Bankruptcy Information:
BANKRUPTCY CHAPTER 11 explained
by the U.S. Bankruptcy Court:
A bankruptcy case commences when a
bankruptcy petition is filed with the
bankruptcy court. Fed. R. Bankr. P.
1002. A petition may be a voluntary
petition, which is filed by the debtor, or
it may be an involuntary petition, which
is filed by creditors that meet certain
requirements. 11 U.S.C. §§ 301, 303.
A voluntary petition should adhere to
the format of Form 1 of the Official
Forms prescribed by the Judicial
Conference of the United States. The
Official Forms may be purchased at
legal stationery stores or downloaded
from the Internet at www.uscourts.gov/
bankform/. The voluntary petition will
include standard information concerning
the debtor’s name(s), social security
number or tax identification number,
residence, location of principal assets (if
a business), the debtor’s plan or intention
to file a plan, and a request for
relief under the appropriate chapter of
the Bankruptcy Code. In addition, the
voluntary petition will indicate whether
the debtor qualifies as a small business
as defined in 11 U.S.C. § 101(51C) and
whether the debtor elects to be considered
a small business under 11 U.S.C.
§ 1121(e).
Upon the filing of a voluntary petition
for relief under chapter 11 or, in
an involuntary case, the entry of an
order for such relief, the debtor automatically
assumes an additional iden-
chapter 11 of the
United States Bankruptcy
Code is frequently referred
to as a “reorganization”
bankruptcy.
REORGANIZATION UNDER THE BANKRUPTCY CODE • 25
tity as the “debtor in possession.”
11 U.S.C. § 1101. The term refers to
a debtor that keeps possession and
control of its assets while undergoing
a reorganization under chapter 11,
without the appointment of a case
trustee. A debtor will remain a debtor
in possession until the debtor’s plan of
reorganization is confirmed, the
debtor’s case is dismissed or converted
to chapter 7, or a chapter 11 trustee is
appointed. The appointment or election
of a trustee occurs only in a small
number of cases. Generally, the
debtor, as “debtor in possession,”
operates the business and performs
many of the functions that a trustee
performs in cases under other chapters.
11 U.S.C. § 1107(a).
A written disclosure statement and a
plan of reorganization must be filed
with the court. 11 U.S.C. § 1121. The
disclosure statement is a document
that must contain information concerning
the assets, liabilities, and business
affairs of the debtor sufficient to
enable a creditor to make an informed
judgment about the debtor’s plan of
reorganization. 11 U.S.C. § 1125. The
information required is governed by
judicial discretion and the circumstances
of the case. The contents of the
plan must include a classification of
claims and must specify how each class
of claims will be treated under the
plan. 11 U.S.C. § 1123. Creditors
whose claims are “impaired,” i.e.,
those whose contractual rights are to
be modified or who will be paid less
than the full value of their claims
under the plan vote on the plan by ballot.
11 U.S.C. § 1126. After the disclosure
statement is approved and the ballots
are collected and tallied, the bankruptcy
court will conduct a confirmation
hearing to determine whether to
confirm the plan. 11 U.S.C. § 1128.
THE CHAPTER 11 DEBTOR
IN POSSESSION
While individuals are not precluded
from using chapter 11, it is more 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. The chapter
11 bankruptcy case of a corporation
(corporation as debtor) does not put the
personal assets of the stockholders at
risk other than the value of their investment
in the company’s stock. A sole
proprietorship (owner as debtor), on
the other hand, does not have an identity
separate and distinct from its
owner(s); accordingly, a bankruptcy
case involving a sole proprietorship
includes both the business and personal
assets of the owners-debtors. Like a corporation,
a partnership exists separate
and apart from its partners. In a partnership
bankruptcy case (partnership as
debtor), however, the partners’ personal
assets may, in some cases, be used to
pay creditors in the bankruptcy case or
the partners may, themselves, be forced
to file for bankruptcy protection.
