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Chapter 11, Title 11, United States Code

From Wikipedia, the free encyclopedia

Chapter 11 is a chapter of Title 11, the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities.[1] In contrast, Chapter 7 governs the process of a liquidation bankruptcy (although liquidation can go under this chapter), while Chapter 13 provides a reorganization process for the majority of private individuals.

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I’m Eric Lanigan with Lanigan and Lanigan attorneys in Winter Park. Florida, I’m going to talk for a minute about some fundamentals of Chapter 11 Bankruptcy. And generally speaking Chapter 11 bankruptcies are associated with businesses. You’ll read about it an airline goes into bankruptcy it’s almost always a Chapter 11 because as you notice they don’t disappear, they keep operating that’s what Chapter 11 is somewhat all about. Chapter 11 can also be used by individuals because Chapter 13 bankruptcy which is for individuals who want to reorganize their debt and enter into a payment plan has certain ceilings of maximum amount of debt that you can have in a Chapter 13. And if you go above that ceiling then you’re going to have to go into Chapter 11 which is more complicated more hands on. So let’s talk about the fundamentals of Chapter 11. I think the one thing that probably gets everyone from a major airline right down to a small business into a Chapter 11 is that they become aggressively hounded by certain creditors and they don’t have the ability to pay them and those creditors have the ability on any given day to put them out of business by levying on property garnishing bank accounts they’re out of business. And if you represent creditors you’re always concerned about racing to the money. Because the second creditor to get to the pot of gold finds that the pot of gold is empty. So the creditors will typically be racing to see who can get to the money first and be very aggressive. That’s when a Chapter 11 comes into play because when you file a Chapter 11 someone will say what’s the most fundamental thing that will happen? I would say, my answer would be that creditors lose their individual collection rights. They are now dealing there are no longer individual creditors they are now dealing with the bankruptcy estate which is operating for the benefit of all creditors. So the business continues operation and all similarly situated creditors are treated the same. So there’s no longer this creditor being highly aggressive and they’re going to put me out of business tomorrow. No they’re not. Because now they’re under the control of the bankruptcy court and they’re all treated collectively. And when the bankruptcy is filed, just like a Chapter 7 bankruptcy for an individual or a Chapter 13 bankruptcy in Chapter 11 an automatic stay or an automatic freeze goes into effect. All collection activity literally stops. Literally if someone files a bankruptcy and they’re loading the cars up on the tow truck to take them away they have to stop and put them down. So everything stops and basically the purpose of that is to give the debtor some breathing room to try to get things reorganized without getting things picked up bank accounts garnished each day you can’t operate a business in that manner. So the automatic stay goes into effect everything stops. Another fundamental issue of the Chapter 11 bankruptcy is what we call The Debtor in Possession. And where that the debtor in possession comes about is if a company were to go into bankruptcy and the bankruptcy law was written such that immediately some outsider, a court appointed trustee is going to come in and run the business there’s two real problems with that. First of all that’s a very expensive proposition especially if you get into some of the larger companies. That they’re already in Chapter 11 because they’re cash strapped. So the last thing on earth that the business can afford is to bring in a whole new management team that’s very expensive. Another fundamental point is if that were to occur, not only would it be expensive, prohibitively expensive but it would probably almost certainly cause the business to immediately collapse. Because all the relationships between existing managers and customers, existing managers and employees would all be gone. And this trustee or management team would be coming in in an almost impossible situation and I think would virtually doom any business that was forced into that position. Therefore the law keeps the existing owner management team in place to operate the business is what they call the Debtor in Possession of the business. Now they run under court oversight and supervision. Basically they run the business for the benefit of the creditors subject to the court’s supervision. The Debtor in Possession they run the business they examine the creditor’s claims and they even decide which claims they think should be paid and which ones should be opposed in court. A Debtor in Possession can be removed for cause. It has to be fraud, dishonesty or gross mismanagement. No just mismanagement, gross mismanagement. That’s a heavy burden in any type of legal situation. So there’s a good likelihood that if the Debtor in Possession follows the basic rules, does the basic reporting that they will stay the Debtor in Possession and continue to run the business throughout the Chapter 11 bankruptcy. Sometimes there can be a middle ground where the court would appoint what is referred to as an examiner. It’s not somebody brought in to run the team but someone to come in to do an in-depth review or examination of the Debtor in Possession activities and to report if they find anything untoward or should not be going on. So you hate to say it to a client but the bottom line was if you’d only been here a year ago when all of this litigation started going bad, and realize that it had to get cut off and get this into a different court, none of this would of happened. But because it was too late we’re stuck in a straight jacket and basically the case was almost basically doomed from the beginning. So don’t wait. If the business is going south get into a lawyer’s office that knows something about a Chapter 11. Discuss your situation. Determine whether or not it’s time to file. Or if not, what can be done to avoid or to deal with a creditor and possibly even to avoid filing a Chapter 11. And again I’m Eric Lanigan Lanigan and Lanigan attorneys in Winter Park Florida.


