FINANCIALLY DISTRESSED COMPANIES · Q 1.6 Do the fiduciary duties of directors and officers change when a company is in financial distress? ..... 1-12. FINANCIALLY DISTRESSED COMPANIES

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FINANCIALLY DISTRESSED COMPANIESANSWER BOOK

2017 Edition

by Douglas P. Bartner

Shearman & Sterling LLP

Practising Law Institute New York City

#205892

This work is designed to provide practical and useful information on the subject matter covered. However, it is sold with the understanding that neither the publisher nor the author is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

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To Cecilia and Alex, with all my unqualified love and grateful appreciation

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ix

About the Author

Douglas P. Bartner is a partner in Shearman & Sterling LLP’s Financial Restructuring & Insolvency Group, where he regularly represents debtors and creditors and acquirors of assets in Chapter 11 bankruptcies and out-of-court restructurings. He joined Shearman & Sterling LLP in 1982 and became a partner in 1991. Mr. Bartner spent two years in Mexico City engaged in private sector restructuring work during the height of the sovereign debt crisis and two years in the firm’s Los Angeles office. Mr. Bartner served as the global Practice Group Leader of the Financial Restructuring & Insolvency Group for ten years. He is currently serving as Chair of the firm’s Audit Committee.

Mr. Bartner is consistently ranked as an industry leader by the leading legal directories, including Chambers USA, Who’s Who Legal: Insolvency & Restructuring and Best Lawyers.

xi

Table of Chapters

Chapter 1 IntroductionChapter 2 Creditor RightsChapter 3 Out-of-Court RestructuringsChapter 4 Introduction to BankruptcyChapter 5 Commencement of Chapter 11 CaseChapter 6 Corporate Governance in Chapter 11Chapter 7 First-Day MotionsChapter 8 Financing in Chapter 11Chapter 9 Contracts and LeasesChapter 10 Safe Harbor Provisions for Certain Financial

ContractsChapter 11 Executive and Employee IssuesChapter 12 Treatment of ClaimsChapter 13 Distressed Debt and Claims TradingChapter 14 Asset SalesChapter 15 Avoidance ActionsChapter 16 Plan ProcessChapter 17 Tax IssuesChapter 18 Bankruptcy Trustees and ExaminersChapter 19 Conversion or DismissalChapter 20 ProfessionalsChapter 21 Small Business Chapter 11 CasesChapter 22 Single Asset Real Estate Chapter 11 Cases

Financially DistresseD companies answer Book 2017

xii

Chapter 23 Chapter 7 CasesChapter 24 Cross-Border ReorganizationsChapter 25 Bankruptcy’s Statutory RegimeChapter 26 Judicial Platform for Bankruptcy Cases

xiii

Table of Contents

About the Author .............................................................................................ixTable of Chapters .............................................................................................xiTable of Contents .......................................................................................... xiiiAcknowledgments ........................................................................................ liii

Chapter 1 Introduction

Financial Distress Generally .................................................................................1-2

Q 1.1 When is a company in “financial distress”? .....................................1-2Q 1.1.1 What are some of the warning signs of impending

financial distress? .....................................................................1-3Q 1.1.2 How is cash flow an important warning sign? ......................1-4Q 1.1.3 How is financing activity another important

warning sign? ............................................................................1-5Q 1.1.4 How can availability of a company’s revolving

credit facility be affected by its financial distress? ..............1-5Q 1.1.5 Who is in the best position to recognize signs of

impending financial distress? .................................................1-6Q 1.1.6 What are some of the consequences of triggering

a default under a loan agreement, bond indenture or material contract? ....................................................................1-7

Q 1.1.7 What is a “cross-default”? .......................................................1-7Q 1.1.8 What is a financial covenant? .................................................1-8Q 1.1.9 When is a financial covenant for a specific

reporting period breached? ....................................................1-8Q 1.1.10 Is it typical that lenders or bondholders are

entitled to exercise remedies individually? ..........................1-9Q 1.2 Why is it critical for a company to acknowledge that it

is in financial distress? ......................................................................1-10Q 1.3 Why is it important for vendors and other creditors to

recognize financial distress? ............................................................1-10Q 1.4 Why is a “going concern” qualification important? ......................1-10Q 1.5 Can a solvent company be in financial distress? ...........................1-11

Effect on Fiduciary Duties ...................................................................................1-12

Q 1.6 Do the fiduciary duties of directors and officers change when a company is in financial distress? .......................................1-12


xiv

Q 1.6.1 What is the “zone of insolvency”? ........................................1-12Q 1.6.2 What should directors and officers do to protect

themselves when the company begins to experience financial distress? ...................................................................1-13

Disclosure ..............................................................................................................1-14

Q 1.7 Is a company required to disclose publicly that it is in financial distress? ..............................................................................1-14

Chapter 2 Creditor Rights

Governing Laws .....................................................................................................2-2

Q 2.1 Which laws affect a creditor’s rights when dealing with a distressed company? ..........................................................................2-2

Reclamation Rights ................................................................................................2-3

Q 2.2 What rights does a supplier have to reclaim delivered goods from a financially distressed company? ...............................2-3

Q 2.2.1 What is the process for reclamation? ....................................2-3Q 2.2.2 Are there limitations on a seller’s right to reclamation? .......2-4Q 2.2.3 Do a creditor’s reclamation rights change if its

buyer files for bankruptcy protection?..................................2-4

Enforcement of Contract Rights ............................................................................2-5

Q 2.3 May a contract party terminate its contract with a distressed debtor? ..............................................................................2-5

Q 2.4 May a creditor change payment terms for a financially distressed company? ..........................................................................2-5

Creditor Accommodations ....................................................................................2-5

Q 2.5 What is a forbearance? .......................................................................2-5Q 2.6 What is a waiver? .................................................................................2-6Q 2.7 What is a creditor’s reservation of rights? .......................................2-6

Perfection of Security Interests .............................................................................2-6

Q 2.8 What is “perfection” of a lien or security interest? .........................2-6

Involuntary Bankruptcy.........................................................................................2-7

Q 2.9 May a creditor file an involuntary bankruptcy petition against a financially distressed company? .......................................2-7

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Q 2.9.1 What are the risks for a creditor that commences an involuntary bankruptcy case? ................................................2-8

Foreclosure ..............................................................................................................2-8

Q 2.10 What is foreclosure?............................................................................2-8Q 2.10.1 What are the differences between a real estate

foreclosure and a personal property (UCC) foreclosure? ...............................................................................2-8

Q 2.10.2 What is a “deed in lieu of foreclosure”? ................................2-9Q 2.10.3 What is an assignment for the benefit of creditors? ............2-9

Control of Counterparties’ Business Affairs .....................................................2-10

Q 2.11 What is a receiver or a receivership? .............................................2-10Q 2.12 May a creditor exercise control over the business

or financial affairs of a financially distressed company? .............2-10Q 2.12.1 What is “lender liability”? ......................................................2-11

Intercreditor Agreements ....................................................................................2-11

Q 2.13 What is an intercreditor agreement? ..............................................2-11Q 2.13.1 Why do creditors enter into intercreditor agreements? .......2-11Q 2.13.2 What are some common provisions in intercreditor

agreements? ............................................................................2-12Q 2.13.3 What is a payment block? .....................................................2-13Q 2.13.4 In what ways does an intercreditor agreement

subordinate the claim of one creditor to another creditor? ..................................................................................2-13

Q 2.13.5 What are the differences between lien subordination and payment subordination? ................................................2-13

Q 2.13.6 Are intercreditor agreements enforceable in bankruptcy? ............................................................................2-13

Q 2.13.7 What provisions do senior creditors ordinarily seek to include in an intercreditor agreement? ...............................2-14

Q 2.13.8 What provisions do junior creditors ordinarily seek to include in an intercreditor agreement? ...............................2-15

Chapter 3 Out-of-Court Restructurings

Alternatives and Requirements ............................................................................3-2

Q 3.1 What alternatives does a financially distressed company have if it would like to avoid bankruptcy? ......................3-2

Q 3.2 What parties may be involved in negotiating an out-of-court restructuring? .................................................................3-2


xvi

Q 3.3 How can a loan be restructured out of court? .................................3-3Q 3.4 How can public securities be restructured out of court? ..............3-5

Q 3.4.1 Are there disclosure requirements for a registered or an unregistered exchange offer? .......................................3-5

Q 3.5 What is the difference between an out-of-court loan restructuring or exchange offer and a “preplanned” bankruptcy? .........................................................................................3-6

Q 3.6 What are some of the advantages and disadvantages of an out-of-court restructuring as compared to a Chapter 11 restructuring? ......................................................................................3-7

Q 3.7 What documentation may be required in an out-of-court restructuring? ......................................................................................3-8

Q 3.8 What limitations might a “change-of-control” provision present in an out-of-court restructuring? .........................................3-9

Cross-Border Restructurings ...............................................................................3-10

Q 3.9 Can a company effectuate a cross-border restructuring without a bankruptcy filing? ............................................................3-10

Q 3.9.1 What considerations may be important in a cross-border restructuring? ..................................................3-10

Disclosure ..............................................................................................................3-11

Q 3.10 Are there disclosure requirements in an out-of-court restructuring? ....................................................................................3-11

Chapter 4 Introduction to Bankruptcy

Principal Goals .......................................................................................................4-2

Q 4.1 What are the principal goals of U.S. bankruptcy law? ....................4-2

Key Differences Between U.S. and Other Bankruptcy Regimes ......................4-2

Q 4.2 How do U.S. bankruptcy laws differ from foreign bankruptcy or insolvency laws? ........................................................4-2

Core Concepts of U.S. Bankruptcy Law ..............................................................4-3

Q 4.3 What types of relief are available under the various chapters of the U.S. Bankruptcy Code? ............................................4-3

Q 4.4 What are the primary concepts in U.S. bankruptcy law? ...............4-3Q 4.4.1 What is the “automatic stay”? ................................................4-4Q 4.4.2 What is a “discharge” of claims in bankruptcy? ...................4-4

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xvii

Key Parties in a Chapter 11 Bankruptcy Case ..................................................4-4

Q 4.5 Who are the principal parties in a Chapter 11 case? ......................4-4Q 4.6 What is the role of a bankruptcy judge? ...........................................4-4Q 4.7 What is the role of the Office of the U.S. Trustee? ..........................4-5Q 4.8 What is the role of the official committee of unsecured

creditors? .............................................................................................4-5Q 4.9 What other official committees may be involved? ..........................4-6Q 4.10 What are “ad hoc” committees, and what is their role? .................4-7Q 4.11 What information do the Bankruptcy Rules require

members of a committee to disclose? ..............................................4-7Q 4.12 What is the role of a debtor’s board of directors and

management? .......................................................................................4-8Q 4.13 What is the role of a debtor’s secured prepetition lenders? .........4-8Q 4.14 What is the role of a party providing debtor-in-possession

financing? ..............................................................................................4-9Q 4.15 What is the role of a Chapter 11 trustee, if appointed? ..................4-9Q 4.16 What is the role of an examiner, if appointed? ................................4-9Q 4.17 What is the role of the Pension Benefit Guaranty Corporation? ........4-10Q 4.18 What is the role of a patient care ombudsman, if appointed? .........4-10

