BANKRUPTCY LAW UPDATE Hot Topics and Updates Special Events Program

Co-Sponsored by the Bankruptcy Law Section

Johnathan C. Bolton Fulbright & Jaworski L.L.P.

Fulbright Tower 1301 McKinney, Suite 5100

Houston, TX 77010-3095 Direct Ph: 713-651-5113

Fax: 713-651-5246 jbolton@fulbright.com

Friday, June 11, 2010 2:15 p.m. – 3:00 p.m.

BIOGRAPHY: Johnathan C. Bolton

Johnathan C. Bolton jbolton@fulbright.com D: +1 713 651 5113

Houston Fulbright Tower 1301 McKinney Suite 5100 Houston, TX 77010-3095 T: +1 713 651 5151 F: +1 713 651 5246

Experience Bankruptcy Restructuring Receiver/Trustee Representation Creditors' Committee Representation DIP Lender Representation Purchaser/Seller Representation Secured and Unsecured Creditor Representation Executory Contracts and Bankruptcy Litigation

Industries Admiralty Advertising and Marketing Banking and Finance Biotech and Life Sciences Chemicals Consumer Products Construction and Building Materials Energy and Utilities Food, Beverage and Tobacco Health Care Products and Services Individuals, Families and Estates Insurance Manufacturing Metals and Mining Oil & Gas Petroleum Refining Real Estate Retail Waste Biotechnology

Johnathan C. Bolton Sr. Associate

"A leader who adds value, works efficiently and gets things done"

AREAS OF CONCENTRATION

EXPERIENCE Johnathan Bolton's practice centers on U.S. and international bankruptcy and cross-border insolvency matters. He is an attorney at law licensed to practice in the U.S. (New York and Texas) and is a solicitor in the U.K. (England and Wales). He is Board Certified in Business Bankruptcy Law by the Texas Board of Legal Specialization and the American Board of Certification.

REPRESENTATIVE EXPERIENCE International and Cross-Border Insolvency Matters

Acted for a Russian oil and gas company in one of the first major Chapter 15 cases filed in the United States and participated in helping to dissolve a U.S. Bankruptcy Court injunction which prevented it from selling one of its major assets, a $1.4 billion refinery in Lithuania Counsel to the Oversight and Control Commission of a foreign debtor from Spain in a Chapter 15 case filed in New York in order to find and recover a valuable asset that was improperly taken from it by a large European financial institution Debtor's counsel in a U.S. Chapter 11 case filed by one of Russia's largest oil and gas companies, in one of the largest bankruptcy cases ever filed in the United States; worked on obtaining a history-making injunction from the U.S. Bankruptcy Court prohibiting certain financial institutions from participating in the Russian Federation's auction of the company's major oil and gas asset Counsel to a group of Mexican Banks in an involuntary cross-border Chapter 7 case initiated against three family members who had guaranteed the indebtedness of several Mexican companies they owned and controlled Has experience in cross-border cases involving the U.S., Mexico and Canada Has provided counsel to clients regarding insolvency matters pending in Argentina

Bankruptcy and Out-of-Court Restructuring Matters

Debtor's counsel for a publicly-traded U.S. steel processing company headquartered in Houston in its successful 11-month bankruptcy restructure Debtor's counsel for a private biotech company from Houston in their

Bankruptcy and Insolvency Business Restructure Cross-Border Insolvency

International Corporate Governance Litigation

Business Services Computer Hardware, Software and Services Electronics and Other Technology International Trade Leisure and Entertainment Telecommunications Publishing and Media Health Care Products and Services

Austin Beijing Dallas Denver Dubai Hong Kong Houston London Los Angeles Minneapolis Munich New York Riyadh San Antonio St. Louis Washington, D.C.

successful 60-day bankruptcy restructure Debtor's counsel for the U.S. subsidiary of a U.K. industrial services company in a Chapter 11 liquidation of its assets Debtor's special counsel for a large U.S. shipping company in its Chapter 11 case in New York Acted for several large creditor and debtor clients in accomplishing out-of-court workouts without the necessity of a bankruptcy filing, including one case in which his creditor-client was ultimately paid in full, including interest and attorney's fees

Indenture Trustee Representation

Counsel to the Indenture Trustee, as representatives of secured or unsecured bondholders, in the following Chapter 11 cases:

In re Paracelsus Healthcare Corporation, et al. (S.D. Tex. - Houston) In re Scotia Development, LLC, et al., (S.D. Tex. - Corpus Christi) In re Matrix Investments, LLC (S.D. Tex. - Houston)

Acted for the Indenture Trustee in a Chapter 11 case in Corpus Christi, Texas which five (5) competing plans of reorganization were proposed, including the Indenture Trustee's own plan

Secured Creditor Representation

Counsel to the Senior Secured Lender(s) in the following chapter 11 cases:

In re Busy Body Inc. (S.D. Tex. - Houston) In re Agrifos Fertilizer LP, et al. (S.D. Tex. - Houston) In re Pioneer Companies Inc, et al. (S.D. Tex. - Houston) In re Video Rental of Eastern Pennsylvania, Ltd. (S.D. Tex. - Houston) In re Raveneaux, Ltd. (S.D. Tex. - Houston) In re Bethany Rolling Hills, LLC, et al. (C.D. Cal. - Santa Ana)

Creditors' Committee Representation

Counsel to the Official Committee of Unsecured Creditors in the following Chapter 11 cases:

In re eCity Suites, Inc. (S.D. Tex. - Houston) In re ASARCO LLC, et al. (S.D. Tex. - Corpus Christi) In re Nexpak Corporation (N.D. Ohio - Canton)

Equity Holder Representation

Counsel to certain equity holders in the following Chapter 11 case: In re Energy Partners Ltd. (S.D. Tex. - Houston)

Chapter 11 Trustee/Receiver Representation

Special counsel to a Chapter 11 Trustee in jointly-administered bankruptcy cases, including the successful pursuit of a fraudulent conveyance action against former owners resulting from a failed LBO Assisted Fulbright's Securities Litigation Section in representing a Receiver appointed in an SEC receivership in federal court in Houston in which the Receiver obtained the recovery of approximately $3.2 million

from former insiders of a failed offshore investment company resulting in the return of approximately 50% of investments to customers through a court-approved Plan of Liquidation

Purchaser/Seller Representation

Bankruptcy counsel to a large construction company that purchased substantially all the assets of Stone & Webster, Inc. in the Delaware Bankruptcy Court in which his client emerged as the successful bidder Bankruptcy counsel to a German valve manufacturer that purchased substantially all the assets of a Bebco, Inc. following an auction in which his client emerged as the successful bidder Bankruptcy counsel to the purchaser of substantially all the assets of Archibald Candy Company following an auction in Chicago Bankruptcy Court in which his client emerged as the successful bidder Bankruptcy counsel to a purchaser of certain Hawaiian real estate assets in the Chapter 11 Case of Dykeswill, Inc. in Corpus Christi, Texas Bankruptcy counsel to a debtor in a complex chapter 11 case selling over $150 million in assets, including various divisions of the company, within a 6-month period

DIP Lender Representation

Acted on behalf of Indenture Trustees, commercial banks, financial institutions and other clients in connection with multi-million dollar debtor-in-possession ("DIP") loan agreements and cash collateral agreements

Secured and Unsecured Creditor Representation

Represented creditors with over a billion dollars in claims in chapter 11 bankruptcy cases throughout the United States Extensive experience in prosecuting and defending claims in U.S. Bankruptcy Court and has represented creditors from outside the U.S., including England, Scotland, Brazil, Mexico, Germany and Taiwan

Executory Contracts and Bankruptcy Litigation

Extensive experience in the negotiation of assumption, rejection, and/or assignment of various types of executory contracts and unexpired leases, including real estate and personal property leases, oil and gas commodities contracts, construction contracts, service agreements, insurance agreements and intellectual property licenses Extensive experience with bankruptcy removal, interpleader and intervention actions Represented numerous companies from the U.S. and abroad in defense of preference, fraudulent conveyance and bankruptcy-related litigation Experience in automatic stay litigation, including obtaining the lifting of the automatic stay to allow previously-filed state court litigation to proceed notwithstanding a defendant's bankruptcy filing

Appointment of Chapter 11 Trustees and Involuntary Bankruptcies

Successfully obtained the appointment of a Chapter 11 Trustee on two occasions Successfully obtained the conversion of a bankruptcy case from Chapter 11 to Chapter 7

Successfully obtained an order for relief in involuntary bankruptcy proceedings commenced against a citizen of a foreign country who conducted business in the United States

Corporate Governance

Provided counsel to corporate board members concerning corporate governance issues relating to insolvency matters Has represented officers and directors in defense of claims owned by a bankruptcy estate

PROFESSIONAL ACTIVITIES AND MEMBERSHIPS

American Bar Association (ABA) Business Bankruptcy Committee Member, Business Law Division (2006 - present) Vice-Director, Affiliate Assistance Team, Young Lawyers Division (2009 - 2010) Team Member Affiliate Assistance Team, Young Lawyers Division (2008 - 2009) Vice-Coordinator of Programming, Young Lawyers Division (2007 - 2008) Chair of Bankruptcy Committee of Young Lawyer's Division (2006 - 2007) Member of International Law Committee of Young Lawyer's Division (2006 - present) Member of Dispute Resolution Committee of Young Lawyer's Division (2006 - present)

American Bankruptcy Institute (ABI) ABI Web Advisory Board, Assistant Executive Editor (2007 - present) Bankruptcy Litigation Committee Member (2007 - present)

Member of ABI Writing Competition Sub-Committee (2008 - present)

Business Reorganization Committee Member (2008 - present) International Committee

Listserve Moderator (2008 - present)

International Association of Restructuring, Insolvency & Bankruptcy Professionals (INSOL)

Young Members Committee Member of Sounding Board Group (2009 - present)

Jessup International Law Moot Court Competition Judge (2010)

Turnaround Management Association (TMA) Houston Chapter

The State Bar of Texas (SBOT) Chair of Bankruptcy Section Young Lawyers Committee (2007 - 2009) Course Director-Nuts and Bolts of Business Bankruptcy Course (2008, 2009) Advanced Business Bankruptcy Course, Planning Committee Member (2008, 2009)

Assistant Course Director, Advanced Business Bankruptcy Course (2010)

Texas Young Lawyers Association (TYLA) ProBAR Children's Project Committee, Vice-Chair (2006 - 2007)

Houston Bar Association (HBA) Member of Bankruptcy Section Member of International Section

Member of the Texas Association of Bank Counsel (TABC)

PROFESSIONAL HONORS

The Best Lawyers in America, Bankruptcy & Creditor-Debtor Rights Law (2009, 2010) "Top Lawyers in Bankruptcy and Creditor-Debtor Rights Law," Corporate Counsel (2009, 2010) "Best Lawyers in Texas" (2009, 2010) "Texas Rising Star" (2004 - 2006, 2008 - 2010) "Up and Comer," H-Texas magazine (2004)

PUBLICATIONS

Co-author with David Barrack, "Lehman Decision Broadens Reach of Ipso Facto Provisions," ABI Litigation Committee Newsletter, April 2010 Co-author with David Rosenzweig, "U.S. Bankruptcy Court Orders Turnover of Attached Funds for Administration in Danish Bankruptcy Proceeding," ABI International Committee Newsletter, Volume 7, Number 1, February 2010 "Breach of Fiduciary Duty Claims," Turnaround Management Association's Journal of Corporate Renewal, Volume 22, Number 9, December 2009 "Recent Texas Case Confirms Gheewalla Doctrine: Creditors of an Insolvent Delaware Corporation Lack Standing to Bring Direct Breach of Fiduciary Duty Claims Against Officers and Directors," and "SEC’s New Units Targeting Complex Securities To Be Set Up Next Year," Fulbright & Jaworski LLP Corporate Governance Practice Group Newsletter, October 5, 2009 Co-author, "Executory Contracts and Protecting Against Credit Risk," State Bar of Texas 27th Annual Advanced Business Bankruptcy Course, October 2009 "What Every Collection Lawyer Needs to Know about Bankruptcy," Judgment Enforcement in Texas, Lorman Education Series, 2009 "Current Decisions: Surprises and Consternations," Turnaround Management Association, Houston Chapter, June 3, 2009 "Responsibilities in the Governance of a Non-Profit," Fulbright & Jaworski L.L.P. Corporate Governance Practice Group Newsletter, May 18, 2009 "International Insolvency and Workouts: Case Update," 2009 State Bar of Texas International Law Section Twenty-First Annual Institute, Houston, Texas, March 5, 2009 "Oil and Gas Bankruptcy Issues," Fulbright & Jaworski L.L.P. Presentation to In-House Counsel, February 2, 2009 Co-author, "Recent Developments: A Survey of Business and Consumer Case Law," 27th Annual Jay L. Westbrook Bankruptcy Conference,

