Page 108 - Bankruptcy Volume 1

Chapter 13

Alternative to Traditional Chapter 11 Reorganization

In recent years, increasing numbers of debtors have opted to forego traditional Chapter 11 reorganiza-
tions in favor of speedier, more efficient alternatives. This chapter considers two such alternatives: pre-
packaged Chapter 11 bankruptcy and pre-negotiated Chapter 11 bankruptcy. Although these two ap-
proaches differ in form, they share a common element. By negotiating a large portion of the reorganiza-
tion prior to filing, the parties can dramatically reduce the amount of time spent in Chapter 11, thereby
avoiding much of the expense, uncertainty, and business disruption of a traditional Chapter 11 bankrupt-
cy.

Prepackaged Cases

A prepackaged Chapter 11 plan is a form of consensual Chapter 11 restructuring that combines both out-
of-court workouts and the structure of conventional bankruptcy.

A prepackaged plan allows a debtor and its stakeholders to negotiate and fully document a Chapter 11
plan and solicit and receive creditor acceptances to that plan before the debtor files for bankruptcy. The
most crucial distinction between a prepackaged plan and a pre-negotiated plan is that, in a prepackaged
case, the debtor enters bankruptcy with formal creditor acceptance of the plan in hand. As the previous
chapter explains, a debtor’s solicitation of support for a traditional Chapter 11 plan is governed by rigor-
ous procedural requirements and supervised by the bankruptcy court. Solicitation in a prepackaged case
can be more flexible. Many of the procedural requirements that apply to a traditional Chapter 11 plan —
such as court approval of the disclosure statement prior to solicitation — do not apply to a prepackaged
plan. In addition, materials used to solicit votes must be submitted to substantially all members of a class
or claims of interest. Creditors are entitled to a "reasonable time" to cast their votes — typically several
weeks to a month. If the debtor has public debt, however, SEC proxy rules may apply. In addition, in
certain jurisdictions, the local bankruptcy rules include rules governing the solicitation of a prepackaged
plan of reorganization.

Only after the requisite majorities of creditors whose votes were solicited have voted to accept the plan
does the debtor commence its Chapter 11 case. Once in Chapter 11, the primary motivation of the debtor
is to seek confirmation of the plan. Consequently, the time spent in Chapter 11 is brief. The court will
typically hold a joint disclosure statement and confirmation hearing within four to eight weeks of the
commencement of the case, and the debtor may spend only 30 to 60 days in bankruptcy. Confirmation
of a prepackaged plan is governed by the same substantive standards that govern confirmation of a tradi-
tional plan. So although use of a prepackaged plan offers the debtor procedural flexibility, it does not al-
low the debtor to force through a plan that otherwise would not pass muster.

The advantages of a prepackaged case are several. A prepackaged plan minimizes the time in, and costs
associated with, a Chapter 11 case. A prepackaged plan affords the debtor greater control over the pro-
cess as compared to a traditional Chapter 11 and minimizes uncertainty. In addition, a prepackaged
Chapter 11 is likely to have fewer adverse effects on the debtor’s business than a traditional Chapter 11
case. Finally, a prepackaged plan may afford the debtor certain income tax advantages.

Nonetheless, the prepackaged Chapter 11 process has several intrinsic limitations and disadvantages that
make it unsuitable for some debtors. First, because the negotiation of the plan occurs prior to the filing,

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