Chapter 5 Commencement of Chapter 11 Case

Commencement of the Case .................................................................................5-2

Q 5.1 How is a Chapter 11 case commenced? ...........................................5-2Q 5.1.1 How does a company voluntarily commence a

Chapter 11 case? ......................................................................5-2Q 5.1.2 May a company’s creditors file an involuntary

Chapter 11 case? ......................................................................5-3Q 5.1.3 May a company’s creditors prevent a company from

filing a voluntary Chapter 11 case? ........................................5-5Q 5.1.4 How are affiliate bankruptcies treated?.................................5-6

Venue .......................................................................................................................5-6

Q 5.2 In what venue may a company file its Chapter 11 case? ................5-6Q 5.2.1 Once a Chapter 11 case has been filed in a

particular proper venue, can it be moved to a bankruptcy court in a different state or district? ................5-7

Q 5.2.2 What is the effect of transferring venue on orders entered in a case before the transfer occurs? ......................5-8


xviii

Q 5.2.3 What happens if a company commences a Chapter 11 case in an improper venue? ................................5-8

Q 5.2.4 What changes have been proposed to the venue rules under the Bankruptcy Code? ........................................5-9

Debtor Eligibility .....................................................................................................5-9

Q 5.3 Who may be a debtor in a Chapter 11 case? ....................................5-9Q 5.3.1 What types of entities are not permitted to file a

case under Chapter 11? .........................................................5-10Q 5.3.2 Under what regimes can an entity restructure or

liquidate if it is not eligible to file a case under Chapter 11? .............................................................................5-10

Q 5.3.3 Can a solvent company be a debtor under Chapter 11? .......5-10Q 5.4 May a non-U.S. company file for protection under the

Bankruptcy Code? .............................................................................5-10

Debtor in Possession ............................................................................................5-11

Q 5.5 What is a “debtor in possession”? ..................................................5-11Q 5.5.1 What are the differences between a debtor in

possession and a “trustee”? ..................................................5-11

Bankruptcy Estate ................................................................................................5-12

Q 5.6 What is a bankruptcy “estate”? .......................................................5-12Q 5.6.1 Once a company files for Chapter 11 protection, which

of its assets are considered “property of the estate”? ........5-12Q 5.6.2 What is the significance of assets being property

of the estate? ...........................................................................5-13Q 5.6.3 Which of a debtor’s assets are excluded from

property of the estate? ..........................................................5-14Q 5.6.4 Are funds held in escrow by the debtor or held

in a trust property of the estate? .........................................5-14Q 5.6.5 Is a debtor entitled to recover property of the

estate that is being held by a third party? ..........................5-14Q 5.6.6 How does a debtor obtain property of the estate

that is being held by a third party? ......................................5-15Q 5.6.7 May a debtor abandon property of the estate? ..................5-16

Automatic Stay .....................................................................................................5-16

Q 5.7 What is the “automatic stay”? .........................................................5-16Q 5.7.1 What actions are prohibited by the automatic stay? ........5-16Q 5.7.2 What actions are exempted from the protections

of the automatic stay? ...........................................................5-17

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xix

Q 5.7.3 Can a creditor enforce the automatic stay? ........................5-17Q 5.7.4 How may a creditor obtain relief from the

automatic stay? ......................................................................5-18Q 5.7.5 Is there an automatic stay in an involuntary

Chapter 11 case? ....................................................................5-19Q 5.7.6 Does the notion of an automatic stay exist outside

the U.S. bankruptcy regime? .................................................5-19

Chapter 6 Corporate Governance in Chapter 11

Corporate Governance Generally .......................................................................6-2

Q 6.1 What are the primary differences between corporate governance before and during a Chapter 11 bankruptcy case? ........6-2

Directors’ and Officers’ Fiduciary Duties ............................................................6-2

Q 6.2 What are the directors’ and officers’ fiduciary duties in bankruptcy? .........................................................................................6-2

Q 6.2.1 What are the duties of directors and officers in a case with multiple debtors? ....................................................6-3

Q 6.3 Does the “business judgment rule” apply in bankruptcy? .............6-3Q 6.4 Does the board of directors meet during a bankruptcy case? ......6-4

Q 6.4.1 Are there any restrictions on a board of directors’ ability to authorize corporate action? ...................................6-4

Shareholders’ Rights ..............................................................................................6-5

Q 6.5 How does bankruptcy affect the rights of the company’s shareholders to control the company? ............................................6-5

Q 6.6 What influence does a shareholder have over management of the debtor in bankruptcy? .............................................................6-5

Q 6.7 What restrictions exist for shareholders’ annual meetings during bankruptcy? .............................................................................6-6

Reporting Requirements ........................................................................................6-6

Q 6.8 Is a debtor required to comply with SEC reporting requirements? ......................................................................................6-6

Q 6.9 Is a debtor required to file tax returns? ............................................6-6Q 6.10 Is a debtor required to comply with the Sarbanes-Oxley

disclosure requirements? ...................................................................6-7Q 6.11 Are there additional reporting requirements mandated

by the Bankruptcy Code or Bankruptcy Rules? ..............................6-7


xx

Corporate Oversight in Bankruptcy ....................................................................6-8

Q 6.12 What oversight role does the court have over corporate governance in a bankruptcy case? ....................................................6-8

Q 6.12.1 What standard does a court use to review the decisions of a debtor?..............................................................6-8

Q 6.13 What other parties have an oversight role in a bankruptcy case? ................................................................................6-8

Directors and Officers in Bankruptcy ..................................................................6-9

Q 6.14 What are the procedures for hiring and terminating directors and officers? ........................................................................6-9

Q 6.15 What is a “chief restructuring officer”? ............................................6-9Q 6.15.1 What are a chief restructuring officer’s duties? ...................6-9

Q 6.16 Are directors compensated in bankruptcy? ....................................6-9Q 6.17 How are director and officer insurance policies treated in

bankruptcy? .........................................................................................6-9

Chapter 7 First-Day Motions

Basics of First-Day Motions ...................................................................................7-2

Q 7.1 What are “first-day motions”? ............................................................7-2Q 7.2 Why are first-day motions important? ..............................................7-2Q 7.3 When are first-day motions granted? ................................................7-3Q 7.4 What are “second-day motions”? ......................................................7-4Q 7.5 What is the “necessity of payment” rule? ........................................7-4Q 7.6 What are the notice requirements for first-day motions? ..............7-5Q 7.7 How do parties in interest obtain copies of first-day motions? .........7-6Q 7.8 What is a “first-day affidavit”?............................................................7-6

Administrative Matters ..........................................................................................7-7

Q 7.9 What are typical administrative first-day motions? ........................7-7Q 7.9.1 What is a joint administration motion? .................................7-7Q 7.9.2 What is an extension for schedules motion? ........................7-8Q 7.9.3 What is a consolidated lists motion? .....................................7-8Q 7.9.4 What is a case management motion? ....................................7-8Q 7.9.5 What is a motion for an automatic stay

“comfort order”? ......................................................................7-8Q 7.9.6 What is an interim compensation motion? ...........................7-9

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xxi

Continuing Supplier Relations ............................................................................7-10

Q 7.10 What are typical first-day motions seeking to continue supplier relations? .............................................................................7-10

Q 7.10.1 What is an essential-suppliers or critical-vendors motion? ....................................................................................7-10

Q 7.10.2 What is a foreign creditors motion? .....................................7-11Q 7.10.3 What is a reclamation procedures motion? ........................7-11Q 7.10.4 What is a shipping, storage and customs motion? ............7-11Q 7.10.5 What is a lien claimants motion? .........................................7-12

Post-Petition Business Operations ......................................................................7-12

Q 7.11 What are typical first-day motions seeking to prevent disruption to the business operations of the debtor? ..................7-12

Q 7.11.1 What is a cash management motion? ..................................7-12Q 7.11.2 What is a customer programs motion? ...............................7-13Q 7.11.3 What is a prepetition sales, use and other

taxes motion? ..........................................................................7-13Q 7.11.4 What is a claims trading motion? .........................................7-14Q 7.11.5 What is a utilities motion? .....................................................7-14

Employee Relations, Professionals and Financing ...........................................7-15

Q 7.12 What are typical first-day motions seeking to preserve employee relations? ..........................................................................7-15

Q 7.13 What are typical first-day applications to retain professionals? .........................................................................7-15

Q 7.14 What are typical first-day motions related to financing? .............7-16Q 7.14.1 What is a DIP financing motion? ...........................................7-16Q 7.14.2 What is a cash collateral motion? ........................................7-17

Chapter 8 Financing in Chapter 11

Basics of DIP Financing .........................................................................................8-2

Q 8.1 What is meant by “DIP financing”? ....................................................8-2Q 8.2 Why does a company in Chapter 11 need DIP financing? ..............8-2Q 8.3 Why would a lender make a loan to a Chapter 11 debtor? ............8-2Q 8.4 When does the debtor ordinarily obtain a commitment

for DIP financing? .................................................................................8-3

Cash Collateral .......................................................................................................8-3

Q 8.5 What is cash collateral? ......................................................................8-3Q 8.6 May a Chapter 11 debtor use cash collateral? ................................8-4


xxii

Adequate Protection ..............................................................................................8-4

Q 8.7 What is “adequate protection”? ........................................................8-4Q 8.7.1 What if adequate protection turns out to be deficient? ..........8-5

Special Types of DIPs .............................................................................................8-5

Q 8.8 What is a “roll up” DIP? .......................................................................8-5Q 8.9 What does “cross-collateralization” mean? .....................................8-5Q 8.10 What is a “priming” DIP? ....................................................................8-6

Approval Process ...................................................................................................8-6

Q 8.11 Does DIP financing need to be approved by the bankruptcy court? ...............................................................................8-6

Q 8.12 What is an interim order for DIP financing? .....................................8-6Q 8.13 When does the bankruptcy court consider final approval

of DIP financing? ..................................................................................8-7Q 8.14 What is a typical timeline for obtaining DIP financing? ..................8-7Figure 8-1 Illustrative Timeline for DIP Financing Documentation

and Closing .........................................................................................8-8Q 8.15 What standard will a bankruptcy court apply in

approving DIP financing? ....................................................................8-9