November 2008 "MERS rolls the dice in Nevada," ABI Bankruptcy Litigation Committee Newsletter, Volume 5, Number 6, October 2008 Co-author with John Barrett and Robert C. Tucker, "Risks and Problems of Forum Selection in a Cross-Border Insolvency Case," Norton Annual Review of International Insolvency, 2009 Edition "Second Circuit Holds U.S. Creditors Are Bound By Ruling in Argentine Bankruptcy Case," Fulbright & Jaworski L.L.P. Briefing, June 12, 2008 "Corporate Governance At-A-Glance," Fulbright & Jaworski L.L.P. Corporate Governance Practice Group Newsletter, May 30, 2008 "What Every Collection Lawyer Needs to Know about Bankruptcy," Judgment Enforcement in Texas, Lorman Education Series, 2008 "Cash Collateral Use and Debtor-in-Possession Financing," State Bar of Texas, Nuts and Bolts of Business Bankruptcy Course, Austin, Texas, April 30, 2008 "Confidentiality in Chapter 11 Cases," ABI Bankruptcy Litigation Committee Newsletter, Volume 5, Number 2, March 2008 "Cross-Border Cases in the United States and China," Institute of Asian-Pacific Business Law, Hong Kong, China March 25, 2008 "Chapter 15: Ancillary and Other Cross-Border Cases," American Bar Association, Young Lawyers Division, 101 Practice Series, March 2008 "Definition of 'Foreign Proceedings' at Issue in Chapter 15 Case," Turnaround Management Association's Journal of Corporate Renewal, Volume 21, Number 3, March 2008 "Bankruptcy Judges' New Standing Order Promotes Pro Bono Work in the Southern District of Texas," Legal Front, December 2007 "Pursuing U.S. Claims Against Foreign Debtors," Turnaround Management Association's Journal of Corporate Renewal, Volume 20, Number 9, September 2007, reprinted in "The Complete Guide to Credit and Collections Law", Aspen Publishing, 2009. Co-author with David Barrack, "Practice Tip: Using Summary Judgment to Establish a Fraudulent Conveyance," ABI Bankruptcy Litigation Committee Newsletter, Volume 4, Number 3, June 2007 "Arbitration Agreements in Bankruptcy," American Bar Association, 101 Practice Series, 2007 "What is a Fair Valuation?" ABI Bankruptcy Litigation Committee Newsletter, Volume 4, Number 1, January 2007 Co-Author with Jason Boland, "When is Bankruptcy Right for your Corporate Client?" American Bar Association, Young Lawyers Division's Committee Compass, 101 Practice Series, 2006 "Direct Appeals to Circuit Court Under the Bankruptcy Abuse Prevention and Consumer Protection Act," American Bar Association, Young Lawyer's Division's Committee Compass, 2006 Co-author with Zack Clement and Carmel Eggelston, "How to Restructure Technology Rich Companies," Managing Intellectual Property Magazine, July - August 2001 Co-author with Zack Clement, "Trying to Get Paid," State Bar of Texas Advanced Business Bankruptcy Course, Dallas, Texas, 2001

SPEECHES

"Executory Contracts and Protecting Against Credit Risk," State Bar of Texas 27th Annual Advanced Business Bankruptcy Course, Houston, Texas, October 1, 2009

"An Overview of Chapter 11," Nuts & Bolts of Business Bankruptcy Course, State Bar of Texas CLE, Houston, Texas, September 30, 2009 Moderator and Panelist "Judgment Enforcement in Texas," Lorman Education Series, Houston, Texas, July 29, 2009 "Workouts & Restructurings: The Basics," Presentation to Ernst & Young's Transactions Advisory Group, April 9, 2009 "Contracts: Risk Allocation in Uncertain Times," Presenter on Bankruptcy Issues, CLE Presentation to In-House Counsel, Houston, Texas, March 4, 2009 "Bankruptcy Update: What Credit Managers Need to Know," National Association of Credit Managers (NMB&C Credit Group), Houston, Texas, February 20, 2009 "Oil and Gas Bankruptcy Issues," Presentation to In-House Counsel, Houston, Texas February 2, 2009 "What Every Collection Lawyer Needs to Know About Bankruptcy," Judgment Enforcement in Texas, Lorman Education Services, Houston, Texas, July 15, 2008 "Cash Collateral Use and Debtor-in-Possession Financing," State Bar of Texas, Nuts and Bolts of Business Bankruptcy Course, Austin, Texas, April 30, 2008 "Bankruptcy," Houston Bar Association (HBA) Presentation, Tomball High School, November 28, 2007 "Out of Court Workouts Involving Intercreditor Agreements: Attempting to Avoid WWIII," Panelist, Turnaround Management Association (TMA), Houston Chapter, October 4, 2007 "Debts and Claims," Association of Corporate Counsel/Fulbright & Jaworski L.L.P. Pro Bono Summit, August 14, 2007 "What Every Litigator Should Know About Bankruptcy," Litigation Section of the Houston Bar Association (HBA), May 31, 2007 "Cross-Border Insolvency 101: What You Need to Know About Insolvency Cases Across the Border," Panelist with Max Mendelsohn, Joint Spring Conference of the American Bar Association/Young Lawyers Division (ABA/YLD) and the Association du Jeune Barreau de Montreal (AJBM), Montreal, Canada, May 3 - 5, 2007

EDUCATIONAL BACKGROUND 2000 - J.D., Baylor Law School 1996 - B.A., cum laude, History and Philosophy, State University of New York at Stony Brook

While in law school, Johnathan was an assistant managing editor of the Baylor Law Review.

Johnathan is admitted to practice in New York and Texas State Courts, the U.S. District and Bankruptcy Courts for the Northern, Southern, Eastern and Western Districts of Texas, the U.S. District and Bankruptcy Courts for the Southern and Eastern Districts of New York and before the U.S. Court of Appeals for the Fifth Circuit.

INTERESTS Johnathan is married and has three children. He enjoys spending time with his family and training in martial arts. He is the founder of both the Houston Martial Arts Academy (HMAA) and the Houston Stick Fighting Association (HSFA).

CIVIC INVOLVEMENT

Houston Volunteer Lawyer's Program (HVLP) National Center for Refugee and Immigrant Children (NCRIC) Pro Bono Asylum Representation Project (ProBAR) Catholic Charities Cabrini Center for Immigrant Legal Assistance (CCILA) YMCA - Youth Soccer Coach Instructor - Womens Attack Prevention

76515621.1

AN OVERVIEW OF CHAPTER 11 BANKRUPTCY Presentation to the

STATE BAR OF TEXAS Annual Meeting

2010

Johnathan C. Bolton FULBRIGHT & JAWORSKI L.L.P.

jbolton@fulbright.com 1301 McKinney, Suite 5100 Houston, Texas 77010-3095

Telephone: 713.651.5113 Facsimile: 713.651.5246

76515621.1

AN OVERVIEW OF CHAPTER 11 BANKRUPTCY Johnathan C. Bolton

INTRODUCTION

This article outlines the major areas in a chapter 11 business case.

If a company is in a restructure situation, most often the company needs to raise cash and restructure its debt obligations so that its projected cash flows can pay its debts as they come due. Indeed, a common method of restructuring is to raise cash, use it to pay off some old debt, and restructure the remaining old debt to pay it off over a longer period of time.

It is important to develop a strategic plan of reorganization to either pay down or restructure existing debt. If the company is fortunate, it can implement that plan through consensual negotiations with its major creditors. It may be necessary, however, to implement that plan in a bankruptcy proceeding, which permits the company to force implementation of certain things.

Some preliminary considerations in the decision to file a chapter 11 reorganization as opposed to a chapter 7 liquidation, particularly in small business bankruptcies, include: (1) whether there is sufficient projected income for the company to reorganize; (2) whether additional financing is needed or has been obtained; (3) whether the company will be able to pay at least some of its debts; and (4) whether there will be anything left for equity interest holders (who may be members of the board of directors).

If the company does decide to file for protection under chapter 11, state law generally requires a vote of the board of directors at a board meeting which has been properly called and held. Board members or officers cannot file for a corporation on their own. In re Arkco Properties, Inc., 207 B.R. 624 (Bankr. E.D. Ark. 1997); In re Stavola/Manson Electric Co., 94 B.R. 21 (Bankr. D. Conn. 1988); In re Autumn Press, Inc., 20 B.R. 60 (Bankr. D. Mass. 1982); In re Al-Wyn Food Distributors, Inc., 8 B.R. 42 (Bankr. M.D. Fla. 1980); In re American Int'l Ind., Inc., 10 B.R. 695 (Bankr. S.D. Fla. 1981).

PURPOSE OF CHAPTER 11

The purpose of chapter 11 is to enable the debtor to reorganize its business affairs and restructure its debts so that it may emerge from bankruptcy as a viable ongoing entity. Chapter 11 provides the method for this reorganization of businesses, including the reorganization of partnerships and public and private corporations. The goal of chapter 11 is to rehabilitate a business as a going concern rather than to liquidate it as would occur in a chapter 7 case, where an independent trustee is appointed to liquidate the company’s assets. In chapter 11, the debtor is given a “fresh start” through the binding effect of the order confirming a plan of reorganization.

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WHO MAY BE A DEBTOR UNDER CHAPTER 11

There is no insolvency requirement for chapter 11 filing. See Kuhns v. Bd. of Governors of Fed. Reserve System, 930 F.2d 39, 40 n.1 (D.C. Cir. 1991); see also In re Johns-Manville Corp., 36 B.R. 727, 730 (Bankr. S.D.N.Y. 1984). Further, an individual or an entity may file chapter 11. Most debtors commencing cases under chapter 11 are corporations, however, a dissolved corporation may not be a debtor under chapter 11. See In re Vt. Fiberglass, Inc., 10 C.B.C.2d 416 (Bankr. D. Vt. 1984). Partnerships also commonly become debtors under Chapter 11. A Chapter 11 case can be filed by or against a partnership itself, or an individual partner and the filing does not automatically dissolve a general partnership. If the partner becomes a debtor, its estate is substituted as a partner of the debtor partnership. See In re Safren, 16 C.B.C.2d 315 (Bankr. C.D. Cal. 1986). A trust cannot file for chapter 11 protection. See In re John M. Cahll, M.D. Assocs. Pension Plan, 15 B.R. 639-40 (Bankr. E.D. Pa. 1981).

VENUE OF BANKRUPTCY CASES

A corporate debtor may commence a case in the state in which it is incorporated. In re Ocean Properties of Del., Inc., 95 B.R. 304, 305 (Bankr. D. Del. 1988). Additionally, a corporate debtor may commence a case in the district in which it is domiciled, resides, has a principal place of business or principal assets for the 180 days preceding the filing of a petition or a longer period, or in the district in which a case is pending concerning an affiliate, general partner or partnership. See 28 U.S.C. § 1408. The debtor’s principal place of business is generally where major business decisions are made rather than where its assets are located. See In re Midland Assocs., 121 B.R. 459, 460 n.1 (Bankr. E.D. Pa. 1990); In re Pavilion Place Assoc., 88 B.R. 32, 35 (Bankr. S.D.N.Y. 1988).

FILING OF SCHEDULES

In a voluntary chapter 11 case, a list of the debtor’s twenty largest unsecured creditors, and a list of equity security holders, including addresses and the amount of claims or the nature and kind of interest registered to each holder, must be filed within 15 days after the petition date unless the court orders otherwise. See 11 U.S.C. § 521(a); see also FED..R. BANKR. P. 1007(a)(3). Extensions of time for submission of lists of creditors and equity security holders may be granted only on motion and on notice to the trustee, the United States trustee, and any committee elected pursuant to Section 705 or appointed pursuant to Section 1102 of the Bankruptcy Code and other parties as the court directs, and for cause shown. See FED. R. BANKR. P. 1007(a)(4).

