirmation Exit and Post Confirmation Secured Creditors US Trustee Executory Contract/Lease Counter-Parties Bankruptcy Court Creditors’ Committees Pre- Arranged Employees Employees Trade Creditors Vendors Customers <ul><li>First Day Hearing </li></ul><ul><li>First Day Motions </li></ul><ul><li>Automatic Stay </li></ul><ul><li>DIP Financing </li></ul>
  • 7. Chapter 11 Timeline Emergence from Chapter 11 Filing and Stabilization Company files for reorganization under Chapter 11 Bar Date Court approves Company’s disclosure statement Creditors approve plan of reorganization Plan of reorganization is negotiated Court confirms plan of reorganization Preparation Plan Formulation and Confirmation Exit Restructuring Formulate business plan and execute restructuring transactions
  • 8. First Days of Case <ul><li>Chapter 11 Filing </li></ul><ul><ul><li>Case begins with filing of a “voluntary petition for relief” in Bankruptcy Court </li></ul></ul><ul><ul><li>Each entity in “corporate family tree” is treated separately </li></ul></ul><ul><ul><ul><li>Each may/may not file its own petition (strategy) </li></ul></ul></ul><ul><ul><ul><li>Each entity’s Chapter 11 case is treated separately, although administered together for efficiency </li></ul></ul></ul><ul><ul><li>All creditors must receive notice of commencement of case </li></ul></ul>
  • 9. First Days of Case <ul><li>Chapter 11 Filing </li></ul><ul><ul><li>Filing of petition divides time into “pre” and “post” petition </li></ul></ul><ul><ul><li>Company stays in control during Chapter 11 case </li></ul></ul><ul><ul><ul><li>Company becomes “debtor-in-possession” of its assets, or a “DIP” </li></ul></ul></ul><ul><ul><ul><li>DIP’s board and management still conduct company’s operations </li></ul></ul></ul><ul><ul><ul><li>DIP owes fiduciary duty to all constituents (creditors) </li></ul></ul></ul><ul><ul><li>Goal is a smooth transition into Chapter 11 </li></ul></ul><ul><ul><ul><li>Customers, employees, and others should see no difference in Company interaction </li></ul></ul></ul>
  • 10. Automatic Stay <ul><li>Commencement of Chapter 11 filing results in a automatic stay (worldwide court injunction) </li></ul><ul><ul><li>Stops pending lawsuits and other actions to collect prepetition debts or take control of company’s assets </li></ul></ul><ul><ul><li>Forbids creditors holding prepetition claims from taking actions outside of bankruptcy court </li></ul></ul><ul><ul><li>Courts sometimes extend the automatic stay to related non-debtors, e.g. directors and officers </li></ul></ul>
  • 11. Automatic Stay cont’d <ul><li>Exceptions to the automatic stay </li></ul><ul><ul><li>Certain government actions </li></ul></ul><ul><ul><li>Acts to collect postpetition debts </li></ul></ul><ul><ul><li>Acts to collect against non-debtor assets (e.g., 3rd party liability insurance, letters of credit, etc.) </li></ul></ul><ul><li>The “Flip Side” of the automatic stay -- the DIP cannot pay prepetition claims without court approval </li></ul>
  • 12. <ul><li>“ First Day” Hearing </li></ul><ul><ul><li>Opportunity for DIP to explain why they filed </li></ul></ul><ul><li>“ First Day” Motions </li></ul><ul><ul><li>Court will consider many first day motions to allow smooth transition into Chapter 11 </li></ul></ul><ul><ul><ul><li>Allow DIP to pay certain prepetition claims or </li></ul></ul></ul><ul><ul><ul><li>Excuse DIP from strict compliance with Bankruptcy Code </li></ul></ul></ul>First Day Hearing
  • 13. <ul><li>Integral to most large Chapter 11 cases </li></ul><ul><li>Bankruptcy Code prohibits a DIP from borrowing money outside of ordinary course of business without court approval </li></ul><ul><ul><li>DIP loan often secured by unencumbered collateral, junior liens, or in some cases “priming liens” </li></ul></ul><ul><ul><li>DIP must show that it obtained the best terms/pricing available in market </li></ul></ul>DIP Financing
  • 14. Players <ul><li>“ Players” During Postpetition Period </li></ul><ul><ul><li>Debtor in Possession </li></ul></ul><ul><ul><li>Bankruptcy Court </li></ul></ul><ul><ul><li>United States Trustee </li></ul></ul><ul><ul><li>Creditors ’ Committee (and its constituents) </li></ul></ul><ul><ul><li>Equity Committee </li></ul></ul><ul><ul><li>Unions/employees/retirees </li></ul></ul><ul><ul><li>Executory contract counterparties </li></ul></ul><ul><ul><li>Non-contractual trade vendors </li></ul></ul><ul><ul><li>Customers </li></ul></ul><ul><ul><li>Government Entities (PBGC, IRS) </li></ul></ul>
