Laws: Cases and Codes : U.S. Code : Title 11
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U.S. Code as of:
01/19/04
Chapter 11 - Notes
SUBCHAPTER I - OFFICERS AND ADMINISTRATION
Sec.
1101. Definitions for this chapter.
1102. Creditors' and equity security holders' committees.
1103. Powers and duties of committees.
1104. Appointment of trustee or examiner.
1105. Termination of trustee's appointment.
1106. Duties of trustee and examiner.
1107. Rights, powers, and duties of debtor in possession.
1108. Authorization to operate business.
1109. Right to be heard.
1110. Aircraft equipment and vessels.
1111. Claims and interests.
1112. Conversion or dismissal.
1113. Rejection of collective bargaining agreements.
1114. Payment of insurance benefits to retired employees.
SUBCHAPTER II - THE PLAN
1121. Who may file a plan.
1122. Classification of claims or interests.
1123. Contents of plan.
1124. Impairment of claims or interests.
1125. Postpetition disclosure and solicitation.
1126. Acceptance of plan.
1127. Modification of plan.
1128. Confirmation hearing.
1129. Confirmation of plan.
SUBCHAPTER III - POSTCONFIRMATION MATTERS
1141. Effect of confirmation.
1142. Implementation of plan.
1143. Distribution.
1144. Revocation of an order of confirmation.
1145. Exemption from securities laws.
1146. Special tax provisions.
SUBCHAPTER IV - RAILROAD REORGANIZATION
1161. Inapplicability of other sections.
1162. Definition.
1163. Appointment of trustee.
1164. Right to be heard.
1165. Protection of the public interest.
1166. Effect of subtitle IV of title 49 and of Federal,
State, or local regulations.
1167. Collective bargaining agreements.
1168. Rolling stock equipment.
1169. Effect of rejection of lease of railroad line.
1170. Abandonment of railroad line.
1171. Priority claims.
1172. Contents of plan.
1173. Confirmation of plan.
1174. Liquidation.
HISTORICAL AND REVISION NOTES
LEGISLATIVE STATEMENTS
Chapter 11 of the House amendment is derived in large part from
chapter 11 as contained in the House bill. Unlike chapter 11 of the
Senate amendment, chapter 11 of the House amendment does not
represent an extension of chapter X of current law [chapter 10 of
former title 11] or any other chapter of the Bankruptcy Act [former
title 11]. Rather chapter 11 of the House amendment takes a new
approach consolidating subjects dealt with under chapters VIII, X,
XI, and XII of the Bankruptcy Act [chapters 8, 10, 11, and 12 of
former title 11]. The new consolidated chapter 11 contains no
special procedure for companies with public debt or equity security
holders. Instead, factors such as the standard to be applied to
solicitation of acceptances of a plan of reorganization are left to
be determined by the court on a case-by-case basis. In order to
insure that adequate investigation of the debtor is conducted to
determine fraud or wrongdoing on the part of present management, an
examiner is required to be appointed in all cases in which the
debtor's fixed, liquidated, and unsecured debts, other than debts
for goods, services, or taxes, or owing to an insider, exceed $5
million. This should adequately represent the needs of public
security holders in most cases. However, in addition, section 1109
of the House amendment enables both the Securities and Exchange
Commission and any party in interest who is creditor, equity
security holder, indenture trustee, or any committee representing
creditors or equity security holders to raise and appear and be
heard on any issue in a case under chapter 11. This will enable the
bankruptcy court to evaluate all sides of a position and to
determine the public interest. This approach is sharply contrasted
to that under chapter X of present law in which the public interest
is often determined only in terms of the interest of public
security holders. The advisory role of the Securities and Exchange
Commission will enable the court to balance the needs of public
security holders against equally important public needs relating to
the economy, such as employment and production, and other factors
such as the public health and safety of the people or protection of
the national interest. In this context, the new chapter 11 deletes
archaic rules contained in certain chapters of present law such as
the requirement of an approval hearing and the prohibition of
prepetition solicitation. Such requirements were written in an age
before the enactment of the Trust Indenture Act [15 U.S.C. 77aaa et
seq.] and the development of securities laws had occurred. The
benefits of these provisions have long been outlived but the
detriment of the provisions served to frustrate and delay effective
reorganization in those chapters of the Bankruptcy Act in which
such provisions applied. Chapter 11 thus represents a much needed
revision of reorganization laws. A brief discussion of the history
of this important achievement is useful to an appreciation of the
monumental reform embraced in chapter 11.