THE BANKRUPTCY ESTATE

The filing of a voluntary petition under chapter 11 of the Bankruptcy Code creates a bankruptcy estate. Section 541 of the Bankruptcy Code broadly defines “property of the estate” and explains that the estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case” wherever in the world it is located and by whomever it is held. 11 U.S.C. § 541(a).

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Property of the estate also includes interests that are acquired after the commencement of the case and property that is recovered by the trustee or debtor in possession during the case from avoidance actions or turnovers. See 11 U.S.C. § 541(a)(7), (a)(4), (a)(3). Property of the estate includes a debtor's equitable interests. See 48th St. Steakhouse, Inc. v. Rockefeller Group, Inc. (In re 48th St. Steakhouse, Inc.), 835 F.2d 427, 430 (2d Cir. 1987), cert. denied, 485 U.S. 1035 (1988); In re The Moore & White Co., Inc., 83 B.R. 277, 281 (Bankr. E.D. Pa. 1988). Excluded from property of the estate, however, are purely possessory interests in nonresidential real estate where the stated term of the lease has expired. 11 U.S.C. § 541(b)(2); see also Erickson v. Polk, 921 F.2d 200, 201 (8th Cir. 1990). Section 541 also defines property of the estate to include all “proceeds, product, offspring, rents, or profits of or from property of the estate.” 11 U.S.C. § 541(a)(6).

The statutory definition of “property of the estate” also makes unenforceable any provision in an agreement or in non-bankruptcy law that purports to terminate or modify a debtor’s rights in property because of the debtor's financial condition or the commencement of a bankruptcy case. See 11 U.S.C. § 541(c).

THE AUTOMATIC STAY

The filing of a voluntary petition under chapter 11 provides protection for businesses who face creditor pressure and gives debtors “breathing space” in which they can formulate a plan of reorganization. In re Ionosphere Clubs, Inc. 922 F.2d 984, 989 (2nd Cir. 1990); Teachers Ins. & Annuity Ass'n of America v. Butler, 803 F. 2d 61, 64 (2d Cir. 1981), cert. denied, 456 U.S. 974 (1982). This is accomplished by the automatic stay imposed by Section 362 of the Bankruptcy Code. See 11 U.S.C. § 362(a). The stay goes into effect automatically upon the filing of the petition and the world is deemed to have actual notice of the filing. The stay is applicable to all entities, including individual persons, partnerships, corporations, estates, trusts, governmental units, and the United States Trustee. See 11 U.S.C. § 101(15). Ignorance of the stay does not negate its binding effect on these entities. See Kalb v. Feurstein, 308 U.S. 433, 438-39 (1940). The scope of protection afforded by the automatic stay provision is broad, and it bars any action which “would inevitably have an adverse impact on the property of the bankruptcy estate.” In re Prudential Lines, Inc., 119 B.R. 430, 432 (S.D.N.Y. 1990); In re 48th Street Steakhouse, Inc., 835 F.2d 427, 431 (2nd Cir. 1987), cert. denied, 485 U.S. 1035, 108 S. Ct. 1596, 99 L.Ed.2d 910 (1988).

Section 362(a) provides that the filing of a bankruptcy petition automatically stays pre-petition acts directed against the debtor or against the debtor's property, including:

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

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(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; (4) any act to create, perfect, or enforce any lien against property of the estate; (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title; (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; (7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and (8) the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor.

11 U.S.C. § 362(A).

The automatic stay is one of the most fundamental protections afforded the debtor by the Bankruptcy Code. See H.R. Rep. No. 595, 95th Cong., 1st Sess. 340 (1977), reprinted on 1978 U.S. Code Cong. & Admin. News 5787, 5963, 6296-97. The key function of the automatic stay is the centralization of all disputes concerning property of the debtor's estate in the Bankruptcy Court. The stay therefore protects the debtor from an uncoordinated race to the courthouse by creditors attempting to scramble for the debtor’s assets in a number of different proceedings. See A.H. Robins Co. v. Piccinin (In re A.H. Robins Company), 788 F.2d 994, 998 (4th Cir.), cert. denied, 479 U.S. 876 (1986). The automatic stay also serves to protect the interests of creditors since all creditors in the same class will be treated equally in an orderly liquidation in a single forum. See University Medical Ctr. v. Sullivan (In re University Medical Ctr.), 973 F.2d 1065, 1074 (3rd Cir. 1992); see also Fidelity Mort. Inv. v. Camelia Builders, Inc. (In re Fidelity Mort. Inv.), 550 F.2d 47, 55 (2d Cir. 1976), cert. denied, 429 U.S. 1093 (1977); In re AP Industries, 117 B.R. 789, 798 (Bankr. S.D.N.Y. 1990). This allows a reorganization to proceed effectively and efficiently, unimpeded by uncoordinated proceedings in other courts. See Hunt v. Bankers Trust Co., 799 F.2d 1060, 1069 (5th Cir. 1986).

The automatic stay is imposed by operation of the Bankruptcy Code itself. The debtor cannot waive the effect of the stay without court approval, because otherwise, the debtor may be strong-armed into granting a creditor relief from the stay without the Court’s knowledge. Bankruptcy Rule 4001(d) requires court approval of any agreement among the debtor and its creditors that modifies the automatic stay. See FED. R. BANKR. P. 4001(d).

With certain exceptions, most acts by creditors, including proceedings, enforcements of judgments, acts to obtain or control property of the estate, acts to create or enforce liens, or other acts to collect a claim are stayed by Section 362. Section 362 also stays judicial, administrative or other proceedings that were or could have been commenced prior to the bankruptcy case. See 11 U.S.C. § 362(a)(1). See Fed. Deposit Insur. Corp. v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125, 130 (2d Cir. 1992); see also In re Knightsbridge Dev. Co., Inc., 884 F.2d 145, 148 (4th Cir. 1989). Section 362 may prohibit proceedings against a debtor where the debtor posted a supersedeas bond to preserve and perfect an appeal, and collection of the judgment, if affirmed,

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would be payable under that bond. See Borman v. Raymark Indus., Inc., 946 F.2d 1031, 1035 (3d Cir. 1991); Sheldon v. Munford, Inc., 902 F.2d 7, 8 (7th Cir. 1990).

Generally, Section 362 does not stay actions that are commenced by the debtor. See Berry Estates, Inc. v. State of New York (In re Berry Estates, Inc.), 812 F.2d 67, cert. denied, 484 U.S. 819 (1987); see also Wills Motors, Inc. v. Volvo N. Am. Corp., 131 B.R. 263 (S.D.N.Y. 1991). However, Section 362 does stay counterclaims against the debtor in suits brought by the debtor. See United Jersey Bank v. Maritime Elec. Co., Inc. (In re Maritime Elec. Co., Inc.), 959 F.2d 1194, 1204 (3d Cir. 1992).

The automatic stay provision of the Bankruptcy Code also stays creditors from attempts to collect on a claim. See, e.g., In re Aponte, 82 B.R. 738, 742 (Bankr. E.D. Pa. 1988) (landlord's failure to provide heat and hot water held an impermissible act to collect a claim); In re Price, 103 B.R. 989, 992-93 (Bankr. N.D. Ill. 1989), aff'd, 130 B.R. 259 (N.D. Ill. 1991) (creditor barred from telephoning debtor to demand payment); Andrews Univ. v. Merchant (In re Merchant), 958 F.2d 738, 741 (6th Cir. 1992)(refusal to provide student debtor with a transcript held an impermissible act to collect a claim); Fidelity Mortgage Inv. v. Camelia Bldrs., Inc. (In re Fidelity Mortgage Inv.), 550 F.2d 47, 53-54 (2d Cir. 1976), cert. denied, 429 U.S. 1093 (1977) (bankruptcy of junior lienholder held a bar to foreclosure by senior lienholder); In re Texaco, Inc., 73 B.R. 960, 968 (Bankr. S.D.N.Y. 1987) (filing a notice of acceleration held a proscribed collection effort); Cal. v. Farmers Mkts, Inc. (In re Farmers Mkts, Inc.), 792 F.2d 1400, 1404 (9th Cir. 1986) (refusal to transfer liquor license held an impermissible act to collect a claim).

Section 362 stays the enforcement of prepetition judgments against a debtor or property of the estate. See 11 U.S.C. § 362(a)(2); see also In re Mullarkey, 81 B.R. 280, 283 (Bankr. D.N.J. 1987). Section 362 also stays all acts to obtain possession of property of the estate, or exercise control over property of the estate. See 11 U.S.C. § 362(a)(3); see also The Minoco Grp. of Cos., Ltd. v. First State Bank Underwriters Agency of N.E. Reinsur. Corp. (In re The Minoco Grp. of Cos., Ltd.), 799 F.2d 517, 519 (9th Cir. 1986)(insurer stayed from cancelling prepaid directors' liability insurance); Federal Home Loan Mort. Corp. v. Holme Circle Realty Corp., 146 B.R. 135, 137 (E.D. Pa. 1992) (move for appointment of receiver was stayed); Wyatt v. Mellon Mortgage, Inc., 36 B.R. 783, 784 (Bankr. S.D. Ohio 1984) (changing locks of debtor's rental unit constituted impermissible act to obtain possession). Section 362 stays all acts to create, perfect or enforce liens against property of the estate. See 11 U.S.C. § 362(a)(4); see also James v. Wash. Mutual Svgs. Bank (In re Brooks), 871 F.2d 89, 89 (9th Cir. 1989) (re-recording of deed of trust).

Section 362 also stays creditors from effecting any postpetition setoff of a debt owing to a debtor against such creditor's prepetition claim. See 11 U.S.C. § 362(a)(7). However, pursuant to Section 553 of the Bankruptcy Code, creditors may obtain court approval to lift the stay and allow the creditor to effect the setoff postpetition. See 11 U.S.C. § 553; see also Univ. Med.l Ctr. v. Sullivan (In re University Medical Cir.), 973 F.2d 1065, 1079 (3d Cir. 1992); Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir. 1984); In re Neilson, 90 B.R. 172, 173-74 (Bankr. W.D.N.C. 1988). Setoffs by commodity brokers, stockbrokers, financial institutions, forward contract merchants and securities clearing agencies are not stayed with respect to their actions under forward contracts. See 11 U.S.C. § 362(b)(6); see also In re Amcor Funding Corp., 117 B.R. 549, 550 (D. Ariz. 1990).

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Like setoff, the debtor takes “property subject to rights of recoupment.” In re Career Consultants, Inc., 84 B.R. 419, 426 (Bankr. E.D. Va. 1988). “Recoupment allows a defendant to reduce the amount of a plaintiff’s claim by asserting a claim against the plaintiff which arose out of the same transaction to arrive at a just and proper liability on the plaintiff’s claim.” Holford v. Powers (In re Holford), 896 F.2d 176, 178 (5th Cir. 1990). “Post-petition recoupment does not violate the automatic stay imposed by the bankruptcy court.” Kosadnar v. Metropolitan Life Ins. Co. (In re Kosadnar)157 F.3d 1011, 1016 (5th Cir. 1988). In addition “[d]efensive claims for recoupment are never subject to statutes of limitations as long as the plaintiff’s action is timely.” In re Gober, 100 F.3d 1195, 1207 (5th Cir. 1996).

A withholding can be a recoupment if two basic conditions are met: (1) overpayment to the debtor; and (2) both the creditor’s claim and the amount owed to the debtor arose from a single contract or transaction. See id. at 1014. Banks may put an “administrative hold” on accounts owned by the debtor, as this had been held to not violate the automatic stay. See Citizens Bank of Md v. Strumpf, 516 U.S. 16 (1995). However, recoupment of liquidated damages for the breach of a contract post-petition may not be recoverable in recoupment where the debtor received no post-petition benefit from the contract at issue. See In re. Gasmark, Ltd., 193 F.3d 371, 374 (5th Cir. 1999).

