Category Archives: Pre-packaged Chapter 11 Case
Fear of the unknown. The Ch. 11 process is unknown to many. C-level executives
dread discussions about bankruptcy options. We just recently filed a new Chapter 11 case and thought we would write a series of posts on basic Ch. 11 procedural matters so as to demystify the process.
Filing Chapter 11 (reorganization/restructuring) is a powerful tool that can be invoked by businesses and certain individuals pursuant to Title 11 of the United States Code (aka the “Bankruptcy Code”). As a practitioner, I am privileged to be able to facilitate such restructurings. Here is the first post in this series on Ch. 11 basics.
The administrative burden of filing a case can be heavy. Often, a paralegal is running the “paper pushing” ship just before and shortly after a case is filed. Information gathering. Data compilation. Report generation. A debtor’s bookkeeper, accountant and/or CFO all work with Debtor’s counsel and paralegal staff to gather necessary documentation and to fulfill requirements imposed by the Court and the United States Trustee (appointed by Department of Justice). Each office has very specific document requests, rules and procedures.
In furtherance of a U.S. Trustee’s monitoring responsibilities, here is a list of what the U.S. Trustee wants prior to the Initial Debtor Interview. Most of the documentation requested is straightforward and anticipated:
- Bank account statements.
- Latest filed Federal Tax Returns or copy of extension to file.
- Financial statements.
- Payroll detail.
- Rent roll.
- Accounts receivable detail.
- Recently filed sales tax
- Recently filed payroll returns.
- Detail of intercompany transactions.
- Accounts payable detail.
- Check register for last 60 days.
- Filed Scheduled and Petition
Other requirements are not as obvious. Two that specifically need explanation are:
- Proof of establishment of Debtor-In-Possession account(s)
- Proof of insurance indicating that the Office of the U.S. Trustee is an additional certificate holder.
Once a debtor has filed a bankruptcy petition, it must close existing bank accounts and open new accounts which identify the debtor as a debtor in possession (“DIP”). All money from the bankruptcy “estate” (i.e. anything the debtor owns) must be put into these accounts. The title of “Debtor in Possession” must be printed on the checks along with the bankruptcy case number. The Bank will not issue a debit card for a DIP account.
While this seems complicated at first, the good news is that this is standard procedure. So, any bank should be familiar with this request. However, a debtor cannot go to just “any” bank. The U.S. Trustee’s Office will only accept DIP accounts from approved depositories. A current list of such institutions is available through the U. S. Bankruptcy Court in the district where the bankruptcy was filed. Approved Banks DIP
Within 15 days of receipt from the bank, a debtor must serve copies of monthly bank statements upon all creditors and interested parties, together with a monthly operating report (MOR) of gross receipts and disbursements. Both the monthly operating report (MOR) and DIP bank statements are publicly filed on a debtor’s docket.
Proof of Insurance
A debtor must maintain all insurance coverage during the bankruptcy process. This includes: general comprehensive liability; property loss from fire, theft or water; vehicle; workers’ compensation; and any other coverage that would be customary in line with the debtor’s business.
In addition to maintenance, a debtor must list the Office of the U.S. Trustee listed as an additional certificate holder and provide proof of such. The documentation of proof must include the type and extent of coverage, effective dates, and insurance carrier information. In order to fulfill the Trustee’s requirements, the debtor will usually have to provide proof of the request. The proof of insurance and additional certificate holder requirement is standard, so the insurance company should not have any trouble fulfilling a debtor’s request.
Please TAKE NOTE that a debtor’s failure to comply could result in DISMISSAL of the case or conversion to a Chapter 7.
This post does not constitute legal advice. Consult an attorney about your specific case.
It was the day before Thanksgiving. A friend of mine called me in a panic. She received a notification that her bank account was frozen by a creditor; she was to get a direct deposit of her salary in the next 2 days, which was two weeks before Christmas. She needed to file bankruptcy fast in order to trigger the automatic stay (legal principle that means no creditor can take action to harm you).
I stayed up until midnight that day in order to get the case filed for her. Her business had gone bad and this was the fallout from it.
Often, bankruptcy cases are filed on an emergency basis. In many instances, time may be of the essence and you need to file the case immediately (e.g. a creditor has a judgment against you and has sent the Sheriff to your home or business; you have received a notice of garnishment of your wages or bank account by a taxing body). If this firedrill can be avoided, it should be.
Rushing into a case is pretty much never a good idea. Filing the petition on an emergency basis only increases the costs of your case and there may not be enough time to research potential issues that may arise during the course of your case. You may omit important creditors. You may omit assets. If the schedules are not accurate, you will need to amend them and that costs more money to do. Substantial, repeated amendments do not leave favorable impressions upon the U.S. Trustee or the Ch. 7 Trustee.
A debtor is permitted to file a barebones “emergency “bankruptcy petition together with a list of 20 largest creditors. The full set of schedules must be submitted within 14 days, unless extended.
Regardless of whether the case is an emergency filing or not, if you are an individual, you MUST complete pre-bankruptcy filing credit counseling course at least 24 hours before any case is filed.
- Talk to an attorney. He or she can give you the questionnaire you need to fill out well ahead of time. He or she will also give you a list of documents you will need You can start gathering that info. If the case is billed hourly, you will save yourself money by gathering up this information rather than having a paralegal do it.
- Pre-bankruptcy planning is always advisable for any individual or business. You don’t want to throw good money after bad (meaning you don’t want to pay down debt that ultimately may be discharged). You don’t want to make preferential or fraudulent transfers. Often, there are non-bankruptcy options, particularly for businesses (but that can be a topic for another blog post).
DISCLAIMER: This does not constitute legal advice. This post does not create an attorney client relationship. Consultant an attorney for more information re: this topic.
By: Stephen Krug, Law Clerk
The various entities that comprise the Quiznos sandwich chain (“debtors”) filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware on March 14, 2014. A motion filed by debtors for joint administration of the cases was granted on March 17, and the case has been assigned to the Honorable Peter J. Walsh.
While debtors’ liabilities range from $500 million to $1 billion, the assets are only estimated to fall between $0 and $50,000. However, Debtors maintain that, although assets are low and 10,001 to 25,000 creditors exist, funds will be available for distribution to unsecured creditors. U.S. Bank National Association, as administrative agent and collateral agent under debtors’ second lien financing facility, is the largest unsecured claimant with a claim for approximately $174 million. Horizon Media Inc., MG-1005, LLC, and ESPN Inc. also hold substantial unsecured claims.
Debtors have proposed a pre-packaged reorganization plan that would slash debt by more than $400 million and would permit the handful of company-owned sandwich shops to remain operational. Sandwich stores operated by franchisees are not part of the bankruptcy proceedings and thus are not provided for in the pre-packaged plan.
Debtors hope to emerge from bankruptcy more viable than ever. Moving forward, debtors hope to reduce food costs and place more of an emphasis on advertising.