Knowing When to Walk Away
On December 8, the American Bankruptcy Institute's Chapter 11 Reform Commission released its report, which was the product of a three-year comprehensive study of issues and trends in Chapter 11 as well as recommendations on how to best modernize the statute. The extensive 400-page report can be located on the Commission's website here, and you can follow the Commission on Twitter here. I am simply awestruck at the amount of effort, coordination and deliberation that the Commisson put into this work. The Commission really went out of its way to gather input from a broad array of constituents and stakeholders, and its efforts to lead a dialogue about how to modernize Chapter 11 warrant a standing ovation.
Here is the video from the release of the Report at the National Press Club:
The Report presents a great deal of material to digest, but I am going to endeavor to summarize for non-bankruptcy practitioners some of the "bottom line" recommendations that the Report makes. Even doing this in list fashion is going to take a while, so I plan to break this up into parts. Here's the first set, aimed largely at some "early case" reform recommendations. The Commission recommends:
Replacing the concept of a bankruptcy examiner with a more-flexible "estate neutral," who could be appointed by the court on a for-cause/best-interests standard. The estate neutral would have a broader range of potential duties than those typically ascribed to examiners.
Amending the statute to grant a form of limited immunity to trustees, committees, and estate neutrals, as well as their members and professionals. The protection would be similar to that granted to receivers in Barton v. Barbour, 104 U.S. 127-29 (1881) (requiring leave of court to commence lawsuit against receiver).
Requiring debtors-in-possession to complete and submit a comprehensive "Valuation Information Package," consisting of tax returns, financial statements, appraisals of material assets, and (in some circumstances) projections at the time it files any motion under Sections 361 through 364, or a plan within the first 60 days.
Amending Sections 327 and 1103 to permit the estate and/or committees to obtain court approval of alternative fee arrangements with professionals.
Requiring that requests for adequate protection utlize a newly-clarified valuation standard called "foreclosure value" of the collateral.
Impose restrictions on the ability of a debtor to incur "roll-up" DIP credit facilities, unless such facility is with a new lender, or if with a pre-petition lender, the new facility provides "substantial and new credit to a debtor" and "more financing on better terms" than the alternatives.
Restricting the ability of a bankruptcy court to approve financing or cash collateral orders that contain auction, sale or plan timing milestones or benchmarks, such that (i) courts should not approve these items in interim orders; and (ii) such milestones/benchmarks cannot be established during the initial 60-day period after the petition is filed.
Imposing a 60-day post-filing moratorium on Section 363 sales, unless there is clear and convincing evidence of declining enterprise value during the window.
Authorizing the "doctrine of necessity" and establishing a standard for the payment of pre-petition wage and critical vendor claims.
Amending Sections 507(a)(4) and (5) to combine them to give an aggregate $25,000 priority claim, per employee, with no 180-day time limit.