Information On Chapter 11 Bankruptcy

Reorganization Under The Bankruptcy Code

A case filed under Chapter 11 of the Bankruptcy Code is often referred to as a bankruptcy "reorganization." Chapter 11 is generally used to reorganize a business but may also be used for individuals. Chapter 11 allows the debtor to continue business operations by way of a plan of reorganization, which must meet certain statutory criteria. 11 U.S.C. § 1129. Congress, through the enactment of Chapter 11, gave the debtor a chance to restructure its finances in order to continue to operate, pay creditors, produce a return for stockholders and provide the employees with jobs. Business reorganization is based on the rationale that the value of a business as an ongoing operation is greater than it would be if the assets were sold. Generally, it is more economically efficient to reorganize, rather than liquidate because reorganization allows jobs and assets to be preserved. Businesses may consider filing a Chapter 11 bankruptcy upon financial difficulties such as cash flow problems. A Chapter 11 bankruptcy may allow the business to extend or reduce its debts or drastically lower operating costs, allowing the business to return to a viable state.

How Chapter 11 Works

Bankruptcy is commenced by the filing of a bankruptcy petition. Fed.R.Bankr.P. 1002. A petition may be a voluntary petition filed by the debtor or it may be an involuntary petition filed by the creditors that meet certain requirements. 11 U.S.C. §§ 301, 303. The voluntary petition will contain standard information such as: debtor's name, tax identification number, residence, location of principal assets (if a business), and a request for relief under the appropriate chapter of the Bankruptcy Code. The voluntary petition will also indicate whether the debtor qualifies as a small business under 11 U.S.C. § 101 (51C) and whether the debtor elects to be considered a small business under 11 U.S.C. §1121(e). The debtor automatically assumes an additional identity as the "debtor in possession" upon the filing of a petition, whether voluntary or involuntary. 11 U.S.C. § 1101. The term refers to a debtor who keeps possession and control of assets while reorganizing under Chapter 11, without the appointment of a trustee and prior to confirmation of a Chapter 11 plan. In a small number of cases there will be an election of a trustee. Normally, the debtor continues to operate the business and performs many of the functions that a trustee performs in other bankruptcy chapters. 11 U.S.C. § 1107(a).

A written disclosure statement and a plan of reorganization must be filed with the court. 11 U.S.C. § 1121. The disclosure statement must contain information concerning the assets, liabilities, and affairs of the debtor sufficient to enable a creditor to make an informed judgment about the plan. 11 U.S.C. § 1125. Judicial discretion and the circumstances of each case govern the information required. The plan must include a classification of claims and must specify how each class of claims will be treated under the plan. The plan may be voted upon by those creditors whose contractual rights are to be modified or who will be paid less than the full value of their claims under the plan. 11 U.S.C. § 1126. A confirmation hearing, at which the court will determine whether to confirm the plan, must be held after the disclosure statement is approved and the ballots are collected and tallied. 11 U.S.C. § 1128.

The Chapter 11 Debtor In Possession

Chapter 11 is more typically used to reorganize a business, which may be a corporation, limited liability company, sole proprietorship or partnership. A corporation exists as a separate entity from the owners. A stockholder, member, or limited liability company is liable only for the amount of their investment and therefore a Chapter 11 bankruptcy does not put the personal assets of the stockholder or member at risk. A sole proprietorship does not have a separate existence from its owner(s) and a bankruptcy case of a sole proprietorship includes both the business and personal estates of the owners-debtors. A partnership exists separate and apart from its partners but the partners' personal assets may be used to pay creditors in the bankruptcy or the partners may be forced to file for bankruptcy protection.

Section 1107 of the Code places the debtor in possession in the position of a fiduciary, with the rights and powers of a Chapter 11 trustee, and requires the performance of all but the investigative functions and duties of a trustee. These duties are set forth in the Bankruptcy Code and Federal Rules of Bankruptcy Procedure and include examining and objecting to claims, accounting for property, and filing informational reports as required by the court and the United States trustee, referred to as monthly operating reports. 11 U.S.C. § 1106, 1107; Fed. R. Bankr. P. 2015(a). The debtor in possession also has many of the other powers and duties of a trustee including the right to employ attorneys, appraisers, accountants, auctioneers or other professional persons. The debtor in possession also has other responsibilities including filing tax returns and filing such reports as are necessary or as the court orders after confirmation, such as a final accounting. The United States trustee is responsible for monitoring the compliance of the debtor in possession as it pertains to the reporting requirements.