Section 1107 of the Code places the
debtor in possession in the position of a
fiduciary, with the rights and powers of
a chapter 11 trustee, and requires the
performance of all but the investigative
functions and duties of a trustee. These
duties are set forth in the Bankruptcy
Code and Federal Rules of Bankruptcy
Procedure. 11 U.S.C. §§ 1106, 1107;
Fed. R. Bankr. P. 2015(a). Such powers
and duties include accounting for property,
examining and objecting to claims,
and filing informational reports as
26 • REORGANIZATION UNDER THE BANKRUPTCY CODE
required by the court and the United
States trustee, such as monthly operating
reports. The debtor in possession
also has many of the other powers and
duties of a trustee including the right,
with the court’s approval, to employ
attorneys, accountants, appraisers, auctioneers,
or other professional persons
to assist the debtor during its bankruptcy
case. Other responsibilities
include filing tax returns and filing such
reports as are necessary or as the court
orders after confirmation, such as a
final accounting. The United States
trustee is responsible for monitoring
the compliance of the debtor in possession
with the reporting requirements.
It should be noted that railroad reorganizations
have specific requirements
under subsection IV of chapter 11
which will not be addressed here and
that stock and commodity brokers are
prohibited from filing under chapter 11
and are restricted to chapter 7.
11 U.S.C. § 109(d).
THE SMALL BUSINESS
DEBTOR
A small business debtor is defined by
the Bankruptcy Code as a person
engaged in commercial or business
activities (not including a person that
primarily owns or operates real property)
that has aggregate noncontingent
liquidated secured and unsecured debts
that do not exceed $2,000,000.
11 U.S.C. § 101(51C). If a debtor qualifies
and elects to be considered a small
business under 11 U.S.C. § 1121(e), the
case is put on a “fast track” and treated
differently than a regular chapter 11
case under the Code. For example, the
appointment of a creditors’ committee
and a separate hearing to approve the
disclosure statement are not mandatory
in a small business case. 11 U.S.C.
§ 1102(a)(3). A small business case
proceeds faster than a regular chapter
11 case because the court may conditionally
approve a disclosure statement,
subject to final approval after notice
and a hearing and solicitation of votes
for acceptance or rejection of the plan.
Thereafter, the disclosure statement
hearing may be combined with the confirmation
hearing. 11 U.S.C. § 1125(f).
In addition, the debtor has a shortened
period of time (100 days from the date
of the order for relief) within which
only the debtor may file a plan. After
the 100-day period expires, any party
in interest may file a plan; however, all
plans must be filed within 160 days
from the date of the order for relief.
11 U.S.C. § 1121(e).
THE SINGLE ASSET REAL
ESTATE DEBTOR
Another type of debtor that has special
provisions under the Bankruptcy Code
is a single asset real estate debtor. The
term “single asset real estate” is
defined as “a single property or project,
other than residential real property
with fewer than four residential
units, which generates substantially all
of the gross income of a debtor and on
which no substantial business is being
conducted by a debtor” other than
operating the real property and which
has aggregate noncontingent liquidated
secured debts of no more than
$4,000,000. 11 U.S.C. § 101(51B).
The Bankruptcy Code provides circumstances
under which creditors of a
single asset real estate debtor may
obtain relief from the automatic stay
which are not available to creditors in
ordinary bankruptcy cases. 11 U.S.C.
§ 362(d). On request of a creditor with
REORGANIZATION UNDER THE BANKRUPTCY CODE • 27
a claim secured by the single asset real
estate and after notice and a hearing,
the court will grant relief from the
automatic stay to the creditor unless
the debtor files a feasible plan of reorganization
or begins making interest
payments to the creditor within 90
days from the date of the order for
relief. The interest payments must
be equal to the current fair market
interest rate on the value of the creditor’s
interest in the real estate.
