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Bankruptcy – Chapter 11

Chapter 11 is typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership. A corporation exists separate and apart from its owners, the stockholders. A case filed under chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy. In these troubling economic times, it is imperative that your business does not enter the point of no return – the point at which bankruptcy becomes inevitable. If your business is experiencing financial distress, call ASK LLP to see if a Chapter 11 reorganization is right for you.

Things you need to know if your company is undergoing financial distress:

Your First Choice is an Out-of-Court Restructuring.
Prior to the creation of ASK LLP, ASK attorneys worked on behalf of debtors and creditors in some of the largest, most complex restructurings, including WorldCom, Parmalat, Atkins, Ames, Lehman Brothers, General Motors and Vertis. ASK LLP attorneys are experienced in all aspects of corporate restructuring and specialize in guiding companies through difficult economic times and helping such companies avoid bankruptcy at all costs. ASK LLP attorneys use their extensive restructuring and bankruptcy experience to negotiate with creditors and other interested parties to help them realize that bankruptcy will hurt them more than it will hurt you. At ASK LLP, an out-of-court restructuring is always the first option.

If Bankruptcy is Inevitable.
Should bankruptcy be necessary, ASK LLP attorneys are experienced in all aspects of Chapter 11, including filing Chapter 11 petitions with the bankruptcy court, drafting first day pleadings, analyzing which contracts and leases to assume and/or reject, negotiating and settling with individual creditors and classes of creditors, and drafting disclosure statements and plans of reorganization. ASK Attorneys had worked on many successful bankruptcies, including Atkins, Parmalat and Vertis, where the debtor emerged stronger and more profitable than ever before.

Damage Control.
Filing for bankruptcy, or even rumors of financial insolvency, may cause vendors and utility companies to shorten payment periods or require prepayment. Banks and other lending parties may be reluctant to provide further advances and may demand immediate repayment of outstanding amounts owed. In addition, customers may be wary of buying your goods, fearing that you will not be able to service them in the future. ASK LLP attorneys have extensive experience in working with all interested parties: banks, creditors, vendors, customers and the media, to ensure that your business keeps running smoothly during the restructuring process.

Select Debtor Representations
ASK LLP attorneys represented Madison 92 Associates LLC, an $82 million New York City Marriot-flagged hotel in its successful restructuring and sale. We successfully resolved disputes with numerous adverse parties, including its secured creditors and unions. ASK attorneys also represented Peter Matt, Inc., a renowned private label wine distributor and subsidiary of international wine distributor Monarchia International. ASK attorneys also represented Flash 31 Management LLC, a large New York City parking garage company, in its successful chapter 11. They also represented 1802 53rd Street, LLC and Park Avenue BSD LLC in their successful chapter 11 cases. ASK currently represents Park Lane I LLC, a large real estate debtor with properties in Atlanta, Georgia and NFKA Inc., the parent of a well-known New York City restaurant.


Bankruptcy Code.
The Bankruptcy Code is codified in title 11 of the United States Code. The Bankruptcy Code is subdivided into several chapters. Each chapter either sets forth general rules in connection with all bankruptcy proceedings (Chapters 1, 3 and 5), or provides rules relating to a particular kind of bankruptcy proceeding (Chapters 7, 9, 11, 12, 13 and 15).

Bankruptcy Court.
The bankruptcy court is a unit of the federal district court for the judicial district in which it is located. The bankruptcy court in which a debtor’s Chapter 11 (or Chapter 7) petition is filed has, essentially, exclusive jurisdiction over all of the debtor’s business affairs and property. Nevertheless, approval of certain actions taken in bankruptcy may require the approval from the district court in the district where the bankruptcy court is situated.

Chapter 7.
When a troubled business or individual is unable to service its debt or pay its creditors, it may file (or be forced by its creditors to file) for bankruptcy under Chapter 7 of the Bankruptcy Code. A Chapter 7 filing means that the business ceases operations unless continued by a Chapter 7 trustee, which is appointed almost immediately. The trustee generally sells all the assets and distributes the proceeds to creditors.

Chapter 11.
Chapter 11, so called because it is set forth in Chapter 11 of the Bankruptcy Code, provides the debtor a vehicle for operating its business under protection from its creditors while developing a plan for resolving its financial problems. In a successful Chapter 11 case, the Bankruptcy Court will confirm a plan of reorganization that enables the debtor to continue to operate free from the burdens that precipitated its Chapter 11 filing.

A creditor is an entity to whom a payment is owed by the debtor and who therefore has a claim against the debtor. Creditors’ claims fall into different classes depending on, among other things, whether they are secured by collateral or are accorded priority pursuant to the Bankruptcy Code.

Disclosure Statement.
Prior to voting on a plan of reorganization, creditors must be provided with a disclosure statement that contains “adequate information” about the company, allowing them to make an informed decision as to whether to accept the plan of reorganization or reject the plan.

Executory Contracts and Unexpired Leases.
Bankruptcy Code section 365 allows for the rejection or assumption of executory contracts (contracts under which performance remains due to some extent on both sides) and unexpired leases entered into before the commencement of a bankruptcy case. In other words, with approval of the bankruptcy court, the debtor may rid itself of (“reject”) burdensome contracts and leases and continue to enjoy (“assume”) beneficial ones. If a debtor decides to assume an executory contract or unexpired lease, it must assume the agreement in its entirety. As a condition to assumption, the debtor is required to cure most existing defaults and provide “adequate assurance” of its future performance. Thus, all monetary defaults then due and owing, whether arising pre-petition or post-petition, must be cured or otherwise satisfied. If a debtor rejects a pre-petition executory contract or unexpired lease, the rejection constitutes a breach that gives the counterparty a claim for damages against the debtor’s estate. The damages resulting from rejection are deemed a pre-petition general unsecured claim.

Out-of-Court Restructuring.
An out-of-court restructuring is an informal, out-of-court process to renegotiate a company’s debt burden as well as trade terms with vendors and other creditors. An out-of-court restructuring is preferable to bankruptcy for several reasons, including: it is generally cheaper and more flexible; it does not pose as many risks; you retain more control of your company; and it does not have the stigma often associated with bankruptcy.

The “petition” is the legal document filed with the bankruptcy court to initiate a bankruptcy case.

Plan of Reorganization.
The “plan of reorganization” is the formal plan setting forth in detail how the claims and interests of each class will be treated. Among other things, it sets forth what distributions, if any, will be made to holders of allowed claims and equity interests. The plan must be voted on and accepted by a certain percentage of creditors and then be approved or “confirmed” by the bankruptcy court to become effective.

Certain classes of claims are given priority in payment by Bankruptcy Code section 507. These include claims for certain unpaid wages and taxes, among other things. Under the Bankruptcy Code, claims must be paid in order of priority, with claimants of a lower priority not receiving anything unless all claimants of a higher priority are paid in full. While priority claims must be paid in full ahead of other claims, they are subordinate to secured claims and claims for administrative expenses (expenses incurred in the administration of the debtor’s estate).