Chapter 11 contains specific requirements for railroad reorganizations under subsection IV. Also, stock and commodity brokers are restricted to filing under Chapter 7. 11 U.S.C. § 109(d).

The Small-Business Debtor

The Small Business Debtor is defined in the Bankruptcy Code as a person engaged in commercial or business activities (not including a person who owns and operates real property) that has aggregate noncontingent liquidated secured and unsecured debts that do not exceed $2,190,000.00. 11 U.S.C. § 101(51C). If a debtor qualifies and chooses to be considered a small business under 11 U.S.C. § 1121(e), the case is put on a "fast track" and treated differently than a regular Chapter 11 case under the Code. In a small business debtor bankruptcy a creditor's committee and separate hearing to approve the disclosure statement are not mandatory. The court may order that a creditor's committee not be appointed on request of a party in interest. 11 U.S.C. § 1102(a)(3). A disclosure statement may be conditionally approved, subject to final approval after notice and a hearing. Solicitation of votes for acceptance or rejection of the plan may proceed based on the conditional approval of the disclosure statement. Thereafter, the disclosure statement may be combined with the confirmation hearing. 11 U.S.C. § 1125(f). The debtor has a shorted period of time, (100 days from the date of the order for relief) within which only the debtor may file a plan. Any party in interest may file a plan after the 100 day period expires. There is a 160 day period in which all plans must be filed. 11 U.S.C. § 1121(e).

The Single-Asset Real Estate Debtor

A single asset real estate debtor is another type of debtor that has special provisions under the Bankruptcy Code. Single asset real estate is defined as a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor and on which no substantial business is being conducted by a debtor other than operating the real property. 11 U.S.C. § 101 (51B). The Code provides circumstances under which creditors of a single asset real estate debtor may obtain relief from the automatic stay. 11 U.S.C. § 362(d). On request of a creditor with a claim secured by the real estate and after notice and a hearing, the court will grant relief from the automatic stay to the creditor, within 90 days from the date of the order for relief, unless the debtor files a feasible plan of reorganization or begins making payments to the creditor. The payments must be equal to the current fair market interest rate on the value of the creditor's interest in the real estate. 11 U.S.C. § 362(d)(3).

The Automatic Stay

The automatic stay provides for a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued on any debt or claim that arose before the filing of the bankruptcy petition. As with cases under other chapters of the Bankruptcy Code, a stay of creditor actions against the debtor automatically goes into effect when the bankruptcy petition is filed. 11 U.S.C. § 362(a). The filing of a petition, however, does not operate as a stay for certain types of action listed under 11 U.S.C. § 362(b) such as criminal prosecution or other governmental intervention. The stay provides a period during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation.

Under certain circumstances, such as when the debtor has no equity in the particular property and that property is not necessary for an effective reorganization, the secured creditor can obtain an order from the court granting relief from the automatic stay to foreclose on the property, sell it and apply the proceeds to the debt. 11 U.S.C. § 362(d). A secured creditor is one which has a lien against or interest in certain property of the debtor to secure payment of a debt or performance of an obligation. See 11 U.S.C. § 101(37).

Creditors are stayed from action against the debtor unless relief is granted by the court. § 331 of the Code permits applications for fees to be made by certain professionals during the case. This means that a debtor's attorney, trustee or any professional person may apply to the court at intervals of 120 days for interim compensation and reimbursement of costs incurred. If the case is very large and requires extensive legal work, the court may permit more frequent applications. Although professional fees may be paid pursuant to authorization by the court, the debtor cannot make payments to creditors on obligations that arose before the filing of the bankruptcy petition. However, the ongoing ordinary expenses of the business must continue to be paid.

Creditors Committees

In a Chapter 11 case, the creditors' committees can play a major role, acting as a safeguard to the proper management of the business by the debtor in possession. The United States trustee, who is a federal employee to be distinguished from a private trustee or panel trustee, appoints the creditor's committee. The committee ordinarily consists of those creditors willing to serve on the committee who hold the seven largest unsecured claims against the debtor. 11 U.S.C. § 1102. Unsecured claims are those claims that are not secured by a lien against the property of the debtor. The creditor's committee may consult the debtor in possession on the administration of the case, investigate the conduct of the debtor and the operation of the business, and participate in the formulation of a plan. 11 U.S.C. § 1103.

