A pre-arranged Chapter 11 bankruptcy, also known as a pre-packaged bankruptcy, involves a debtor company agreeing on a reorganization plan with its creditors before filing for Chapter 11. This pre-negotiation process can significantly streamline the bankruptcy proceedings and ensure a smoother transition.

Typically, a pre-arranged Chapter 11 bankruptcy process begins with the debtor company identifying its major creditors and then negotiating with them to agree on a reorganization plan. This plan outlines how the company will restructure its debts, repay its creditors, and modify its business operations to ensure future profitability.

Once the debtor company and its creditors agree on a reorganization plan, the company then files for Chapter 11 bankruptcy and submits the agreed plan to the court. The court reviews the plan to ensure it complies with bankruptcy laws, is fair to all creditors, and is feasible. If the court approves the plan, the bankruptcy process proceeds with the implementation of the reorganization plan.

Pre-arranged Chapter 11 bankruptcy offers several advantages over traditional Chapter 11 proceedings. Firstly, it can significantly reduce the time taken to complete the bankruptcy process. This is because the negotiations with creditors, which can be the most time-consuming part of a Chapter 11 bankruptcy, are conducted before the bankruptcy filing. Secondly, pre-packaged bankruptcies can lower legal costs and administrative fees, as the process is more streamlined. Lastly, because the reorganization plan is negotiated and agreed upon in advance, there is greater certainty for all parties involved, which can help preserve business relationships and protect the company’s reputation.

However, it is important to note that a pre-arranged Chapter 11 bankruptcy is not suitable for all businesses. It requires the debtor company to have a good understanding of its financial situation and the ability to negotiate effectively with its creditors. Additionally, not all creditors may be willing to negotiate in advance, particularly if they believe they may get a better deal through a traditional Chapter 11 bankruptcy.

Businesses considering a pre-arranged Chapter 11 bankruptcy should seek legal advice to evaluate whether it is the best option for them. Experienced bankruptcy attorneys in Modesto, California can guide you through this complex process and help you make an informed decision.

Verity Health Systems Bankruptcy

The bankruptcy filing included no less than seventeen separate medical facilities. The CEO of Verity Heath, Rich Adcock, states that the company decided to declare Chapter 11 bankruptcy, “after a diligent process of assessing all possible options alongside our financial and legal advisors, Verity Health has made the best strategic decision for all of our patients, employees and other stakeholders.” The company has secured a $185 million loan in order to continue operating throughout the bankruptcy process.

Employee Union Challenges Bankruptcy

Not everyone involved with Verity Health Systems believes that the California bankruptcy is for the best, however. The union of healthcare workers that make up roughly 2,000 of Verity Health Hospital workers, the SEIU-UHW, is challenging the bankruptcy. The SEIU-UHW is challenging the bankruptcy in an effort to ensure that the communities served by the hospitals continue to receive access to care. Additionally, the California union wants to ensure that its hospitals stay open and continue to meet employee pension obligations. The challenge signifies that Verity will have a tough time attempting to nullify any collective bargaining agreements.

Hunt for Buyers Continues

It’s no secret that Verity Health has been searching for buyers for some time, and will continue to find a suitable offer that it can accept. Struggling businesses often use California Chapter 11 bankruptcy in order to sell all or a great number of their assets. Chapter 11 can offer many unique advantages for both the buyer of a business, as well as, the seller.

Trustee Objections to Reorganization Plan

The US Trustee assigned to Global Brokerage’s bankruptcy case argues that certain broad releases set to be granted to FXCM Group and Leucadia, in addition to, CEO compensation violates the fair and equitable test set forth by the U.S. Bankruptcy Code. Under the “fair and equitable” test, secured creditors must be paid at least the value of their collateral and the debtor’s owner may not retain anything on account of their equity interest until all obligations are paid in full. In order to obtain approval or “confirmation” of a chapter 11 plan, the bankruptcy court requires that the plan also be feasible, in good faith, and in the best interest of the creditors.