Under the existing Bankruptcy Act [former title 11] debtors
seeking reorganization may choose among three reorganization
chapters, chapter X, chapter XI, and chapter XII [chapters 10, 11,
and 12 of former title 11]. Individuals and partnerships may file
under chapter XI or, if they own property encumbered by mortgage
liens, they may file under chapter XII. A corporation may file
under either chapter X or chapter XI, but is ineligible to file
under chapter XII. Chapter X was designed to facilitate the
pervasive reorganization of corporations whose creditors include
holders of publicly issued debt securities. Chapter XI, on the
other hand, was designed to permit smaller enterprises to negotiate
composition or extension plans with their unsecured creditors. The
essential differences between chapters X and XI are as follows.
Chapter X mandates that, first, an independent trustee be appointed
and assume management control from the officers and directors of
the debtor corporation; second, the Securities and Exchange
Commission must be afforded an opportunity to participate both as
an adviser to the court and as a representative of the interests of
public security holders; third, the court must approve any proposed
plan of reorganization, and prior to such approval, acceptances of
creditors and shareholders may not be solicited; fourth, the court
must apply the absolute priority rule; and fifth, the court has the
power to affect, and grant the debtor a discharge in respect of,
all types of claims, whether secured or unsecured and whether
arising by reason of fraud or breach of contract.
The Senate amendment consolidates chapters X, XI, and XII
[chapters 10, 11, and 12 of former title 11], but establishes a
separate and distinct reorganization procedure for "public
companies." The special provisions applicable to "public companies"
are tantamount to the codification of chapter X of the existing
Bankruptcy Act and thus result in the creation of a "two-track
system." The narrow definition of the term "public company" would
require many businesses which could have been rehabilitated under
chapter XI to instead use the more cumbersome procedures of chapter
X, whether needed or not.
The special provisions of the Senate amendment applicable to a
"public company" are as follows:
(a) Section 1101(3) defines a "public company" as a debtor who,
within 12 months prior to the filing of the petition, had
outstanding $5 million or more in debt and had not less than 1000
security holders;
(b) Section 1104(a) requires the appointment of a disinterested
trustee irrespective of whether creditors support such appointment
and whether there is cause for such appointment;
(c) Section 1125(f) prohibits the solicitation of acceptances of
a plan of reorganization prior to court approval of such plan even
though the solicitation complies with all applicable securities
laws;
(d) Section 1128(a) requires the court to conduct a hearing on
any plan of reorganization proposed by the trustee or any other
party;
(e) Section 1128(b) requires the court to refer any plans "worthy
of consideration" to the Securities and Exchange Commission for
their examination and report, prior to court approval of a plan;
and
(f) Section 1128(c) and section 1130(a)(7) requires the court to
approve a plan or plans which are "fair and equitable" and comply
with the other provisions of chapter 11.
The record of the Senate hearings on S. 2266 and the House
hearings on H.R. 8200 is replete with evidence of the failure of
the reorganization provisions of the existing Bankruptcy Act
[former title 11] to meet the needs of insolvent corporations in
today's business environment. Chapter X [chapter 10 of former title
11] was designed to impose rigid and formalized procedures upon the
reorganization of corporations and, although designed to protect
public creditors, has often worked to the detriment of such
creditors. As the House report has noted:
The negative results under chapter X [chapter 10 of former title
11] have resulted from the stilted procedures, under which
management is always ousted and replaced by an independent trustee,
the courts and the Securities and Exchange Commission examine the
plan of reorganization in great detail, no matter how long that
takes, and the court values the business, a time consuming and
inherently uncertain procedure.
The House amendment deletes the "public company" exception,
because it would codify the well recognized infirmities of chapter
X [chapter 10 of former title 11], because it would extend the
chapter X approach to a large number of new cases without regard to
whether the rigid and formalized procedures of chapter X are
needed, and because it is predicated upon the myth that provisions
similar to those contained in chapter X are necessary for the
protection of public investors. Bankruptcy practice in large
reorganization cases has also changed substantially in the 40 years
since the Chandler Act [June 22, 1938, ch. 575, 52 Stat. 883,
amending former title 11] was enacted. This change is, in large
part, attributable to the pervasive effect of the Federal
securities laws and the extraordinary success of the Securities and
Exchange Commission in sensitizing both management and members of
the bar to the need for full disclosure and fair dealing in
transactions involving publicly held securities.
