are ultimately resolved, bankruptcy
will involve significant litigation costs.
This will cause a number of companies
to fail when they might otherwise
have successfully reorganized.
Out of Options
Chapter 11 as originally envisioned was
a powerful tool that carefully balanced
leverage among numerous parties to
drive consensus. That system now is
broken, and Chapter 11 is a much more
litigious and much less successful
route for struggling companies to
reorganize than it once was.
Bobby Guy is a partner in Frost Brown Todd
LLC’s Nashville, Tenn., office and specializes in
fixing, buying, and selling distressed companies.
He is certified in Business Bankruptcy Law
by the American Board of Certification. He
can be reached at firstname.lastname@example.org.
The Bankruptcy Code is the only
method under the U.S. Constitution
that can readily allow struggling
companies to modify their debts over
the objections of their creditors and
force holdouts to the table. Without
significant change to Chapter 11, many
distressed companies that could survive
will soon be left without an accessible
method under the Bankruptcy Code to
reorganize and return to prosperity. J
1 For a recent example, see the cover article
of the March 2013 Journal of Corporate
Renewal, “Despite Bankruptcy’s Appeal,
Alternatives May Entice More.” See also
Jessup, Rochel, and Jernigan, “The Top Ten
Impediments to Bankruptcy Reorganization
Today: Why CompaniesDon’t Reorganize
in Chapter 11 Anymore,” Conf. Materials,
31st Annual Jay L. Westbrook Bankruptcy
2 Immediately following publication, a link to
this article will be posted on the author’s blog
at www.distresstosuccessbook.com, where
readers can suggest additional reasons that
the practice is so different and, of course, to
disagree with the author’s conclusions.
3 Bank of America Nat’l Trust and Sav. Assn. v.
203 N. LaSalle Str. Partn.,;526;U.S.;434;(1999).
4 The debtor has the exclusive right to file a
plan during the first 180 days of a Chapter
11, which can be extended up to 20 months,
so unless the debtor lets the time expire,
the debtor must waive exclusivity to
allow other parties to propose a plan.
5 See Bobby Guy, “Has LaSalle Decision Delayed
Economic Recovery? Dearth of Chapter 11s
Slows Capital Reallocation,” Journal of Corporate
compare In re Castleton Plaza, LP, 2013 U.S. App.
member of original holder the new equity is an
impermissible attempt to skirt LaSalle), with In re
equity for minimal amount without auction
and comply with LaSalle because, among
other things, exclusivity period had expired).
6 Uniform Commercial Code Rev. Art. 9,
available at www.law.cornell.edu/uss/9/.
7 C. Scott Pryor, “How Revised Article 9 Will
Turn the Trustee’s Strong-Arm Into A
Weak Finger: A Potpourri of Cases,” 9 Am.
8 To be clear, this does not suggest that
lenders should not receive the benefit of
their collateral. However, this is a major
change from past practice and has a
substantial effect on Chapter 11.
10 BAPCPA also curtailed the practice of
providing existing management with Key
11;11;U.S.C.;§§;362(b)( 6)-( 7);and;546(e)-(g).
12 11 U.S.C. § 1104.
13 “Air ball” loans usually include a term loan
portion that is tied to the enterprise value
of the borrower based on a multiple of
EBITDA, as opposed to the traditional practice
of basing a loan on collateral value.
14 See Jacqueline Palank, “Bankruptcy Milestones
Put Companies on Short Leash,” Dow Jones
lenders in 44 out of 50 surveyed recent
cases were the pre-petition lenders).
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