Chapter 11 in general

When a business is unable to service its debt or pay its creditors, the business or its creditors can file with a federal bankruptcy court for protection under either Chapter 7 or Chapter 11.

In Chapter 7, the business ceases operations, a trustee sells all of its assets, and then distributes the proceeds to its creditors. Any residual amount is returned to the owners of the company.

In Chapter 11, in most instances the debtor remains in control of its business operations as a debtor in possession, and is subject to the oversight and jurisdiction of the court.[2]

Features of Chapter 11 reorganization

Chapter 11 retains many of the features present in all, or most, bankruptcy proceedings in the U.S. It provides additional tools for debtors as well. Most importantly, 11 U.S.C. § 1108 empowers the trustee to operate the debtor's business. In Chapter 11, unless a separate trustee is appointed for cause, the debtor, as debtor in possession, acts as trustee of the business.[3]

Chapter 11 affords the debtor in possession a number of mechanisms to restructure its business. A debtor in possession can acquire financing and loans on favorable terms by giving new lenders first priority on the business's earnings. The court may also permit the debtor in possession to reject and cancel contracts. Debtors are also protected from other litigation against the business through the imposition of an automatic stay. While the automatic stay is in place, creditors are stayed from any collection attempts or activities against the debtor in possession, and most litigation against the debtor is stayed,[4] or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue. An example of proceedings that are not necessarily stayed automatically are family law proceedings against a spouse or parent. Further, creditors may file with the court seeking relief from the automatic stay.

If the business is insolvent, its debts exceed its assets and the business is unable to pay debts as they come due,[5] the bankruptcy restructuring may result in the company's owners being left with nothing; instead, the owners' rights and interests are ended and the company's creditors are left with ownership of the newly reorganized company.

All creditors are entitled to be heard by the court.[6] The court is ultimately responsible for determining whether the proposed plan of reorganization complies with the bankruptcy law.

One controversy that has broken out in bankruptcy courts concerns the proper amount of disclosure that the court and other parties are entitled to receive from the members of the ad hoc creditor's committees that play a large role in many such proceedings.[7]

Chapter 11 plan

Chapter 11 usually results in reorganization of the debtor's business or personal assets and debts, but can also be used as a mechanism for liquidation. Debtors may "emerge" from a chapter 11 bankruptcy within a few months or within several years, depending on the size and complexity of the bankruptcy. The Bankruptcy Code accomplishes this objective through the use of a bankruptcy plan. The debtor in possession typically has the first opportunity to propose a plan during the period of exclusivity. This period allows the debtor 120 days from the date of filing for chapter 11, to propose a plan of reorganization before any other party in interest may propose a plan. If the debtor proposes a plan within the 120-day exclusivity period, a 180-day exclusivity period from the date of filing for chapter 11 is granted in order to allow the debtor to gain confirmation of the proposed plan.[4] With some exceptions, the plan may be proposed by any party in interest.[8] Interested creditors then vote for a plan.