The automatic stay of Section 362 also applies to the commencement or continuation of a proceeding before the United States Tax Court involving the debtor. See 11 U.S.C. § 362(a)(8). The automatic stay may be lifted for the limited purpose of determining tax liability in the Tax Court. See Lerch v. Commissioner of Internal Rev. Svc., 877 F.2d 624, 626-27 (7th Cir. 1989). However, Section 362 does not apply to the commencement or continuation of an action or proceeding by a governmental unit to enforce its police or regulatory power, or a governmental unit's enforcement of a non-monetary judgment obtained from such proceeding. See 11 U.S.C. § 362(b)(4), (b)(5); see also Cournoyer v. Town of Lincoln (In re Cournoyer), 790 F.2d 971 (1st Cir. 1986)(town's efforts to enforce zoning ordinance against debtor held exempt from the automatic stay); Thomassen v. Div. of Med. Quality Assurance (In re Thomassen), 15 B.R. 907 (B.A.P. 9th Cir. 1981) (license revocation proceeding against physician/debtor held not subject to automatic stay); Colonial Tavern Inc. v. Byrne (In re Colonial Tavern, Inc.), 420 F.Supp. 44 (D. Mass. 1976) (pre-Code case involving suspension of liquor license for violation of midnight closing hour).

There is a split in the Circuits as to whether actions taken in violation of the stay are held void or merely voidable. The First, Second, Third, Sixth, Tenth and Eleventh Circuits have held that acts violating the automatic stay are void ab initio. See, e.g. Ellis v. Consolidated Diesel Elec. Corp., 894 F.2d 371 (10th Cir. 1990); In re Brooks, 79 Bank 479 (B.A.P. 9th Cir. 1989); In re Taylor, 884 F.2d 478 (9th Cir. 1989); Smith v. First Am. Bank, N.A., 876 F.2d 5244 (6th Cir. 1989); In re 48th Street Steakhouse, Inc., 835 F.2d 427 (2nd Cir. 1987), cert. denied, 485 U.S. 1035, (1988); In re Smith Corset Shops, Inc., 696 F.2d 971 (1st Cir. 1982); In re Ward, 837 F.2d 12444 (3rd Cir. 1988); Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306 (11th Cir. 1982). The Fifth Circuit has held that acts violating the stay are merely voidable. See Sikes v. Global Marine, Inc., 881 F.2d 176 (5th Cir. 1989). The Fourth Circuit has not spoken on the issue.

Relief from the automatic stay must be granted by the Bankruptcy Court if the debtor is unable to demonstrate its ability to protect a secured creditor from a decline in the value of its

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interest in the property of the debtor. See United States Ass'n of Tex. v. Timbers of Inwood Forest Assocs, Ltd., 108 S. Ct. 626, 629 (1988) (secured creditors interest not adequately protected if the security is depreciating during the term of the stay); Hamilton v. Lomas Mortgage U.S.A. (In re Hamilton), 100 B.R. 385, 388 (N.D. Ill. 1989) (where equity cushion steadily eroded, secured creditor does not have sufficient assurance that value of secured interest will be protected). In determining whether to grant relief from the stay, the Bankruptcy Court must also consider “the impact of the stay on the parties and the ‘balance of hurt’ in fashioning relief” from the stay. In re Abrantes Const. Corp., 132 B.R. 234 (N.D.N.Y. 1991). The automatic stay may be terminated, modified or conditioned for cause, including lack of adequate protection of an interest in property of the creditor. See 11 U.S.C. § 362(d)(1). The stay can also be terminated, modified, or conditioned with respect to the stay of an act against property of the estate, if the debtor does not have any equity in the property and the property is not necessary to an effective reorganization. See 11 U.S.C. § 362(d)(2).

In addition, courts sometimes grant relief from the automatic stay to allow litigation in another forum to proceed against the debtor. The factors that the courts use to determine whether such relief should be granted include the following: (1) whether the relief will result in a partial or complete resolution of the issues; (2) lack of any connection with or interference with the bankruptcy case; (3) whether the foreign proceeding involves the debtor as fiduciary; (4) whether a specialized tribunal has been established to hear the particular cause of action and that tribunal has the expertise to hear the case; (5) whether the debtor's insurance carrier has assumed full financial responsibility for defending the litigation; (6) whether the action essentially involves third parties, and the debtor functions only as a bailee or conduit for goods or proceeds in question; (7) whether litigation in another forum would prejudice the interests of other creditors' committee and other interested parties; (8) whether the judgment claim arising from the foreign action is subject to equitable subordination under Section 510(c); (9) whether the movant's success in the foreign proceeding would result in a judicial lien avoidable by the debtor under Section 522(f); (10) the interest of judicial economy and the expeditious and economical determination of litigation for the parties; (11) whether the foreign proceedings have progressed to the point where the parties are prepared for trial; and (12) the impact of the stay on the parties and the ‘balance of hurt’. See In re Curtis, 40 B.R. 795, 799 (Bankr. D. Utah 1984).

PLANS OF REORGANIZATION

Formulation of a Plan

During the first 120 days of the case, the debtor-in-possession has the exclusive right to file a plan of reorganization, in which the company proposes a plan for the repayment of debt. See 11 U.S.C. § 1121(b). However, if creditors believe that the debtor’s plan is not feasible, or if the creditors and equity interest holders do not agree with the debtor’s plan, the Bankruptcy Code provides that these parties have the right after the 120-day exclusivity period, to file their own plans of reorganization. See 11 U.S.C. § 1121 (c).1

1 In a single asset chapter 11 case, the debtor-in-possession must file a plan within the first 90 days of the case that has a reasonable probability of being confirmed within a reasonable time or the secured creditor will be granted relief from the automatic stay. 11 U.S.C. § 362(d)(3).

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The major secured creditor of the debtor can have a lot of influence in the negotiation of the debtor’s plan, especially if that secured creditor is financing the debtor’s bankruptcy case. The Official Committee of Unsecured Creditors can also have influence in negotiations over the debtor’s plan, since collectively the Committee has the power to vote against any plan proposed by the debtor and may be able to delay confirmation of any plan. Holders of equity interests in the debtor can influence the outcome of plan negotiations since they have the power to vote out the current board of directors.

The plan of reorganization must separate similar types of claims into distinct classes. The Code states that the plan must “place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.” See 11 U.S.C. § 1122. Additionally, a plan of reorganization “may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.” Id.

In order to get a plan of reorganization approved, the debtor-in-possession must first get court approval of a disclosure statement which will be sent out to all parties in interest. See 11 U.S.C. 1125(b). The disclosure statement gives a detailed description of the plan of reorganization and is required to contain “adequate information,” which means “reasonably practicable, in light of the nature and history of the debtor and the condition of the debtor's books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan.” 11 U.S.C. § 1125(a).

After approval of the disclosure statement, the bankruptcy court then sets a hearing for confirmation of the plan after the votes are cast by parties in interest in favor of or against the plan. See 11 U.S.C. § 1128.

Holders of claims or interests whose claims are impaired (i.e., will not receive 100 cents on the dollar) may vote to accept or reject the plan of reorganization based on the information contained in the disclosure statement. See 11 U.S.C. § 1126(a). In order for a class of claims or interests to accept a plan of reorganization, the holders of at least two-thirds in amount and more than one-half in number of the allowed claims or interests of such class held by creditors or holders of such interests must vote in favor of the plan. See 11 U.S.C. § 1126(c)(d). The holders of claims or interests must vote in good faith, and their votes must be solicited or procured in good faith. See 11 U.S.C. § 1126(e).

Holders of claims or interests whose claims are not impaired (i.e. will receive 100 cents on the dollar) are not entitled to vote on the plan, since they “are conclusively presumed to have accepted the plan, and solicitation of acceptances with respect to such class from the holders of claims or interests of such class is not required.” 11 U.S.C. § 1126(f).

Confirmation of a Plan of Reorganization

In order for a plan of reorganization to be confirmed by the bankruptcy court, it must meet each of the elements of Section 1129. Section 1129(a) states, that the court shall confirm a plan if all of the following requirements are met:

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(1) The plan complies with the applicable provisions of this title. (2) The proponent of the plan complies with the applicable provisions of this title. (3) The plan has been proposed in good faith and not by any means forbidden by law. (4) Any payment made or to be made by the proponent, by the debtor, or by a person issuing securities or acquiring property under the plan, for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to the approval of, the court as reasonable. (5)(A)(i) The proponent of the plan has disclosed the identity and affiliations of any individual proposed to serve, after confirmation of the plan, as a director, officer, or voting trustee of the debtor, an affiliate of the debtor participating in a joint plan with the debtor, or a successor to the debtor under the plan; and (ii) the appointment to, or continuance in, such office of such individual, is consistent with the interests of creditors and equity security holders and with public policy; and (B) the proponent of the plan has disclosed the identity of any insider that will be employed or retained by the reorganized debtor, and the nature of any compensation for such insider. (6) Any governmental regulatory commission with jurisdiction, after confirmation of the plan, over the rates of the debtor has approved any rate change provided for in the plan, or such rate change is expressly conditioned on such approval. (7) With respect to each impaired class of claims or interests (A) each holder of a claim or interest of such class - (i) has accepted the plan; or (ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date; or (B) if Section 1111(b)(2) of this title applies to the claims of such class, each holder of a claim of such class will receive or retain under the plan on account of such claim property of a value, as of the effective date of the plan, that is not less than the value of such holder's interest in the estate's interest in the property that secures such claims. (8) With respect to each class of claims or interests - (A) such class has accepted the plan; or (B) such class is not impaired under the plan. (9) Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that

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(A) with respect to a claim of a kind specified in Section 507(a)(1) or 507(a)(2) of this title, on the effective date of the plan, the holder of such claim will receive on account of such claim cash equal to the allowed amount of such claim; (B) with respect to a class of claims of a kind specified in Section 507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6), or 507(a)(7) of this title, each holder of a claim of such class will receive - (i) if such class has accepted the plan, deferred cash payments of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) if such class has not accepted the plan, cash on the effective date of the plan equal to the allowed amount of such claim; and (C) with respect to a claim of a kind specified in Section 507(a)(8) of this title, the holder of such claim will receive on account of such claim deferred cash payments, over a period not exceeding six years after the date of assessment of such claim, of a value, as of the effective date of the plan, equal to the allowed amount of such claim. (10) If a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider. (11) Confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan. (12) All fees payable under Section 1930 of title 28, as determined by the court at the hearing on confirmation of the plan, have been paid or the plan provides for the payment of all such fees on the effective date of the plan. (13) The plan provides for the continuation after its effective date of payment of all retiree benefits, as that term is defined in Section 1114 of this title, at the level established pursuant to subSection (e)(1)(B) or (g) of Section 1114 of this title, at any time prior to confirmation of the plan, for the duration of the period the debtor has obligated itself to provide such benefits.

11 U.S.C. § 1129(A).

If one or more classes votes in favor of rejecting the plan of reorganization, the Court may still approve the plan if the requirements of the “cramdown” Section 1129(b) are met. Under this provision of the Bankruptcy Code, each of the classes of claims must be paid in “absolute priority” order, which essentially means that, after administrative and other priority claims, holders of secured claims get paid in full first, then holders of unsecured claims get paid in full, then holders of equity interests get paid. Section 1129(b) provides that

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(b)(1) Notwithstanding Section 510(a) of this title, if all of the applicable requirements of subsection (a) of this Section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. (2) For the purpose of this subsection , the condition that a plan be fair and equitable with respect to a class includes the following requirements: (A) With respect to a class of secured claims, the plan provides - (i)(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property; (ii) for the sale, subject to Section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or (iii) for the realization by such holders of the indubitable equivalent of such claims. (B) With respect to a class of unsecured claims - (i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property. (C) With respect to a class of interests - (i) the plan provides that each holder of an interest of such class receive or retain on account of such interest property of a value, as of the effective date of the plan, equal to the greatest of the allowed amount of any fixed liquidation preference to which such holder is entitled, any fixed redemption price to which such holder is entitled, or the value of such interest; or

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(ii) the holder of any interest that is junior to the interests of such class will not receive or retain under the plan on account of such junior interest any property.

