Mike Markham on Chapter 11 – Part 4 of 10 – Liquidation

Part 4 – Liquidation
Then we have the Chapter 11 liquidation planning, which is a variation on a Chapter 7 liquidation. In Chapter 11 the business or investment situation can be kept intact and active while a buyer or other transitional situation is lined up to maximize what can be received and paid to the creditors.  A good example of this would be a restaurant that needs to stay operational in order to have any positive material value. With a Section 363 sale the buyer can receive the assets free and clear of all liens.  The money is going to come into the case, and then the money is going to get distributed to secured creditors and administrative creditors and priority creditors and unsecured creditors pursuant to the priorities in the Bankruptcy Code.
You see a lot of liquidating cases.  In fact, most of the Ponzi scheme type cases are liquidating Chapter 11’s, because of the advantages that a liquidating Chapter 11 creates.  One of the things that is very unique to Chapter 11 that can’t happen in other kinds of cases is the assignment of causes of action into a trust.  For example, let’s say you have a case where there are malpractice claims.  Malpractice claims, and there are other types of claims – personal type claims that are not assignable under state law, but those types of claims, whether they are malpractice claims or personal, non-assignable claims under state law, can be assigned into a trust that is created under a plan, and then that trust is administered by a Plan Trustee. This is usually a professional Trustee or receiver who gets appointed, and then they are the ones that prosecute that litigation for the benefit of all the creditors.  We also see this used to maintain a bad faith claim in an insurance situation assigned into a trust for the benefit of creditors.  Bad faith claims are generally not assignable under state law, and if a debtor is facing a claim that exceeds its insurance limits, and there was some wrongdoing on the part of the insurance carrier, it is very difficult under state law to assign that claim for the benefit of the creditor and then create a settlement that gets a release for the debtor. But, that is much easier done in a Chapter 11 reorganization case that is a liquidating case.
One of the other things that is unique about Chapter 11 liquidating plans is that you might have a case with insurance proceeds in it that are insufficient to pay the creditors.  It might have claims against that insurance, and again you can use the Chapter 11 liquidating plan to cut a deal with the carrier to have the proceeds paid into that liquidating trust, so that then the claimants receive a pro-rata distribution.
You can also have situations where net operating losses (NOLs) can be transferrable to a buyer of the company, through a merger or a more complicated corporate transaction.  It is possible to preserve NOLs for tax purposes and transfer those at least in part to the bottom line of a liquidating trust for the benefit of creditors where in essence you take the stock of the debtor and you reissue that stock to creditors and then the company takes advantage of the NOLs on a going forward basis, which creates tax-free revenue that can be distributed to shareholders.

 

 

Since starting with the Johnson Pope Bokor Ruppel & Burns firm in 1988, Michael’s practice has concentrated on bankruptcy and insolvency related Litigation.
Michael has represented corporate and individual debtors, secured creditors, equipment lenders, landlords, creditor’s committees, trustees and petitioning creditors in involuntary bankruptcies.

 

Michael also has substantial experience in receivership cases.