11 U.S.C. § 362(d)(3).
THE AUTOMATIC STAY
The automatic stay provides for a
period of time in which all judgments,
collection activities, foreclosures, and
repossessions of property are suspended
and may not be pursued by the
creditors on any debt or claim that
arose before the filing of the bankruptcy
petition. As with cases under
other chapters of the Bankruptcy
Code, a stay of creditor actions
against the debtor automatically goes
into effect when the bankruptcy petition
is filed. 11 U.S.C. § 362(a). The
filing of a petition, however, does not
operate as a stay for certain types
of actions listed under 11 U.S.C.
§ 362(b). The stay provides a breathing
spell for the debtor, during which
negotiations can take place to try to
resolve the difficulties in the debtor’s
financial situation.
Under specific circumstances, the
secured creditor can obtain an order
from the court granting relief from the
automatic stay. For example, when the
debtor has no equity in the property
and that property is not necessary for
an effective reorganization, the secured
creditor can seek an order of the court
lifting the stay to permit the creditor to
foreclose on the property, sell it, and
apply the proceeds to the debt.
11 U.S.C. § 362(d).
It should be noted that, although
creditors are stayed from action
against the debtor unless relief is granted
by the court, section 331 of the
Bankruptcy Code permits applications
for fees to be made by certain professionals
during the case. Thus, a trustee,
a debtor’s attorney, or any professional
person appointed by the court may
apply to the court at intervals of 120
days for interim compensation and
reimbursement payments. In very large
cases with extensive legal work the
court may permit more frequent applications.
Although professional fees
may be paid pursuant to authorization
by the court, the debtor cannot make
payments to professional creditors on
prepetition obligations, i.e., obligations
which arose before the filing of
While individuals are
not precluded from
using chapter 11,
it is more typically
used to reorganize a
business, which may
be a corporation,
sole proprietorship,
or partnership.
28 • REORGANIZATION UNDER THE BANKRUPTCY CODE
the bankruptcy petition. The ordinary
expenses of the ongoing business, however,
continue to be paid.
CREDITORS’ COMMITTEES
Creditors’ committees can play a
major role in chapter 11 cases. The
United States trustee, a federal employee
to be distinguished from a private
case trustee or panel trustee, appoints
the committee, which ordinarily consists
of unsecured creditors who hold
the seven largest unsecured claims
against the debtor. 11 U.S.C. § 1102.
The committee may consult with the
debtor in possession on the administration
of the case, investigate the conduct
of the debtor and the operation of the
business, and participate in the formulation
of a plan. 11 U.S.C. § 1103. A
creditors’ committee may, with the
court’s approval, hire an attorney or
other professionals to assist in the performance
of the committee’s duties. A
creditors’ committee can be an important
safeguard to the proper management
of the business by the debtor in
possession.
WHO CAN FILE A PLAN
There is no specific statutory time limit
set for the filing of a plan; however, the
debtor (unless a “small business”
debtor, as set out above) has a 120-day
period during which it has an exclusive
right to file a plan. 11 U.S.C.
§ 1121(b). The debtor’s exclusive period
in which to file a plan may be
extended or reduced by the court. After
the exclusive period has expired, a creditor
or the case trustee may file a competing
plan. The United States trustee
may not file a plan. 11 U.S.C. § 307.
A chapter 11 case may continue for
many years unless the court, the United
States trustee, the committee, or another
party in interest acts to ensure the
case’s timely resolution. The creditors’
right to file a competing plan provides
incentive for the debtor to file a plan
within the exclusive period and acts as
a check on excessive delay in the case.
AVOIDABLE TRANSFERS
The debtor in possession or the trustee,
as the case may be, has what are called
“avoiding” powers. Such powers may
be used to undo a transfer of money or
property made during a certain period
of time prior to the filing of the bankruptcy
petition. By avoiding a particular
transfer of property, the debtor in
possession can cancel the transaction
and force the return or “disgorgement”
of the payments or property, which
then are available to pay all creditors.
Generally, the power to avoid transfers
is effective against transfers made within
90 days prior to the filing of the petition.