11 U.S.C. § 1129(B).

If there is more than one plan of reorganization which has been properly solicited and voted in favor of by creditors and equity interest holders, since only one plan of reorganization can be confirmed “the court shall consider the preferences of creditors and equity security holders in determining which plan to confirm.” 11 U.S.C. § 1129(e). No plan may have the avoidance of taxes or the avoidance of the application of Section 5 of the Securities Act of 1933 as its principal purpose. See 11 U.S.C. § 1129 (f).

Small Businesses Reorganization

In cases where the debtor has elected to be considered a “small business” under Section 1121 (e), “the court may conditionally approve a disclosure statement subject to final approval after notice and a hearing: and may solicit acceptances and rejections of the plan based on a conditionally approved disclosure statement. 11 U.S.C. § 1125(f). The conditionally approved disclosure statement “must be mailed at least ten days prior to the date of the hearing on confirmation of the plan,” but a “hearing on the disclosure statement may be combined with a hearing on confirmation of a plan.” Id.

The Bankruptcy Code defines “small business” as a business with debts that do not exceed $2,000,000.

“[s]mall business” means a person engaged in commercial or business activities (but does not include a person whose primary activity is the business of owning or operating real property and activities incidental thereto) whose aggregate noncontingent liquidated secured and unsecured debts as of the date of the petition do not exceed $2,000,000[.]

11 U.S.C. § 101 (51C).

The Bankruptcy Code defines “person” as including an “individual, partnership and corporation” and certain governmental units under certain circumstances. 11 U.S.C. § 101(41).

If a debtor designates its case as a small business case, then Section 1125(f) of the Bankruptcy Code provides that the disclosure statement can be conditionally approved by the Court and set for final approval at the same time as the plan confirmation hearing, permitting a faster, more economical confirmation of a plan of reorganization. Federal Rule of Bankruptcy Procedure 3017.1 details the procedures for this.

(a) Conditional Approval of Disclosure Statement. If the debtor is a small business and has made a timely election to be considered a small business in a Chapter 11 case, the court may, on application of the plan proponent, conditionally approve a disclosure statement filed in accordance with Rule 3016(b). On or

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before conditional approval of the disclosure statement, the court shall: (1) fix a time within wich the holders of claims and interests may accept or reject the plan; (2) fix a time for filing objections to the disclosure statement; (3) fix a date for the hearing on final approval of the disclosure statement to be held if a timely objection if filed; and (4) fix a date for the hearing on confirmation. (b) Application of Rule 3017. Rule 3017(a), (b), (c), and (e) do not apply to a conditionally approved disclosure statement. Rule 3017(d) applies to a conditionally approved disclosure statement, except that conditional approval of the disclosure statement for the purpose of applying Rule 3017(d). (c) Final Approval. (1) Notice. Notice of the time fixed for filing objections and the hearing to consider final approval of the disclosure statement shall be given in accordance with Rule 2002 and may be combined with notice of the hearing on confirmation of the plan. (2) Objections. Objections to the disclosure statement shall be fled, transmitted to the United States trustee and served on the debtor, the trustee, any committee appointed under the Code and any other entity designated by the court at any time before final approval of the disclosure statement or by an earlier date as the court may fix (3) Hearing. If a timely objection to the disclosure statement is filed, the court shall hold a hearing to consider a final approval before or combined with the hearing on confirmation of the plan.

FED. R. BANKR. P. 3071.1.

Federal Rule of Bankruptcy Procedure 3017.1 permits a motion attaching a plan and disclosure statement, requesting: (1) immediate conditional approval of the disclosure statement, (2) scheduling deadlines for voting and objecting and (3) scheduling a hearing on final approval of the plan and disclosure statement. Rule 3017.1 requires notice in accordance with Rule 2002, which provides for 25 days notice of a hearing to approve a disclosure statement or to confirm a plan of reorganization. See FED. R. BANKR. P. 2002(b). Rule 3017.1 thus contemplates a completion of the disclosure statement approval and plan confirmation process approximately 30 days from its initiation. Interestingly, while Rule 3017.1 requires 25 days notice of the combined disclosure statement/confirmation hearing, Bankruptcy Code Section 1125(f)(2) only requires that the disclosure statement itself be mailed 10 days before this hearing. See 11 U.S.C. § 1121(e).

Also, the existing Bankruptcy Code provides a 100 (instead of 120) day period for the debtor to file a plan of reorganization and a 160 (instead of 180) day period to confirm such a plan. 11 U.S.C. § 1121(e).

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The existing rules for small businesses obviously recognize that speed can be important in reorganizing small businesses. The recent trend toward pre-packaged bankruptcies in large public company cases (where the plan and disclosure statement are already drafted and votes in support of the plan have been solicited pre-bankruptcy) and the speed at which many of these cases have been moved through the courts, is evidence that many people believe speed is important in larger cases. In some pre-packaged cases for large companies in which substantial support has been pre-solicited, the courts have actually set disclosure statement approval hearing at the same time as the plan confirmation hearing, replicating for these larger cases what is currently permitted by Rule 3017.1 for small business cases.

Prepackaged Bankruptcies

Prepackaged chapter 11 bankruptcies, commonly referred to as “prepacks,” are bankruptcies in which the plan of reorganization and disclosure statement are filed at the same time as the bankruptcy petition and are put on a “fast track.” Prepackaged plans are often considered preferable to traditional chapter 11 filings, because they reduce the time and expense of litigation and allow the debtor to proceed with its reorganization as quickly as possible. See In re REPH Acquisition Co., 134 B.R. 194, 196 n. 1 (N.D. Tex. 1991).

Prepackaged plans are specifically contemplated by the provisions of the Bankruptcy Code and the Bankruptcy Rules. Section §§ 1102(b)(1), 1121(a) and 1126(b) of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 3018(b) provide for the mechanisms by which prepackaged plans may be negotiated, filed and confirmed.

Section 1102(b)(1) allows prepetition creditors’ committees to act as the committees in the bankruptcy case if they are representative of the claims and interests in the case. This is commonly found in cases involving a significant amount of bond debt. Section 1102(b)(1) provides:

A committee of creditors appointed under subsection (a) of this Section shall ordinarily consist of persons, willing to serve, that hold the seven largest claims against the debtor of the kinds represented on such committee, or of the members of a committee organized before the commencement of the case under this chapter, if such committee was fairly chosen and is representative of the different kinds of claims to be represented.

11 U.S.C. § 1102(B)(1).

Section 1121(a) of the Bankruptcy Code allows the debtor-in-possession to “file a plan with a petition commencing a voluntary case” See 11 U.S.C. § 1121(a).

Section 1126(b) and Federal Rule of Bankruptcy Procedure 3018(b) provide the mechanism for acceptance and confirmation of a prepackaged plan. Section 1126(b) provides, in relevant part:

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a holder of a claim or interest that has accepted or rejected the plan before the commencement of the case under this title is deemed to have accepted or rejected such plan, as the case may be, if - (1) the solicitation of such acceptance or rejection was in compliance with any applicable nonbankruptcy law, rule, or regulation governing the adequacy of disclosure in connection with such solicitation; or (2) if there is not any such law, rule, or regulation, such acceptance or rejection was solicited after disclosure to such holder of adequate information, as defined in Section 1125(a) of this title.

11 U.S.C. § 1126(B).

Rule 3018(b) further explains the procedure for prepetition plan acceptance. Rule 3018(b) provides:

An equity security holder or creditor whose claim is based on a security of record who accepted or rejected the plan before commencement of the case shall not be deemed to accepted or rejected the plan pursuant to § 1126(b) of the Code unless the equity security holder or creditor was the holder of record of the security on the date specified in the solicitation of acceptance or rejection for the purposes of such solicitation. A holder of a claim or interest who has accepted or rejected a plan before the commencement of the case under the Code shall not be deemed to have accepted or rejected the plan if the court finds after notice and hearing that the plan was not transmitted to substantially all creditors and equity holders of the same class, that an unreasonably short time was prescribed for such creditors and equity security holders to accept or reject the plan, or that the solicitation was not in compliance with § 1126(b) of the Code.

FED. R. BANKR. P. 3018(b).

As explained above, the Court will only confirm any plan if it meets the requirements of Section 1129 of the Bankruptcy Code.

The filing of a prepackaged plan may not be the solution for every debtor seeking to reorganize under chapter 11, however. Some debtors facing mounting litigation or a creditor foreclosure may benefit from the imposition of the automatic stay and may not have time to negotiate and solicit approval of a prepackaged plan. Further, in instances in which the debtor plans to avail itself of the ability to assume or reject executory contracts, the filing of a prepackaged plan may not be suitable. The assumption or rejection of contracts often involves litigation, which prepackaged plans, by their nature, seek to avoid. Accordingly, when a debtor is likely to seek relief from unexpired contracts or leases, it may find that the normal chapter 11 process is more beneficial. Also, it must be remembered that any plan negotiated prepetition remains subject to court approval so debtors may face some uncertainty when they proceed to court and move for plan confirmation.

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OPERATING IN CHAPTER 11

Duties of the Debtor in Possession

The debtor-in-possession, who has the same powers as a trustee of the bankruptcy estate, has the duty of preserving the value of the business for the benefit of creditors and owners. See 11 U.S.C. §§ 1107, 1108; see also In re Int’l Yacht and Tennis, Inc., 922 F.2d 659, 661 (11th Cir. 1991). As a trustee of the estate, the debtor-in-possession has fiduciary obligations to its creditors which precludes the debtor from acting solely in self-interest. The Code imposes a duty on the debtor-in-possession to conduct itself throughout the Chapter 11 case with the good faith belief that each of its actions are in the best interests of all creditors and interest owners. If the company acts as a debtor-in-possession, the debtor's management and directors make the business judgments and procedural decisions throughout the case. See 11 U.S.C. § 1108. However, the management and directors’ power is limited by the Bankruptcy Code and is subject to judicial review.

There are three key restraints on the conduct of the debtor's business: (a) transactions outside of the ordinary course of business must be approved by the bankruptcy court, (b) a debtor may not use a secured creditor’s cash collateral without first obtaining court approval or secured creditor consent, and (c) the use, sale or lease of property of the estate which represents a secured creditor’s collateral may, if requested by a creditor, be conditioned on providing “adequate protection” for the creditor's interest in the property.

A debtor-in-possession may use, sell or lease property of the estate in the ordinary course of business, or enter into any other transaction involving property of the estate in the ordinary course of business, without any specific court authorization. See 11 U.S.C. § 363(c)(1); see also Burlington N. R.R. Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 703-04 (9th Cir. 1988); U. S. v. Bicoastal Corp. (In re Bicoastal Corp.), 125 B.R. 658, 663 (M.D. Fla. 1991); In re Telesphere Commc’ns, Inc., 148 B.R. 525, 530 (Bankr. N.D. Ill. 1992).

The debtor-in-possession is authorized, after gaining court approval, to retain professional persons to provide services and represent them as they carry out their duties. Professional persons include attorneys, accountants, appraisers, auctioneers and in some cases investment bankers. See 11 U.S.C. § 327(a). If an Official Committee of Unsecured Creditors is appointed by the United States Trustee pursuant to 11 U.S.C. § 1102(a), it too is authorized to hire bankruptcy professionals to represent it in the bankruptcy cases. See 11 U.S.C. § 1103(a). The fees of all these bankruptcy professionals who are retained by Court order are paid with priority out of the assets of the estate before any pre-petition claims are paid, along with other costs and expenses of administering the bankruptcy case. See 11 U.S.C. § 503(b).

Use of Cash Collateral

In order to operate during the chapter 11 case, the debtor must have cash at its disposal. However, certain issues arise when the debtor-in-possession’s available cash has been pledged as collateral for a secured loan, or constitutes “proceeds” of such collateral. The term “cash collateral” is defined by Section 363 of the Bankruptcy Code as “cash, negotiable instruments,

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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.” 11 U.S.C. § 363(a).

The debtor is prohibited from using cash collateral unless each entity having an interest in the cash consents to its use or the court, after notice and a hearing, authorizes such use, sale or lease. See 11 U.S.C. § 363(c)(2)(A), (B). Bankruptcy Rule 4001(b) requires that a request to use cash collateral be made by motion in accordance with Bankruptcy Rule 9014. See FED. R. BANKR. P. 4001(b)(1).