If the judge approves the reorganization plan and the creditors all agree, then the plan can be confirmed. If at least one class of creditors objects and votes against the plan, it may nonetheless be confirmed if the requirements of cramdown are met. In order to be confirmed over the creditors' objection, the plan must not discriminate against that class of creditors, and the plan must be found fair and equitable to that class. Upon confirmation, the plan becomes binding and identifies the treatment of debts and operations of the business for the duration of the plan. If a plan cannot be confirmed, the court may either convert the case to a liquidation under chapter 7, or, if in the best interests of the creditors and the estate, the case may be dismissed resulting in a return to the status quo before bankruptcy. If the case is dismissed, creditors will look to non-bankruptcy law in order to satisfy their claims.

Automatic stay

Like other forms of bankruptcy, petitions filed under chapter 11 invoke the automatic stay of § 362. The automatic stay requires all creditors to cease collection attempts, and makes many post-petition debt collection efforts void or voidable. Under some circumstances, some creditors, otherwise the United States Trustee can request for the court converting the case into a liquidation under chapter 7, or appointing a trustee to manage the debtor's business. The court will grant a motion to convert to chapter 7 or appoint a trustee if either of these actions is in the best interest of all creditors. Sometimes a company will liquidate under chapter 11, in which the pre-existing management may be able to help get a higher price for divisions or other assets than a chapter 7 liquidation would be likely to achieve. Appointment of a trustee requires some wrongdoing or gross mismanagement on the part of existing management and is relatively rare.

Executory contracts

Some contracts, known as executory contracts, may be rejected if canceling them would be financially favorable to the company and its creditors. Such contracts may include labor union contracts, supply or operating contracts (with both vendors and customers), and real estate leases. The standard feature of executory contracts is that each party to the contract has duties remaining under the contract. In the event of a rejection, the remaining parties to the contract become unsecured creditors of the debtor. For example, in some districts a contract for deed is an executory contract, while in others it is not.

In the new millennium airlines have fallen under intense scrutiny for what many see as abusing Chapter 11 Bankruptcy as a simple tool for escaping labor contracts, usually 30-35% of an airline's operating cost.[9] Every major US airline has filed for Chapter 11 since 2002.[10] In the space of 2 years (2002–2004) US. Airways filed for bankruptcy twice[11] leaving the AFL-CIO,[12] pilot unions and other airline employees claiming the rules of Chapter 11 have helped turn the USA into a corporatocracy.[13]


Chapter 11 follows the same priority scheme as other bankruptcy chapters. The priority structure is defined primarily by § 507 of the Bankruptcy Code (11 U.S.C. § 507.)

As a general rule, administrative expenses (the actual, necessary expenses of preserving the bankruptcy estate, including expenses such as employee wages, and the cost of litigating the chapter 11 case) are paid first.[14] Secured creditors—creditors who have a security interest, or collateral, in the debtor's property—will be paid before unsecured creditors. Unsecured creditors' claims are prioritized by § 507. For instance the claims of suppliers of products or employees of a company may be paid before other unsecured creditors are paid. Each priority level must be paid in full before the next lower priority level may receive payment.

Section 1110

Section 1110 (11 U.S.C. § 1110) generally provides a secured party with an interest in an aircraft the ability to take possession of the equipment within 60 days after a bankruptcy filing unless the airline cures all defaults. More specifically, the right of the lender to take possession of the secured equipment is not hampered by the automatic stay provisions of the U.S. Bankruptcy Code.


If the company's stock is publicly traded, a Chapter 11 filing generally causes it to be delisted from its primary stock exchange if listed on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ. On the NASDAQ the identifying fifth letter "Q" at the end of a stock symbol indicates the company is in bankruptcy (formerly the "Q" was placed in front of the pre-existing stock symbol; a celebrated example was Penn Central, whose symbol was originally "PC" and became "QPC" after the company filed Chapter 11 in 1970). Many stocks that are delisted quickly resume listing as over-the-counter (OTC) stocks. Actual share value does not reach zero unless the probability of restructuring is so low that a Chapter 7 filing is sure to follow.