Issues with Debtor Release

US Bankruptcy Trustee William K. Harington submitted his objection to the confirmation of Global Brokerage’s Chapter 11 plan because its “released parties” was too far-reaching and to encompassing from claims, obligations, damages, and liabilities, among others. Harrington mentioned in a press release relating to the case that “in applying heightened scrutiny and some skepticism, the Court will find that the Debtor Releases, as currently drafted, are overbroad.” This would present a problem should securities litigation or other litigation arises against Global Brokerages’ non-debtor affiliates, successful plaintiffs may not be able to “pierce the corporate veil”, or transfer liabilities to its shareholders. It is not a large surprised then that shareholders unanimously voted to approve the reorganization under Chapter 11 protection.

CEO Bonus Violates Bankruptcy Code

An additional objection to the Global Brokerage Chapter 11 plan was the completion bonus of $1 million payable to the company CEO, Kenneth Grossman. The bankruptcy trustee also cited the section 503(c) of the Bankruptcy Code which was enacted to “eradicate the notion that executives were entitled to bonuses simply for staying with the Company through the bankruptcy process. With confirmation hearings set for this week, it’s a possibility that Global Brokerage will have to go back to the drawing board with its reorganization plan to come up with a plan that satisfies creditors and the bankruptcy trustee in order to have it confirmed.

In its bankruptcy filings, Gymboree claimed that they had fallen victim to shifts in consumer behavior that have led to more online shopping and less traffic in shopping malls throughout the country. Gymboree will continue its business operations while shedding nearly 330 underperforming stores in order to convert some $900 million of debt into equity. The new president and CEO of Gymboree, Daniel Griesemer, said in a statement “while there is still work ahead to complete the process, we are excited about the future opportunities for Gymboree as we continue to transform the business”. The company experienced a fairly straight forward Chapter 11 bankruptcy with only one objection filed by the Department of Revenue in August that caused the bankruptcy plan that Gymboree entered into bankruptcy with to be altered slightly.

The company’s post-bankruptcy strategy is to place capital previously allotted towards interest payments and fixed obligations towards updating merchandising and investing in store remodels. By lowering the company’s brick and mortar footprint through the store closings, they hope to be able to clean up their long-term balance sheet and focus instead on their more profitable lines.

Because of the newness surrounding the recent retailer Chapter 11 bankruptcy exits of Payless and Gymboree, it is hard to say whether the new financial game plans will equate to steady profitability. In the same week that Gymboree is exiting bankruptcy, Vitamin World, a chain retail store with shops across America is reported planning to enter into Chapter 11.

However, it seems that in chapter 9 (municipal bankruptcies) fees do not have to be disclosed. This means that the attorneys for Detroit could charge millions in legal fees without ever disclosing to the court or to creditors how much they are charging or what they are spending their time on. The bankruptcy judge in this case decided to take a closer look at the cost of the case, and so the judge intends to appoint an examiner to make sure that the attorneys’ fees are “disclosed and reasonable.” Among other things, the examiner will probably review the attorneys’ fees and inform the court if they fees are out of the scope of permissible legal work. While the parties could object to the appointment of an examiner, it seems unlikely at this time.

Fortunately for most individuals considering bankruptcy, most bankruptcies are handled on a flat fee basis. This means that the price is agreed upon before the bankruptcy is filed, so that a debtor knows exactly how much he or she will be paying for a bankruptcy filing and doesn’t have to worry about the hourly rate of an attorney.

Source: Tom Hals, Yahoo! News,” Lawyers in Detroit bankruptcy may face scrutiny on fees,” August 1, 2013

Further, litigants can still try to seek relief from stay, allowing them to continue their lawsuits outside of bankruptcy court. Additionally, just because state and federal court litigation was put on hold doesn’t mean litigation can’t occur in the bankruptcy court itself. In fact, this is what the bankruptcy judge wants to occur. The judge believes that having the issue of Detroit’s eligibility for bankruptcy litigated in one forum will save Detroit both time and money, which will give Detroit a better chance at a successful reorganization.

