Bankruptcy Law Commons^™

What We “Know” About Chapter 11 Cost Is Wrong, Stephen J. Lubben

Fordham Journal of Corporate & Financial Law

Among the collective wisdom about large corporate bankruptcy cases, the following points are almost undisputed: Longer chapter 11 cases cost more; prepackaged chapter 11 cases cost less; cases filed in New York or Delaware cost more; and fee examiners control the costs of big chapter 11 cases. But each of these points is wrong, and in most cases entirely backward. This Article provides empirical evidence to show why. Ultimately, I argue that the complexity of the bankruptcy and the compensation structure of the professionals retained (which may itself reflect further aspects of complexity) are the key determinants of cost. The …

Chapter 11 Reorganization And The Fair And Equitable Standard: How The Absolute Priority Rule Applies To All Nonprofit Entities, Pamela Foohey

Scholarly Works

In recent years, nonprofit entities increasingly have sought bankruptcy protection. Though the Bankruptcy Code does not prevent nonprofits from reorganizing, Chapter 11 was designed for and applies best to for-profit businesses. This creates challenges for courts evaluating a nonprofit’s reorganization plan. This Article focuses on one crucial aspect of a court’s evaluation — the fair and equitable standard, a necessary, but not sufficient condition of which is satisfaction of the absolute priority rule.

The few courts addressing absolute priority claims in nonprofit reorganizations have held that the rule is categorically inapplicable to nonprofit entities except in limited circumstances. These courts …

The Bankruptcy Of D & K Aviation, T J. Hatter, Maurice Echols, Michael Mason

Chapter 11 Bankruptcy Case Studies

No abstract provided.

Solyndra, Brandon Brewer, Matthew Kinsey, Anthony Mendenhall

Chapter 11 Bankruptcy Case Studies

No abstract provided.

Chapter 11 Reorganization And The Fair And Equitable Standard: How The Absolute Priority Rule Applies To All Nonprofit Entities, Pamela Foohey

Articles by Maurer Faculty

In recent years, nonprofit entities increasingly have sought bankruptcy protection. Though the Bankruptcy Code does not prevent nonprofits from reorganizing, Chapter 11 was designed for and applies best to for-profit businesses. This creates challenges for courts evaluating a nonprofit’s reorganization plan. This Article focuses on one crucial aspect of a court’s evaluation — the fair and equitable standard, a necessary, but not sufficient condition of which is satisfaction of the absolute priority rule.

The few courts addressing absolute priority claims in nonprofit reorganizations have held that the rule is categorically inapplicable to nonprofit entities except in limited circumstances. These courts …

Improving Bankruptcy Sales By Raising The Bar: Imposing A Preliminary Injunction Standard For Objections To § 363 Sales, Matthew A. Bruckner

Catholic University Law Review

No abstract provided.

The Case For Value Billing In Chapter 11, Nancy B. Rapoport

Scholarly Works

This article explores the forces contributing to very high professional fees in large Chapter 11 cases and suggests that lawyers might want to consider valuing their services in ways other than the traditional billable hour approach.

Can A Secured Creditor Be Denied The Right To Credit Bid When The Creditor’S Collateral Is Sold Pursuant To A Chapter 11 Plan Of Reorganization?, Marshall E. Tracht

Articles & Chapters

CASE AT A GLANCE

A bankruptcy plan can only be confirmed over the objection of a secured creditor if the plan is found to be “fair and equitable.” The fair and equitable standard requires, at a minimum, that (i) the creditor may retain its lien on its collateral; (ii) the collateral will be sold subject to the creditor’s right to credit bid its debt; or (iii) the creditor will receive the “indubitable equivalent” of its claim. The Supreme Court must decide whether a plan can provide for the sale of collateral without granting the creditor the right to credit bid …

Committee Capture? An Empirical Analysis Of The Role Of Creditors' Committees In Business Reorganizations, Michelle M. Harner, Jamie Marincic

Vanderbilt Law Review

The number of businesses experiencing financial distress increased significantly during the past several years. The number of Chapter 11 reorganization cases likewise rose. And many of these business failures were spectacular, leaving little value for creditors and even less for shareholders. Consequently, how the business debtor's limited asset pie is divided and who gets to allocate the pieces are very relevant and important questions.