A hearing on the use of cash collateral may be a preliminary hearing or may be consolidated with a final hearing. See 11 U.S.C. § 363 (c)(3). If the court holds a preliminary hearing, the court may authorize the requested use, of cash collateral “only if there is a reasonable likelihood that the [debtor] will prevail at the final hearing under section 363(e)”, and may authorize the use of only that amount of cash collateral as is necessary to avoid immediate and irreparable harm to the estate pending a final hearing. Id.; see also FED. R. BANKR. P. 4001(b)(2). The final hearing on a motion for authority to use cash collateral may be commenced only after fifteen days following service of the motion on each entity with an interest in the cash collateral, and on any committee on the twenty largest unsecured creditors. See FED. R. BANKR. P. 4001(b)(1), (2).

RAISING CAPITAL IN CHAPTER 11

There are essentially three methods of raising cash in a strategic reorganization plan in chapter 11: (i) borrowing money and taking on more debt; (ii) selling assets or (iii) selling stock in the company. The Bankruptcy Code facilitates each of these.

Borrowing Money

Corporate debtors generally need credit to operate their businesses, particularly if they expect to reorganize. Section 364 sets forth the requirements and procedures pursuant to which a debtor may obtain postpetition financing.

Agreements to provide postpetition financing to a debtor-in-possession (“DIP Financing”) start out as contracts between the debtor and the debtor’s senior secured lender (“DIP Lender”), in which the lender generally attempts to extract as many concessions from the debtor as possible in return for a postpetition loan. Often, the only controls on the senior secured lender’s negotiating leverage is the availability of alternative lenders, and the objections likely to be asserted by other parties in the case, such as the Official Committee of Unsecured creditors. Banks, which lent to the debtor prepetition, often initially require, as conditions for post-petition lending, that the debtor (a) agree that the bank’s pre-petition liens are valid and perfected; (b) waive any prepetition lender liability, preference or fraudulent conveyance claims against the lender; (c) cross-collateralize the pre- and post- petition lending, if possible; and (d) agree that the automatic stay may automatically be lifted in the event of default in the post-petition agreement to permit the bank to seize its pre-petition collateral.

Section 364 of the Bankruptcy Code permits a debtor to borrow money and grant a lien on its assets to secure a postpetition loan. This provision of the Bankruptcy Code gives a debtor-

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in-possession a chance to obtain new loans if it can prove the value of its collateral to be large enough to provide adequate protection to pre-existing lenders. This is a very substantial power. This DIP Financing may be secured by junior liens (even if pre-petition lending agreements prohibit them); by equal liens (even if pre-petition liens prohibit them, as long as adequate protection is provided to the pre-existing lenders) or by senior liens (even if pre-petition liens prohibit them, as long as adequate protection is provided to the pre-existing lenders).

Each of these alternative lending schemes is part of a hierarchy established by Section 364. At the bottom of the hierarchy are the terms which are the least disruptive of prepetition creditors' existing interests; at the top are the most disruptive. See H.R. Rep. No. 595, 95th Cong., 1st Sess. 347 (1977). Therefore, a debtor-in-possession must first seek to obtain DIP Financing on an unsecured basis and offer the DIP Lender an administrative priority for its claim to be paid along with other administrative expenses in cash on the effective date of the plan of reorganization. See 11 U.S.C. § 364(b). This financing must be for an appropriate purpose in order to receive administrative expense priority status as financing actual and necessary costs and expenses of preserving the bankruptcy estate. See Mark IV Props., Inc. v. Club Dev. & Mgt. Corp. (In re Club Dev. & Mgt. Corp.), 27 B.R. 610, 611-12 (9th Cir. BAP 1982). If, however, the debt is neither appropriate nor beneficial for the estate, administrative expense priority status may be denied. See In re Johnston Energy Corp., 101 B.R. 684 (Bankr. E.D. Okla. 1988).

If the debtor can show that it is unable to obtain DIP financing on these unsecured terms, then, and only then is the debtor allowed to offer a DIP Lender either superpriority status over some or all other administrative claims and/or senior security interests in unencumbered assets and /or junior security interests in encumbered assets. See 11 U.S.C. § 364(c). Lastly, if a debtor is unable to obtain DIP Financing pursuant to those terms, it is permitted to offer the DIP Lender a lien on encumbered property that is either equal to or senior to existing liens. This final option for the debtor, which is essentially the priming of existing liens, is the most drastic and disruptive of prepetition creditors’ interests, and the Bankruptcy Code requires that the prepetition lienholders be given “adequate protection” of their liens if such liens are to be primed in this manner. See 11 U.S.C. § 364(d).

Adequate protection for Section 364(d) purposes can be provided in several ways: (a) providing an additional or replacement lien to the affected creditor to the extent that there has been a decline in value of the creditor’s property interest caused by the priming of its lien; (b) providing cash payments to the affected creditors equal to the decline in value of the creditor’s property interest caused by the priming of its lien; or (c) granting other relief so the affected creditor obtains the “indubitable equivalent” of its original property interest. See 11 U.S.C. § 361. Courts are given the power to determine what form of adequate protection is required, based on the facts of each case. See In re Beker Indus. Corp., 58 B.R. 725, 736 (Bankr. S.D.N.Y. 1986).

As further protection of the existing secured creditor’s interests, Section 507(b) provides that if a debtor-in-possession gives a creditor adequate protection as part of priming existing liens under Section 364(d) and the adequate protection is found insufficient, the creditor’s deficiency claim is entitled to administrative expense priority. See 11 U.S.C. § 507(b). Some courts have found that adequate protection exists when there is a sufficient equity cushion in the assets with priming liens. See, e.g., In re Timber Prods., Inc., 125 B.R. 433 (Bankr. W.D. Pa.

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1990); Heritage Svgs. & Loan Assn. v. Rogers Dev. Corp. (In re Rogers Dev. Corp.), 2 B.R. 679 (Bankr. E.D. Va. 1980). Other courts have rejected any reliance on an equity cushion as a form of adequate protection. See, e.g., General Elec. Mortgage Corp. v. S. Village, Inc. (In re S. Village, Inc.), 25 B.R. 987 (Bankr. D. Utah 1982); In re Alyucan Interstate Corp., 12 B.R. 803 (Bankr. D. Utah 1981). See also Bray v. Shenandoah Fed. Svgs. & Loan Assn. (In re Showshoe Co., Inc.), 789 F.2d 1085 (4th Cir. 1986) (discussing, but refusing to decide whether an equity cushion alone offers adequate protection).

In determining whether to approve post-petition financing, the court has discretion. See 11 U.S.C. § 364 (c), (d). The court's discretion under Section 364 “is to be utilized on grounds that permit reasonable business judgement to be exercised so long as the financing agreement does not contain terms that leverage the bankruptcy process and powers or its purpose is not so much to benefit the estate as it is to benefit a party in interest.” In re Ames Dep’t Stores, Inc., 115 B.R. 34, 37 (Bankr. S.D.N.Y. 1990).

Motions to obtain credit under Section 364 (“DIP Motions”) must be made in accord with Federal Rule of Bankruptcy Procedure 9014. See FED. R. BANKR. P. 4001(c)(1). The Bankruptcy Court may commence a final hearing on a DIP Motion no earlier than 15 days after service of the motion. See FED. R. BANKR. P. 4001 (c)(2). The Court may hold a preliminary hearing before the expiration of the 15 day period, but may authorize the obtaining of DIP Financing “only to the extent necessary to avoid immediate and irreparable harm to the estate pending the final hearing” during the interim period. FED. R. BANKR. P 4001(c)(2).

Since the DIP Financing Agreement must be approved by the Bankruptcy Court, and any party-in-interest has the right to object to its approval, often the DIP Lender finds itself negotiating with the Official Committee of Unsecured Creditors about the terms of the DIP Financing which negations often modify the terms of the financing. For example, if the DIP Lender has a valid and perfected lien on substantially all of the debtor’s assets, there will not be free assets with which the debtor may pay the bankruptcy professionals during the case. Many Creditor’s Committees and will insist on a “carve-out” of the DIP Financing, in a reasonable amount, in order to pay the professionals during the case. “Absent such protection”, at least one court has stated, “the collective rights and expectations of all parties in interest are sorely prejudiced.” In re Ames Dep’t Stores, Inc., 115 B.R. 34, 37 (Bankr. S.D.N.Y. 1990).

Section 364 reflects the policy goal of inducing creditors to advance the additional funds that are necessary for the debtor to be able to rehabilitate its operations and effect a successful reorganization. In order to qualify for the beneficial treatment given to such creditors under Section 364, the credit extensions must involve new money advanced for the use and benefit of the debtor. See In re Jartran, Inc., 732 F.2d 584 (7th Cir. 1984); In re Glover, Inc., 43 B.R. 322 (Bankr. D.N.M. 1984); Peninsula Nat'l Bank v. Allen Carpet Shops, Inc. (In re Allen Carpet Shops, Inc.), 27 B.R. 354, 358 (Bankr. E.D.N.Y. 1983). Transactions that are inconsistent with this policy goal are likely to be ineligible for Section 364’s preferential treatment. See, e.g., Merchants & Farmers Bank v. Hill, 122 B.R. 539, 545 (E.D. Ark. 1990) (legal services advanced to prosecute lawsuits do not constitute new credit within the purview of Section 364); In re Cascade Oil Co., 51 B.R. 877 (Bankr. D. Kan. 1985) (postpetition note to bank to cover honoring of prepetition check not eligible for Section 364 treatment).

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One form of inducement for a DIP Lender to finance a debtor-in-possession’s bankruptcy case is to allow it to “cross-collateralize,” that is, transform its existing prepetition unsecured debt into secured debt by cross-collateralizing new secured DIP Financing with the DIP Lender’s prepetition unsecured debt. Cross-collateralization is controversial since it essentially grants a preference to the DIP Lender. However, cross-collateralization has been allowed when the debtor has lacked other financing options and there was no opposition to such an arrangement. See, e.g., In re Ellingsen MacLean Oil Co., Inc., 834 F.2d 599 (6th Cir. 1987); In re Beker Indus. Corp., 58 B.R. 725 (Bankr. S.D.N.Y. 1986); In re Roblin Indus., Inc., 52 B.R. 241 (Bankr. W.D.N.Y. 1985).

In approving such a cross-collateralization financing arrangement, as in approving other forms of DIP Financing, the court must examine the proposed transaction to insure that the principal beneficiary of such an arrangement is the estate, rather than the DIP Lender. See In re Ames Dept. Stores, Inc., 115 B.R. 34 (Bankr. S.D.N.Y. 1990). The Second Circuit has called cross-collateralization, “contrary to the spirit” of bankruptcy law, but has nevertheless refused to absolutely bar it. See Otte v. Mfrs. Hanover Comm. Corp. (In re Texlon Corp.), 596 F.2d 1092 (2d Cir. 1979). The Eleventh Circuit has barred cross-collateralization altogether, stating that it violates the Bankruptcy Code’s scheme of priority. See Shapiro v. Saybrook Mfg. Co., Inc. (In re Saybrook Mfg. Co., Inc.), 963 F.2d 1490 (11th Cir. 1992).

If the court finds that a postpetition DIP Lender acted in good faith, then any appeals from an order granting such liens are moot unless the objector obtains a stay pending such an appeal. Section 364(e) provides a safe harbor for DIP Lenders who act in good faith. Under Section 364(e), the district or circuit court may not reverse an authorization to obtain credit or incur debt from a good faith DIP Lender if the order authorizing such financing was not stayed pending appeal. See 11 U.S.C. § 364(e). Absent a stay pending appeal, an appeal from a postpetition financing order is moot. In re Adams Apple, Inc., 829 F.2d 1484 (9th Cir. 1987). Such an appeal is moot even where the postpetition lender has yet to fully disburse the authorized loan. Resolution Trust Corp. v. Swedeland Dev. Group, Inc. (In re Swedeland Dev.t Group, Inc.), 1993 WL 394747 (3d Cir. 1993). But see In re Saybrook Mfg. Co. Inc., 963 F.2d 1490 (11th Cir. 1992) (holding scope of safe harbor provision of 364(e) only applies to actual funds advanced).