As the Detroit bankruptcy case shows, the automatic stay is a very powerful thing. Fortunately for debtors, the automatic stay is not limited to municipal bankruptcies. If an individual files for bankruptcy, he or she will also benefit from the automatic stay. This means that all lawsuits against him or her, as well as foreclosures and other collection actions, will be put on hold.

Source: Robert Snell and Chad Livengood, The Detroit News, “Judge rules he has sole jurisdiction in Detroit bankruptcy, freezes suits against city, Snyder, EM,” July 24, 2013.

Residential Capital LLC (ResCap) filed for bankruptcy protection on May 14, 2012. ResCap is the mortgage lending unit of Ally Financial. ResCap recently filed its chapter 11 plan, which describes how its creditors will be paid. Under the plan, junior secured noteholders will be paid in full. However, unsecured creditors will only be paid 36.3 cents on the dollar (they will receive approximately $779 million of the $2.15 billion that they are owed).

A large portion of these payouts will come from ResCap’s parent company, Ally Financial. In return for a release of liability from claims by ResCap and its creditors, Ally will pay ResCap $2.1 billion.

The plan is not yet binding. First, the disclosure statement (which in this case is 399 pages) must be approved. Then, the plan needs to be voted on by creditors and approved by the bankruptcy court. So, ResCap has a ways to go before its bankruptcy is complete.

If a business is considering bankruptcy it should consult with an experienced bankruptcy attorney to go over its options. One of the biggest benefits of bankruptcy is the automatic stay, which temporarily puts a halt to almost all creditor actions, including foreclosures and lawsuits.

Source: Jonathan Stempel, Reuters, “Ally’s ResCap unit files bankruptcy plan,” July 5, 2013

A California-based electric car company filed for Chapter 11 protection recently. The company, CODA Holdings, filed after poor sales. They intend to get out of the auto business permanently with this filing. The company says that it will focus post-bankruptcy efforts on an energy storage business that is also under the CODA name and uses similar technology.

At the moment, a group of debtors plans to buy the company for $25 million. The company is only four years old and only has about 40 employees.

CODA is not the first electric car company to struggle financially. Only last month, an Anaheim based company laid off almost 75 percent of their work force. This company makes electric sports cars. Another company, Tesla, has yet to make a profit and the company owes the government almost $500 million in loans.

Filing for bankruptcy can put an automatic stay on creditor actions. This includes repossessions and foreclosures. Bankruptcy can allow a business time to reorganize and reduce or eliminate penalties and fees.

Companies in any type of business can experience financial difficulty. Whether due to market changes or other commercial factors, business owners in such situations should explore the possibility of chapter 11 filing, to determine if it can help save the company.

Source: The Sacramento Bee, “Electric car maker CODA files for Chapter 11,” Robert Jablon, My 1, 2013

Unfortunately, it appears that Mr. Cook was unsuccessful in finding a backer. Chief Bankruptcy Judge Christopher Klein recently approved the sale of Mr. Cook’s minority share to Mr. Hansen. Mr. Hansen agreed to buy Mr. Cook’s minority share for $15.1 million, and Mr. Cook was apparently unable to match this offer.

While this is not the end for the Sacramento Kings (the sale is only for a minority interest, and the NBA Board of Governors still needs to approve it), this sale puts the Kings one step closer to leaving Sacramento. This story also highlights one of the dangers of bankruptcy: once a debtor files for bankruptcy, the debtor doesn’t necessarily control what happens to his assets.

Source: Dale Kasler, The Sacramento Bee/Bellingham Herald, “Bankruptcy Judge OKs Sale of 7 Percent of Sacramento Kings to Seattle’s Hansen,” April 16, 2013.

A company that owns clothing stores recently filed for Chapter 11 bankruptcy protection. The company cited the effects of Hurricane Sandy in its bankruptcy filing. The company hopes to continue operation of its stores through the bankruptcy process.