Key DIP Documents and Terms .............................................................................8-9

Q 8.16 What are the key documents in a DIP financing? ............................8-9Q 8.16.1 What documentation is filed with the bankruptcy

court and becomes public? ...................................................8-11Q 8.16.2 When does a DIP loan terminate or mature? ......................8-11Q 8.16.3 Who pays the fees and expenses of the DIP lenders’

professional advisors? ...........................................................8-12Q 8.16.4 Who negotiates DIP financing? .............................................8-12

Q 8.17 What is a “carveout”? .......................................................................8-12Q 8.18 Are DIP lenders able to obtain a lien over avoidance actions? ........8-12

Chapter 9 Contracts and Leases

Executory Contracts and Unexpired Leases .......................................................9-2

Q 9.1 What is an executory contract? .........................................................9-2Q 9.1.1 Does the Bankruptcy Code define

“executory contract”? ..............................................................9-2Q 9.1.2 What definition of executory contract do

bankruptcy courts usually use? .............................................9-2

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Q 9.1.3 Are there other factors that courts consider in determining whether a contract is executory? ....................9-2

Q 9.1.4 Can a contract entered into post-petition be considered an executory contract? .......................................9-3

Q 9.1.5 What types of contracts are not considered executory contracts? ...............................................................9-3

Q 9.2 What is an “unexpired lease”? ...........................................................9-3

Available Post-Petition Options ............................................................................9-4

Q 9.3 What happens to contracts and leases in bankruptcy? .................9-4Q 9.4 Are the parties to a contract or lease required to

perform their obligations in bankruptcy? ........................................9-4Q 9.5 May a non-debtor counterparty terminate or modify a

prepetition contract or lease after the petition date? ....................9-4Q 9.5.1 What is an “ipso facto” provision in a contract or lease? ......9-4Q 9.5.2 What steps may a contract or lease counterparty

take if the debtor does not perform its obligations under a contract or lease that has not been rejected? .......9-5

Q 9.6 What is the procedure by which a debtor may assume, assume and assign, or reject an executory contract or unexpired lease? ..................................................................................9-5

Assuming a Contract or Lease ..............................................................................9-5

Q 9.7 What does it mean to “assume” a contract or unexpired lease? .......9-5Q 9.8 What rights does a counterparty have as a condition to the

debtor’s assumption of a contract or lease? ...................................9-5Q 9.8.1 What exceptions exist to the debtor’s cure requirement? ......9-6Q 9.8.2 How does a debtor satisfy the adequate assurance

standards required to assume a contract or lease? ............9-7Q 9.8.3 What types of contracts or leases may not be assumed? .......9-7Q 9.8.4 Is there a deadline by which a debtor must assume a

contract or lease? .....................................................................9-8Q 9.8.5 May a debtor assume part of a contract or lease?...............9-8

Assuming and Assigning a Contract or Lease ...................................................9-9

Q 9.9 What does it mean to “assume and assign” a contract or lease? ......9-9Q 9.9.1 Why would a debtor seek to assume and assign a

contract or lease? .....................................................................9-9Q 9.9.2 What requirements must a debtor meet to assume

and assign a contract or lease? ..............................................9-9Q 9.9.3 Is a provision in a contract or lease that states that it

may not be assigned enforceable in bankruptcy?................9-9


xxiv

Q 9.9.4 What types of contracts and leases may not be assumed and assigned? .........................................................9-10

Rejecting a Contract or Lease .............................................................................9-10

Q 9.10 What does it mean to “reject” a contract or lease? ......................9-10Q 9.10.1 How does a debtor reject a contract or lease? ...................9-10Q 9.10.2 What rights does a counterparty have when a

debtor rejects a contract or lease? ......................................9-10Q 9.10.3 Is a contract or lease rejection the same as a

termination of the contract or lease? ..................................9-11Q 9.10.4 May a debtor reject a contract or lease after it has

assumed the contract or lease?............................................9-11

Special Rules for Real Property Leases .............................................................9-11

Q 9.11 What are the rules for real property leases? .................................9-11Q 9.11.1 What rights does a landlord have when a debtor

tenant rejects a real property lease? ...................................9-11Q 9.11.2 What is the cap on damages that the landlord may

recover if a debtor rejects a real property lease? ..............9-12Q 9.11.3 Does the damages cap apply to a guarantee claim? ..........9-12Q 9.11.4 Does a landlord have a duty to mitigate its damages

when its lease is rejected? ....................................................9-12Q 9.11.5 Are a landlord’s claims different if the debtor rejects

the lease after having assumed it? .......................................9-13Q 9.11.6 What rights does a tenant have if a debtor rejects a

real property lease? ...............................................................9-13Q 9.11.7 Is there a deadline by which a debtor must assume

or reject a nonresidential real property lease? ..................9-14Q 9.11.8 Is a debtor required to perform under a real property

lease post-petition? ................................................................9-15

Other Special Rules ..............................................................................................9-15

Q 9.12 Is a debtor required to perform under a personal property lease post-petition? ...........................................................................9-15

Q 9.13 What are the special rules for shopping center leases? ...............9-15Q 9.14 What are the special rules for intellectual property licenses? ....9-16Q 9.15 What are the special rules for franchise contracts? .....................9-16Q 9.16 What are the special rules for labor contracts? ............................9-17Q 9.17 What are the special rules for retiree benefits?.............................9-17Q 9.18 What are the special rules for certain financial contracts? .........9-17Q 9.19 What are the special rules for aircraft equipment and

vessel leases? .....................................................................................9-17

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Chapter 10 Safe Harbor Provisions for Certain Financial Contracts

Benefits of Safe Harbors .....................................................................................10-2

Q 10.1 What are the benefits of safe harbor provisions? .........................10-2Q 10.1.1 What is the meaning of “termination”?................................10-2Q 10.1.2 What is the meaning of “liquidation”? .................................10-3Q 10.1.3 What is the meaning of “acceleration”? ..............................10-3Q 10.1.4 What are the requirements for setoff? .................................10-3Q 10.1.5 Is cross-affiliate—or “triangular”—setoff permitted? .........10-3

Safe Harbor Provisions in Other Insolvency Regimes .....................................10-4

Q 10.2 What types of insolvency regimes contain safe harbor provisions? ............................................................................10-4

Q 10.2.1 What type of insolvency does the FDIA cover? ..................10-5Q 10.2.2 What type of insolvency does the SIPA cover? ...................10-5Q 10.2.3 What is the OLA? ....................................................................10-5Q 10.2.4 What is the IRMA? ..................................................................10-6

Contracts Subject to Safe Harbors .....................................................................10-6

Q 10.3 What kinds of contracts are subject to safe harbors? ..................10-6Q 10.3.1 What is a “swap agreement”? ...............................................10-6Q 10.3.2 What is a “securities contract”? ...........................................10-7Q 10.3.3 What is a “repurchase agreement”? .....................................10-7Q 10.3.4 What is a “forward contract”? ..............................................10-8Q 10.3.5 What is a “commodity contract”? ........................................10-8Q 10.3.6 What is a “master netting agreement”? ...............................10-9

Parties with Safe Harbor Protections ................................................................10-9

Q 10.4 Who may exercise safe harbors under the Bankruptcy Code? ........10-9Q 10.4.1 What is a “swap participant”? ............................................10-10Q 10.4.2 What is a “repo participant”? .............................................10-10Q 10.4.3 What is a “forward contract merchant”?...........................10-10Q 10.4.4 What is a “stockbroker”? .....................................................10-10Q 10.4.5 Who is a “financial participant”? ........................................10-10Q 10.4.6 Who is a “financial institution”? .........................................10-11Q 10.4.7 Who is a “commodity broker”?...........................................10-11Q 10.4.8 Are there any restrictions against who may benefit

from safe harbors under other insolvency regimes? .......10-11


xxvi

Chapter 11 Executive and Employee Issues

Treatment of Prepetition and Post-Petition Compensation Claims .................11-2

Q 11.1 Are employees entitled to receive wages and benefits for services performed post-petition? ............................................11-2

Q 11.2 May a debtor pay employees’ wages and benefits post-petition for services performed prepetition? .......................11-3

Q 11.2.1 How are wages and benefits in excess of the caps treated? ....................................................................................11-4

Q 11.3 Is an employee permitted to take vacation time post-petition that accrued but was not taken prepetition? .........11-4

Q 11.4 Is a debtor permitted to reimburse an employee post-petition for business expenses incurred prepetition? .........11-5

Limits on Payments to Insiders ...........................................................................11-5

Q 11.5 Is a debtor able to claw back prepetition payments made to an employee-insider? .........................................................11-5

Q 11.5.1 Who is an insider? ..................................................................11-6Q 11.6 Is the debtor permitted to pay directors’ fees and

expenses for post-petition services? ..............................................11-7Q 11.7 Is the debtor permitted to pay directors’ fees and

expenses for prepetition services? .................................................11-7Q 11.8 What is a “KERP”? ..............................................................................11-7

Q 11.8.1 Is a debtor authorized to maintain a KERP that was established prepetition or to create a new KERP post-petition? ...............................................................11-8

Q 11.8.2 What limitations does the Bankruptcy Code place on KERPs? .....................................................................................11-8

Q 11.8.3 How have debtors responded to the limitations on KERPs that were introduced by the 2005 amendments? ......11-9

Q 11.9 What is a “KEIP”? ...............................................................................11-9Q 11.9.1 Are the Bankruptcy Code limitations applicable to

KERPs also applicable to KEIPs? ..........................................11-9Q 11.10 May a debtor pay severance payments to an insider? ...............11-10

Employment Contracts in Bankruptcy .............................................................11-11

Q 11.11 May a debtor reject an employment contract? ...........................11-11Q 11.11.1 What claim does an employee have for rejecting an

employment contract? .........................................................11-11Q 11.12 May a debtor assume an employment contract and

assign it to a third-party purchaser?.............................................11-12

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Labor Issues ........................................................................................................11-12

Q 11.13 Is a debtor liable for claims for damages resulting from noncompliance with the Worker Adjustment and Retraining Notification (WARN) Act? ............................................11-12

Q 11.14 Do collective bargaining agreements continue in effect post-petition? ...................................................................................11-12

Q 11.15 Do prepetition claims under a collective bargaining agreement have a special priority over other general unsecured claims? ...........................................................................11-12

Q 11.16 May a debtor reject a collective bargaining agreement? ...........11-13Q 11.16.1 What standard will a court apply in determining

whether a debtor may reject a collective bargaining agreement? ........................................................11-14

Q 11.16.2 Does a union have the right to strike if a collective bargaining agreement is rejected? .....................................11-15

Q 11.16.3 Does a bankruptcy court have jurisdiction to adjudicate allegations of unfair labor practices? .............11-15