The U.S. Bankruptcy Code generally contemplates the appointment of a committee of the debtor's unsecured creditors to serve as a fiduciary for all general unsecured creditors and as a statutory watchdog over the debtor and its …

The Potential Value Of Dynamic Tension In Restructuring Negotiations, Michelle M. Harner, Jamie Marincic

Faculty Scholarship

No abstract provided.

The Story Of Kmart's Reorganization, John Fisher, Justin Wolbert

Chapter 11 Bankruptcy Case Studies

No abstract provided.

Drug Fair Group, Inc., Robby Lockett, Scott Lochridge, Jessica Manning

Chapter 11 Bankruptcy Case Studies

No abstract provided.

Committee Capture? An Empirical Analysis Of The Role Of Creditors' Committees In Business Reorganizations, Michelle M. Harner, Jamie Marincic

Faculty Scholarship

The number of businesses experiencing financial distress increased significantly during the past several years. The number of Chapter 11 reorganization cases likewise rose. And many of these business failures were spectacular, leaving little value for creditors and even less for shareholders. Consequently, how the business debtor’s limited asset pie is divided and who gets to allocate the pieces are very relevant and important questions.

The U.S. Bankruptcy Code generally contemplates the appointment of a committee of the debtors’ unsecured creditors to serve as a fiduciary for all general unsecured creditors and as a statutory watchdog over the debtor and its …

Tragedy On The Descent: The Ascent And Fall Of Eddie Bauer, Austin Fleming, Bryan C. Hathorn

Chapter 11 Bankruptcy Case Studies

For many entrepreneurs, bankruptcy is the unfortunate end of what began as a business dream. The birth of a business is an exciting time for the entrepreneur, but its death is often a painful process—both for the company's owners and its creditors. Those businesses that choose not to reorganize close their doors forever. However, reorganization can often salvage a business enterprise that is a good one but is impaired by debt, crisis, or simple bad luck.

The goals of the reorganization process are clear—the idea is to produce a viable business enterprise but one not necessarily owned by the original …

Appalachian Oil Company, Inc.: A Company's Journey After Running Out Of Gas, Allison S. Jackson, Raymond G. Lewallen Jr., Jennifer T. Mcginn

Chapter 11 Bankruptcy Case Studies

When Appalachian Oil Company, Inc. filed for Chapter 11 protection on February 9, 2009, it marked the end of an era for a company with more than eighty-six years of experience in the petroleum products industry. The company’s failure was attributable to a couple of factors, including the worst financial crisis since the Great Depression and a parasitic parent company. The combination of a lack of operating income and access to credit rendered the company insolvent and unable to continue its operations. Appalachian Oil Company, Inc.’s journey through Chapter 11, however, was unique in that it never reemerged; rather, the …

Active Ride Shop : Chapter 11 Bankruptcy, Matt Fink, Philip Meyer

Chapter 11 Bankruptcy Case Studies

In 2008, hundreds of people waited in the rain for the grand opening of Active Ride Shop’s new Chico Hills location, its twenty-sixth store and its biggest opening event yet. In the same year, Active was awarded the Surf Industry Men’s Retailer of the Year Award, yet less than a year later the company would file for chapter 11 protection. This paper will explore Active’s financial downturn and resulting chapter 11 case, inform the reader about the workings of the chapter 11 process, and impart an understanding of how the process works in the context of a non-plan sale of …

Death Of A (Used Car) Salesman: An Examination Of The Incredible Auto Sales, Llc Bankruptcy, Alicia Teubert, Melissa Carraso

Chapter 11 Bankruptcy Case Studies

At first glance, the Incredible Auto Sales, LLC (“Incredible Auto”) Chapter 11 bankruptcy appeared fairly standard. A once prospering business found itself in the red trying to keep its inventory stocked, pay its bills, and remain a going concern. On paper, the prospects of reorganization seemed promising. It had nearly $2 million worth of inventory. It had nearly $200,000 worth of machinery, fixtures, parts, and supplies. Plus, there was a market for its product because Incredible Auto was the only Kia MotorsAmerica (“KIA”) dealership in a 250-300 mile radius. However, the Incredible Auto on paper was not the same Incredible …