Time Limits And Who Can File A Plan

There is no specific statutory time limit set for the filing of a plan. The debtor has a 120-day period during which it has an exclusive right to file a plan (unless it is a small business debtor). 11 U.S.C. § 1121(b). The debtor's exclusive period in which to file a plan may be extended or reduced by the court. After the exclusive period has expired, a creditor, the creditors committee, or the trustee, if one was appointed, may file a competing plan. The United States Trustee may not file a plan. 11 U.S.C. § 307.

A Chapter 11 case may continue for many years unless a party in interest (the court, U.S. trustee, committee...) acts to ensure its timely resolution. The debtor has an incentive to file a plan within the exclusivity period, though the creditors have the right to file competing plans. Creditor's rights act as a check on excessive delay in the bankruptcy.

Avoidable Transfers

The debtor in possession, or the trustee, has an "avoiding power." These powers may be used to undo a transfer of property or money made during a certain period of time prior to the filing of the bankruptcy petition. By invoking the power and avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return of the payments or property which then are available to pay all creditors rather than only one or otherwise be used in its efforts to reorganize. The power to avoid transfers is generally effective against transfers made 90 days prior to the filing of the petition. Transfers made to insiders (relatives, general partners, and directors or officers of the debtor) made up to a year prior to filing can be undone. 11 U.S.C. §§ 101(31), 101(54), 547, 548. Additionally, under 11 U.S.C. § 544, the trustee is given the authority to avoid transfers under applicable state law, which often provides for longer time periods.

Cash Collateral, Adequate Protection And Operating Capital

The heart of a Chapter 11 case centers around the preparation, confirmation and implementation of a plan of reorganization. There are other issues that may arise and be addressed by the debtor in possession. The debtor in possession may use, sell, or lease property of the estate in the ordinary course of its business, without prior approval, unless the court orders otherwise. 11 U.S.C. § 363(c). If the sale or use is outside the ordinary course of business, permission from the court is required. A debtor in possession may not use cash collateral i.e., collection of accounts subject to security interests or proceeds from the sale of pledged inventory or equipment, without the consent of the secured party or authorization by the court which must first examine whether the interest of the secured party is adequately protected. 11 U.S.C. § 363.

When cash collateral is used, either in the ordinary course of business or outside of it, the secured creditors receive additional protection under § 363 of the Bankruptcy Code. Cash collateral is defined as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest. 11 U.S.C. § 363. Cash collateral includes the proceeds, products, offspring, rents or profits or property and the fees, charges, accounts or payments for the public facilities in hotels, motels or other lodging properties subject to a creditor's security interest. A motion requesting an order from the court authorizing the use of the cash collateral must be filed by the debtor in possession. After notice of the hearing, the debtor in possession must segregate and account for cash collateral pending consent of the secured creditor or court authorization. 11 U.S.C. § 363(c)(4). A party with an interest in property being used by the debtor may request that the court prohibit or condition this use to the extent necessary to provide adequate protection to the creditor.

Adequate protection may be necessary to protect the value of the creditor's interest in the property being used by the debtor in possession. The adequate protection is especially important when there is a decrease in the value of the property. The debtor may make periodic or lump sum cash payments, or provide an additional or replacement lien that will result in the creditor's property interest being adequately protected. 11 U.S.C. § 361.

A court-approved "superpriority" may be given to a lender, if and when the debtor in possession needs operating capital. The "superpriority" will give the lender priority over other unsecured creditors or a lien on property of the estate. 11 U.S.C. § 364.

Appointment Or Election Of A Trustee

The appointment of a trustee is a rarity in Chapter 11. A party in interest or the United States trustee can request the appointment of a case trustee or examiner at any time prior to confirmation. The court shall order the appointment of a case trustee for cause, including incompetence, gross mismanagement, fraud, or dishonesty or if such appointment is in the interest of the creditors, any equity holders and other interests of the estate, on a motion from the United State trustee or a party in interest. 11 U.S.C. § 1104(a). The trustee is appointed by the United States trustee, after consultation with parties in interest and subject to the court's approval. Fed.R.Bankr.P.2007.1.