  • 15. Business As Usual <ul><li>During Chapter 11 case, DIP may transact in “ordinary course of business” without court authority or approval </li></ul><ul><li>“ Ordinary course of business” defined </li></ul><ul><ul><li>Includes all day-to-day, normal activities including </li></ul></ul><ul><ul><ul><li>New sales, procurement, pricing, customer relations </li></ul></ul></ul><ul><ul><ul><li>Performance of postpetition contractual obligations </li></ul></ul></ul><ul><ul><ul><li>Payment of postpetition payroll, taxes, permits, licenses, etc. </li></ul></ul></ul><ul><ul><ul><li>Non-executive hiring and compensation </li></ul></ul></ul><ul><ul><li>Rule of thumb -- if board must approve, it is not likely outside ordinary course of business </li></ul></ul>
  • 16. Outside the Ordinary Course <ul><li>Transactions outside of “ordinary course of business” require court approval </li></ul><ul><ul><li>Pledging assets to borrow money </li></ul></ul><ul><ul><li>Using cash collateral that was pledged prepetition </li></ul></ul><ul><ul><li>Engaging in certain extraordinary transactions like a sale of all or substantially assets </li></ul></ul><ul><ul><li>Assuming and/or rejecting executory contracts and leases </li></ul></ul><ul><ul><li>Payments to professionals (attorneys, accountants, consultants) </li></ul></ul><ul><ul><li>Payments of prepetition claims </li></ul></ul>
  • 17. Executory Contracts <ul><li>Executory contracts/unexpired leases </li></ul><ul><ul><li>Defined as those contracts where material obligations remain to be performed on BOTH sides </li></ul></ul><ul><li>Counterparty must continue to perform contractual obligations on a postpetition basis, even if DIP has not paid prepetition amounts outstanding </li></ul>
  • 18. Executory Contracts <ul><li>DIP has right to assume or reject executory contracts </li></ul><ul><ul><li>Decision subject to business judgment test </li></ul></ul><ul><ul><li>Counterparty may try to force DIP to assume or reject </li></ul></ul><ul><li>If DIP “rejects” contract </li></ul><ul><ul><li>DIP is no longer bound </li></ul></ul><ul><ul><li>Counterparty has general unsecured “rejection” claim </li></ul></ul><ul><li>If DIP “assumes” contract </li></ul><ul><ul><li>DIP is bound by contract and must continue to perform </li></ul></ul><ul><ul><li>DIP must cure any outstanding defaults (whether prepetition or postpetition) </li></ul></ul><ul><ul><li>Adequate assurance of future performance </li></ul></ul><ul><ul><li>Breach of assumed contract results in admin claim </li></ul></ul>
  • 19. Special Executory Contracts <ul><li>Personal Property Leases -- Section 365(d)(5) </li></ul><ul><ul><li>DIP must timely perform after day 60 </li></ul></ul><ul><li>Commercial Real Property Leases -- Section 365(d)(4) </li></ul><ul><ul><li>DIP must decide to assume/reject within first 120 days (court can extend for 90 more days, but no longer) </li></ul></ul><ul><ul><li>Counterparty can agree to extension </li></ul></ul><ul><ul><li>Assumption liability limited to two years under 503(b)(7), if later rejected </li></ul></ul>
  • 20. Vendor Demands <ul><li>Vendors will try to extract better terms (CIA, COD, etc.) or demand payment of prepetition invoices </li></ul><ul><ul><li>However, if vendors are subject to a contract, must continue to perform </li></ul></ul><ul><ul><li>Pure purchase order vendors have leverage </li></ul></ul><ul><ul><ul><li>Company can rely on “ essential trade ” basket </li></ul></ul></ul><ul><ul><li>Reclamation claims and 503(b)(9) claims </li></ul></ul>
  • 21. Disclosure Obligations <ul><li>Schedules and Statements of Financial Affairs </li></ul><ul><ul><li>Due 15 days after the petition date </li></ul></ul><ul><ul><li>Courts generally grants 30-60 day extensions </li></ul></ul><ul><ul><li>Require historical information about each filing entity </li></ul></ul><ul><ul><li>Each filing entity must file schedules of each asset, liability, secured creditor, unsecured creditor, executory contract and unexpired lease, etc. </li></ul></ul><ul><ul><li>Each filing entity must file statement of financial affairs (listing, among other things, all disbursements within 90 days before petition date). </li></ul></ul>
  • 22. Disclosure Obligations <ul><li>Monthly Operating Reports </li></ul><ul><ul><li>Required reports for each month from Petition Date to exit from Chapter 11 </li></ul></ul><ul><li>Section 341 Meeting of Creditors </li></ul><ul><ul><li>Opportunity for U.S. Trustee and creditors to “depose” DIP’s representative regarding assets and reasons for filing for Chapter 11 </li></ul></ul><ul><li>Creditors’ Committee Inquiries </li></ul><ul><ul><li>DIP must be responsive to requests </li></ul></ul>