However, transfers to insiders (i.e.,
relatives, general partners, and directors
or officers of the debtor) made up
to a year prior to filing can be avoided.
11 U.S.C. §§ 101(31), 101(54), 547,
548. In addition, under 11 U.S.C.
§ 544, the trustee is given the authority
to avoid transfers under applicable state
law, which often provides for longer
time periods. Avoiding powers are used,
for example, to prevent unfair prepetition
payments to one creditor at the
expense of all other creditors.
CASH COLLATERAL,
ADEQUATE PROTECTION,
AND OPERATING CAPITAL
Although the preparation, confirmation,
and implementation of a plan of
reorganization is at the heart of a chapter
11 case, other issues may arise
REORGANIZATION UNDER THE BANKRUPTCY CODE • 29
which must be addressed by the debtor
in possession. The debtor in possession
may use, sell, or lease property of the
estate in the ordinary course of its business,
without prior approval, unless
the court orders otherwise. 11 U.S.C.
§ 363(c). If the intended sale or use is
outside the ordinary course of its business,
the debtor must obtain permission
from the court. A debtor in possession
may not use “cash collateral,” i.e., collections
of accounts subject to security
interests or proceeds from the sale of
pledged inventory or equipment, without
the consent of the secured party or
authorization by the court which must
first examine whether the interest of the
secured party is adequately protected.
11 U.S.C. § 363.
When “cash collateral” is used
(spent), the secured creditors are entitled
to receive additional protection
under section 363 of the Bankruptcy
Code. Section 363 defines “cash collateral”
as cash, negotiable instruments,
documents of title, securities, deposit
accounts, or other cash equivalents,
whenever acquired, in which the estate
and an entity other than the estate have
an interest. It includes the proceeds,
products, offspring, rents, or profits of
property and the fees, charges,
accounts or payments for the use or
occupancy of rooms and other public
facilities in hotels, motels, or other
lodging properties subject to a creditor’s
security interest. The debtor in
possession must file a motion requesting
an order from the court authorizing
the use of the cash collateral. Pending
consent of the secured creditor or court
authorization for the debtor in possession’s
use of cash collateral, the debtor
in possession must segregate and
account for all cash collateral in its possession.
11 U.S.C. § 363(c)(4). A party
with an interest in property being used
by the debtor may request that the
court prohibit or condition this use to
the extent necessary to provide “adequate
protection” to the creditor.
Adequate protection may be required
to protect the value of the creditor’s
interest in the property being used by
the debtor in possession. This is especially
important when there is a
decrease in value of the property. The
debtor may make periodic or lump sum
cash payments, or provide an additional
or replacement lien that will result in
the creditor’s property interest being
adequately protected. 11 U.S.C. § 361.
When a chapter 11 debtor needs
operating capital, it may be able to
obtain it from a lender by giving the
lender a court-approved “superpriority”
over other unsecured creditors or
a lien on property of the estate.
11 U.S.C. § 364.
APPOINTMENT OR
ELECTION OF A CASE
TRUSTEE
Although the appointment of a case
trustee is a rarity in a chapter 11 case,
a party in interest or the United States
trustee can request the appointment of
a case trustee or examiner at any time
prior to confirmation in a chapter 11
case. The court, on motion by a party
in interest or the United States trustee
and after notice and hearing, shall
order the appointment of a case
trustee for cause, including fraud,
dishonesty, incompetence, or gross
mismanagement, or if such an
appointment is in the interest of creditors,
any equity security holders, and
other interests of the estate. 11 U.S.C.
§ 1104(a). The trustee is appointed by
30 • REORGANIZATION UNDER THE BANKRUPTCY CODE
the United States trustee, after consultation
with parties in interest and subject
to the court’s approval. Fed. R.
Bankr. P. 2007.1. Alternatively, a
trustee in a case may be elected if a
party in interest requests the election
of a trustee within 30 days after the
court orders the appointment of a
trustee. In that instance, the United
States trustee convenes a meeting of
creditors for the purpose of electing a
person to serve as trustee in the case.