It is important to note that Congress passed the Chandler Act
[June 22, 1938, ch. 575, 52 Stat. 883, amending former title 11]
prior to enactment of the Trust Indenture Act of 1939 [15 U.S.C.
section 77aaa et seq.] and prior to the definition and enforcement
of the disclosure requirements of the Securities Act of 1933 [15
U.S.C. 77a et seq.] and the Securities Exchange Act of 1934 [15
U.S.C. 78a et seq.]. The judgments made by the 75th Congress in
enacting the Chandler Act are not equally applicable to the
financial markets of 1978. First of all, most public debenture
holders are neither weak nor unsophisticated investors. In most
cases, a significant portion of the holders of publicly issued
debentures are sophisticated institutions, acting for their own
account or as trustees for investment funds, pension funds, or
private trusts. In addition, debenture holders, sophisticated, and
unsophisticated alike, are represented by indenture trustees,
qualified under section 77ggg of the Trust Indenture Act [probably
should be "section 307" which is 15 U.S.C. 77ggg]. Given the high
standard of care to which indenture trustees are bound, they are
invariably active and sophisticated participants in efforts to
rehabilitate corporate debtors in distress.
It is also important to note that in 1938 when the Chandler Act
[June 22, 1938, ch. 575, 52 Stat. 883, amending former title 11]
was enacted, public investors commonly held senior, not
subordinated, debentures and corporations were very often privately
owned. In this environment, the absolute priority rule protected
debenture holders from an erosion of their position in favor of
equity holders. Today, however, if there are public security
holders in a case, they are likely to be holders of subordinated
debentures and equity and thus the application of the absolute
priority rule under chapter X [chapter 10 of former title 11] leads
to the exclusion, rather than the protection, of the public.
The primary problem posed by chapter X [chapter 10 of former
title 11] is delay. The modern corporation is a complex and
multifaceted entity. Most corporations do not have a significant
market share of the lines of business in which they compete. The
success, and even the survival, of a corporation in contemporary
markets depends on three elements: First, the ability to attract
and hold skilled management; second, the ability to obtain credit;
and third, the corporation's ability to project to the public an
image of vitality. Over and over again, it is demonstrated that
corporations which must avail themselves of the provisions of the
Bankruptcy Act [former title 11] suffer appreciable deterioration
if they are caught in a chapter X proceeding for any substantial
period of time.
There are exceptions to this rule. For example, King Resources
filed a chapter X [chapter 10 of former title 11] petition in the
District of Colorado and it emerged from such proceeding as a
solvent corporation. The debtor's new found solvency was not,
however, so much attributable to a brilliant rehabilitation program
conceived by a trustee, but rather to a substantial appreciation in
the value of the debtor's oil and uranium properties during the
pendency of the proceedings.
Likewise, Equity Funding is always cited as an example of a
successful chapter X [chapter 10 of former title 11] case. But it
should be noted that in Equity Funding there was no question about
retaining existing management. Rather, Equity Funding involved
fraud on a grand scale. Under the House amendment with the deletion
of the mandatory appointment of a trustee in cases involving
"public companies," a bankruptcy judge, in a case like Equity
Funding, would presumably have little difficulty in concluding that
a trustee should be appointed under section 1104(6).
While I will not undertake to list the chapter X [chapter 10 of
former title 11] failures, it is important to note a number of
cases involving corporations which would be "public companies"
under the Senate amendment which have successfully skirted the
shoals of chapter X and confirmed plans of arrangement in chapter
XI [chapter 11 of former title 11]. Among these are Daylin, Inc.
("Daylin") and Colwell Mortgage Investors ("Colwell").
Daylin filed a chapter XI [chapter 11 of former title 11]
petition on February 26, 1975, and confirmed its plan of
arrangement on October 20, 1976. The success of its turnaround is
best evidenced by the fact that it had consolidated net income of
$6,473,000 for the first three quarters of the 1978 fiscal year.
Perhaps the best example of the contrast between chapter XI and
chapter X [chapters 11 and 10 of former title 11] is the recent
case of In re Colwell Mortgage Investors. Colwell negotiated a
recapitalization plan with its institutional creditors, filed a
proxy statement with the Securities and Exchange Commission, and
solicited consents of its creditors and shareholders prior to
filing its chapter XI petition. Thereafter, Colwell confirmed its
plan of arrangement 41 days after filing its chapter XI petition.
This result would have been impossible under the Senate amendment
since Colwell would have been a "public company."
There are a number of other corporations with publicly held debt
which have successfully reorganized under chapter XI [chapter 11 of
former title 11]. Among these are National Mortgage Fund (NMF),
which filed a chapter XI petition in the northern district of Ohio
on June 30, 1976. Prior to commencement of the chapter XI
proceeding, NMF filed a proxy statement with the Securities and
Exchange Commission and solicited acceptances to a proposed plan of
arrangement. The NMF plan was subsequently confirmed on December
14, 1976. The Securities and Exchange Commission did not file a
motion under section 328 of the Bankruptcy Act [section 728 of
former title 11] to transfer the case to chapter X [chapter 10 of
former title 11] and a transfer motion which was filed by private
parties was denied by the court.