There are peculiar issues with granting liens on intellectual property. Trade secrets, patents and patent application are generally treated as “general intangibles” under Article 9 of the UCC. See U.S. v. Antenna Sys., Inc., 251 F. Supp. 1013 (D. N.H. 1966). Rights in a trademark are also considered to be “general intangibles” under Article 9, but the debtor should be sure to grant the secured party a security interest in the “goodwill” of the company, and any assets which embody that “goodwill.” Therefore, a lender may take a security interest in any of these types of collateral to secure its debtor-in-possession financing.

In addition, a secured lender may wish to take a security interest in the debtor’s copyrights, including the right to rental or license income. See In re AEG Acquisition Corp., 127 B.R. 34 (Bankr. C.D. Cal. 1991). Taking a security interest in a debtor’s right to payment is a common commercial practice and can be used in the bankruptcy context to give a potential lender sufficient collateral protection to make a debtor-in-possession loan. Finally, a lender may

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also seek a security interest in the right to sue and recover for past infringement of a patent or a copyright.

Sales of Assets

For the debtor-in-possession to reorganize its affairs and for the liquidating trustee to maximize the value of the debtor's assets for distribution, they must be able to use, sell or lease the assets which constitute the estate.

Paragraph Section 363 of the Bankruptcy Code generally permits a debtor to sell assets free and clear of liens, with the liens stripped from the assets to then attach to the proceeds of such a sale. This provision of the Code encourages buyers to purchase a debtor’s property, because good faith purchasers of the debtor’s assets receive extremely clean title to the property. Additionally, a good faith purchaser is protected from challengers to the sale since any appeals from a bankruptcy court order approving the sale are moot unless a stay is obtained stopping the consummation of the sale and stays are difficult to obtain. Many purchasers prefer the protections they receive in sales from the bankruptcy court to the uncertainties outside the bankruptcy sale process.

Generally, bankruptcy sales are done through an auction with the bankruptcy court essentially acting as auctioneer. Often in these types of proceedings, a bid procedures order is entered by the Court, which sets forth the rules for the auction, the procedures for bidding, and grants the initial bidder a break-up fee for its trouble in negotiating the initial sale agreement with the Debtor. Often, the other bidders take advantage of this work and simply copy the contract. The break-up fee is payable to the initial bidder if the initial bidder loses at the auction. These auction sales tend to generate very good prices for assets.

Section 363 distinguishes between the use, sale or lease of property in the ordinary course of the debtor’s business, where court approval of the transaction is not required, and use, sale or lease out of the ordinary course of business, where court approval, after notice and a hearing, is required. See 11 U.S.C. § 363 (c) (b). “The purpose behind the ordinary course of business rule in Section 363 is to allow a business to continue its daily operations without incurring the burden of obtaining court approval or notifying creditors for minor transactions, while at the same time protecting secured creditors and others from the dissipation of the estate's assets.” Lopa v. Selgar Realty Corp. (In re Selgar Realty Corp.), 85 B.R. 235, 240 (Bankr. E.D.N.Y. 1988).

Section 363 of the Bankruptcy Code provides that the debtor-in-possession’s use, sale, or lease of property in which a non-debtor has an interest is conditioned on providing that non-debtor with “adequate protection” of its interest. See 11 U.S.C. § 363(c). This requirement is intended to compensate the creditor for decrease in the value of its lien during the pendency of the case. See In re Cont’l Airlines, Inc., 154 B.R. 176, 180 (Bankr. D. Del. 1993). In order to obtain adequate protection of a security interest, a creditor must first request it. See 11 U.S.C. § 363(e). A debtor seeking approval of an agreement to furnish adequate protection must follow the same procedure for obtaining approval of an agreement to modify the automatic stay or use cash collateral. See FED. R. BANKR. P. 4002(d).

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By contrast to ordinary course of business transactions, on a use, sale, lease or other transaction outside the debtor's ordinary course of business, the debtor must give notice of its intent to enter into the transaction and obtain authority from the bankruptcy court to consummate the transaction. See 11 U.S.C. § 363(b)(1); see also Dalton Dev. Project # 1 v. Unsecured Creditors Comm. (In re Unioil), 948 F.2d 678, 682 (10th Cir. 1991).

The substantive standard that a court will apply in reviewing a request from a debtor to enter into a transaction outside the ordinary course of business depends on the nature of the transaction at issue. If the request involves a business decision outside the ordinary course of business, but does not involve a fundamental change in the composition or character of the debtor’s estate, the debtor must show that its decision is in the “best interests of the estate.” In re Planned Sys., Inc., 82 B.R. 919, 923 (Bankr. S.D. Ohio 1988); see also Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1311 (5th Cir. 1985).

Section 363(f) permits the debtor to sell property in which another entity asserts an interest free and clear of that interest only if

(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; (2) such entity consents; (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

11 U.S.C. § 363(f).

The other entity’s interest in the property sold attaches to the proceeds of the sale. If one or more entities claim an interest, such entities often consent to the disposition of property if such disposition will maximize their recovery and litigate the extent, priority and validity of their claims to the proceeds of the sale at some later date.

As stated previously, appeals from an order authorizing the sale or lease of property are difficult to obtain, since a challenger must obtain a stay pending appeal. Section 363(m) states that

The reversal or modification on appeal of an authorization under subSection (b) or (c) of this Section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

11 U.S.C. § 363(m).

Sales of Stock

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It is also possible to sell stock when emerging from bankruptcy. The new equity investor essentially makes its equity investment on the effective date of the debtor’s plan of reorganization, simultaneous with when the plan restructures or discharges old debt. As with loans and sales, appeals of plan confirmation orders are moot unless the objector obtains a stay of the consummation of the plan pending an appeal. This permits new equity investors to invest with the assurance that the company is able to present it with the capital structure, restructured pursuant to the plan, that the equity investor is willing to invest in.

There are basic rules governing what can be done in a plan or reorganization that new equity might invest in. First, every class must receive at least as much as it would receive in liquidation. Second, the plan must be feasible. After that, each class must either vote to accept the plan or be treated fairly and equitably. The Code defines what is fair and equitable. Secured claims must receive cash payments with a present value equal to the secured claim. Unsecured claims can be paid in cash, notes or stock, but must receive 100% payment before old equity can retain any interest.

If a company has an enterprise value of 100 and has secured debt of 25, there is a value of 75 left to pay unsecured creditors. If there are unsecured claims of 30, then they can be paid 100% by giving them 1/3 of the common stock of the reorganized company. In this example old equity can keep 2/3 of the common stock of the reorganized company. It is essentially up to old equity, to determine how much of that 2/3 it wishes to give to a new investor for its investment at the consummation of this plan of reorganization.

The amount of the reorganized debtor’s stock that goes to old unsecured claims, old equity and the new investor is much negotiated and can be resolved by the Court. The new investor is the only one of these parties who can walk away with its money in its pocket if it doesn’t like the result. On the other hand, if it likes the result, it can then invest in a company with a capital structure that it likes.

Executory Contracts

Reorganization under Chapter 11 of the Bankruptcy Code involves the restructuring of the company’s contractual arrangements so that the debtor can achieve renewed vitality. The Bankruptcy Code provides a procedure by which a debtor-in-possession may be relieved of the burden of performing its prepetition contractual duties, but meanwhile preserves them to make rehabilitation possible. The Bankruptcy Code essentially allows debtors-in-possession to take advantage of contracts which will benefit the estate, relieves the debtor’s estate of burdensome contracts, promotes the debtor-in-possession’s fresh start, and prevents parties from remaining in doubt concerning their status vis-à-vis the estate. See In re Monument Record Corp., 61 B.R. 866, 868 (Bankr. M.D. Tenn. 1986). This is accomplished through Section 365, which authorizes the debtor-in-possession, subject to the court’s approval, to assume or reject executory contracts and unexpired leases. See 11 U.S.C. § 365(a).

The Bankruptcy Code does not furnish a definition of an executory contract. The legislative history of Section 365 states that “though there is no precise definition of what contracts are executory, it generally includes contracts on which performance remains due to some extent on both sides.” H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 347 (1977), reprinted

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in 1978 U.S. Code. Cong. & Admin. News 5787, 5963, 6303; see also NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522 n.6 (1984).

The leading definition of what constitutes an executory contract is the “Countryman definition,” which defines an executory contact as “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” Vernon Countryman, Executory Contracts in Bankr.: Part I, 57 MINN. L. REV. 439, 460 (1973); see also Sharon Steel Corp. v. Nat’l Fuel Gas Dist. Corp., 872 F.2d 36, 39 (3d Cir. 1989); In re Access Beyond Tech. Inc., 237 B.R. 32, 43 (Bankr. D. Del. 1999). Many courts have adopted the Countryman definition. See, e.g., Counties Contracting of Constr. Co. v. Constitution Life Ins. Co., 855 F.2d 1054, 1060 (3rd Cir. 1988); In re Speck, 798 F.2d 279, 279-80 (8th Cir. 1986); In re Pac. Express, Inc., 780 F.2d 1482, 1487 (9th Cir. 1986); Lubrizol Enter., Inc. v. Richmond Metal Finishers, 756 F.2d 1043, 1045 (4th Cir. 1985), cert. denied, 475 U.S. 1057 (1986).

In a Chapter 11 case, the debtor-in-possession has until confirmation of its plan to decide whether to assume or reject these executory contracts and its unexpired leases, except that leases of non-residential real property must generally be assumed or rejected in 60 days. The proposed amendments to Section 365 by the Bankruptcy Reform Act of 2001, S. 420, 107th Cong. (2001) change the time in which an unexpired lease of non-residential real property to be assumed or rejected is increased from 60 to 120 days and would make two years worth of rent and other non-penalty obligations due an administrative priority under Section 503(b) for the rejection of a previously assumed lease of non-residential real property. S. 420, 107th Cong. § 404 (2001)

The debtor-in-possession must essentially decide whether the executory contracts and unexpired leases to which it is a party are more of a burden or a benefit to the estate. If the debtor assumes such a contract or lease, it can then assign it to a third party and hopefully make a profit. The decision of whether to assume or reject is generally left to the debtor’s business judgment, but must be approved by the bankruptcy court. See In re Lubrizol Ent., Inc., 756 F.2d 1043 (4th Cir. 1985); see also In re O.P.M. Leasing Servs., Inc., 79 Bankr. 161 (S.D.N.Y. 1987); Richmond Leasing Co., v. Capital Bank, N.A., 762 F.2d 1303, 1309 (5th Cir. 1985); In re Nat’l Sugar Refining Co., 26 Bankr. 765 (Bankr. S.D.N.Y. 1983); In re Minges, 60 F.2d 38, 42 (2d Cir. 1979); In re Tilco, Inc., 558 F.2d 1369 (10th Cir. 1977).

If a debtor assumes an executory contract, it must cure all past due defaults. Once assumed the contract becomes an administrative liability, breaches of which are paid as an administrative claim, essentially at 100 cents on the dollar. If the contract is rejected, never having been assumed, then damages are pre-petition unsecured claims which are often paid at cents on the dollar. In most cases, the non-debtor party to the contract, thus, wants its contract to be assumed.

If the debtor chooses to assume an executory contract or unexpired lease, generally the debtor may then assign that contract to the highest bidder to generate additional assets to pay other creditors. See 11 U.S.C. § 365(f)(2). This is true even if the contract in question contains a provision which prohibits such assignment. See 11 U.S.C. § 365(f)(1). To accomplish this, a debtor must cure all past due defaults under the contract or provide adequate assurances that it

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will promptly cure, and provide adequate assurances of the assignee’s ability to perform in the future. See 11 U.S.C. § 365(f)(2). Assignment of a contract or lease assumed under Section 365 relieves the bankruptcy estate of any liability for any breach of the contract or lease after assignment. See 11 U.S.C. § 365(k).

However, there is a notable exception to a debtor’s ability to assume and assign executory contracts and unexpired leases. Section 365(c)(1) of the Bankruptcy Code prohibits a debtor’s assumption and assignment of such a contract if “applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession . . . and (B) such party does not consent to such assumption or assignment.” 11 U.S.C. § 365(c)(1).

