INTRODUCTION Bankruptcy encourages risk-taking (by making way out available for Ds)… Discourages by Cs “grabbing” As company w/ survival potential) begins to fail, Cs prematurely kill company to ensure payment (smell blood in water)… AND, insiders (people running company) want to protect themselves … from impending catastrophe (incentive to steal, OR engineering in “asset anticipation of insolvency”) Preserves of entity/assets going concern value When Cs value of each part of entity suffers… “grab”, AND, thus, of entity as a whole suffers even more … Bankruptcy timeline… When D-entity starts to fail, (“magic wall”) is filed 2 bankruptcy petition types… Voluntary petition (powerful weapon for petitioning C(s)… BUT, Involuntary petition premature/incorrect filing could make liable to D for damages) 2 major kinds of business petitions… (“I Ch. 7 liquidation quit”) – (tweak things a little, write off some debt, sell Ch. 11 reorganization – some assets, reemerge) Most Ds should file BUT, file instead… Ch. 7… Ch. 11 AND, majority of fail (conversion from to Ch. 11s Ch. 11 Ch. 7) … 2 reasons why Ds file Ch. 11… Good reason (false hope/good faith mistake that euphoria” “D’s everything will be OK, merely going through rough patch) Real/strategic reason D knows it can’t reorganize, BUT wants to make process more drawn-out/expensive for Cs Filing scares Cs (esp. leading lenders), who are more likely to Ch. 11 settle/cut deal… AND, judges must be sympathetic presumptions in favor of D … (even though majority of fail, D MAY survive) Ch. 11s (in vs. (“DIP”) (in Trustee D-in-possession Ch. 7) Ch. 11)… In filing, (3rd is chosen from panel goals of preserving Ch. 7 trustee estate, augmenting assets, winding up business (paid w/ % of assets)
INTRODUCTION Bankruptcy encourages risk-taking (by making way out available for Ds)… Discourages “grabbing” by Cs As company w/ survival potential) begins to fail, Cs prematurely kill company to ensure payment (smell blood in water)… … AND, insiders (people running company) want to protect themselves from impending catastrophe (incentive to steal, OR “asset engineering in anticipation of insolvency”) Preserves going concern value of entity/assets When Cs “grab”, value of each part of entity suffers… … AND, thus, of entity as a whole suffers even more Bankruptcy timeline… When D-entity starts to fail, bankruptcy petition (“magic wall”) is filed 2 types… Voluntary petition Involuntary petition (powerful weapon for petitioning C(s)… BUT, premature/incorrect filing could make liable to D for damages) 2 major kinds of business petitions… Ch. 7 – liquidation (“I quit”) Ch. 11 – reorganization (tweak things a little, write off some debt, sell some assets, reemerge) Most Ds should file Ch. 7… BUT, file Ch. 11 instead… … AND, majority of Ch. 11s fail (conversion from Ch. 11 to Ch. 7) 2 reasons why Ds file Ch. 11… Good reason “D’s euphoria” (false hope/good faith mistake that everything will be OK, merely going through rough patch) Real/strategic reason D knows it can’t reorganize, BUT wants to make process more drawn-out/expensive for Cs Filing Ch. 11 scares Cs (esp. leading lenders), who are more likely to settle/cut deal… … AND, judges must be sympathetic presumptions in favor of D (even though majority of Ch. 11s fail, D MAY survive) Trustee (in Ch. 7) vs. D-in-possession (“DIP”) (in Ch. 11)… In Ch. 7 filing, trustee (3rd is chosen from panel goals of preserving estate, augmenting assets, winding up business (paid w/ % of assets)
Bankruptcy_Schechter-Fall-2009.docx