Q 11.17 May a bankruptcy court authorize interim modifications to a collective bargaining agreement? ..........................................11-15

Q 11.18 How are retiree benefits treated in Chapter 11? ..........................11-16Q 11.18.1 May a debtor seek authority to modify or not pay

retiree benefits? ....................................................................11-16Q 11.18.2 May a debtor modify or terminate retiree benefits

without following the procedures under the Bankruptcy Code if the benefit plan is terminable by its terms?......................................................11-17

Q 11.18.3 What standard will a court apply in determining whether a debtor may modify its obligation to pay retiree benefits? ....................................................................11-17

Q 11.18.4 Is a bankruptcy court able to reinstate retiree benefits that were modified prepetition? ..........................11-17

Q 11.18.5 Who is an “authorized representative”? ............................11-18

Treatment of Pension Liabilities ........................................................................11-18

Q 11.19 What is a single-employer defined benefit pension plan? ..........11-18Q 11.20 May a debtor reject a single-employer defined benefit

pension plan in bankruptcy? .........................................................11-18Q 11.21 What role does the PBGC play in bankruptcy proceedings? .......11-19Q 11.22 What is a “controlled group”? ........................................................11-19

Q 11.22.1 What liabilities do non-debtor controlled group members have in bankruptcy? ...........................................11-19


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Q 11.23 How would a debtor terminate a single-employer pension plan through a distress termination?............................................11-20

Q 11.23.1 What are the requirements for the reorganization test? .............................................................11-21

Q 11.24 May a company terminate a single-employer pension plan if the plan is maintained pursuant to a collective bargaining agreement? ....................................................................11-21

Q 11.25 What are termination premiums? ..................................................11-21Q 11.26 Can the buyer in a section 363 asset sale decline to

assume an underfunded single-employer pension plan? ...........11-22Q 11.27 What is a multiemployer pension plan? .......................................11-22Q 11.28 How are multiemployer pension plans treated when the

debtor is a contributing employer? ..............................................11-22

Chapter 12 Treatment of Claims

Basics of Claims ...................................................................................................12-2

Q 12.1 What is a “claim” in bankruptcy? ....................................................12-2Q 12.1.1 When is a claim deemed to arise for bankruptcy

purposes? ................................................................................12-2Q 12.1.2 Is an equity interest a claim? ................................................12-3

Types of Claims ....................................................................................................12-3

Q 12.2 What types of claims can be asserted in a bankruptcy? ..............12-3Q 12.2.1 What is a secured claim? .......................................................12-3Q 12.2.2 What is an administrative claim? .........................................12-4Q 12.2.3 What is a priority unsecured claim? ....................................12-4Q 12.2.4 What is a general unsecured claim? ....................................12-5Q 12.2.5 What is an unliquidated claim? ............................................12-5Q 12.2.6 What is a contingent claim? ..................................................12-6Q 12.2.7 What is an unmatured claim? ...............................................12-6Q 12.2.8 What is a disputed claim? .....................................................12-6

Secured Claims .....................................................................................................12-7

Q 12.3 How does a court determine whether a claim is secured? ..........12-7Q 12.3.1 What are an oversecured claim and an

undersecured claim? ..............................................................12-7Q 12.3.2 How is a secured claim treated if the value of the

collateral is less than the amount of the claim? .................12-7Q 12.3.3 Is the holder of a secured claim entitled to receive

interest payments during bankruptcy? ...............................12-7

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Q 12.3.4 Will the holder of a secured claim be responsible for the costs of maintaining or disposing of its collateral in bankruptcy? ........................................................................12-8

Priority of Claims .................................................................................................12-8

Q 12.4 What is the priority for payment of claims and interests in bankruptcy? .......................................................................................12-8

Q 12.4.1 What is the “absolute priority rule”? ...................................12-9Q 12.4.2 What is the purpose of the absolute priority rule?............12-9

Administration and Payment of Claims ..........................................................12-10

Q 12.5 What is claim “allowance”? ............................................................12-10Q 12.5.1 Does a claim need to be allowed in order to qualify

for a distribution? .................................................................12-10Q 12.5.2 What are a debtor’s schedules? .........................................12-10Q 12.5.3 What is a proof of claim? .....................................................12-11Q 12.5.4 How is a proof of claim filed? ..............................................12-11Q 12.5.5 What is a bar date? ...............................................................12-12Q 12.5.6 What is a bar date order? ....................................................12-12Q 12.5.7 What is the effect of failing to file a claim by the

bar date? ................................................................................12-13Q 12.5.8 What is the penalty for knowingly filing a false claim? ........12-14Q 12.5.9 What is the effect of a claim being listed in the

debtor’s schedules as undisputed, liquidated and noncontingent? .............................................................12-14

Q 12.5.10 May a claimant freely amend or withdraw a filed proof of claim? ......................................................................12-14

Q 12.5.11 Is a properly filed claim presumed to be valid? ...............12-15Q 12.5.12 Who may object to a claim? ................................................12-15Q 12.5.13 What is the process for objecting to a claim? ..................12-15Q 12.5.14 If no objection is made to a claim, is the claim

automatically allowed? ........................................................12-16Q 12.5.15 Can claims be allowed in Chapter 11 for purposes

other than distribution under a Chapter 11 plan? ...........12-16Q 12.5.16 Are there claims that must be allowed by a district

court rather than a bankruptcy court? .............................12-16Q 12.5.17 Can a claim that has been disallowed ever be

reconsidered? .......................................................................12-16Q 12.6 What is claim “estimation”? ...........................................................12-17

Q 12.6.1 When is claim estimation ordinarily used? .......................12-17Q 12.6.2 Can a claim be estimated for purposes other than

receiving plan distributions? ..............................................12-17


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Q 12.6.3 How does claim estimation work? .....................................12-17Q 12.6.4 Does claim estimation have res judicata effect? ...............12-18

Significant Legal Concepts Affecting the Priority or Payment of Claims .............................................................................................12-18

Q 12.7 What is claim “recharacterization”? .............................................12-18Q 12.7.1 Is recharacterization provided for in the

Bankruptcy Code? ................................................................12-18Q 12.7.2 Under what circumstances might a claim be

subject to recharacterization? ............................................12-18Q 12.8 What is claim subordination? ........................................................12-19

Q 12.8.1 Is subordination provided for under the Bankruptcy Code? ................................................................12-20

Q 12.8.2 What is contractual subordination? ..................................12-20Q 12.8.3 Are contractual subordination agreements

honored in bankruptcy? ......................................................12-20Q 12.8.4 Are breach claims relating to rescission of an equity

security sale or purchase agreement subject to subordination? ......................................................................12-20

Q 12.8.5 What is “equitable subordination”? ...................................12-21Q 12.8.6 Are claims of insiders subject to a different standard

with regard to equitable subordination? ...........................12-21Q 12.8.7 What is equitable disallowance? ........................................12-21

Q 12.9 What is “substantive consolidation”? ...........................................12-22Q 12.9.1 Is substantive consolidation provided for under the

Bankruptcy Code? ................................................................12-22Q 12.9.2 What is the procedure for seeking substantive

consolidation? ......................................................................12-22Q 12.9.3 What factors does a court ordinarily consider

in determining whether to grant substantive consolidation? ......................................................................12-22

Q 12.9.4 What are the effects of substantive consolidation? .........12-24Q 12.10 What is setoff?..................................................................................12-24

Q 12.10.1 Is setoff provided for in the Bankruptcy Code?................12-24Q 12.10.2 When is a setoff generally permissible? ............................12-24Q 12.10.3 What is a “mutual“ claim? ...................................................12-25Q 12.10.4 Is the right of setoff subject to the automatic stay? ........12-25Q 12.10.5 What is the process for effectuating a setoff? ..................12-25

Q 12.11 What is recoupment? ......................................................................12-26Q 12.11.1 Is recoupment provided for in the Bankruptcy Code? ........12-26Q 12.11.2 When is recoupment generally permissible? ....................12-26Q 12.11.3 Is recoupment subject to the automatic stay? .................12-27

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Q 12.11.4 What is the process for effectuating recoupment? .........12-27Q 12.11.5 What is the difference between recoupment

and setoff? .............................................................................12-27Q 12.12 What is a “make-whole” provision? ...............................................12-27

Q 12.12.1 Are make-whole provisions enforceable in bankruptcy? ..........................................................................12-28

Chapter 13 Distressed Debt and Claims Trading

Distressed Debt .....................................................................................................13-2

Q 13.1 What is distressed debt? ..................................................................13-2Q 13.1.1 Why would someone buy distressed debt? ........................13-2

Claims Trading ......................................................................................................13-3

Q 13.2 May a creditor transfer or assign its bankruptcy claim? .............13-3Q 13.2.1 Can a claimholder sell participations in its claim? ............13-3

Q 13.3 What types of restrictions on claims trading are there in bankruptcy? .......................................................................................13-4

Q 13.3.1 What are some of the primary considerations in purchasing distressed debt? .................................................13-5

Q 13.3.2 Does a seller or buyer need to give notice of the trade to anyone? .....................................................................13-6

Q 13.3.3 Can a claim be traded at any time during a bankruptcy case? ...................................................................13-7

Q 13.3.4 Must the terms of a claim trade be disclosed in the bankruptcy case? .............................................................13-7

Q 13.4 What is the process for trading or assigning claims? ...................13-7Q 13.5 How is a trade of a claim typically documented? .........................13-8

Q 13.5.1 What are some common provisions in trade documentation? ......................................................................13-8

Q 13.5.2 What provisions does a seller of a claim typically seek to include in trade documentation? ............................13-8

Q 13.5.3 What provisions does a buyer of a claim typically seek to include in trade documentation? ............................13-9

Q 13.6 What rights does a purchaser of a claim acquire? ......................13-10Q 13.7 Do securities laws govern the trading of claims? ........................13-10

Q 13.7.1 What are the consequences of trading claims based on material non-public information? ......................13-11

Q 13.8 May a claim be split among multiple buyers? .............................13-12Q 13.9 In what respects do trading of trade debt and

bank debt differ? ..............................................................................13-12


xxxii

Special Issues in Claims Trading ......................................................................13-13

Q 13.10 Can a claim be treated differently in the hands of a buyer than it would have been in the hands of the original claimant? ............................................................................13-13

Q 13.10.1 What is a record date? .........................................................13-13Q 13.10.2 Are there any reasons a claim may not be

enforceable by a purchaser? ...............................................13-14Q 13.10.3 May a party trade claims for the purpose of obtaining

leverage in a bankruptcy case? ..........................................13-14Q 13.10.4 What does it mean to “designate” a claim? .......................13-15Q 13.10.5 What is “equitable subordination”? ...................................13-15