11 U.S.C. § 1104(b).
The case trustee is responsible for
management of the property of the
estate, operation of the debtor’s business,
and, if appropriate, the filing of
a plan of reorganization. Section 1106
of the Code requires the trustee to file
a plan “as soon as practicable” or,
alternatively, to file a report explaining
why a plan will not be filed or
to recommend that the case be converted
to another chapter or dismissed.
11 U.S.C. § 1106(a)(5).
The court, after notice and hearing,
may, at any time before confirmation,
upon the request of a party in interest
or the United States trustee, terminate
the trustee’s appointment and restore
the debtor to possession and management
of the property of the estate and
of the operation of the debtor’s business.
11 U.S.C. § 1105.
THE ROLE OF AN
EXAMINER
The appointment of an examiner in a
chapter 11 case is rare. The role of an
examiner is generally more limited
than that of a trustee. The examiner is
authorized to perform the investigatory
functions of the trustee and is
required to file a statement of any
investigation conducted. If ordered to
do so by the court, however, an examiner
may carry out any other duties of
a trustee that the court orders the
debtor in possession not to perform.
11 U.S.C. § 1106. Each court has the
authority to determine the duties of an
examiner in each particular case. In
some cases, the examiner may file a
plan of reorganization, negotiate or
help the parties negotiate, or review
the debtor’s schedules to determine
whether some of the claims are
improperly categorized. Sometimes,
the examiner may be directed to determine
if objections to any proofs of
claim should be filed or whether caus-
Although the
appointment of a
case trustee is a rarity
in a chapter 11 case,
a party in interest or
the United States
trustee can request
the appointment of
a case trustee or
examiner at any time
prior to confirmation
in a chapter 11 case.
REORGANIZATION UNDER THE BANKRUPTCY CODE • 31
es of action have sufficient merit so
that further legal action should be
taken. An examiner may not serve as a
trustee. 11 U.S.C. § 321.
THE UNITED STATES
TRUSTEE OR BANKRUPTCY
ADMINISTRATOR
In addition to the case trustee or examiner
and the creditors’ committee, the
United States trustee plays a major role
in monitoring the progress of a chapter
11 case and supervising its administration.
The United States trustee is
responsible for monitoring the debtor
in possession’s operation of the business,
and the submission of operating
reports and fees. Additionally, the U.S.
Trustee monitors applications for compensation
and reimbursement by professionals,
plans and disclosure statements
filed with the court, and creditors’
committees. The United States
trustee conducts a meeting of the creditors,
often referred to as the “section
341 meeting,” in a chapter 11 case. 11
U.S.C. § 341. The United States trustee
and creditors may question the debtor
or the debtor’s corporate representative
under oath at the section 341
meeting concerning the debtor’s acts,
conduct, property, and the administration
of the case.
The United States trustee also imposes
certain requirements on the debtor in
possession concerning matters such as
reporting its monthly income and operating
expenses, the establishment of
new bank accounts, and the payment of
current employee withholding and
other taxes. By law, the debtor in possession
must pay a quarterly fee to the
United States trustee for each quarter of
a year until the case is converted or dismissed.
28 U.S.C. § 1930(a)(6). The
amount of the fee, which may range
from $250 to $10,000, depends upon
the amount of the debtor’s disbursements
during each quarter. Should a
debtor in possession fail to comply with
the reporting requirements of the
United States trustee or orders of the
bankruptcy court or fail to take the
appropriate steps to bring the case to
confirmation, the United States trustee
may file a motion with the court to have
the debtor’s chapter 11 case converted
to a case under another chapter of the
Code or to have the case dismissed.
It should be noted that in North
Carolina and Alabama, bankruptcy
administrators perform similar functions
that United States trustees perform
in the remaining forty-eight
states. The bankruptcy administrator
program is administered by the
Administrative Office of the United
States Courts, while the United States
trustee program is administered by the
Department of Justice. For purposes of
this fact sheet, references to United
States trustees are also applicable to
bankruptcy administrators.