Individuals may file Chapter 11, but due to the complexity and expense of the proceeding, this option is rarely chosen by debtors who are eligible for Chapter 7 or Chapter 13 relief.


In enacting Chapter 11 of the Bankruptcy code, Congress concluded that it is sometimes the case that the value of a business is greater if sold or reorganized as a going concern than the value of the sum of its parts if the business's assets were to be sold off individually. It follows that it may be more economically efficient to allow a troubled company to continue running, cancel some of its debts, and give ownership of the newly reorganized company to the creditors whose debts were canceled. Alternatively, the business can be sold as a going concern with the net proceeds of the sale distributed to creditors ratably in accordance with statutory priorities. In this way, jobs may be saved, the (previously mismanaged) engine of profitability which is the business is maintained (presumably under better management) rather than being dismantled, and, as a proponent of a chapter 11 plan is required to demonstrate as a precursor to plan confirmation, the business's creditors end up with more money than they would in a Chapter 7 liquidation.


The reorganization and court process may take an inordinate amount of time, limiting the chances of a successful outcome and sufficient debtor in possession financing may be unavailable during an economic recession. A preplanned, preagreed approach between the debtor and its creditors (sometimes called a pre-packaged bankruptcy) may facilitate the desired result. A company undergoing Chapter 11 reorganization is effectively operating under the "protection" of the court until it emerges. An example is the airline industry in the United States; in 2006 over half the industry's seating capacity was on airlines that were in Chapter 11.[15] These airlines were able to stop making debt payments, break their previously agreed upon labor union contracts, freeing up cash to expand routes or weather a price war against competitors — all with the bankruptcy court's approval.

Studies on the impact of forestalling the creditors' rights to enforce their security reach different conclusions.[16]


Within 60 days of filing for Chapter 11 bankruptcy, the debtor must submit a written disclosure statement with the court containing information on assets, liabilities and business affairs.[17]



Chapter 11 cases dropped by 60% from 1991 to 2003. One 2007 study[18] found this was because businesses were turning to bankruptcy-like proceedings under state law, rather than the federal bankruptcy proceedings, including those under chapter 11. Insolvency proceedings under state law, the study stated, are currently faster, less expensive, and more private, with some states not even requiring court filings. However, a 2005 study[18] claimed the drop may have been due to an increase in the incorrect classification of many bankruptcies as "consumer cases" rather than "business cases".

Cases involving more than US$50 million in assets are almost always handled in federal bankruptcy court, and not in bankruptcy-like state proceeding.

Largest cases

The largest bankruptcy in history was of the US investment bank Lehman Brothers Holdings Inc., which listed $639 billion in assets as of its Chapter 11 filing in 2008. The 16 largest corporate bankruptcies as of 13 December 2011:[citation needed]

Company Filing date Total Assets pre-filing Assets adjusted to the year 2012 Filing court district
Lehman Brothers Holdings Inc. 2008-09-15 $639,063,000,800 $726 billion NY-S
Washington Mutual 2008-09-26 $327,913,000,000 $373 billion DE
Worldcom Inc. 2002-07-21 $103,914,000,000 $141 billion NY-S
General Motors Corporation[19] 2009-06-01 $82,300,000,000 $93.9 billion NY-S
CIT Group 2009-11-01 $71,019,200,000 $81 billion NY-S
Enron Corp.* 2001-12-02 $63,392,000,000 $87.6 billion NY-S
Conseco, Inc. 2002-12-18 $61,392,000,000 $83.5 billion IL-N
MF Global 2011-10-31 $41,000,000,000 $44.6 billion NY-S
Chrysler LLC[20] 2009-04-30 $39,300,000,000 $44.8 billion NY-S
Texaco, Inc. 1987-04-12 $35,892,000,000 $77.3 billion NY-S
Financial Corp. of America 1988-09-09 $33,864,000,000 $70.1 billion CA-C
Penn Central Transportation Company[21] 1970-06-21 $7,000,000,000 $44.1 billion PA-S
Refco Inc. 2005-10-17 $33,333,172,000 $41.8 billion NY-S
Global Crossing Ltd. 2002-01-28 $30,185,000,000 $41.1 billion NY-S
Pacific Gas and Electric Co. 2001-04-06 $29,770,000,000 $41.1 billion CA-N
UAL Corp. 2002-12-09 $25,197,000,000 $34.3 billion IL-N
Delta Air Lines, Inc. 2005-09-14 $21,801,000,000 $27.3 billion NY-S
Delphi Corporation, Inc. 2005-10-08 $22,000,000,000 $27.3 billion NY-S