In Chapter 11 cases, the trustee is generally a private individual. The United States Trustee is responsible for monitoring all Chapter 11 cases and has standing to appear and be heard on any issue in any case, but may not file a plan. See 11 U.S.C. § 307. The trustee is responsible for management of the property on the estate, operation of the debtor's business, operation of the debtor's business and if appropriate, the filing of a plan of reorganization. The trustee is required to file a plan "as soon as practicable" or, alternatively, to file a report explaining why a plan will not be filed or to recommend that the case be converted to Chapter 7 or dismissed. 11 U.S.C. § 1106(a)(5).

The court, after notice and hearing, may, at any time before confirmation, upon the request of a party in interest or the United States trustee, terminate the trustee's appointment and restore the debtor to possession and management of the property of the estate and the operation of the debtor's business. 11 U.S.C. § 1105.

The Role Of An Examiner

The appointment of an examiner in a Chapter 11 case happens rarely. The role of the examiner is generally more limited than that of a trustee. The examiner is authorized to perform the investigatory functions of the trustee and is required to file a statement of any investigation to be conducted. An examiner may carry out other duties of a trustee that the court orders the debtor in possession not to perform. 11 U.S.C. § 1106. The individual court has the authority to determine the duties of an examiner in each particular case. In some cases, the examiner may file a plan of reorganization, negotiate or help the parties negotiate, or review the debtor's schedules to determine whether some of the claims are improperly listed as disputed, contingent or unliquidated, or whether other claims should be listed as such. Sometimes, the examiner may be directed to determine if objections to any proofs of claim should be filed or whether causes of action have sufficient merit so that further action should be taken. The examiner in a case may not serve as a trustee. 11 U.S.C. § 321.

The United States Trustee Or Bankruptcy Administrator

The United States trustee plays a major role in monitoring the progress of a Chapter 11 case and overseeing its administration. The United States trustee is responsible for monitoring the debtor in possession's operation of the business, creditor's committees, plans and disclosure statements, and applications for compensation and reimbursement. The United States trustee conducts a meeting of the creditors, called a 341 meeting, in a Chapter 11 case. 11 U.S.C. § 341. The U.S. Trustee may question the debtor under oath at the 341 meeting concerning the debtor's conduct, property, administration of the case and acts.

The United States trustee imposes requirements on the debtor in possession concerning matters such as the payment of current employee withholding and other taxes, the reporting of its monthly income and operating expenses, and the establishment of bank accounts. By law, the debtor in possession must pay a quarterly fee to the United States trustee for each quarter of a year until a plan is confirmed or the case is converted or dismissed. 28 U.S.C. § 1903(a)(6). The fee may vary from $250-$5000, depending upon the amount of disbursements during each quarter. If a debtor in possession fails to comply with the reporting requirements of the US trustee, fails to take the appropriate steps to bring the case to confirmation or fail to comply with the orders of the bankruptcy court, the United States trustee may file a motion with the court to have the Chapter 11 case converted to a Chapter 7 or to have the case dismissed.

Motions

Prior to confirmation of a plan several things may occur. The continued operation of the debtor's business may lead to the filing of a number of strongly-contested motions, seeking the use of cash collateral, to obtain credit, or seeking relief from the automatic stay. Litigation over executory (unfilled) contracts and unexpired leases and the assumption or rejection of those executory contracts and unexpired leases by the debtor in possession may also occur. 11 U.S.C. § 365. Delays in formulating, filing, and obtaining confirmation of a plan often cause creditors to file motions for relief from stay or motions to convert the case to a Chapter 7 or dismiss the case altogether.

Adversary Proceedings

The debtor in possession will frequently institute an adversary proceeding (a lawsuit). An adversary proceeding seeks to recover money or property for the estate. The adversary proceedings may be actions to avoid preferences, actions to avoid post petition transfers, actions to avoid fraudulent transfers or lien avoidance actions. These proceedings may be filed by creditors to determine the dischargeability of a debt, to obtain an injunction, to subordinate a claim of another creditor, to revoke an order confirming a plan, or to determine the validity or priority of a lien. Creditor's committees will be allowed to file an adversary proceeding if the plan allows for it or if the debtor has refused a demand to do so.