MOTIONS
Prior to confirmation of a plan, there
are several activities that may take
place in a chapter 11 case. The continued
operation of the debtor’s business
may lead to the filing of a number of
contested motions. The most common
are those seeking relief from the automatic
stay, the use of cash collateral, or
to obtain credit. There may also be litigation
over executory (i.e., unfulfilled)
contracts and unexpired leases and the
assumption or rejection of those executory
contracts and unexpired leases
by the debtor in possession. 11 U.S.C.
§ 365. Delays in formulating, filing,
32 • REORGANIZATION UNDER THE BANKRUPTCY CODE
and obtaining confirmation of a plan
often cause creditors to file motions for
relief from stay or motions to convert
the case to a chapter 7 or to dismiss the
case altogether.
ADVERSARY
PROCEEDINGS
Frequently, the debtor in possession will
institute a lawsuit, known as an adversary
proceeding, to recover money or
property for the estate. Adversary proceedings
may take the form of lien
avoidance actions, actions to avoid
preferences, actions to avoid fraudulent
transfers, or actions to avoid post petition
transfers. Such proceedings are
governed by Part VII of the Federal
Rules of Bankruptcy Procedure. At
times, a creditors’ committee may be
authorized by the bankruptcy court to
pursue these actions against insiders of
the debtor if the plan provides for the
committee to do so or if the debtor has
refused a demand to do so. Creditors
may also initiate adversary proceedings
by filing complaints to determine the
validity or priority of a lien, to revoke
an order confirming a plan, to determine
the dischargeability of a debt, to
obtain an injunction, or to subordinate
a claim of another creditor.
CLAIMS
A claim is a right to payment or a right
to an equitable remedy for a failure of
performance if the breach gives rise to a
right to payment. 11 U.S.C. § 101(5).
In some instances, a creditor must file a
proof of claim form along with documentation
evidencing the validity and
amount of the claim. When proofs of
claim are required to be filed, creditors
must file the proofs of claim with the
bankruptcy clerk in the district where
the case is pending. The clerk is
required to keep a list of claims filed in
a case when it appears that there will be
a distribution to unsecured creditors.
Fed. R. Bankr. P. 5003(b). Most creditors
whose claims are scheduled (i.e.,
claims listed by the debtor on the
debtor’s schedules), but not listed as
disputed, contingent, or unliquidated,
need not file claims because the schedule
of liabilities is deemed to constitute
evidence of the validity and amount of
those claims. 11 U.S.C. § 1111. Any
creditor whose claim is not scheduled,
or is scheduled as disputed, contingent,
or unliquidated, must file a proof of
claim in order to be treated as a creditor
for purposes of voting on the plan
and distribution under it. Fed. R.
Bankr. P. 3003(c)(2). If a scheduled
creditor chooses to file a claim, a properly
filed proof of claim supersedes any
scheduling of that claim. Fed. R. Bankr.
P. 3003(c)(4). It is the responsibility of
the creditor to determine whether the
claim is accurately listed. The debtor
must provide notification to those creditors
whose names are added and
whose claims are listed as a result of an
amendment to the schedules. The notification
also should advise such creditors
of their right to file proofs of claim
and that their failure to do so may prevent
them from voting upon the
debtor’s plan of reorganization or participating
in any distribution under that
plan. When a debtor amends the schedule
of liabilities to add a creditor or
change the status of any claims to disputed,
contingent, or unliquidated
claims, the debtor must provide notice
of the amendment to any entity affected.
Fed. R. Bankr. P. 1009(a).
REORGANIZATION UNDER THE BANKRUPTCY CODE • 33
EQUITY SECURITY
HOLDERS
An equity security holder is a holder of
an equity security of the debtor.