Q 13.11 How is a trade impacted if the claim is disputed? ......................13-15Q 13.12 What is the impact of a lock-up agreement on claims trading? .......13-16Q 13.13 Is a restriction on trading claims in a pre-bankruptcy credit

agreement enforceable in bankruptcy? ........................................13-16

Chapter 14 Asset Sales

Overview of Chapter 11 Asset Sales ................................................................14-2

Q 14.1 Is a debtor in bankruptcy permitted to sell or use its assets outside the ordinary course of business? ..........................14-2

Q 14.2 What must a debtor show in order to obtain court authorization to sell assets? ............................................................14-2

Q 14.3 What are the key distinctions between selling assets pursuant to section 363 and pursuant to a Chapter 11 plan? ........14-3

Q 14.4 May a debtor sell all or substantially all of its assets in a bankruptcy sale? ...............................................................................14-4

Q 14.4.1 What is a “sub rosa” plan? .....................................................14-4Q 14.5 Why would a debtor seek to sell substantially all of its assets? ...... 14-4

Auctions and Bidding Procedures in Chapter 11 ............................................14-5

Q 14.6 Is an auction required for the sale of a debtor’s assets? ..............14-5Q 14.6.1 What is the typical process for an auction in

Chapter 11? .............................................................................14-5Q 14.7 What do typical bidding procedures

provide? ..............................................................................................14-5Q 14.7.1 What is a “stalking horse”? ...................................................14-6Q 14.7.2 What bid protections might a stalking horse obtain? .......14-6Q 14.7.3 What is a break-up fee? ..........................................................14-7Q 14.7.4 Are “no shop” restrictions on the debtor permissible? ........14-7

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Claims and Interests in Assets to Be Sold .........................................................14-8

Q 14.8 May a debtor sell its assets free and clear of liens, claims and encumbrances? ..............................................................14-8

Q 14.9 Will a purchaser of a debtor’s assets in bankruptcy be subject to claims for successor liability? .......................................14-8

Q 14.10 What is credit bidding? .....................................................................14-9Q 14.10.1 Can the debtor prohibit a secured creditor from

credit bidding? ........................................................................14-9Q 14.10.2 If a secured lender’s collateral is valued at less than

the secured lender’s debt, is the secured lender limited to the value of the collateral in its credit bid? .........14-10

Q 14.10.3 How does credit bidding work in a syndicated bank loan facility where some lenders do not wish to participate in a credit bid? ..................................................14-10

Documentation of an Asset Sale ......................................................................14-10

Q 14.11 What are the key documents in an asset sale in Chapter 11? ........14-10

Consumer Privacy Ombudsman ......................................................................14-11

Q 14.12 When is an “ombudsman” required in a Chapter 11 asset sale? ........................................................................................14-11

Chapter 15 Avoidance Actions

Avoidance Actions Generally .............................................................................15-2

Q 15.1 What is an avoidance action? ..........................................................15-2Q 15.2 Is “transfer” defined under the Bankruptcy Code? .......................15-2Q 15.3 What is the “strong-arm clause”? ....................................................15-2Q 15.4 May a debtor avoid a statutory lien? ..............................................15-3Q 15.5 May a debtor avoid a post-petition transfer? ................................15-3Q 15.6 Who may seek to avoid a transfer? .................................................15-3

Q 15.6.1 May an individual creditor or a creditors’ committee seek to avoid a transfer? ....................................15-3

Q 15.7 Are the avoidance powers different in Chapter 7 and Chapter 11 cases? ..............................................................................15-4

Q 15.8 Are there limitations on a debtor’s powers to avoid transfers? ......15-4Q 15.8.1 Is there a deadline by which a debtor may

commence an action to avoid a transfer? ...........................15-4Q 15.8.2 May a debtor avoid a creditor’s security interest if

the creditor takes steps post-petition to perfect or continue a security interest against the debtor? ...............15-5


xxxiv

Q 15.8.3 How do a creditor’s reclamation rights affect the debtor’s avoidance powers? .................................................15-5

Q 15.8.4 Are there limitations on the avoidability of transfers in connection with financial contracts? ..............................15-5

Q 15.9 What action must a debtor take to avoid a transfer? ...................15-5

Preferential Transfers ...........................................................................................15-6

Q 15.10 What is a “preferential transfer” or “preference”? ........................15-6Q 15.10.1 What is an “interest of the debtor in property”? ................15-6Q 15.10.2 How does a court determine whether a transfer

was “for the benefit of a creditor”? ......................................15-6Q 15.10.3 What is an “antecedent debt”? .............................................15-7Q 15.10.4 Is “insolvent” defined in the Bankruptcy Code? .................15-7Q 15.10.5 Who are “insiders” for purposes of preferential

transfers? .................................................................................15-7Q 15.10.6 Can a payment to a secured creditor be avoided as

preferential? ............................................................................15-8Q 15.10.7 Who has the burden of proving that a transfer was

preferential? ............................................................................15-8Q 15.11 Why does the Bankruptcy Code permit a debtor to recover

transfers as preferential? ..................................................................15-9Q 15.12 Are there exceptions or defenses to preference actions? ............15-9

Q 15.12.1 What constitutes substantially contemporaneous exchange for new value? .......................................................15-9

Q 15.12.2 How do courts determine whether a transfer was in the ordinary course of business? .......................................15-10

Q 15.12.3 What is a purchase money security interest? ..................15-10Q 15.12.4 What is the subsequent new value defense? ....................15-11Q 15.12.5 When is a “floating lien” an exception to a

preferential transfer? ...........................................................15-11Q 15.12.6 Is the fixing of a statutory lien an exception to a

preferential transfer? ...........................................................15-12Q 15.12.7 Who has the burden of proving an exception or

defense in a preference action? ..........................................15-12

Fraudulent Conveyances ...................................................................................15-12

Q 15.13 What is a fraudulent transfer or fraudulent conveyance? .........15-12Q 15.14 What is “actual fraud”? ...................................................................15-13Q 15.15 What is “constructive fraud”? ........................................................15-13Q 15.16 What are the elements of a fraudulent transfer under the

Bankruptcy Code? ...........................................................................15-13

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Q 15.17 May a debtor in bankruptcy avoid a transfer under state fraudulent conveyance laws? .........................................................15-14

Q 15.17.1 What state fraudulent laws are available to the debtor? ......15-14Q 15.17.2 What is the Uniform Fraudulent Conveyance Act? ..........15-14Q 15.17.3 What is the Uniform Fraudulent Transfer Act? ................15-14Q 15.17.4 How do courts determine which state’s fraudulent

conveyance law should apply? ...........................................15-14Q 15.17.5 Will the governing law provision in a contract control

which state’s law applies in a fraudulent conveyance lawsuit? ............................................................15-15

Q 15.18 How long will a party be at risk after a transaction for potential avoidance of a transfer as a fraudulent conveyance? ................15-15

Constructive Fraudulent Conveyance Elements ..............................................15-16

Q 15.19 How does a court determine whether a debtor received “reasonably equivalent value” or “fair consideration”? .............15-16

Q 15.19.1 Does the good faith of the parties matter in determining the equivalence or fairness of the value exchanged? ..........................................................15-16

Q 15.19.2 Which party has the burden of proving reasonably equivalent value or fair consideration? .............................15-17

Q 15.19.3 Will a fairness opinion obtained in connection with a transaction provide a defense in case of a future fraudulent conveyance action? ...............................15-17

Q 15.20 What are the financial tests that a court will apply to determine whether a transfer was constructively fraudulent? .............................................................15-17

Q 15.20.1 Is the test for “insolvency” different for fraudulent conveyances than for preferential transfers? ...................15-18

Q 15.20.2 How would a court determine whether transferor was left with “unreasonably small capital” as the result of a transfer? ..............................................................15-18

Q 15.20.3 What is “equitable insolvency”? .........................................15-19Q 15.20.4 Will a court consider contingent liabilities in

determining insolvency? .....................................................15-19Q 15.20.5 Which party has the burden of proving the financial

condition of the transferor? ................................................15-19Q 15.20.6 Does the court consider whether the transferor’s

future financial demise was unforeseeable at the time of the transfer? .............................................................15-19

Q 15.20.7 Will a solvency opinion obtained in connection with a transaction provide a defense in case of a future fraudulent conveyance action? ...............................15-20


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Q 15.21 Do courts consider the circumstances surrounding a transfer in determining whether it was constructively fraudulent? .......................................................................................15-20

Remedies .............................................................................................................15-20

Q 15.22 What is the remedy if a debtor is successful in avoiding a transfer? .........................................................................................15-20

Q 15.22.1 From whom may the debtor recover? ...............................15-20Q 15.22.2 Is there strict liability for an avoided transfer? ................15-21Q 15.22.3 What types of parties to a transaction would not

be liable for an avoided transfer? ......................................15-21Q 15.22.4 Can a debtor recover from a foreign party?......................15-21

Q 15.23 What will a debtor do with any assets recovered in an avoidance action? ............................................................................15-21

Q 15.24 Will a claim against a creditor for an avoided transfer affect any claim that the creditor may have against the debtor? ........15-21

Avoidance Actions in Chapter 15 ....................................................................15-22

Q 15.25 May a foreign representative in a Chapter 15 case utilize the debtor’s avoidance powers under the Bankruptcy Code? .........15-22

Chapter 16 Plan Process

Plan Basics ............................................................................................................16-2

Q 16.1 What is a Chapter 11 plan? ...............................................................16-2Q 16.2 Does a plan require bankruptcy court approval? .........................16-2

Q 16.2.1 What is the process for bankruptcy court confirmation? ...............................................................16-3

Q 16.2.2 Can a Chapter 11 plan provide for liquidation rather than reorganization? ..............................................................16-3

Q 16.3 What is an “exclusivity” period? .....................................................16-3Q 16.3.1 How long is the debtor’s exclusivity period? .....................16-3Q 16.3.2 Why is the exclusivity period important to a debtor?.......16-4Q 16.3.3 How long is the exclusivity period for a small

business debtor? ....................................................................16-4Q 16.3.4 Can a party in interest seek to terminate or shorten

the exclusivity period? ..........................................................16-4Q 16.3.5 What rights do other parties in interest have after the

expiration of the exclusivity period? ...................................16-5

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The Disclosure Statement ....................................................................................16-5

Q 16.4 What is a disclosure statement? ......................................................16-5Q 16.4.1 What is required for a disclosure statement to be

approved by the court? .........................................................16-5Q 16.4.2 What is adequate information? ............................................16-6Q 16.4.3 How much notice must be provided prior to a

hearing to approve a disclosure statement? ......................16-6Q 16.4.4 May a debtor solicit votes for its plan prior to

filing its bankruptcy petition? ...............................................16-6Q 16.4.5 Are the disclosure statement requirements different

if a debtor solicits votes for its plan prior to filing its bankruptcy petition? .................................................................16-7