This so-called “personal services” exception to the general rule of the assignability of executory contracts and unexpired leases has been held to apply to licenses of certain types of intellectual property, where federal or state law prohibits assignment. For example, some bankruptcy courts have held that both the federal patent and copyright laws are “applicable law” prohibiting such assignment under 11 U.S.C. § 365(c). See, e.g., In re Patient Educ. Media, Inc., 210 B.R. 237, 242 (Bankr. S.D.N.Y. 1997); In re CFLC, Inc. 89 F.3d 673, 675 (9th Cir. 1996) (holding that patent licenses were nonassignable under federal common law). Bankruptcy courts have looked to state law on trademarks to determine whether “applicable law” bars assignment. See, e.g., In re Rooster, Inc., 100 B.R. 228, 232 (Bankr. E.D. Pa. 1989) (applying Pennsylvania law).

Particular issues are presented when intellectual property is sought to be sold by the debtor-in-possession. Often that intellectual property is in the form of a license agreement. A debtor may be the licensor in some cases and the licensee in others. Nonexclusive patent and copyright licenses, along with trademark licensing agreements have generally considered to be executory contracts.

Most nonexclusive patent licenses have been held to be executory contracts under this definition. See, e.g., In re CFLC, Inc., 89 F.3d 673, 677 (9th Cir. 1996); Summit Inv. & Dev. Corp. v. Leroux (In re Leroux), 69 F.3d 608, 610 n.3 (1st Cir. 1995); Lubrizol Ent., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043, 1046 (4th Cir. 1985), cert denied, 475 U.S. 1057 (1986); Biosafe Int’l, Inc. v. Controlled Shredders, Inc.(In re Szombathy ), 1996 WL 417121 (Bankr. N.D. Ill. 1996), rev’d in part, 1997 WL 189314 (N.D. Ill 1997). The reasoning is that “a licensor’s obligation to forebear from suing the licensee . . . [is] both a significant and continuing performance obligation that [makes] the contract executory as to the licensor.” Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673 (9th Cir. 1996); see also De Forest Radio Tel. & Tel. Co. v. U.S., 273 U.S. 236 (1927). Additionally, most patent licenses include various ongoing obligations on the part of the licensor; including: (1) the duty to maintain the patent; (2) the duty to give notice of an defend from infringement suits; (3) the duty to indemnify; (4) the duty to forebear from granting licenses to others; (5) most favored licensee provision; (6) the duty to not unreasonably withhold sublicense permission; and on the part of the licensee, including: (a) the duty to pay royalties to the licensor; (2) the duty to account for sales and provide written reports to the licensor; and (3) the duty to allow audits.

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Nonexclusive copyright licenses have also been held to constitute “executory contracts.” See, e.g., In re Patient Educ. Media, Inc., 210 B.R. 237, 240 (Bankr. S.D.N.Y. 1997)(noting that under federal copyright law, nonexclusive license is personal to licensee who cannot assign it to third party without consent of copyright owner); see also Harris v. Emus Records Corp., 734 F.2d 1329, 1333-34 (9th Cir. 1984) (holding that copyright license cannot be transferred without permission of licensor); Ilyin v. Avon Publ’ns, Inc., 144 F. Supp. 368, 372 (S.D.N.Y. 1956) (holding that copyright licensee cannot assign his privilege). Additionally, a few courts have held that trademark licensing agreements are “executory” in nature. See, e.g., Richard Royce Collection, Ltd. v. New York City Shoes, Inc. (In re New York City Shoes, Inc.), 84 B.R. 947, 960 (Bankr. E.D. Pa. 1988)(noting that trademark licensing agreement was executory contract in that contract was not terminated prepetition, was not fully performed by both sides, and gave debtor right to assume or reject).

Section 365(c)(1) has been interpreted by at least one federal circuit court as stating that a debtor may not even assume its own non-exclusive patent license absent consent of the licensor. See Perlman v. Catapult Entm’t, Inc. (In re Catapult Entm’t, Inc.), 165 F.3d 747 (9th Cir.), cert. dismissed, 528 U.S. 924 (1999); see also In re Access Beyond Techs., Inc., 237 B.R. 32 (D. Del. 1999). However, another federal circuit court has allowed a debtor/licensee to assume such a license absent consent of the licensor. See Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489, 495 (1st Cir.), cert denied, 521 U.S. 1120 (1997). This split of authority in the federal circuit courts remains undecided by the United States Supreme Court.

If a debtor-in-possession chooses to reject an executory contract or unexpired lease without assuming it, the contract or lease is deemed to be breached as of the petition date, and the other party has a pre-petition claim arising from that deemed branch. If a debtor chooses to reject a license of intellectual property under which it is the licensor, Section 365(n) of the Bankruptcy Code provides certain protections to the non-debtor party to such license. Section 365(n) states:

(1) If the trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may elect (A) to treat such contract as terminated by such rejection if such rejection by the trustee amounts to such a breach as would entitle the licensee to treat such contract as terminated by virtue of its own terms, applicable nonbankruptcy law, or an agreement made by the licensee with another entity; or (B) to retain its rights (including a right to enforce any exclusivity provision of such contract, but excluding any other right under applicable nonbankruptcy law to specific performance of such contract) under such contract and under any agreement supplementary to such contract, to such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law), as such rights existed immediately before the case commenced, for -(i) the duration of such contract; and (ii) any period for which such

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contract may be extended by the licensee as of right under applicable nonbankruptcy law. (2) If the licensee elects to retain its rights, as described in paragraph (1)(B) of this subSection , under such contract (A) the trustee shall allow the licensee to exercise such rights; (B) the licensee shall make all royalty payments due under such contract for the duration of such contract and for any period described in paragraph (1)(B) of this subSection for which the licensee extends such contract; and (C) the licensee shall be deemed to waive (i) any right of setoff it may have with respect to such contract under this title or applicable nonbankruptcy law; and (ii) any claim allowable under Section 503(b) of this title arising from the performance of such contract. (3) If the licensee elects to retain its rights, as described in paragraph (1)(B) of this subSection , then on the written request of the licensee the trustee shall (A) to the extent provided in such contract, or any agreement supplementary to such contract, provide to the licensee any intellectual property (including such embodiment) held by the trustee; and (B) not interfere with the rights of the licensee as provided in such contract, or any agreement supplementary to such contract, to such intellectual property (including such embodiment) including any right to obtain such intellectual property (or such embodiment) from another entity. (4) Unless and until the trustee rejects such contract, on the written request of the licensee the trustee shall (A) to the extent provided in such contract or any agreement supplementary to such contract (i) perform such contract; or (ii) provide to the licensee such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law) held by the trustee; and (B) not interfere with the rights of the licensee as provided in such contract, or any agreement supplementary to such contract, to such intellectual property (including such embodiment), including any right to obtain such intellectual property (or such embodiment) from another entity.

11 U.S.C. § 365 (n).

A claim which arises as a result of a rejection is determined under Section 502(b), and to the extent allowed, the rejection damages claim is treated as a pre-petition claim. In re First Alliance Corp., 126 B.R. 589 (Bankr. S.D. Cal. 1991); In re Cornwall Hill Realty, Inc., 128 B.R. 378 (Bankr. S.D.N.Y. 1991). The Bankruptcy Code places limitations on such damages, however. For example, an employee’s claim for rejection of his employment contract is limited to the compensation provided for under contract for the year following the earlier of (a) the petition date; or (b) the date of termination of employment. See 11 U.S.C. § 502(b)(7).

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Similarly, Section 502(b)(6) limits a landlord’s claim for rejection damages of an unexpired lease to:

(A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of- (i) the date of the filing of the petition; and (ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus (B) any unpaid rent due under such lease, without acceleration, on the earlier of such dates.

11 U.S.C. § 502(b)(6).

The Bankruptcy Code provides that until a debtor-in-possession assumes or rejects an executory contract, it may enforce that contract against the non-debtor party. See In re McLean Indus., 96 B.R. 440 (Bankr. S.D.N.Y. 1989). However, the debtor-in-possession is required to pay all post-petition rent under a lease for non-residential real property as it comes due. See In re Regency Chevrolet, Inc., 122 B.R. 60 (Bankr. S.D. Tex. 1990).

Many contracts and leases contain provisions which state that upon the insolvency (or other financial condition) of a party or a bankruptcy filing by a parties, the contract is terminated or modified. These clauses, known as “ipso facto” clauses, are generally not enforceable under the Bankruptcy Code. See 11 U.S.C. § 365(e)(1).

OTHER ISSUES

APPOINTMENT OF A CHAPTER 11 TRUSTEE

If creditors or other parties in interest wish to remove the debtor-in-possession and seek the appointment of a Chapter 11 Trustee, they may move the bankruptcy court, pursuant to 11 U.S.C. § 1104, for the appointment of a Chapter 11 trustee to replace the management of a debtor. However, there is a strong presumption that a corporate debtor should continue in control and possession of its business. In re Ionosphere Clubs, Inc., 113 B.R. 164, 167 (Bankr. S.D.N.Y. 1990); see also Committee of Dalkon Shield Claimants v. A.H. Robbins Co., Inc., 828 F.2d 239, 241 (4th Cir. 1987).

Once the motion is made, according to 11 U.S.C. § 1104(a), the Court shall appoint a Chapter 11 trustee (i) for cause including fraud, dishonesty, incompetence or gross mismanagement or (ii) if such appointment is in the best interests of creditors or shareholders. See 11 U.S.C. § 1104(a). A Chapter 11 trustee is appointed by the United States Trustee pursuant to a bankruptcy court order. 11 U.S.C. § 1104(b).

If a trustee is not appointed, the Court must order the appointment of an examiner to conduct an investigation of the debtor to, among other things, determine whether there is mismanagement or fraud by management. Section 1106(b) gives the Bankruptcy Court the power to order a debtor not to perform certain duties and to require an examiner to perform such

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duties instead. See 11 U.S.C. § 1106(b); see also H.R. Rep. No. 595, 95th Cong., 1st Sess. No. 595, 95th Cong., 1st Sess. 404 (1977); S. Rep. No. 989, 95th Cong., 2d Sess. 116 (1978).

There is apparently a split of authority as to whether the appointment of an examiner is mandatory in a case where a debtor's unsecured debts exceed $5,000,000. See In Re Revco, D.S., Inc., 898 F.2d 498 (6th Cir. 1990)(appointment mandatory); but see In re GHR Companies, Inc., 43 B.R. 165 (Bankr. D. Mass. 1984); In re Shelter Res. Corp., 35 B.R. 304 (Bankr. N.D. Ohio 1983) (examiner not mandatory where the courts have, in effect, rewritten the statute so as to make the appointment of an examiner discretionary).

Once appointed, a chapter 11 trustee operates the debtor's business under the watchful eye of the Office of the United States Trustee and the Bankruptcy Court. The chapter 11 trustee’s powers and duties include operating of the business of the debtor, investigating of the acts, conduct, assets, liabilities and financial affairs of the debtor, filing a report of the results of such investigation, filing tax returns for the debtor and proposing a plan of reorganization. See 11 U.S.C. § 1106. Additionally, the chapter 11 trustee has avoidance powers under the Bankruptcy Code, including the power to avoid fraudulent or preferential transfers, to pursue turnover actions and to pursue certain causes of action under state law. See 11 U.S.C. § 544.

The chapter 11 Trustee is authorized, after gaining court approval, to retain professional persons to provide services and represent the trustee the trustee carries out the relevant duties. See 11 U.S.C. § 327(a).

CONVERSION OF CASES

A case commenced under chapter 11 may be converted to a case under chapter 7 at the request of either the debtor or its creditors, if it becomes apparent that reorganization is not possible. See 11 U.S.C. § 1112(a). Section 1112(a) provides that a debtor may convert a case from under Chapter 11 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 on the debtor's request. See 11 U.S.C. § 1112(a). The debtor may convert its case without notice or a hearing.

Section 348 of the Bankruptcy Code governs the effect of the conversion of a case from one chapter of the Bankruptcy Code to another chapter. Section 348(a) provides

Conversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but, except as provided in subSection s (b) and (c) of this Section , does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief.

11 U.S.C. § 348(a).

In addition, conversion of a bankruptcy case to chapter 7 does not trigger a new automatic stay. See In re Compos, 128 B.R. 790 (Bankr. C.D. Cal. 1991). Upon conversion, the time for assuming or rejecting executory contracts begins again. 11 U.S.C. § 348 (c). Claims

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that arise during the chapter 11 case, but before the case is converted, are treated the same as prepetition claims.