Claims

A claim is a right to payment or a right to an equitable remedy for a failure to perform, if the breach gives rise to a right to payment. 11 U.S.C. § 101(5). In some instances, proof of claim must be filed by the creditors. In that case, the creditors must file the proofs of claim with the bankruptcy clerk in the district where the case is pending. The proof of claim must be filed on a proof of claim form evidencing the validity and amount of the claim. The clerk must keep a list of claims filed in a case when it appears that there will be a distribution to unsecured creditors. Fed. R. Bankr. P. 5003(b). Most creditors whose claims are scheduled (ie, claims listed by the debtor on the debtor's schedules), but not listed as disputed, contingent, or unliquidated, need not file claims because the schedule of liabilities is deemed to constitute evidence of the validity and amount of those claims. 11 U.S.C. § 1111. Any creditor whose claim is not scheduled or is scheduled as disputed, contingent or unliquidated must file a proof of claim in order to be treated as a creditor for purposes of voting on the plan and distribution under it. Fed. R. Bankr. P. 3003(c)(2). If a scheduled creditor chooses to file a claim, a properly filed proof of claim supersedes any scheduling of that claim. Fed. R. Bankr. P. 3003 (c)(4). The creditor must determine whether or not the amount scheduled is an accurate representation. Notification by the debtor is required for those creditors whose names are added and whose claims are listed as a result of an amendment to the schedules. The notification should include a statement to the creditors of their right to file proofs of claim and that their failure to do so may preclude them from voting upon the debtor's plan of reorganization or participating in any distribution under that plan. When a debtor amends the schedules of liabilities to add a creditor or change the status of any claims to disputed, contingent, or unliquidated claims, the debtor must provide notice of the amendment to any entity affected. Fed. R. Bankr.P. 1009(a).

Equity Security Holders

Examples of an equity security are listed in 11 U.S.C. §§ 101 (16) & (17) and include a share in a corporation, an interest of a limited partner in a limited partnership, or a right to purchase, sell or subscribe to a share, security or interest of a share in a corporation or an interest in a limited partnership. An equity security holder may vote on the plan of reorganization and may file a proof of interest, rather than a proof of claim. A proof of interest is deemed filed for any interest that appears in the debtor's schedules, unless it is scheduled as unliquidated, contingent or disputed. 11 U.S.C. § 1111. An equity security holder whose interest is not scheduled or is scheduled as unliquidated, contingent or disputed must file a proof of interest in order to be treated as a creditor for purposes of voting on the plan and distribution under it. Fed.R.Bankr.P. 3003(c)(2). A properly filed proof of interest supersedes any scheduling of that interest. Fed.R.Bankr.P. 3003(c)(4). Generally, most of the provisions that apply to proofs of claim, as discussed above, are also applicable to proofs of interest.

Conversion Or Dismissal

Under Chapter 11, a debtor has a one-time absolute right to convert from a Chapter 11 to a Chapter 7 unless (1) the debtor is not a debtor in possession, (2) the case originally commenced as an involuntary case under Chapter 11, or (3) the case was converted to a case under Chapter 11 other than at the debtor's request. 11 U.S.C. § 1112(a). A debtor in a Chapter 11 case does not have an absolute right to have the case dismissed. Upon request of a party in interest or the United States trustee, after notice and hearing and "for cause," the court may convert a Chapter 11 case to a case under Chapter 7 or dismiss the case, whichever is in the best interest of creditors of the estate. 11 U.S.C. § 1112(b). When there is a continuing loss to the estate, an inability to effectuate a plan, unreasonable delay that is prejudicial to creditors, denial or revocation of confirmation, or inability to consummate a confirmed plan the Court may convert or dismiss a case for cause. Important exceptions to the conversion process in a Chapter 11 case exist such as, unless the debtor requests the conversion, § 1112(C) of the Code prohibits the court from converting a case involving a farmer or charitable institution to a liquidation case under Chapter 7.

