continued from page 35
The effect of all of these trends is
fewer Chapter 11 filings, especially in
the midmarket. Borrowers without
unencumbered cash follow other
paths—walking away, consenting
to the sale plan, or agreeing to
an extend, amend, and pretend
restructuring, among other options.
Bobby Guy is a member with Frost Brown Todd,
LLC, in the firm’s Nashville, Tennessee, office and
specializes in representing borrowers and buyers in
Chapter 11 proceedings and restructurings. He is the
author of Distress to Success: A Survival Handbook
for Struggling Businesses and Buyers of Distressed
Opportunities (FreneticMarket Press, May 2011). He can
be reached at email@example.com or (615) 251-5557.
Are these simply Malthusian musings on
the fate of Chapter 11? Maybe, but maybe
not. The author is actually optimistic
about the future of Chapter 11 because
it is impossible for other processes
to replace bankruptcy in the United
States. With limited exceptions, only
the bankruptcy powers under the U.S.
Constitution make it possible to modify
a company’s obligations to its creditors
against the wishes of those creditors.
ABC, 3 creating havoc in the liquidation
process. So, Chapter 11 still provides
debtors with significant leverage.
Other processes, such as receiverships
and assignments for the benefit of
creditors (ABCs), will never replace
Chapter 11 because they are merely
liquidation tools. They also have a fatal
flaw—a debtor can throw a wrench in
the works by filing a designed Chapter
11 just before the successful receivership
sale or during the administration of the
As a result, Chapter 11 will always have a
place in the economics of restructuring.
But the bench and bar should take care,
lest Chapter 11 become inaccessible as a
result of LaSalle to all but the rare debtor.
Anecdotal evidence and the dearth of
bankruptcies in an economy filled with
commercial business distress supports
this theory. It will be interesting to
see what the future holds, whether
a formal study to confirm the theory
or changes to shift the balance of
Chapter 11 back in the other direction.
LaSalle and its implications seem
ripe for study by academia and the
think tanks that focus on the health
of the U.S. financial market. J
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1 526 U. S. 434 (1999).
2 One more thought about the potential effect
of LaSalle on the broader economy: has it
contributed to access to cheaper credit in the
first decade of the 21st century? This seems
a stretch, but basic economic theory (the
correlation of risk and reward) would suggest
some plausibility. Lenders loan at higher
rates when their risk is higher. If lenders have
had less risk of being crammed down in a
bankruptcy, then their risk of loss would be
lower and their rates should have been, too,
suggesting easy, cheap credit. Sound familiar?
3 See, for example, 11 U.S.C. Section 542(d)( 2),
providing that a bankruptcy court shall not
require a custodian to turn over records to
the bankruptcy estate if the custodian was
appointed or took possession more than 120
days before the filing of the bankruptcy case. So
in theory, even a fully consensual ABC process is
subject to disruption for up to 120 days. Accord,
11 U.S.C. Section 305 (court may dismiss or
suspend bankruptcy proceedings if the interests
of creditors and debtor better served by such
dismissal); 28 U. S.C. Section 1334 (providing that
bankruptcy court can abstain under appropriate
circumstances). In practice, however, such
dismissals or abstentions are generally rare.