Examples of an equity security are a
share in a corporation, an interest of a
limited partner in a limited partnership,
or a right to purchase, sell, or subscribe
to a share, security, or interest of a share
in a corporation or an interest in a limited
partnership. 11 U.S.C §§ 101(16) ,
(17).An equity security holder may vote
on the plan of reorganization and may
file a proof of interest, rather than a
proof of claim. A proof of interest is
deemed filed for any interest that
appears in the debtor’s schedules, unless
it is scheduled as disputed, contingent,
or unliquidated. 11 U.S.C. § 1111. An
equity security holder whose interest is
not scheduled or scheduled as disputed,
contingent, or unliquidated must file a
proof of interest in order to be treated
as a creditor for purposes of voting on
the plan and distribution under it. Fed.
R. Bankr. P. 3003(c)(2).A properly filed
proof of interest supersedes any scheduling
of that interest. Fed. R. Bankr. P.
3003(c)(4). Generally, most of the provisions
that apply to proofs of claim, as
discussed above, are also applicable to
proofs of interest.
CONVERSION OR
DISMISSAL
A debtor in a case under chapter 11 has
a one-time absolute right to convert the
chapter 11 case to a case under chapter 7
unless (1) the debtor is not a debtor in
possession, (2) the case originally was
commenced as an involuntary case under
chapter 11, or (3) the case was converted
to a case under chapter 11 other than
at the debtor’s request. 11 U.S.C.
§ 1112(a). A debtor in a chapter 11 case
does not have an absolute right to have
the case dismissed upon request.
Generally, upon the request of a party
in interest in the case or the United
States trustee, after notice and hearing
and “for cause,” the court may convert
a chapter 11 case to a case under chapter
7 or dismiss the case, whichever is in
the best interest of creditors and the
estate. 11 U.S.C. § 1112(b). The court
may convert or dismiss a case “for
cause” when there is a continuing loss
to the estate, an inability to effectuate a
plan, unreasonable delay that is prejudicial
to creditors, denial or revocation of
confirmation, or inability to consummate
a confirmed plan.
There are important exceptions to
the conversion process in a chapter 11
case. One exception is that, unless the
debtor requests the conversion, section
1112(c) of the Code prohibits the court
from converting a case involving a
farmer or charitable institution to a liquidation
case under chapter 7.
THE DISCLOSURE
STATEMENT
The filing of a written disclosure statement
is preliminary to the voting on a
plan of reorganization, and the disclosure
statement must provide “adequate
information” concerning the affairs of
the debtor to enable the holder of a
claim or interest to make an informed
judgment about the plan. 11 U.S.C.
§ 1125.After the disclosure statement is
filed, the court must hold a hearing to
determine whether the disclosure statement
should be approved. Acceptance
or rejection of a plan cannot be solicited
without prior court approval of the
written disclosure statement. 11 U.S.C.
§ 1125(b). After the disclosure statement
has been approved, the debtor or
34 • REORGANIZATION UNDER THE BANKRUPTCY CODE
proponent of a plan can begin to solicit
acceptances of the plan, and creditors
may also solicit rejections of the plan.
Fed. R. Bankr. P. 3017(d) requires that,
upon approval of a disclosure statement,
the following must be mailed to
the United States trustee and all creditors
and equity security holders: (1) the
plan, or a court approved summary of
the plan; (2) the disclosure statement
approved by the court; (3) notice of the
time within which acceptances and
rejections of the plan may be filed; and
(4) such other information as the court
may direct, including any opinion of the
court approving the disclosure statement
or a court-approved summary of
the opinion. Fed. R. Bankr. P. 3017(d).
In addition, the debtor must mail to the
creditors and equity security holders
entitled to vote on the plan or plans (1)
notice of the time fixed for filing objections;
(2) notice of the date and time for
the hearing on confirmation of the plan;
and (3) a ballot for accepting or rejecting
the plan and, if appropriate, a designation
for the creditors to identify their
preference among competing plans. Id.
However, in a small business case, the
court may conditionally approve a disclosure
statement subject to final
approval after notice and a combined
disclosure statement/plan confirmation
hearing. 11 U.S.C. § 1125(F).