In Re Crabtree & Evelyn: "Almost Washed Up", Kristina Chuck, Lin Ye

Chapter 11 Bankruptcy Case Studies

Crabtree and Evelyn (“C&E”) started in 1972 as an outlet of fine soaps from all over the globe. The name was derived from the crabapple tree and John Evelyn who was a Renaissance Englishman who had works on the conservation of forests and timber. Over the almost forty years since then it has expanded what it has to offer from fine soaps to a variety of other products including “personal care products and related accessories, fragrances, comestibles (i.e., food products including cookies, teas and jams), products for the home and gift arrangements.”

It also “manufactures and distributes more …

Assessing The Chrysler Bankruptcy, Mark J. Roe, David Skeel

Michigan Law Review

Chrysler entered and exited bankruptcy in forty-two days, making it one of the fastest major industrial bankruptcies in memory. It entered as a company widely thought to be ripe for liquidation if left on its own, obtained massive funding from the United States Treasury, and exited via a pseudo-sale of its main assets to a new government-funded entity. The unevenness of the compensation to prior creditors raised concerns in capital markets, which we evaluate here. We conclude that the Chrysler bankruptcy cannot be understood as complying with good bankruptcy practice, that it resurrected discredited practices long thought interred in the …

Rethinking Professional Fees In Chapter 11 Cases, Nancy B. Rapoport

Scholarly Works

This article discusses the many ways in which professional fees can spiral out of control in chapter 11 bankruptcy cases and evaluates the possible ways to monitor and control those fees.

Chrysler's Bankruptcy: Money Laundering On A Grand Scale, James J. White

Articles

The interesting issue in Chrysler is not the lawyers’ manipulation of the law; it is the politicians’ use of the bankruptcy to launder money. Had the President simply announced that the federal government would give $4 billion to the UAW, the public, even the public in the UAW’s home state of Michigan, would have been up in arms. By laundering the money through the Chapter 11 process, the administration disguised the payment and avoided the outrage.

Government Involvement In Chrysler Bankruptcy: The Least-Worst Alternative?, John A. E. Pottow

Articles

As usual, my colleague Jim White has hit many nails on many heads. Also as usual, however, I’m going to be a pain and part ways with him a bit. First, was Chrysler’s bankruptcy “suspicious” in its use of section 363 of the Bankruptcy Code? You bet. Leaving aside the proliferation of 363 sales to swallow Chapter 11 as we once knew it, Chrysler was out in left field. Not only was it a “sale” of everything meaningful in the company, it was to a seller—Fiat—that put in no money. (To be fair, Fiat agreed to contribute technological know-how on …

Creditor Control And Conflict In Chapter 11, Kenneth M. Ayotte, Edward R. Morrison

Faculty Scholarship

We analyze a sample of large privately and publicly held businesses that filed Chapter 11 bankruptcy petitions during 2001. We find pervasive creditor control. In contrast to traditional views of Chapter 11, equity holders and managers exercise little or no leverage during the reorganization process. 70 percent of CEOs are replaced in the two years before a bankruptcy filing, and few reorganization plans (at most 12 percent) deviate from the absolute priority rule to distribute value to equity holders. Senior lenders exercise significant control through stringent covenants, such as line-item budgets, in loans extended to firms in bankruptcy. Unsecured creditors …

Chrysler, Gm And The Future Of Chapter 11, Edward R. Morrison

Faculty Scholarship

Although they caused great controversy, the Chrysler and GM bankruptcies broke no new ground. They invoked procedures that are commonly observed in modern Chapter 11 reorganization cases. Government involvement did not distort the bankruptcy process; it instead exposed the reality that Chapter 11 offers secured creditors – especially those that supply financing during the bankruptcy case – control over the fate of distressed firms. Because the federal government supplied financing in the Chrysler and GM cases, it possessed the creditor control normally exercised by private lenders. The Treasury Department found itself with virtually the same, unchecked power that the FDIC …