Enron, Lehman Brothers, MF Global and Refco have all ceased operations while others were acquired by other buyers or emerged as a new company with a similar name.

The Enron assets were taken from the 10-Q filed on November 11, 2001. The company announced that the annual financials were under review at the time of filing for Chapter 11.

See also

Similar programs in other countries


  1. ^ "Chapter 11 – Bankruptcy Basics". United States Courts. Retrieved 5 August 2015.
  2. ^ Joseph Swanson and Peter Marshall, Houlihan Lokey and Lyndon Norley, Kirkland & Ellis International LLP (2008). A Practitioner's Guide to Corporate Restructuring. City & Financial Publishing, 1st edition ISBN 978-1-905121-31-1
  3. ^ 11 U.S.C. § 1107
  4. ^ a b "11 U.S. Code § 362 – Automatic stay". Retrieved 5 August 2015.
  5. ^ "§ 1-201. General Definitions". Retrieved 5 August 2015.
  6. ^ 1 U.S.C. Sec. 1109 (b)
  7. ^ "Bankruptcy Rules Committee rethinks 2019 pricing disclosure amid HF panic attack". Financial Times. Retrieved 5 August 2015.
  8. ^ 11 U.S.C. § 1121
  9. ^ "massachusetts institute of technology: Airline Data Project". MIT.
  10. ^ Davies, Richard (Nov 29, 2011). "AMR Files for Bankruptcy: The Last Giant to Fall". ABC News. Retrieved 19 May 2012.
  11. ^ Warner, Margeret (Sep 13, 2004). "US Airways Files....Again". Public Broadcasting Service. Retrieved 19 May 2012.
  12. ^ Jablonski, Donna. "AFL-CIO Cries Foul". AFL-CIO. Retrieved 19 May 2012.
  13. ^ Trumbul, Mark (Nov 29, 2011). "AMR Files for Chapter 11". The Christian Science Monitor. Retrieved 19 May 2012.
  14. ^ "11 U.S. Code § 503 – Allowance of administrative expenses". Retrieved 5 August 2015.
  15. ^ Isidore, Chris; Senior, /Money (2005-09-14). "Delta and Northwest airlines both file for bankruptcy". CNN. Retrieved November 17, 2005.
  16. ^ "The night of the killer zombies". 2002-12-12. Retrieved 2006-08-05.
  17. ^ "3 Deadlines to Beware of When Filing a Chapter 11 Bankruptcy". DCDM. 2014-02-17. Retrieved 2014-10-15.
  18. ^ a b (January 24, 2007), "Small Firms Spurn Chapter 11", Wall Street Journal, page B6B
  19. ^ "Bankruptcy Reorganization Chapter". Retrieved 5 August 2015.
  20. ^ "Bankruptcy Reorganization Chapter". Retrieved 5 August 2015.
  21. ^ Dascher, Paul E. (1 January 1972). "The Penn Central Revisited: A Predictable Situation". Financial Analysts Journal. 28 (2): 61–64. JSTOR 4470905.

External links

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