Q 16.4.6 Are the requirements for approval of the disclosure statement of small business debtors different? .................16-7

Q 16.5 What are typical disclosure statement contents? .........................16-7Q 16.5.1 What type of financial information is provided in a

disclosure statement? ............................................................16-8Q 16.5.2 What is a liquidation analysis? .............................................16-8Q 16.5.3 What risk factors are commonly included in a

disclosure statement? ............................................................16-9Q 16.5.4 Must a disclosure statement comply with securities

registration requirements if the plan proposes the issuance of securities? ...........................................................16-9

Q 16.5.5 Is there an obligation to update the information included in a disclosure statement? ..................................16-10

Plan Requirements .............................................................................................16-10

Q 16.6 What must a Chapter 11 plan include? .........................................16-10Q 16.7 What is a class of claims or interests? ..........................................16-11

Q 16.7.1 Must all classes of similarly situated claims be treated the same? .................................................................16-11

Q 16.7.2 What is a convenience class? .............................................16-11Q 16.7.3 Is there a priority under the Bankruptcy Code for the

treatment of different types of claims under a plan? .......16-12Q 16.7.4 What treatment is required for “priority” claims? ...........16-12Q 16.7.5 What treatment is required for “administrative”

claims? ...................................................................................16-12Q 16.7.6 What is a “section 1111(b) election”? ................................16-12

Q 16.8 What other types of provisions may a plan include? .................16-13Q 16.9 What is a plan supplement? ...........................................................16-13


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Plan Voting ..........................................................................................................16-14

Q 16.10 What are the procedures for voting to accept or reject a Chapter 11 plan? ..............................................................................16-14

Q 16.10.1 Who is entitled to vote to accept or reject a plan? ..........16-14Q 16.10.2 How long do creditors and equity holders typically

have to submit their ballots? ..............................................16-14Q 16.10.3 What is a voting record date? .............................................16-15Q 16.10.4 If a claim or equity interest is traded, who is entitled

to submit the ballot for that claim or equity interest? ......16-15Q 16.11 What is a “plan support agreement” or “lock-up agreement”? ......16-15Q 16.12 Can a plan be modified after votes have been solicited? ...........16-16Q 16.13 How does the court treat competing plans

of reorganization? ............................................................................16-16

Plan Confirmation ..............................................................................................16-17

Q 16.14 How long does the plan approval process take in a typical Chapter 11 bankruptcy case? ...........................................16-17

Q 16.14.1 What is a typical timeline for the plan approval process? .................................................................................16-17

Figure 16-1 Illustrative Timeline for Traditional Plan Approval Process ..........................................................................................16-18

Q 16.15 What are the confirmation requirements for a plan?..................16-19Q 16.15.1 Is there a good faith requirement for plans? ....................16-19Q 16.15.2 What is “feasibility”? ............................................................16-19

Q 16.16 What are the voting requirements for a plan to be approved? ......16-20Q 16.16.1 Who selects the classification of creditors? .....................16-20Q 16.16.2 What is an impaired class? ..................................................16-20Q 16.16.3 What does it mean to “designate” a claim? .......................16-21

Q 16.17 Can a plan be approved if a class of claims or interests votes to reject the plan? .................................................................16-22

Q 16.17.1 What is “cram down”? .........................................................16-22Q 16.17.2 How does a plan “unfairly discriminate”? .........................16-23Q 16.17.3 What is “fair and equitable” treatment? ............................16-23Q 16.17.4 What is the “absolute priority rule”? .................................16-24Q 16.17.5 What is the new value exception to the absolute

priority rule? .........................................................................16-24Q 16.17.6 May creditors agree to treatment that does not

comply with the absolute priority rule? ............................16-25Q 16.17.7 What is “gifting”? ..................................................................16-25Q 16.17.8 What is the effect of the plan on creditors’ claims

and equity holders’ interests? ............................................16-25Q 16.18 How does a debtor emerge from bankruptcy after a plan is

confirmed? ........................................................................................16-25

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Q 16.19 What is the effect of plan confirmation and plan consummation? ...............................................................................16-26

Q 16.19.1 What is a “discharge” of claims in bankruptcy? ...............16-26Q 16.19.2 Can a debtor receive a discharge under a plan of

liquidation? ...........................................................................16-26Q 16.19.3 What releases and injunctions are commonly

included in a plan? ...............................................................16-27Q 16.19.4 What are “exculpations” in a plan? ....................................16-27Q 16.19.5 What is a “channeling injunction”? ....................................16-28Q 16.19.6 Does the automatic stay remain in place once a

Chapter 11 plan becomes effective? ..................................16-29Q 16.19.7 Can a plan be modified after it is confirmed? ...................16-29Q 16.19.8 What is the effect of the failure of a confirmed plan

to be consummated? ............................................................16-29Q 16.20 What is a litigation trust or a liquidation trust? ..........................16-29

Q 16.20.1 How is a litigation trust or a liquidation trust funded? ..................................................................................16-30

Q 16.20.2 What rights and duties does a litigation trustee or a liquidation trustee have?.....................................................16-30

Exit Financing .....................................................................................................16-30

Q 16.21 What is “exit financing”? .................................................................16-30Q 16.21.1 Are there any specific requirements for exit

financing under the Bankruptcy Code? .............................16-30Q 16.21.2 Who can provide exit financing? ........................................16-31Q 16.21.3 What types of financing are acceptable forms of

exit financing? .......................................................................16-31Q 16.21.4 When does exit financing become effective? ....................16-31Q 16.21.5 What special provisions are typically included in

exit-financing agreements? ..................................................16-31Q 16.21.6 Does the bankruptcy court have jurisdiction over

disputes with respect to exit financing? ............................16-32Q 16.21.7 Are there special protections under the Bankruptcy

Code for an exit lender? ......................................................16-32Q 16.21.8 What happens if a company defaults on its

exit financing? .......................................................................16-32

Post-Confirmation Issues ...................................................................................16-33

Q 16.22 May a party in interest appeal the court’s confirmation of a Chapter 11 plan? ..............................................................................16-33

Q 16.22.1 What risks must a party consider in determining whether to appeal a confirmation order? .........................16-33

Q 16.22.2 What is “equitable mootness”?...........................................16-33Q 16.23 How and when is a Chapter 11 case closed? ...............................16-34


xl

Prepackaged and Prenegotiated Plans ...........................................................16-34

Q 16.24 What is a “prepackaged” plan of reorganization? .......................16-34Q 16.24.1 How long does the plan approval process take in a

prepackaged Chapter 11 bankruptcy case? ......................16-35Q 16.24.2 What would a typical timeline be for a prepackaged

Chapter 11 case? ..................................................................16-35Figure 16-2 Illustrative Timeline for Prepackaged Plan Approval

Process ..........................................................................................16-35Q 16.24.3 Must a debtor comply with applicable securities

registration requirements in a prepackaged bankruptcy case? .................................................................16-36

Q 16.24.4 Why would a debtor want to pursue a prepackaged plan? ...............................................................16-36

Q 16.25 What is a “prenegotiated” Chapter 11 case? ................................16-36Q 16.25.1 How long does the plan approval process take in a

prenegotiated Chapter 11 bankruptcy case? ....................16-36Q 16.25.2 How might a lock-up or plan support agreement be

used in a prenegotiated Chapter 11 case? ........................16-37Q 16.25.3 What would a typical timeline be for a prenegotiated

Chapter 11 case? ..................................................................16-37Figure 16-3 Illustrative Timeline for Prenegotiated Plan Approval

Process ..........................................................................................16-38Q 16.25.4 Why would a debtor want to pursue a

prenegotiated plan? .............................................................16-38

Chapter 17 Tax Issues

Cancellation of Indebtedness Income ................................................................17-2

Q 17.1 What is “cancellation of indebtedness income”? ..........................17-2Q 17.2 How is cancellation of indebtedness income taxed? ....................17-2Q 17.3 What is the insolvency exception to taxation of cancellation

of indebtedness income? ..................................................................17-3Q 17.4 What is the bankruptcy exception to taxation of cancellation

of indebtedness income? ..................................................................17-3Q 17.5 How are the debtor’s tax attributes reduced as a

consequence of using the insolvency or bankruptcy exceptions? ........................................................................................17-4

Net Operating Losses ..........................................................................................17-5

Q 17.6 What are net operating losses? .......................................................17-5Q 17.7 How is a taxpayer’s use of net operating losses limited

outside of bankruptcy? .....................................................................17-6

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Q 17.8 Why is the use of net operating losses limited? ............................17-7Q 17.9 What rules apply to the use of net operating losses when a

debtor emerges from bankruptcy? ..................................................17-8Q 17.10 What is the special valuation rule that may apply when a

debtor emerges from bankruptcy? ..................................................17-8Q 17.11 Is there any other rule that may permit a debtor emerging

from bankruptcy to use its net operating losses without the usual limitations? ........................................................................17-9

Q 17.12 What tax attributes besides net operating losses are subject to similar limitations? .......................................................17-11

Q 17.13 What provisions are often found in trading orders in order to preserve the debtor’s ability to use its net operating losses? .............................................................................17-11

Tax Consequences of Restructuring to Debtors ..............................................17-12

Q 17.14 What are the tax consequences to the debtor corporation when it makes a cash payment to settle its debt? ......................17-12

Q 17.15 What are the tax consequences to the debtor corporation when it issues new debt to a creditor in settlement of existing debt? ...................................................................................17-12

Q 17.16 What are the tax consequences to the debtor corporation when it issues stock to a creditor in settlement of existing debt? ...................................................................................17-13

Q 17.17 What forms of tax-free reorganization are available to a debtor corporation that reorganizes in the form of a different entity? ...............................................................................17-13

Q 17.18 Is it possible to reorganize a debtor corporation in a taxable transaction, and why might this be advantageous? ...................17-15

Q 17.19 What are the tax consequences to the debtor corporation if the debtor corporation transfers its assets to a liquidating trust? .............................................................................17-15

Tax Consequences of Restructuring to Creditors and Stockholders ............17-16

Q 17.20 When may a creditor stop accruing interest on its debt? ..........17-16Q 17.21 When may a creditor claim a bad debt deduction? ....................17-17Q 17.22 When may a shareholder claim a worthless

stock deduction? .............................................................................17-17Q 17.23 When is tax-free treatment beneficial to a creditor, and

when is taxable treatment beneficial to a creditor?....................17-19Q 17.24 What are the tax consequences to a creditor that settles

its debt in exchange for a cash payment? ....................................17-19