While there are other examples of large publicly held companies
which have successfully reorganized in chapter XI [chapter 11 of
former title 11], including Esgrow, Inc. (C.D.Cal. 73-02510),
Sherwood Diversified Services Inc. (S.D.N.Y. 73-B-213), and United
Merchants and Manufacturers, Inc. (S.D.N.Y. 77-B-1513), the
numerous successful chapter XI cases demonstrate two points: first,
the complicated and time-consuming provisions of chapter X [chapter
10 of former title 11] are not always necessary for the successful
reorganization of a company with publicly held debt, and second,
the more flexible provisions in chapter XI permit a debtor to
obtain relief under the Bankruptcy Act [former title 11] in
significantly less time than is required to confirm a plan of
reorganization under chapter X of the Bankruptcy Act.
One cannot overemphasize the advantages of speed and simplicity
to both creditors and debtors. Chapter XI [chapter 11 of former
title 11] allows a debtor to negotiate a plan outside of court and,
having reached a settlement with a majority in number and amount of
each class of creditors, permits the debtor to bind all unsecured
creditors to the terms of the arrangement. From the perspective of
creditors, early confirmation of a plan of arrangement: first,
generally reduces administrative expenses which have priority over
the claims of unsecured creditors; second, permits creditors to
receive prompt distributions on their claims with respect to which
interest does not accrue after the filing date; and third,
increases the ultimate recovery on creditor claims by minimizing
the adverse effect on the business which often accompanies efforts
to operate an enterprise under the protection of the Bankruptcy Act
[former title 11].
Although chapter XI [chapter 11 of former title 11] offers the
corporate debtor flexibility and continuity of management,
successful rehabilitation under chapter XI is often impossible for
a number of reasons. First, chapter XI does not permit a debtor to
"affect" secured creditors or shareholders, in the absence of their
consent. Second, whereas a debtor corporation in chapter X [chapter
10 of former title 11], upon the consummation of the plan or
reorganization, is discharged from all its debts and liabilities, a
corporation in chapter XI may not be able to get a discharge in
respect of certain kinds of claims including fraud claims, even in
cases where the debtor is being operated under new management. The
language of chapter 11 in the House amendment solves these problems
and thus increases the utility and flexibility of the new chapter
11, as compared to chapter XI of the existing Bankruptcy Act
[chapter 11 of former title 11].
Those who would urge the adoption of a two-track system have two
major obstacles to meet. First, the practical experience of those
involved in business rehabilitation cases, practitioners, debtors,
and bankruptcy judges, has been that the more simple and
expeditious procedures of chapter XI [chapter 11 of former title
11] are appropriate in the great majority of cases. While attempts
have been made to convince the courts that a chapter X [chapter 10
of former title 11] proceeding is required in every case where
public debt is present, the courts have categorically rejected such
arguments. Second, chapter X has been far from a success. Of the
991 chapter X cases filed during the period of January 1, 1967,
through December 31, 1977, only 664 have been terminated. Of those
cases recorded as "terminated," only 140 resulted in consummated
plans. This 21 percent success rate suggests one of the reasons for
the unpopularity of chapter X.
In summary, it has been the experience of the great majority of
those who have testified before the Senate and House subcommittees
that a consolidated approach to business rehabilitation is
warranted. Such approach is adopted in the House amendment.
Having discussed the general reasons why chapter 11 of the House
amendment is sorely needed, a brief discussion of the differences
between the House bill, Senate amendment, and the House amendment,
is in order. Since chapter 11 of the House amendment rejects the
concept of separate treatment for a public company, sections
1101(3), 1104(a), 1125(f), 1128, and 1130(a)(7) of the Senate
amendment have been deleted.
AMENDMENTS
1988 - Pub. L. 100-334, Sec. 2(c), June 16, 1988, 102 Stat. 613,
added item 1114.
1984 - Pub. L. 98-353, title III, Secs. 514(b), 541(b), July 10,
1984, 98 Stat. 387, 391, added item 1113 and substituted
"Implementation" for "Execution" in item 1142.
1983 - Pub. L. 97-449, Sec. 5(a)(1), Jan. 12, 1983, 96 Stat.
2442, substituted "subtitle IV of title 49" for "Interstate
Commerce Act" in item 1166.
-SECREF-
CHAPTER REFERRED TO IN OTHER SECTIONS
This chapter is referred to in sections 103, 105, 109, 303, 326,
327, 329, 346, 347, 362, 363, 365, 502, 503, 524, 546, 706, 1102,
1203, 1301, 1306, 1307 of this title; title 7 section 2008h; title
20 sections 1002, 1087; title 21 section 356c; title 26 sections
108, 1398, 6012; title 28 sections 157, 586, 1930; title 29
sections 1341, 1342; title 49 sections 521, 13905.
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