The retailer, Big M Inc., began restructuring in November of 2011 following the economic downturn. It closed over 20 of its stores that did not perform well, renegotiated leases and followed through on various other means to reduce costs.

The storm, which hit in late October, closed almost all of their stores in New York and two nearby states. These stores had to be closed for about a week, including the distribution center and offices. Three stores were closed for a month and are still only operated with limited hours.

In addition, the retailer has yet to receive any insurance money because of a disagreement over how much is owed to them. Overall, the fact that the company has not received insurance money and the reduction in business has left it without the funds needed to continue operating.

Filing for Chapter 11 protection can allow a business time to reorganize and restructure without the stress of creditors. Filing for bankruptcy protection stops all creditors’ collection actions immediately. It also allows a business to create a debt reorganization plan that may reduce interest payments. Also, any fees or penalties may be reduced or even eliminated.

Source: The Sacramento Bee, “Retailer seeks bankruptcy protection, cites storm,” Eileen AJ Connelly, Jan. 7, 2013

Recently, a palm tree farmer, Cocopah Nurseries Inc., filed for Chapter 11 bankruptcy. This filing followed an attempt to restructure the business debt without liquidating to save the business.

Cocopah Nurseries Inc. not only grows and sells palm trees but it also grows citrus fruit. Their revenue fell from $57 million in 2006 to $23 million last year. Their revenue mainly comes from the sale of trees to commercial, residential and retail developments including the San Diego Convention Center. Many of their holdings are in California.

But the recent recession has left Cocopah Nurseries Inc., and many others, in financial turmoil. Owning a business can be difficult financially at any time, but the difficulties business owners have faced in the recent economic downturn have been for some catastrophic.

Even minor changes in a business’s revenue can result in payments not being made to creditors and vendors not sending needed supplies. Missing a payment to a creditor can lead to creditors initiating collections proceedings. These proceedings can be daunting for a business owner. Creditors can be seeking their payments and pressuring the owner for payments when the company does not have liquid assets.

This is where a Chapter 11 bankruptcy plan is most advantageous. Once a company files for Chapter 11 protection, all creditors collection actions must stop. This is commonly referred to as an “automatic stay.” The stay stops all collection action and includes mechanic’s liens and repossession actions. Filing for Chapter 11 can also help to create a debt repayment plan to allow the business to save some assets and continue operation.

Source: Wall Street Journal, “Palm Tree Farmer Files for Chapter 11,” Stephanie Gleason, July 10, 2012

Equifax, one of the nation’s top three credit reporting agencies, says that 323 small Sacramento-Arden-Arcade-Roseville regional firms filed for bankruptcy protection in the first quarter of 2012, whereas 445 filed the same period in 2011. Many other regions nationwide have seen a similar trend, and Equifax predicts that small business filings will continue to decline.

The Equifax study analyzed Chapter 7, 11 and 13 filings of commercial entities of fewer than 100 employees. While this is may be a sign that the economy is improving, many small business owners may still be struggling in the current economic environment.

Filing for bankruptcy protection affords small businesses the chance to protect the owner’s personal assets while restructuring to save the company. There are several types of bankruptcy that small businesses may file, including:

• Chapter 11 bankruptcy: This filing allows the business to keep creditors at bay while working out a plan to reorganize the company
• Chapter 7: Often called a straight liquidation, a Chapter 7 is the fastest type to file, but the business is shut down and not allowed to reorganize
• Chapter 13: This filing allows a business to work out a repayment plan with some creditors (usually for secured debts) while relieving the business of other debts, depending on the amount that the business will pay back over the life of the Chapter 13 plan

For California business owners considering their options, dealing with complex bankruptcy issues may be overwhelming. However, resources are available to help determine the best path, whether it involves closing the company or reorganizing for future success. While overall trends are encouraging, circumstances that may often be beyond control can influence the decision to consider bankruptcy.

Source: The Sacramento Bee, “Small-business bankruptcies down in Sacramento region,” Mark Glover, June 14, 2012