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Q 17.25 What are the tax consequences to a creditor that exchanges its existing debt for new debt? ...................................17-19

Q 17.26 What are the tax consequences to a creditor that exchanges its existing debt for stock? ..........................................17-20

Q 17.27 What are the tax consequences to a creditor that participates in a tax-free reorganization of the debtor corporation into a new entity? .........................................17-20

Q 17.28 What are the tax consequences to a creditor when the debtor corporation transfers its assets to a liquidating trust? .............................................................................17-21

Deemed Debt Exchanges ..................................................................................17-21

Q 17.29 When is a loan modification treated for tax purposes as the exchange of the existing debt instrument for a new debt instrument? ......................................................................................17-21

Q 17.30 What are the tax consequences of a deemed exchange to the debtor corporation? .................................................................17-22

Q 17.31 What are the tax consequences of a deemed exchange to the creditor? .....................................................................................17-23

Chapter 18 Bankruptcy Trustees and Examiners

Chapter 11 Trustee ...............................................................................................18-2

Q 18.1 What is a Chapter 11 trustee? ..........................................................18-2Q 18.2 How is a Chapter 11 trustee appointed? ........................................18-2

Q 18.2.1 Under what circumstances will a bankruptcy court grant a motion seeking the appointment of a Chapter 11 trustee? ................................................................18-3

Q 18.2.2 Who appoints the Chapter 11 trustee? ................................18-3Q 18.3 What happens to a debtor’s management team if a

Chapter 11 trustee is appointed? ....................................................18-3Q 18.4 What are the duties of a Chapter 11 trustee upon his or

her appointment? ..............................................................................18-4Q 18.4.1 What professionals does a Chapter 11 trustee

generally retain to assist in the performance of his or her duties? ...............................................................18-4

Q 18.4.2 How is a Chapter 11 trustee compensated for his or her duties?....................................................................18-5

Q 18.4.3 How are the Chapter 11 trustee’s retained professionals compensated? ................................................18-5

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Q 18.5 What are the essential differences between a Chapter 7 trustee and a Chapter 11 trustee? ...................................................18-5

Bankruptcy Examiner ..........................................................................................18-6

Q 18.6 What is a bankruptcy examiner? .....................................................18-6Q 18.7 How is the examiner appointed? .....................................................18-6Q 18.8 Under what circumstances will a bankruptcy court grant a

motion seeking the appointment of an examiner? ........................18-6Q 18.9 Does the appointment of an examiner displace a debtor’s

management team? ...........................................................................18-6Q 18.10 What are the duties of an examiner upon his or her

appointment? .....................................................................................18-7Q 18.10.1 What professionals does an examiner generally retain

to assist in the performance of his or her duties? .............18-7Q 18.10.2 How is an examiner compensated for his or her duties? ......18-7Q 18.10.3 How are the examiner’s retained professionals

compensated? .........................................................................18-8

Key Differences Between Trustee and Examiner .............................................18-8

Q 18.11 What are the differences between a Chapter 11 trustee and an examiner? .................................................................18-8

Q 18.11.1 Under what circumstance would a party seek the appointment of an examiner but not of a Chapter 11 trustee? ................................................................18-8

Q 18.11.2 Can both an examiner and a Chapter 11 trustee be appointed? .........................................................................18-9

Receiver .................................................................................................................18-9

Q 18.12 What is a receiver? ............................................................................18-9Q 18.12.1 Can a receiver be appointed in a Chapter 11 case? ...........18-9

Chapter 19 Conversion or Dismissal

Conversion, Dismissal Generally .......................................................................19-2

Q 19.1 What does it mean to “convert” a bankruptcy case? ...................19-2Q 19.2 What does it mean to dismiss a bankruptcy case? .......................19-2

Conversion, Dismissal of Chapter 11 Cases .....................................................19-2

Q 19.3 Does a debtor have the right to convert a case from Chapter 11 to Chapter 7? ..................................................................19-2


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Q 19.4 May a party other than the debtor seek to convert or dismiss a Chapter 11 bankruptcy case? .........................................19-3

Q 19.5 Is a court required to convert or dismiss a Chapter 11 bankruptcy case on the request of a party in interest? ...............19-3

Q 19.6 What constitutes “cause” for purposes of dismissing or converting a Chapter 11 case? .........................................................19-4

Q 19.7 Does “bad faith” constitute “cause” for conversion or dismissal of a Chapter 11 case? .......................................................19-4

Q 19.8 May a court dismiss or convert a Chapter 11 bankruptcy case sua sponte (that is, of its own accord)? ............19-5

Q 19.9 How quickly must a court hear the motion of a non-debtor party in interest to convert or dismiss a Chapter 11 debtor’s case? ....................................................................................19-5

Q 19.10 Can a Chapter 11 case be converted to Chapter 7 without the debtor’s consent? .......................................................................19-5

Conversion, Dismissal of Chapter 7 Cases .......................................................19-6

Q 19.11 When may a Chapter 7 case be converted to a Chapter 11 case? ................................................................................19-6

Q 19.12 When may a Chapter 7 case be dismissed? ...................................19-6Q 19.12.1 What constitutes “cause” for purposes of dismissing a

Chapter 7 case? ......................................................................19-6Q 19.13 What is a structured dismissal? ......................................................19-6

Chapter 20 Professionals

Professional Retentions .......................................................................................20-2

Q 20.1 What are professionals under the Bankruptcy Code? ..................20-2Q 20.1.1 How does a bankruptcy court determine if a

professional has a central role in a bankruptcy case and thus must be retained? ..................................................20-2

Q 20.1.2 What requirements must be met for the debtor to retain a professional that has a central role in the case?..............................................................................20-3

Q 20.1.3 What requirements must be met for the debtor to retain special counsel that does not play a central role in the bankruptcy case?.................................................20-3

Q 20.1.4 What is an ordinary course professional? ..........................20-3Q 20.1.5 How does a debtor retain a professional as an officer

of the company? .....................................................................20-4

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Q 20.1.6 What requirements must be met for an official committee to retain a professional? ....................................20-5

Retention Requirements .......................................................................................20-5

Q 20.2 What is an “adverse interest”? ........................................................20-5Q 20.3 What is a “disinterested person”? ...................................................20-5Q 20.4 What is a conflict of interest? ..........................................................20-6

Q 20.4.1 Must conflicts of interest be disclosed by a professional? ...........................................................................20-6

Q 20.4.2 May conflicts of interest be waived?....................................20-6Q 20.4.3 What is an “ethical wall”? ......................................................20-7Q 20.4.4 What is the “Jay Alix Protocol”? ...........................................20-7

Retention Applications .........................................................................................20-8

Q 20.5 What is a retention application? ......................................................20-8Q 20.5.1 Who may object to a retention application?.......................20-9

Q 20.6 What is a nunc pro tunc retention? ..................................................20-9

Compensation .....................................................................................................20-10

Q 20.7 What are typical methods of compensating professionals? ..........20-10Q 20.8 What is the general standard for compensation of

professionals? ..................................................................................20-10Q 20.8.1 Do professionals typically obtain retainers in

advance of a bankruptcy filing? ..........................................20-11Q 20.9 What is a fee application? ..............................................................20-11

Q 20.9.1 Who may object to a fee application? ...............................20-13Q 20.10 When may professional fees be paid? ..........................................20-13Q 20.11 May professional fees be paid out of a creditor’s collateral? .........20-13Q 20.12 What is a fee examiner? ..................................................................20-14

Chapter 21 Small Business Chapter 11 Cases

Covered Debtors ..................................................................................................21-2

Q 21.1 What is a “small business case”? .....................................................21-2Q 21.2 What is a “small business debtor”? .................................................21-2

Reporting Obligations .........................................................................................21-3

Q 21.3 What special reporting requirements are applicable to small business debtors? .............................................................................21-3


xlvi

Filing and Other Obligations ..............................................................................21-4

Q 21.4 What additional duties does a small business debtor have? ......21-4Q 21.5 What additional duties does the U.S. Trustee have with

respect to a small business debtor? ...............................................21-5Q 21.6 Is a small business debtor required to file a disclosure

statement and have it approved by the bankruptcy court prior to the confirmation hearing? .......................................21-5

Q 21.7 When must a small business debtor file its plan and disclosure statement? .......................................................................21-5

Q 21.8 When must a small business debtor’s plan be confirmed? ..........21-6Q 21.9 When may a small business debtor obtain an extension of

its plan and disclosure statement filing deadlines? ......................21-6

Chapter 22 Single Asset Real Estate Chapter 11 Cases

Applicability of SARE Provisions ........................................................................22-2

Q 22.1 What is a SARE case? ........................................................................22-2Q 22.2 When does a debtor qualify as a SARE debtor? ............................22-2

Special Rules for SARE Debtor Cases ................................................................22-3

Q 22.3 What special relief is afforded in SARE cases? ..............................22-3Q 22.4 May a SARE debtor use post-petition rents from the

property to fund its operations? .....................................................22-4Q 22.5 Are SARE cases subject to dismissal as bad- faith filings? ...........22-4

Chapter 23 Chapter 7 Cases

Commencement of a Chapter 7 Case ................................................................23-2

Q 23.1 How is a Chapter 7 case commenced? ...........................................23-2Q 23.1.1 May a company’s creditors file an involuntary

Chapter 7 case? ......................................................................23-2Q 23.2 Who may be a Chapter 7 debtor? ....................................................23-2Q 23.3 What is the immediate effect of the commencement of a

Chapter 7 case under the Bankruptcy Code? ................................23-3Q 23.3.1 What is the Chapter 7 estate? ...............................................23-3Q 23.3.2 What is the automatic stay? ..................................................23-3

Q 23.4 Who are the principal constituents in a Chapter 7 case? ............23-3Q 23.4.1 What is the role of the Chapter 7 trustee? ..........................23-3

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Q 23.4.2 What is the role of the debtor? .............................................23-4Q 23.4.3 What is the role of the bankruptcy court? ..........................23-4Q 23.4.4 Is there an official creditors’ committee in a

Chapter 7 case? ......................................................................23-4Q 23.4.5 What is the role of a Chapter 7 creditors’ committee? ......23-5

Chapter 7 Trustees ...............................................................................................23-5

Q 23.5 Who administers the Chapter 7 estate? .........................................23-5Q 23.5.1 How is an interim Chapter 7 trustee appointed? ...............23-5Q 23.5.2 How is a permanent Chapter 7 trustee appointed? ...........23-6

Q 23.6 What are the Chapter 7 trustee’s primary obligations? ...............23-6Q 23.6.1 Does a company continue to operate in

Chapter 7? ...............................................................................23-7

Chapter 7 Bankruptcy Estate ..............................................................................23-7

