American Bankruptcy Institute
20 IV. Proposed Recommendations: Commencing the Case
The financially distressed company is typically the party that commences the chapter 11 case by filing a voluntary petition for relief under chapter 11 of the Bankruptcy Code. Although creditors may file an involuntary chapter 11 petition against a company under section 303 of the Bankruptcy Code, creditors rarely invoke this remedy.68 One study reported that involuntary bankruptcies “have represented less than one-tenth of one per cent of all U.S. liquidation bankruptcy cases for over a decade.”69 Creditors may consider an involuntary chapter 11 filing during their prepetition negotiations with a debtor. It is most common, however, for the debtor to then file a voluntary case or for the parties to reach an out-of-court resolution.70
Companies do not undertake a chapter 11 filing lightly. A company’s management is commonly concerned about the public nature of a chapter 11 case and the potential distractions to the business caused by enhanced oversight from the court, the U.S. Trustee, creditors, and other parties in interest.71 In fact, some commentators and practitioners suggest that financially distressed companies tend to wait too long to file a chapter 11 case, which makes it more difficult to use the restructuring tools of chapter 11 in an effective manner.72 Regardless, chapter 11 provisions should help companies achieve a “soft landing” in bankruptcy — i.e., minimize business disruptions to foster reorganization prospects — and develop a feasible restructuring strategy that benefits all stakeholders.
Witnesses before the Commission testified concerning the various perceived barriers to successful reorganizations under chapter 11, including challenges to financing chapter 11 cases, uncertainty and costs associated with the bankruptcy process, delays built into the process, and insufficient value available to support a restructuring.73 Some witnesses suggested that these perceived barriers may cause companies to forego the chapter 11 process entirely.74 Anecdotal evidence likewise indicates that distressed companies are increasingly turning to state law remedies (e.g., receiverships and assignments for the benefit of creditors) and equity receivership law with more frequency now
68 The Administrative Office of the U.S. Courts stopped collecting data on involuntary bankruptcies apparently because of their rarity. See Robert M. Lawless & Elizabeth Warren, The Myth of Disappearing Business Bankruptcy, 93 Cal. L. Rev. 743, 750 n. 11 (2005). 69 Jason Kilborn & Adrian Walters, Involuntary Bankruptcy as Debt Collection: Multi-Jurisdictional Lessons in Choosing the Right Tool for the Job, 87 Am. Bankr. L.J. 123, 125 (2013). 70 See Susan Block-Lieb, Why Creditors File So Few Involuntary Petitions and Why the Number Is Not Too Small, 57 Brooklyn L. Rev. 803, 805–06 (“Creditors file few involuntary petitions because they often prefer a negotiated resolution of a debtor’s financial troubles.”). 71 See, e.g., Stephen J. Lubben, The Direct Costs of Corporate Reorganization: An Empirical Examination of Professional Fees in Large Chapter 11 Cases,74 Am. Bankr. L.J. 509, 543 (“The indirect costs [of chapter 11] . . . include loss in value due to managerial distraction, foregone investment opportunities, erosion of customer confidence, increases in employee turnover, and increased cost of supplier credit.”). 72 See, e.g., Harner & Griffin, supra note 46, 324–38 (2014) (presenting empirical survey of 453 restructuring professionals and data showing that, of those professionals who had clients refuse to file a bankruptcy case at a time the professional thought advisable, 90 percent of those companies ultimately had to file a case). See generally supra note 66 and accompanying text (generally discussing limitations of chapter 11 empirical studies). 73 See Oral Testimony of Josh Gotbaum: ACB Field Hearing Before the ABI Comm’n to Study the Reform of Chapter 11, at 18 (Mar. 14, 2013) (ACB Transcript) (“[I]n many cases financial institutions and financial markets have outstripped the law’s ability to comprehend them and the bankruptcy court’s ability to preserve fair treatment of other constituencies in the face of them.”),
available at Commission website, supra note 55; Oral Testimony of Wilbur Ross: ASM Field Hearing Before the ABI Comm’n to Study the Reform of Chapter 11, at 4–7 (Apr. 19, 2013) (ASM Transcript) (discussing unpredictable cost increases in chapter 11),
available at Commission website, supra note 55; Oral Testimony of the Honorable James Peck: VALCON Field Hearing Before the ABI Comm’n to Study the Reform of Chapter 11, at 29–30 (Feb. 21, 2013) (VALCON Transcript) (discussing problems faced in some cases, including waste and delay as a result of valuation issues), available at Commission website, supra note 55. 74 See Written Statement of John Haggerty, Argus Management Corp.: ASM Field Hearing Before the ABI Comm’n to Study the Reform of Chapter 11 (Apr. 19, 2013) (stating that a large majority of clients avoid chapter 11 and seek state law relief because of the costs, delay, structure of case administration, control by the secured creditor, and lack of flexibility attendant in a chapter 11 case), available at Commission website, supra note 55; Oral Testimony of John Haggerty, Argus Management Corp.: ASM Field Hearing Before the ABI Comm’n to Study the Reform of Chapter 11, at 34–36 (Apr. 19, 2013) (ASM Transcript) (same), available
at Commission website, supra note 55.