Three Implementation Goals of BK? (Policy Behind it)
(1) Avoid race of diligence
a. BK replaces this w/ pro rata distribution
(2) Capital restructuring of firms in financial distress w/ going concern value
a. Financial distress (L > A +E) – current capital structure does not apply the biz to service its debt; a restructuring would allow it to and continue operating the biz.
b. Going concern value must be greater than the liquidation value
(3) Provides “honest but unfortunate” individuals w/ a fresh start
The goal of BK: maximize recovery for all creditors.
Who is a debtor under 109(a)?
a person that resides or has a domicile, a place of business, or property in the United States.
§ 101(41): the term person includes individual, partnership, and corporation but does not include governmental unit.
Specifics re. involuntary petition?
a. Generally, must have at least 12 creditors; the petition must be filed by 3 or more creditors, each of whom is the holder of an unsecured claim that is not contingent as to liability or subject to a bona fide dispute.
b. Undisputed, non-contingent claims must be aggregated to at least $18,600.
c. If > 12 creditors, only one creditor with a sufficiently large claim is needed.
d. 303(i) further provides that
Filtering/ Screen Tools? (1/2)
What is it and what is the test?
- §305(a): dismissal in the best interest of the debtor or creditor
Test for a motion to abstain: compare what creditors are receiving under the workout agreement to what creditors are expected to receive in BK - Workout > BK dismiss
- BK > workout keep in BK (deny motion)
o Rationale: According to Beard & Jackson, BK is for creditors
Filtering/ Screen Tools? (2/2)
What is it and what is the test?
- §1112(b): allows BK court to convert or dismiss a Chapter 11 case for “cause” including “the absence of a reasonable likelihood of rehabilitation.”
- The doctrine of good faith (bad faith dismissal)
- Test: (1) does the BK serve a valid BK purpose; and (2) was it filed only to obtain a tactical advantage?
WHY ARE SECURED CREDITORS WORRIED ABOUT BANKRUPTCY?
(1) Enforcement of SP’s security interest is stayed. 11 U.S.C. §362.
(2) Debtor can use SP’s collateral indefinitely during the bankruptcy provided that SP is “adequately protected” 11 U.S.C. § 361, 363.
(3) Debtor can “cramdown” a plan of reorganization on SP that re-writes the SP’s loan agreement. 11 U.S.C. § 1129(b).