Disclosure Statement

A disclosure statement must be filed before the voting on a plan of reorganization and must provide "adequate information" concerning the affairs of the debtor to enable the holder of a claim or interest to make an informed judgment about the plan. 11 U.S.C. § 1125. After filing the statement, the court must hold a hearing to determine whether approval should be granted. Acceptance or rejection of a plan cannot be solicited without prior court approval of the written disclosure statement. 11 U.S.C. § 1125(b). Once the disclosure statement has been approved, the debtor can begin to solicit acceptances of the plan, and creditors may also solicit rejections of the plan. Fed.R.Bankr.P.. 3017(d) requires that the following must be mailed to the United States trustee and all creditors and equity security holders, unless the court orders otherwise with respect to unimpaired classes:

1) the plan, or a court approved summary of the plan;

2) the disclosure statement approved by the court;

3) notice of the time within which acceptance and rejections of the plan may be filed; and

4) such other information as the court may direct, including the opinion of the court approving the disclosure statement or a court-approved Summary of the opinion. Fed.R.Bankr.P. 3017(d).

Additionally, the debtor must mail to the creditors and equity security holders entitled to vote on the plan or plans:

1) notice of the time fixed for filing objections;

2) notice of the date and time for the hearing on confirmation of the plan; and

3) a ballot for accepting or rejecting the plan and, if appropriate, a designation for the creditors to identify their preference among competing plans. Id.

Acceptance Of The Plan Of Reorganization

The debtor-in-possession has the exclusive right to file a plan of reorganization (which also acts as the order of relief) during the first 120-day period after the filing of a voluntary bankruptcy petition. The debtor-in-possession has 180 days after the filing of the voluntary petition, or in the case of an involuntary petition, after the order for relief, to obtain acceptances of the plan. 11 U.S.C. § 1121. This exclusive period may be extended or reduced by the court for cause. 11 U.S.C. § 1121 (d). The debtor's right to file a plan is lost if:

1) a trustee has been appointed in the case,

2) the debtor has not filed a plan within the 120-day exclusive period or during any extension granted by the court, or

3) the debtor has not filed a plan which has been accepted by each class of

4) claims or interests that is impaired under the plan within the 180-day period or any extensions granted by the court. 11 U.S.C. § 1121.

If the exclusive period expires before the debtor has filed and obtained acceptance of the plan, other parties in interest in a case, such as a creditor's committee or a creditor, may file a plan. These plans may compete with other plans filed by other parties in interest. A party in interest that files a plan is required to conform to the same requirements as the debtor with respect to disclosure and solicitation. In the instance that a trustee is appointed, the trustee is responsible for filing a plan, a report of why the trustee will not file a plan, or a recommendation for the conversion or dismissal of the case. 11 U.S.C. § 1106(a)(5).

A liquidating plan is permissible under Chapter 11. This type of plan often allows for the debtor to liquidate the business under more economically advantageous circumstances than a Chapter 7 liquidation. Liquidation under Chapter 11 allows the creditors to take a more active role in fashioning the liquidation of the assets and distribution of the proceeds than in a Chapter 7 case.

Section 1123(a) of the Bankruptcy Code lists the mandatory provisions of a Chapter 11 plan and § 1123(b) lists the discretionary provisions. Section 1123(a) provides that a Chapter 11 plan shall designate classes of claims and interests for treatment under the reorganization. Generally, a plan will classify claim holders as secured creditors, unsecured creditors entitled to priority, general unsecured creditors, and equity security holders.

An entire class of claims has accepted a plan if the plan has been accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims of the class held by creditors that have accepted or rejected the plan according to § 1126(c) of the Code. The court cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims. 11 U.S.C. § 1129(a)(10). Holders of unimpaired claims are deemed to have accepted the plan under § 1126(f).

The proponent of a plan is allowed to modify the plan at any time before confirmation, and the modified plan will become the plan; but the plan must meet all the requirements of Chapter 11. 11 U.S.C. § 1127(a). Federal Rule of Bankruptcy Procedure 3019 provides that, when there is a proposed modification after balloting has been conducted and the court finds after a hearing that the proposed modification does not adversely affect the treatment of any creditor who has not accepted the modification in writing, the modification shall be deemed to have been accepted by all creditors who previously accepted the plan. If it is determined that the proposed modification does have an adverse effect on the claims of nonconsenting creditors, then another balloting must take place.

Because more than one plan may be submitted to the creditors for approval, Federal Rules of Bankruptcy Procedure 3016(a) requires that every proposed plan and modification be dated and identified with the name of the entity or entities submitting such plan or modification. When competing plans are presented, the court must consider the preferences of the creditors and equity security holders in determining which plan to confirm.