  • 23. Claims Resolution <ul><li>Court sets “bar date” - deadline for creditors to file claims </li></ul><ul><li>After the bar date, DIP begins omnibus claims objection process </li></ul><ul><li>Establishes classes for plan of reorganization </li></ul><ul><li>Resolution/estimation of claims usually needed to ensure sufficient “float” for stock exchange re-listing </li></ul><ul><li>Lengthy process </li></ul><ul><ul><li>Many claims not resolved until after exit </li></ul></ul>
  • 24. Plan Process <ul><li>Plan of Reorganization </li></ul><ul><ul><li>Goal of every Chapter 11 case </li></ul></ul><ul><ul><li>Is a court-imposed contract between the DIP and its creditors </li></ul></ul><ul><ul><li>Establishes the terms of company’s restructuring and treatment of all classes of creditors </li></ul></ul>
  • 25. Plan Components <ul><li>Exit financing </li></ul><ul><li>Corporate issues </li></ul><ul><ul><li>Cancellation of old securities </li></ul></ul><ul><ul><li>Issuance of new securities </li></ul></ul><ul><ul><li>Re-listing of stock on national exchange </li></ul></ul><ul><ul><li>Amended/reinstated corporate charter and bylaws </li></ul></ul><ul><ul><li>Restructuring transactions/elimination of shells </li></ul></ul><ul><ul><li>Corporate governance and Board/management composition </li></ul></ul><ul><li>Creditor settlements </li></ul><ul><li>Tax restrictions to preserve NOLs </li></ul><ul><li>Discharge, release, exculpation, and indemnification </li></ul>
  • 26. Disclosure Statement <ul><li>Like a prospectus, Disclosure Statement provides adequate information for reasonable investor to make informed judgment about plan </li></ul><ul><li>Disclosure Statement typically includes: </li></ul><ul><ul><ul><li>Plan summary </li></ul></ul></ul><ul><ul><ul><li>Claims classification/distribution mechanics </li></ul></ul></ul><ul><ul><ul><li>Restructuring transactions </li></ul></ul></ul><ul><ul><ul><li>Liquidation and valuation analyses </li></ul></ul></ul><ul><ul><ul><li>Financial projections </li></ul></ul></ul>
  • 27. Solicitation <ul><li>Once plan is formulated and disclosure statement is approved </li></ul><ul><ul><li>DIP solicits acceptances of all creditors whose claims are “impaired” </li></ul></ul><ul><ul><li>Creditors submit ballots with their votes </li></ul></ul><ul><ul><li>If certain voting thresholds are met, then the DIP will request that the court “confirm” the plan at confirmation hearing </li></ul></ul>
  • 28. Plan Confirmation <ul><li>To be confirmed, plan must comply with Bankruptcy Code: </li></ul><ul><ul><li>Provide creditors with recovery they would receive if the DIP was liquidated -- “best interests” test </li></ul></ul><ul><ul><li>Not be likely to be followed by additional reorganization or liquidation -- feasibility </li></ul></ul><ul><ul><li>Good faith </li></ul></ul><ul><ul><li>Disclosure of officers and directors </li></ul></ul><ul><ul><li>Other administrative requirements </li></ul></ul>
  • 29. Cram Down <ul><li>If impaired class does not accept plan, it can still be “crammed down” if: </li></ul><ul><ul><li>Plan does not “unfairly discriminate” </li></ul></ul><ul><ul><ul><li>Creditors with similar legal rights should not receive materially different treatment under plan without a compelling justification </li></ul></ul></ul><ul><ul><li>Plan is “fair and equitable” </li></ul></ul><ul><ul><ul><li>No junior class receives anything on account of its claims before superior class is paid in full </li></ul></ul></ul>
  • 30. Plan Payouts <ul><li>DIP Lenders - normally paid in full with proceeds from the exit facility </li></ul><ul><li>Secured Claims – normally paid in full, reinstated, receive their collateral or otherwise unimpaired </li></ul><ul><li>Administrative Claims (normally paid in full) </li></ul><ul><li>Priority Tax Claims – normally income taxes for 3 years prepetition can be paid over six years </li></ul><ul><li>Priority non-tax wage claims, including employee benefit claims, etc. </li></ul><ul><li>General Unsecured Claims </li></ul><ul><li>Shareholders/Equity </li></ul>
  • 31. Exit <ul><li>Company “exits” from Chapter 11 </li></ul><ul><ul><li>At least 10 days after confirmation order to let appeal period run </li></ul></ul><ul><ul><li>DIP’s assets vest in the reorganized company free and clear of all claims (except as provided in plan) </li></ul></ul><ul><ul><li>Company is “discharged” from all prepetition debts (except as provided in plan) </li></ul></ul><ul><ul><li>Automatic stay terminates </li></ul></ul><ul><ul><li>Debt converts to equity </li></ul></ul><ul><ul><li>Equity canceled or diluted </li></ul></ul><ul><ul><li>Exit financing replaces DIP financing </li></ul></ul><ul><ul><li>Company distributes new securities and is re-listed </li></ul></ul>

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