ACCEPTANCE OF THE PLAN
OF REORGANIZATION
As noted earlier, during the first 120-
day period after the filing of the voluntary
bankruptcy petition, which filing
also acts as the order of relief, only the
debtor in possession may file a plan of
reorganization. The debtor in possession
has 180 days after the filing of the
voluntary petition (or in a case commenced
by an involuntary petition, after
the order for relief) to obtain acceptances
of the plan. 11 U.S.C. § 1121.
For cause, the court may extend or
reduce this exclusive period. 11 U.S.C.
§ 1121(d). The exclusive right of the
debtor in possession to file a plan is lost
and any party in interest, including the
debtor, may file a plan if and only if (1)
a trustee has been appointed in the case,
(2) the debtor has not filed a plan within
the 120-day exclusive period or any
extension granted by the court, or (3)
the debtor has not filed a plan which
has been accepted by each class of
claims or interests that is impaired
under the plan within the 180-day period
or any extensions granted by the
court. 11 U.S.C. § 1121.
If the exclusive period expires before
the debtor has filed and obtained
acceptance of a plan, other parties in
interest in a case, such as the creditors’
committee or a creditor, may file a
plan. Such a plan may compete with a
plan filed by another party in interest
or by the debtor. If a trustee is appointed,
the trustee is responsible for filing a
plan, a report of why the trustee will
not file a plan, or a recommendation
for the conversion or dismissal of the
case. 11 U.S.C. § 1106(a)(5). A proponent
of a plan is subject to the same
requirements as the debtor with respect
to disclosure and solicitation.
It should be noted that, in a chapter
11 case, a liquidating plan is permissible.
Such a plan often allows the debtor
in possession to liquidate the business
under more economically advantageous
circumstances than a chapter 7
liquidation. It also permits the creditors
to take a more active role in fashioning
the liquidation of the assets and the
distribution of the proceeds than in a
chapter 7 case.
Section 1123(a) of the Bankruptcy
Code lists the mandatory provisions of
a chapter 11 plan and section 1123(b)
lists the discretionary provisions.
Section 1123(a)(1) provides that a
chapter 11 plan shall designate classes
of claims and interests for treatment
under the reorganization. Generally, a
plan will classify claim holders as
secured creditors, unsecured creditors
entitled to priority, general unsecured
creditors, and equity security holders.
Under section 1126(c) of the Code,
an entire class of claims accepts a plan
if the plan is accepted by creditors that
hold at least two-thirds in amount and
more than one-half in number of the
allowed claims in the class. Under section
1129(a)(10), if there are impaired
classes of claims, the court cannot confirm
a plan unless the plan has been
accepted by at least one class of noninsiders
who hold impaired claims.
“Impaired” claims are claims that are
not going to be paid completely or in
which some legal, equitable, or contractual
right is altered. Moreover,
under section 1126(f), holders of unimpaired
claims are deemed to have
accepted the plan.
Under section 1127(a) of the
Bankruptcy Code, the proponent may
modify the plan at any time before
confirmation, but the plan as modified
must meet all the requirements of
chapter 11. Federal Rule of
Bankruptcy Procedure 3019 provides
that, when there is a proposed modification
after balloting has been conducted
and the court finds after a hearing
that the proposed modification
does not adversely affect the treatment
of any creditor who has not accepted
the modification in writing, the modification
shall be deemed to have been
accepted by all creditors who previously
accepted the plan. If it is determined
that the proposed modification does
have an adverse effect on the claims of
nonconsenting creditors, then another
balloting must take place.
Because more than one plan may
be submitted to the creditors for
approval, Federal Rule of Bankruptcy
Procedure 3016(a) requires that every
proposed plan and modification
be dated and identified with the name
In a chapter 11
case, a liquidating
plan is permissible.
Such a plan often
allows the debtor
in possession to
liquidate the
business under
more economically
advantageous
circumstances
than a chapter 7
liquidation.
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