Is The Bankruptcy Code An Adequate Mechanism For Resolving The Distress Of Systemically Important Institutions?, Edward R. Morrison

Faculty Scholarship

The President and members of Congress are considering proposals that would give the government broad authority to rescue financial institutions whose failure might threaten market stability. These systemically important institutions include bank and insurance holding companies, investment banks, and other "large, highly leveraged, and interconnected" entities that are not currently subject to federal resolution authority. Interest in these proposals stems from the credit crisis, particularly the bankruptcy of Lehman Brothers. That bankruptcy, according to some observers, caused massive destabilization in credit markets for two reasons. First, market participants were surprised that the government would permit a massive market player to …

The Success Of Chapter 11: A Challenge To The Critics, Elizabeth Warren, Jay Lawrence Westbrook

Michigan Law Review

Although Chapter 11 has served as a model for bankruptcy reform around the world, the conventional wisdom has been that it is characterized by a relatively low success rate and endless delay. The data from large samples of Chapter 11 cases filed in 1994 and 2002 demonstrate that this characterization is wrong. Nearly all troubled companies choose Chapter 11 over Chapter 7 liquidation, which means that the system serves a critical screening function to eliminate hopeless cases relatively quickly. Almost half the unsuccessful cases were jettisoned within six months and almost eighty percent were gone within a year The cases …

Bankruptcy Vérité, Lynn M. Lopucki, Joseph W. Doherty

Michigan Law Review

In the empirical study we report in Bankruptcy Fire Sales, we compared the recoveries from the going-concern bankruptcy sales of twenty-five large, public companies with the recoveries from the bankruptcy reorganizations of thirty large, public companies. We found that, controlling for the asset size of the company and its presale or pre-reorganization earnings ("EBITDA"), reorganization recoveries were more than double sale recovenes. We are honored that Professor James J. White has chosen to comment on our study. White is an eloquent defender of the status quo, pulls no punches, and always has something interesting to say. Bankruptcy Noir is …

Bankruptcy Noir, James J. White

Articles

In Bankruptcy Fire Sales, Professor LoPucki and Dr. Doherty do two things. First, they present provocative data about the relative payoff to be had in Chapter 11 by a full reorganization compared with the payoff from a section 363 sale without a full reorganization. Second, they give a yet more provocative explanation for their data. Taking a page from Professor LoPucki's recent book, they blame the meager return that they observe on 363 sales on the unprincipled behavior of the lawyers, managers, creditors, investment bankers, and even judges involved in the sales. Messrs. LoPucki and Doherty's data appear to …

The Corporate Governance And Public Policy Implications Of Activist Distressed Debt Investing, Michelle M. Harner

Faculty Scholarship

Activist institutional investors traditionally have invested in a company's equity to try to influence change at the company. Some of these investors, however, are now purchasing a company's debt for this same purpose. They may seek to change a company's management and board personnel, operational strategies, asset holdings or capital structure. The chapter 11 bankruptcy cases of Allied Holdings, Inc. and its affiliates exemplify the strategies of activist distressed debt investors. In the Allied cases, Yucaipa Companies, a distressed debt investor, purchased approximately 66% of Allied's outstanding general unsecured bond debt. Yucaipa used this debt position to exert significant influence …

Trends In Distressed Debt Investing: An Empirical Study Of Investors' Objectives, Michelle M. Harner

Faculty Scholarship

Increased creditor control in chapter 11 cases has generated considerable debate over the past several years. Proponents of creditor control argue that, among other things, it promotes efficiency in corporate reorganizations. Critics assert that it destroys corporate value and frequently forces otherwise viable entities to liquidate. The increasing involvement of professional distressed debt investors in chapter 11 cases has intensified this debate. In this article, I present and analyze empirical data regarding the investment practices and strategies of distressed debt investors. Based on this data and actual case reports, I reach two primary conclusions. First, although relatively few in number, …