Any party in interest may file an objection to confirmation of a plan. The Bankruptcy Code requires the court, after notice, to hold a hearing on the confirmation of a plan. If no objection to confirmation has been timely filed, the Code allows the court to determine that the plan has been proposed in good faith and according to law. Fed.R.Bankr.P. 3020(b)(2). Before confirmation can be granted, the court must be satisfied that there has been compliance with the other requirements of confirmation set forth in § 1129 of the Code, even in the absence of any objections. In order to confirm the plan, the court must find that (1) the plan is feasible, (2) it is proposed in good faith, and (3) the plan an the proponent of the plan are in compliance with the Code. In addition, the court must find that confirmation of the plan is not likely to be followed by liquidation or the need for further financial reorganization.

The Discharge

While some courts have a practice of issuing a discharge order in a case involving an individual, a separate order of discharge is usually not entered in a Chapter 11 case. Ordinarily, this is reserved for individuals only. Section 1141 (d)(1) specifies that the confirmation of a plan discharges the debtor from any debt that arose before the date of the confirmation. After the plan is confirmed, the debtor is required to make plan payments and is bound by the provisions of the plan of reorganization. The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts.

There are exceptions to the general rule that an order confirming a plan operates as a discharge. Confirmation of a plan of reorganization will discharge any type of debtor (corporation, limited liability company, partnership, or individual) from most types of prepetition debts. It does not, however, discharge an individual debtor from any debt made nondischargeable by § 523 of the Bankruptcy Code. Confirmation does not discharge the debtor if the plan is a liquidation plan, as opposed to one of reorganization, and the debtor is not an individual. When the debtor is an individual, confirmation of a liquidation plan will result in a discharge unless grounds would exist for denying the debtor a discharge. 11 U.S.C. § 1141 (d)(2), 727(a).

Post-confirmation Modification Of The Plan

At any time after confirmation and before substantial consummation of a plan, the proponent of a plan may modify a plan if the modified plan would meet certain Bankruptcy Code requirements. 11 U.S.C. § 1127(b). This should be distinguished from preconfirmation modification of the plan. A modified postconfirmation plan does not automatically become the plan. A modified postconfirmation plan in a Chapter 11 case becomes the plan only "if circumstances warrant such modification" and the court, after notice and hearing, confirms the plan as modified pursuant to Chapter 11 of the Code.

Post-confirmation Administration

Federal Rule of Bankruptcy Procedure 3020(d) provides that, "notwithstanding the entry of the order of confirmation, the court may issue any other order necessary to administer the estate." This authority would include the postconfirmation determination of objections to claims or adversary proceedings which must be resolved before a plan can be fully consummated. Sections 1106(a)(7) and 1107(a) of the Bankruptcy Code require a debtor in possession or a trustee to report on the progress made in implementing a plan after confirmation. A Chapter 11 trustee or debtor in possession has a number of responsibilities to perform after confirmation, including consummating the plan, reporting on the status of consummation, and applying for a final decree.

Revocation Of The Confirmation Order

A revocation of the confirmation order is an undoing or cancellation of the confirmation of a plan. A request for revocation of confirmation, if made at all, must be made by a party in interest within 180 days of confirmation. The court, after notice and hearing, may revoke a confirmation order "if and only if [the confirmation] order was procured by fraud." 11 U.S.C. § 1144.

The Final Decree

A final decree closing the case must be entered after the estate has been "fully administered." Fed.R.Bankr.P. 3022. Local bankruptcy court policies may determine when the final decree should be entered and the case closed.

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WE WANT TO REITERATE THAT THE ABOVE LETTER IS BY NO MEANS A COMPREHENSIVE ANALYSIS OF THE BANKRUPTCY CODE, NOR IS IT DESIGNED TO REPLACE THE SERVICES OF ADEQUATE LEGAL COUNSEL. THE ABOVE LETTER IS MERELY A ROUGH GUIDELINE AS TO HOW THE BANKRUPTCY PROCESS WORKS. PLEASE CONTACT US WITH ANY QUESTIONS YOU MIGHT HAVE REGARDING FILING A CHAPTER 11 BANKRUPTCY

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