Q 23.7 How is financing obtained in a Chapter 7 case? ............................23-7Q 23.8 How are asset sales conducted in Chapter 7? ...............................23-7Q 23.9 How does a Chapter 7 trustee address prepetition executory

contracts and unexpired leases? .....................................................23-8Q 23.10 Does the Chapter 7 trustee have any special lien avoidance

powers under Chapter 7? .................................................................23-9

Treatment of Claims in Chapter 7 ......................................................................23-9

Q 23.11 How are claims filed? ........................................................................23-9Q 23.12 What is the deadline by which claims must be filed? ...................23-9Q 23.13 What is the effect of failing to file a proof of claim by the

deadline? ..........................................................................................23-10Q 23.14 Who may object to a claim? ...........................................................23-10Q 23.15 What is the process for objecting to a claim? .............................23-10Q 23.16 How are claims allowed for distribution purposes? ...................23-10

Distributions in Chapter 7 .................................................................................23-11

Q 23.17 What is the process for distribution of property of the Chapter 7 estate? .............................................................................23-11

Q 23.17.1 What is the priority order of distributions? .....................23-12Q 23.17.2 When are distributions made?............................................23-12

Conclusion of a Chapter 7 Case ......................................................................23-12

Q 23.18 Are companies entitled to a discharge of indebtedness under Chapter 7? .............................................................................23-12

Q 23.19 When may a Chapter 7 case be converted to a case under Chapter 11? ...........................................................................23-13

Q 23.20 When may a Chapter 7 case of a company be dismissed? .........23-13


xlviii

Chapter 24 Cross-Border Reorganizations

Foreign Company Insolvency in the United States ..........................................24-2

Q 24.1 Is a non-U.S. company eligible to file for bankruptcy protection in the United States? ......................................................24-2

Q 24.1.1 What is required for a foreign company to file for bankruptcy relief in the United States? ...............................24-2

Q 24.2 Where could a company with assets in more than one country file for bankruptcy protection? .........................................24-3

Q 24.2.1 Why might a foreign company choose to seek bankruptcy protection in the United States? ......................24-3

Q 24.3 Are bankruptcy laws in other countries similar to the U.S. Bankruptcy Code? .............................................................................24-3

Q 24.4 Can a company have bankruptcy cases pending in both the United States and another country at the same time? .................24-4

Q 24.4.1 What is a “dual proceeding”? ................................................24-4Q 24.4.2 What is an “ancillary proceeding”? ......................................24-5

Q 24.5 Is there an international law for cross-border reorganizations? ......24-5Q 24.5.1 What is “comity”? ...................................................................24-6

Q 24.6 What is a “protocol” in a cross-border case or dual proceeding? ........................................................................................24-6

Q 24.6.1 Is a protocol mandatory in a dual proceeding? ..................24-6Q 24.6.2 Must each country’s bankruptcy court approve a

proposed protocol? ................................................................24-7Q 24.7 Do other countries’ bankruptcy courts have jurisdiction

over U.S. creditors? ...........................................................................24-7Q 24.8 Do U.S. bankruptcy courts have jurisdiction over foreign

creditors? ...........................................................................................24-7

Chapter 15 of the Bankruptcy Code..................................................................24-8

Q 24.9 What is Chapter 15? ..........................................................................24-8Q 24.9.1 What is a “foreign proceeding”? ...........................................24-8Q 24.9.2 What is a “foreign representative”? .....................................24-8Q 24.9.3 What is a “center of main interests”? ..................................24-9Q 24.9.4 What is a “foreign main proceeding”? .................................24-9Q 24.9.5 What is a “foreign nonmain proceeding”? ...........................24-9Q 24.9.6 What is “recognition” of a foreign proceeding? ..................24-9

Q 24.10 How does a foreign representative commence a Chapter 15 case? ..............................................................................24-10

Q 24.10.1 In what district must a foreign representative commence a Chapter 15 case? ...........................................24-10

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Q 24.10.2 When can a Chapter 15 case be dismissed? .....................24-11Q 24.11 What relief is available to a foreign representative upon

the filing of a Chapter 15 petition? ................................................24-11Q 24.11.1 Is there an “automatic stay” in Chapter 15? .....................24-12

Q 24.12 What relief is granted upon recognition of a “foreign main proceeding”? ....................................................................................24-12

Q 24.13 What relief is granted upon recognition of a “foreign nonmain proceeding”? ....................................................................24-13

Q 24.14 How do creditors file claims in a Chapter 15 case? ....................24-13Q 24.15 What are the primary differences between Chapter 11 and

Chapter 15? ......................................................................................24-13Q 24.15.1 Why would a distressed company choose to either

file Chapter 11 or Chapter 15 over the other? ..................24-14

Chapter 25 Bankruptcy’s Statutory Regime

Bankruptcy Code..................................................................................................25-2

Q 25.1 What is the Bankruptcy Code? ........................................................25-2Q 25.2 What are the different chapters of the Bankruptcy Code? ..........25-2Q 25.3 What chapters of the Bankruptcy Code are relevant to a

debtor that has filed for Chapter 7 protection? ............................25-3Q 25.4 What chapters of the Bankruptcy Code are relevant to a

debtor that has filed for Chapter 11 protection? ..........................25-4Q 25.5 What chapters of the Bankruptcy Code are relevant to a

foreign debtor who also has a foreign insolvency proceeding pending? .............................................................................................25-4

Q 25.6 Are all of the powers granted to the bankruptcy court enumerated in the Bankruptcy Code? ............................................25-4

Federal Rules of Bankruptcy Procedure ............................................................25-5

Q 25.7 What are the Federal Rules of Bankruptcy Procedure? ................25-5Q 25.7.1 What portion of the Federal Rules of Bankruptcy

Procedure governs an adversary proceeding within a Chapter 11 case? .....................................................25-6

Federal Rules of Civil Procedure ........................................................................25-6

Q 25.8 What are the Federal Rules of Civil Procedure? ............................25-6Q 25.8.1 How do the Federal Rules of Civil Procedure interact

with the Federal Rules of Bankruptcy Procedure? .............25-6Q 25.8.2 Which of the Federal Rules of Civil Procedure are

relevant to a bankruptcy case? ............................................25-7


l

Other Statutory Regimes .....................................................................................25-7

Q 25.9 What are “local rules”? .....................................................................25-7Q 25.9.1 If there is a conflict between the Federal Rules of

Bankruptcy Procedure and the local rules, which rules govern? ...............................................................25-8

Q 25.10 What are “chamber’s rules”? ...........................................................25-8Q 25.10.1 If there is a conflict between chamber’s rules and the

Federal Rules of Bankruptcy Procedure or local rules, which rules govern? ...........................................25-8

Q 25.11 What are the Federal Rules of Evidence? .......................................25-9Q 25.11.1 Which of the Federal Rules of Evidence are relevant

to a bankruptcy case? ............................................................25-9Q 25.12 What are Official Forms? ..................................................................25-9Q 25.13 What are the U.S. Trustee guidelines? ..........................................25-10

Chapter 26 Judicial Platform for Bankruptcy Cases

Establishment of Bankruptcy Courts ..................................................................26-2

Q 26.1 How does the U.S. Code provide for the establishment of bankruptcy courts? ...........................................................................26-2

Q 26.1.1 How are bankruptcy courts divided among different regions? .........................................................................................26-2

Figure 26-1 U.S. Federal Circuits.......................................................................26-3

Jurisdiction ............................................................................................................26-3

Q 26.2 Which court has jurisdiction to hear the issues raised by the filing of a bankruptcy petition? .................................................26-3

Figure 26-2 Bankruptcy Cases and Core/Non-core Proceedings ..................26-4Q 26.2.1 What is the scope of a bankruptcy court’s jurisdiction? ......26-4Q 26.2.2 What is a “core” proceeding? ................................................26-5Q 26.2.3 What is the effect of the Supreme Court’s decision in

Stern v. Marshall on bankruptcy court jurisdiction? ..............26-5Q 26.2.4 What court will adjudicate “non-core” proceedings? ........26-6Q 26.2.5 May a district court abstain from hearing a

particular bankruptcy proceeding? .....................................26-6Q 26.2.6 What is a “reference order”? .................................................26-7Q 26.2.7 What is a withdrawal of the reference? ...............................26-7Q 26.2.8 How can a bankruptcy court bind a foreign defendant

to an obligation or adjudicate rights over the foreign defendant’s property? ............................................................26-8

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Q 26.2.9 Is a bankruptcy court precluded from adjudicating any claims? ..............................................................................26-8

Equitable Powers of the Bankruptcy Court.......................................................26-9

Q 26.3 What general powers does a bankruptcy court possess? ...........26-9Q 26.3.1 Does a bankruptcy court have authority to issue

contempt orders or impose sanctions?...............................26-9

Appeals .................................................................................................................26-9

Q 26.4 What court will hear appeals of a bankruptcy court’s orders? ...................................................................................26-9

Q 26.4.1 What is a stay pending appeal? ..........................................26-10Q 26.4.2 What happens when an appellant fails to obtain a

stay pending appeal? ...........................................................26-11Q 26.4.3 What is a supersedeas bond? .............................................26-11Q 26.4.4 Is the posting of a bond required to pursue

an appeal? .............................................................................26-11

Appendix: Table of Authorities ............................................................ App.-1

Index ........................................................................................................... I-1

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Acknowledgments

The author is grateful for the assistance and contribution of a number of current and former lawyers at Shearman & Sterling LLP who have volunteered their valuable time, including nights and weekends, to work on aspects of this book: John Anzelc, Anne Bahr, Roger Baneman, Robert Britton, Stacey Corr-Irvine, Alyssa Cowley, Milana Dabran, Edmund Emrich, Richard Facundo, Jill Frizzley, Shekhar Kumar, Kerry Neligan, Solomon Noh, Leticia Olivera, James Park, Ned Schodek, David Winterton, Veronica Wissel, Doreen Xia and senior legal assistant Jérôme Mounier.

Susan Fennessey, a former Counsel at Shearman & Sterling LLP and currently General Counsel at Essar Steel Minnesota LLC, was instrumental in co-authoring earlier editions of this book. Her dedication, wisdom and insight are gratefully acknowledged by the author. The publication of this book would not have been possible without her extraordinary commitment.

The author also would like to acknowledge the exceptionally impor-tant contribution of Barbara Kraus, the Global Business Director– Finance, and Ronni Arnold, the Knowledge Management Attorney for the Financial Restructuring & Insolvency Group of Shearman & Sterling LLP. Barbara and Ronni’s careful review and editing were invaluable, and their discipline and organization were essential, in completing this project.

Finally, the author would like to thank Sayuri Shimoda and Bradley Simon for their valuable assistance in completing the 2017 update to this book.